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For The First Time Since August 2008, Credit Card Debt Hits A Plateau

While many celebrated the record high US household wealth in the latest data from The Fed, what most missed was a record $1.0 trillion of credit card/revolving loans, a record $1.3 trillion of auto loans, and a record $1.5 trillion of student loans.

As we previously noted, among these, credit card and auto loans, in particular, have been experiencing accelerating delinquencies, but the very gradual increase in aggregated Net Charge-Offs has allayed any economist concerns about the state of the US consumer. But, a modest scratch below the surface, and a surprising discovery emerges.

While the larger U.S. banks that dominate credit card issuance have focused on prime and super prime consumers post the Great Financial Crisis (GFC), and have enjoyed a prolonged period of low charge off rates concurrent with the Fed’s almost decade long ZIRP (Read more detailed breakdown here.), the charge-off rates among the nation’s smaller banks, those outside the Top 100, have seen the charge-off rates soar.

And now, based on this month’s consumer credit data from the Fed, which saw an unexpectedly small increase in consumer credit of only $11.5BN, below the $15.2BN expected, and down from $13.6BN last month, it appears this reality is starting to hit home, as March consumer credit rose at the slowest pace since September…

… as outstanding credit card borrowings unexpectedly declined by $2.6BN, the most since the end of 2012, after a drop of just over $500MM last month.

As the chart below shows, the two consecutive months of credit card deleveraging means that the until recently relentless increase in revolving credit appears to have again hit a plateau. The last time this happened? August of 2008 (the sharp move in December 2015 was simply a data revision).

While it is painfully obvious, as Bloomberg adds, “the 0.9 percent annualized decline in first-quarter credit-card debt outstanding shows a waning appetite for borrowing after a 10.3 percent surge in the final three months of 2017.”

To summarize the results:

  • Total credit increased $11.6b (less than the expected $15.2b).
  • Revolving credit outstanding dropped $2.6b MoM, after a $515m decrease in Feb.
  • Non-revolving debt outstanding climbed $14.2b for a second month

The results are consistent with first-quarter data that showed household spending cooled following a strong run of gains. All that dis-saving (and credit-card-debt engorgement) managed to spike consumer confidence to near record highs…

It also confirms that with the US personal savings level once again near all time lows, and with households no deleveraging on their credit cards, the second quarter is about to get very ugly for the economy which is 70% driven by consumer spending. 

There was a silver lining: non-revolving credit – auto and student loans – rose by a solid $14.2BN as household continued to just charge their assorted college-linked purchases not to mention car purchases. In fact, as the latest Fed data shows, both auto and student loans hit a new all time high of $1.52 trillion and $1.118 trillion, respectively.

And so, Americans may be going broke, but at least they’ll have a college degree and a car – both bought on credit – to show for it.

 

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All Downhill From Here? Market Refuses To Reward Earnings Beats, Punishes Misses

With the bulk of earnings season now behind us, one chart summarizes best the unprecedented divergence in surging EPS actual vs consensus:

Some more details on what has transpired so far, courtesy of BofA: as of Week 4, 409 companies, or 87% of S&P 500 1Q earnings, have reported. The remainder (chiefly Retailers/Tech) will be spread out over the rest of May/June, after which we’ll issue a final update.

Bottom-up EPS surged to $37.98 from $37.53 last week (led by Energy), now 5% above analysts’ expectations at the start of earnings season (biggest beat in three years) and 4% above our forecast.

In case it’s not clear, it has been an avalanche: all 11 sectors have seen earnings beat, led by Tech, Financials and Industrials, with 72% of companies beating on EPS, 73% on sales and 57% on both – the highest proportion of EPS and sales beats in BofA data history (since 2000). Digging deeper, tech saw the most beats on both (87%, a record high), followed by Health Care and Industrials (71% and 63%, both near-record highs).

With Q1 2018 earnings growth tracking +23% YoY – the best in 7+ years – BofA contends that this is more than just lower taxes, as the beat in pre-tax profits is tracking 3%, and growth in pre-tax profits is a healthy +13% YoY (suggesting ~10ppt of earnings growth is from tax reform). And sales are tracking +8% YoY (+9% ex-Financials), more than 1% above analysts’ expectations at the start of April (and nearly 4x the size of the average sales surprise in our data history since late 2011.

However, these amazing stats have not been sufficient, and the S&P continues to be flat for the year despite the best earnings season in 7 years. One reason, perhaps the biggest one as we discussed last night, is that according to various indicators, this is as good as it will get for earnings, and whether due to margin pressures, or contracting P/E multiples, it’s all downhill from here.

That also explains a striking observation: the market has not rewarded earnings beats this quarter, while severely punishing earnings misses.

As BofA summarizes, EPS and sales beats outperformed by 0.5ppt the next day, the third time in the last four quarters we’ve seen a sub-1ppt reward for beats, a late-cycle phenomenon. Meanwhile, misses have been slammed, lagging the market by 1.5ppt. 

Putting this divergence in context, since 2000, beats/misses have outperformed/ underperformed by 1.6ppt/2.4ppt the next day.

And while most sectors have seen a muted reward for beats, beats have outperformed most within Telecom and Real Estate. Conversely, misses have been punished the most in Staples, Telecom and Health Care.

To summarize: yet another confirmation it is so late in the cycle, the market itself no longer believes these fantastic earnings can continue for more than one or two quarters at the most…

 

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Oliver North Tapped as President of the NRA

Lt. Colonel Oliver North has been tapped to be the next president of the National Rifle Association (NRA).

A Monday press release announced that the NRA’s board of directors had begun the process of naming North to lead the head the organization, following current president Pete Brownell’s decision to resign.

“Oliver North is a legendary warrior for American freedom, a gifted communicator and skilled leader,” said Wayne LaPierre, the NRA’s long-serving CEO of the NRA, in the press release. “In these times, I can think of no one better suited to serve as our President.”

According to the press release, the decision to elevate North—already an NRA board member—to the presidency came at the suggestion of LaPierre, who reportedly said the organization needed a “warrior” in the position.

North, a former Reagan administration official and current Fox News host, is best known for his central role in the Iran-contra scandal. The former Marine helped establish a covert network used to sell weapons to the Islamic Republic of Iran in the 1980s, the proceeds of which were then illegally funneled to the contra rebels fighting the left-wing government of Nicaragua.

North admitted to lying to Congress about his role in the affair. He was convicted in 1989 of three felonies, including receiving illegal bribes, destroying government documents, and obstructing a congressional investigation. His convictions were overturned in 1991.

Following the Waco stand-off of 1993, where 82 members of the Branch Davidian sect were killed following a failed attempt to serve a warrant on the group’s leader, David Koresh, on weapons charges, North offered a full-throated defense of the feds, criticizing “arm-chair critics…second-guessing law enforcement officers on the scene.”

North also ran an unsuccessful campaign for an open U.S. Senate seat in Virginia in 1994. During the campaign, North had his concealed carry license revoked by a state judge who determined he was “not of good character.”

Bowell’s resignation and North’s appointment came as a something of a surprise, all apparently happening this morning.

Although North is retiring from Fox News immediately—where he hosts the show War Stories—he will not assume the NRA presidency right away.

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Trump “Committed To Regime Change” In Iran: Giuliani

President Donald Trump is committed to regime change in Iran, said Rudy Giuliani, Trump’s newest controversial attorney (although perhaps not for long) and longtime informal advisor.

Speaking to reporters after a Saturday keynote to the Iran Freedom Convention for Democracy and Human Rights in Washington, Giuliani said “We got a president who is tough, who does not listen to the people who are naysayers, and a president who is as committed to regime change as we are.” In other words, pulling out of the Iran nuclear deal is now being conflated with regime change in Iran. 

Giuliani says he’s been a supporter of regime change for “ten years,” that it’s the only way to peace in the middle east, and that it’s “more important than an Israeli-Palestinian deal.”

The former Mayor of New York City, who was at one point under consideration for Secretary of State, pretended at one point in his speech that his notes were the Iran nuclear deal – ripping them up and spitting on them. 

“With Secretary of State Pompeo now on his right hand and his national security advisor John Bolton… on his left side, what do you think is going to happen to that agreement, that nuclear agreement?” Giuliani asked. 

Ok, so nuclear agreement has got to go – but let’s check with December, 2016 Trump to see what he thinks about regime change: 

And with just five days to go before Donald Trump withdraws from the Iran nuclear deal on May 12, Iranian President Hassan Rouhani warned the US of “historic regret” if it pulls out from the nuclear deal. 

“If the United States leaves the JCPOA, you will soon see the historic regret which the move will bring about for Washington”, Rouhani told a crowd in Sabzevar in northeast Iran.

Under the deal, technically known as the Joint Comprehensive Plan of Action (JCPOA), signed in 2015, the U.S. and other world powers agreed to lift some of the economic sanctions imposed on Iran in return for the latter agreeing to rein in its nuclear program. The biggest, impact, however was lowering the price of crude, as the global market suddenly had access to nearly 1 million in Iranian oil output; and one of the key reasons why the price of oil has spiked in recent weeks is the market’s growing confidence that Trump will dump the JCPOA.

Whereas Trump has called the pact “one of the worst negotiated agreements” he has ever seen, and has repeatedly threatened to pull the U.S. out of the deal and has to make a decision on whether he will do so by the Saturday deadline, Rouhani said Iran has been “loyal to its promises”.

On Saturday, we reported that former Secretary of State John Kerry and a group of his former State Department officials have been acting as unofficial diplomats in recent weeks – sneaking around the world trying to salvage the Iran deal he presided over ahead of its renewal deadline, the Boston Globe reported Friday.

In response, Trump tweeted on Monday “The United States does not need John Kerry’s possibly illegal Shadow Diplomacy on the very badly negotiated Iran Deal. He was the one that created this MESS in the first place!”

Perhaps we could just rip up the Iran deal but not conduct regime change?  

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Cops Called a Helicopter to Confront Three Black Women Leaving an Airbnb

When police in Rialto, California, received a report of three black women carrying luggage out of a suburban home, they responded with a show of force that included several cruisers and a helicopter.

The women were merely checking out of their Airbnb.

Video of the incident posted to social media accounts by one of the women shows a number of police cars surrounding a black SUV. In a Facebook post, Kells Fyffe-Marshall says seven cop cars surrounded the vehicle and shut down the street as she and her friends were trying to leave.

“The officers came out of their cars demanding us to put our hands in the air,” Fyffe-Marshall writes. (She does not say whether any guns were drawn.) “They informed us that there was also a helicopter tracking us. They locked down the neighborhood and had us standing in the street.”

Why the aggressive response? In the video, one of the police officers can be heard explaining that a neighbor reported “three black people stealing stuff. Like breaking into the house and stealing stuff.”

After being told that they were only removing their own luggage from the house, the cop admits, “That’s possible, but you never know.”

Fyffe-Marshall says it took more than 45 minutes to resolve the misunderstanding, during which time the police accused them of lying and claimed they had never heard of Airbnb before. Even after being presented with booking confirmations and even after talking to the owner of the house on the phone, the police continued to detain the three women for what they said was a “felony charge.”

“We have been dealing with different emotions and you want to laugh about this but it’s not funny. The trauma is real. I’ve been angry, fustrated and sad,” Fyffe-Marhsall wrote. “This is insanity.”

Did race play a role here? Fyffe-Marshall thinks so. She calls the incident “racial profiling” and suggests that a group of white women would not have had the cops called on them in the first place. The evidence suggests that she has a point, though we don’t have the benefit of knowing why the neighbor acted as she did, or whether the cops would have more quickly admitted their mistake after confronting a group with skin of a different color.

But whether or not racism was at work, this was a clear case of institutionalized paranoia. The neighbor who called the cops was doing exactly what all those “see something, say something” ads are always reminding us to do: assume the worst about a seemingly innocuous event. Nosy neighbors have been around for as long as human beings have lived in communities, but now they are encouraged to do more than gossip.

Meanwhile, the cops’ response—seven cars and a freaking helicopter—shows that a police department ready to go head-to-head with dangerous thieves engaged in a brazen daylight robbery. There was no attempt to ascertain whether the phone call was legitimate, no apparent procedure to have a patrol car check out the scene and call for backup if needed. These police go straight from zero to 100 at the drop of hat. This is the same mentality that has SWAT teams beating down doors to deliver warrants and officers diving out of their cars, guns drawn, to confront a child with a toy. Call in the helicopter, because every possible threat must be treated like the most serious one ever faced. It’s easy to imagine how the incident could have spiraled into something more tragic.

It’s a bit crazy to suggest that these officers deserve any credit for only detaining three people for 45 minutes and calling in a helicopter, rather than just killing someone. But if this is typical police work in Rialto, that may be where we are.

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Trump Will Announce Iran Deal Decision At 2 PM Tuesday

President Donald Trump tweeted Monday afternoon that he will be announcing his long-awaited decision on whether the US will be pulling out of the Iran deal tomorrow at 2 pm ET. The decision will be announced from the White House.

As Bloomberg notes, Germany, France and the UK have lobbied Trump and his top aides to remain in the deal, which the president has frequently criticized. Trump has strongly hinted that he will withdraw from the agreement, and French President Emmanuel Macron said after meeting with Trump last month that he expects the US to exit the deal.

There’s been some speculation that Trump might continue pursuing negotiations even after ending the waiver on the US’s sanctions against Iran, using the period before the most draconian sanctions kick back in as leverage to try and achieve restrictions on Iran’s ballistic missile program.

The announcement triggered a “sell the news” reaction in oil.

Chart

 

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Israel Threatens Assad: “If You Continue Allowing Iran To Operate Out Of Syria, It Will Be Your End”

One month after Trump launched another 105 Tomahawk missiles at Syria, the latest US assault on a sovereign nation has been mostly forgotten, but not to Israel which keeps reminding the world that another provocation to be follower shortly by another regional war, is just a matter of time.

Amid alleged Israeli tensions that an expected retaliatory attack by Iran – whose Syria-based forces Israel has repeatedly attacked in the past month – is imminent, Energy Minister, and cabinet member Yuval Steinitz issued a direct threat against the Syrian ruler, when during a Ynet studio interview on Monday he said that, “if Syrian President Bashar Assad continues allowing the Iranians to operate out of Syria, it would be the end of him, the end of his regime.”

Syrian President Assad will be eliminated and his regime toppled if he does not stop Iran, Israel Energy Minister Steinitz warned.

Responding to a question on the readiness of Israel’s home front for a possible war in the north such an approach might lead to, Steinitz said there was “no absolute readiness.”

On Sunday, Haaretz reported that Iran may soon execute the retaliatory attack that previously vowed to carry out in the wake of the airstrike on the T-4 Airbase near Homs, which the Pentagon subsequently admitted was conducted by Israel.

T4 Syrian Air Force Base

However, since Hezbollah is expected to be involved in firing a missile barrage at a military base on Israeli territory, commander of the Islamic Revolutionary Guard Corps (IRGC)’s elite Quds Force Qasem Soleimani was reported to have decided to postpone the attack to immediately after the Lebanese elections  which took place this weekend, in order to catch Israel unawares.

According to Ynet news, Soleimani and other IRGC officials have seemingly reached a conclusion — most likely with the assent of Iranian Supreme Leader Ayatollah Ali Khamenei — that US President Donald Trump had already made up his mind to suspend the 2015 nuclear deal, and that was therefore no point in waiting for May 12, when Trump is set to make his decision public.

Of course, with Israel setting the stage for an immediate retaliatory attack, it would be all too possible that a “false flag” attack is instead “launched” into Israel simply to give the IDF the green light to commence an attack on Syria or Iran.

In the Ynet interview, Steinitz also spoke about the years’ long civil war still raging in Syria, saying that Israel had thus far refrained from intervening in the internal conflict. “If Assad allows Iran to turn Syria into a forward operating base against us,” he clarified, “to attack us from Syrian soil, he should know that will spell his end.“

* * *

In a potential twist, the energy minister was then reminded of Benjamin Netanyahu’s upcoming visit to Moscow on Wednesday, where he will meet President Vladimir Putin, who will most likely be less than enthused with such statements. As reported previously, on Aprul 25 Russia is set to send advanced anti-aircraft missiles to Syria, having warned Israel of “catastrophic consequences” should the Jewish state launch another attack on Syria.

“It’s excellent that the premier is going,” Steinitz countered. “He has engendered unprecedented dialogue with Putin. Russia is an important superpower with which we have a lot of mutual interests.”

“Sometimes there are also conflicts of interest,” he continued, “but usually our interests converge. Everyone should understand, however, that certain things are red lines for us. If anyone is interested in maintaining Assad’s survival, they should tell him to prevent missile and drone attacks on Israel.”

When asked if that meant Israel might assassinate Assad, Steinitz had a witty retort, saying any assassination of Assad would be his own doing: “He will have his blood on his head.“

Steinitz also suggested that his remarks did not reflect Israeli government policy, saying, “I’m not talking about any concrete proposal.” Nevertheless asked how Israel could go about bringing an end to Assad, the Cabinet member explained that a similar dilemma existed regarding Lebanon in the past. “We deliberated whether the fact that Hezbollah was attacking us from Lebanon meant that we would only retaliate against Hezbollah or also strike at Lebanon.“

“Assad can permit them to attack Israel from Syria soil, or not. He can permit them to bring in missiles, antiaircraft systems and drones into Syria, or not, and if he does—he should know there is a price tag,” the minister concluded ominously.

Meanwhile, one week after his “huge” revelation that Iran was, at one point, developing nuclear weapons ended up being a giant dud on the international arena, Netanyahu commented on the Iranian threat at the beginning of a Sunday coalition meeting, saying, “we are determined to block Iran’s aggression against us, even if this means a (military) conflict. Better now than later. We do not want escalation but we are ready for any scenario.”

The premier also asserted that Israel maintained “full freedom of action to defend itself” and “explained” that in recent months, the IRGC have “transferred advanced weaponry to Syria in order to attack us both on the battlefield and on the home front, including weaponized UAVs, ground-to-ground missiles and Iranian anti-aircraft batteries that would threaten air force jets,” the prime minister said.

For now, neither Syria nor Iran have attacked Israel despite the avalanche of pre-retaliatory rhetoric.

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Which Hunt?

Authored by James Howard Kunstler via Kunstler.com,

It was refreshing to read the response of Federal Judge T. S. Ellis III to a squad of prosecutors from Robert Mueller’s office who came into his Alexandria, Virginia, court to open the case against Paul Manafort, erstwhile Trump campaign manager, for money-laundering shenanigans dating as far back as 2005. Said response by the judge being:

“You don’t really care about Mr. Manafort’s bank fraud. You really care about getting information that Mr. Manafort can give you that would reflect on Mr. Trump and lead to his prosecution or impeachment or whatever.”

Judge Ellis’s concise summation was like a spring zephyr clearing out a long winter’s fog of unreality in our national politics – the idea that Mueller’s mission has been anything but the Deep State’s ongoing crusade to nullify the 2016 election.

In the meantime of the past year, Mueller has been additionally burdened by obvious misconduct in the FBI and its parent agency, the Department of Justice, which makes Mueller himself look like the instrument of a cover-up, or at least a massive organized distraction from the misdeeds of the Deep State itself.

Source: Ben Garrison

I was never a Trump supporter or voter, but it seems to me he deserves to succeed or fail as President on his own merits (or lack of). It’s much more disturbing to me to see the runaway train that federal prosecution has turned into, along with orchestrated intrigues of FBI and DOJ officials at the highest level. These are of a piece with the creeping surveillance of all Americans, and the collusion of multiple intelligence agencies with social media companies and what used to be the respectable organs of the news, especially The New York Times, The Washington Post, and CNN — all of which are behaving like Grand Inquisitors in a medieval religious hysteria.

Judge Ellis’s remarks also speak to a growing consensus that the Russia “collusion” or “meddling” story is a phantom, if not a fabrication of the FBI itself, and that Robert Mueller’s appointment to investigate it was illegitimate from the start. In any case, it seems, for now, to be going nowhere, except maybe ricocheting back at itself — because more and more it looks like Mueller is there only to defend the reputation of the agency. Also, for now, the FBI and DOJ are engaged in a war of wills with both houses of congress. Senator Charles Grassley, the chair of the Senate Judiciary Committee, and members of the House Intelligence Committee are battling Acting Attorney General Rod Rosenstein for official documents that he refuses to produce. It only makes the FBI and DOJ look like rogue agencies.

Now Judge Ellis is asking to see unredacted memoranda spelling out Mueller’s exact commission as Special Counsel, to determine just where his authority begins and ends. Ellis is apparently familiar with the stratagems casually employed by overzealous federal prosecutors that can look like dirty pool – for instance, turning witnesses with janky charges, setting perjury traps, or, in the separate case of General Flynn, threatening to bankrupt a person for lawyers’ fees to defend himself against Mickey Mouse charges.

The Deep State – and when I use that term, I mean the swollen, entrenched, permanent federal bureaucracy and their water-carrier corps of lobbyists, policy wonks, contractors, and media mouthpieces – may not get away with this inquisition. It’s possible that Judge Ellis may, at least, send the Manafort case to a different jurisdiction, the Eastern District Court of Virginia, if he doesn’t throw the case out altogether on the grounds of prosecutorial overreach. The latter would be a blow against Special Counsel Mueller. It ought to be grounds for his dismissal. And what’s left of the Russia case after that? General Flynn’s guilty plea for lying to FBI agents about whether he had a conversation with the Russian ambassador?

Behind the disintegrating RussiaGate campaign is a much deeper, darker swamp of official misconduct at the FBI and DOJ, for which there is already a ton of evidence that has been made public and which seems worthy of prosecution.

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Giuliani Confesses to Spreading ‘Rumors’ About Stormy Daniels

This crazy Stormy Daniels deal keeps getting crazier. On Friday, Donald Trump said Rudy Giuliani, who supposedly is speaking on the president’s behalf as his lawyer, does not have his facts straight regarding the $130,000 hush payment to porn star Stormy Daniels. On ABC’s This Week yesterday, Giuliani seemed rattled by his client’s criticism, confessing that he had reported “rumor” as fact in several interviews last week. “This is more rumor than it is anything else,” he said, referring to his own account of how Trump had reimbursed his lawyer Michael Cohen for paying Daniels to keep quiet about her affair with the future president. “I can just say it’s rumor. I can prove it’s rumor, but I can’t prove it’s fact. Yet. Maybe we will.”

All of this is mystifying for several reasons. First, after his jaw-dropping interview with Sean Hannity last Wednesday, Giuliani insisted that he and the president were on the same page: Before the interview, he had consulted with Trump, who knew and approved what he planned to say. Second, the morning after the interview, Trump seemed to confirm the gist of Giuliani’s account with a series of tweets acknowledging that he had reimbursed Cohen, as part of “a monthly retainer,” for the cost of the nondisclosure agreement that Daniels signed. Third, Giuliani is supposed to be helping Trump, but whenever he opens his mouth he inspires fresh speculation about exactly which law the president may have violated through his arrangement with Cohen.

The leading contenders so far are the limit on individual campaign contributions, reporting rules for campaign expenditures, and a law that requires federal officials to disclose liabilities of more than $10,000. Giuliani’s position, which may or may not coincide with Trump’s, is that the payment to Daniels was not a contribution because it was reimbursed, was not a campaign expenditure because the motivation for it was primarily personal rather than political, and was not a debt that Trump owed Cohen because it was part of billable legal expenses. “The retainer agreement,” Giuliani explained to George Stephanopoulos on This Week, “was to repay expenses, which turns out to have included this one.”

That circumlocution is Giuliani’s way of reconciling two apparently contradictory assertions: that Trump did not know about Cohen’s payment to Daniels and that he reimbursed Cohen for it. According to Giuliani, Trump paid Cohen $420,000 in monthly installments of $35,000, and $130,000 of that covered the payment to Daniels, which was a legal expense so routine and trivial that Cohen never bothered mentioning it to Trump. Then again, that story, also according to Giuliani, may be no more than a “rumor.”

If so, it is not a very plausible rumor. Nor is Giuliani’s claim that Cohen paid off Daniels to avoid embarrassing Trump’s wife, Melania, rather than to keep the story of Daniels’ affair with Trump out of the news during the final months of his presidential campaign. “It was to settle a personal issue that would be embarrassing to him and his wife,” Giuliani told Stephanopoulos.

Yet Giuliani also suggested, during a Fox and Friends interview last Thursday, that Cohen was worried the Stormy Daniels story would hurt Trump’s electoral chances. “Imagine if that came out on October 15, 2016, in the middle of the, you know, last debate with Hillary Clinton,” Giuliani said. “Cohen didn’t even ask. Cohen made it go away. He did his job.”

Incredible as Giuliani’s tale may be, it also must be said that Cohen’s fears were almost certainly misplaced. Trump survived multiple accusations from women who said he had kissed or groped them against their will, combined with a video in which he bragged about such behavior. What are the odds that reports of a consensual affair would have stopped him from winning the election? Trump has a well-known history as an indiscreet philanderer, although he denies this particular relationship. People who voted for him understood that he was boorish and unfaithful. It did not stop them.

If adultery is not the scandal here, neither is dishonesty. When Stephanopoulos asked if “it’s OK to lie to the press,” Giuliani acknowledged there have been “a few presidents who did that.” But according to Giuliani, Trump is not one of them. “I don’t think that this president has done that,” he said. Of all the implausible claims that Giuliani made yesterday, that may be the most risible. Trump lies routinely, reflexively, and extravagantly, but his supporters do not seem to hold it against him.

So we are left, probably, with an arguable violation of a reporting requirement. If you think Trump knowingly broke the law to keep embarrassing information out of the news prior to the election, that would indeed be a pretty big deal. But when you listen to the president and his legal advisers, it is hard to believe they are sophisticated enough to be guilty of that crime.

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And The Best Indicator For Imminent Emerging Market Turmoil Is…

The past month has seen a flurry of dramatic correlation shifts and changes across key US and global assets – traditionally an indication that a major market transition is upon us – with the most notable move being the sudden positive correlation spike between the USD and US Treasury yields, as yield-differential mysteriously recoupled after a year of forcing FX strategists to goalseek tortured explanations why surging US yields failed to push the dollar higher.

All that changed recently, but what is most interesting and what has gotten relatively little discussion, is what was the catalyst that unleashed this positive correlation between the USD and rates, one which as JPM said over the weekend, “could be as disruptive to global markets as the reversal of the correlation between stocks and bonds in February.”

For the answer, look to Beijing, because it was here that something unexpectedly snapped mid-way through April. For those who may have forgotten what it was, here is a reminder from Bank of America:

April 17th Chinese surprised with an easing of monetary policy; this was the trigger for US dollar strength

And not only dollar strength, but bond weakness too: because it was almost as if a switch was flipped in the middle of the ongoing escalating Trade War with Trump, when Beijing suddenly decided to send a message, how easy it is to not only send the dollar soaring, but also unleash havoc among US risk assets.

In any event, China’s dovish capitulation, prompted a global echo and in the past 2 weeks, hawkish central banks including the BoE, BoC, Riksbank, and even the ECB, all turned dovish; this left the Fed (and the central bank of Argentina, of course, which hiked rates by 12.75% in just 5 days although we can ignore that for now) as the long hawk, a clear US dollar positive, and more importantly, EM FX negative, something we will touch on momentarily.

Meanwhile, as the dollars surged, so did Treasury yields, and just over a week after the start of Chinese easing, US 10Y Yields spiked, briefly rising above 3.00%, a level which it turns out, is now considered the “magic number” on Wall Street, above which risk assets start to crumble.

Here, once again, is Bank of America, which reminds us that in the latest Fund Manage Survey, respondents said that 3.5% is the level they will shift from equities to bonds, down from 3.6% a month earlier. So, as BofA’s Michael Hartnett notes, “it should not be a surprise if reallocation starts before yields get to 3.5%. Indeed, as we breached 3% the following asset classes all suggested that the 3-3.5% range would become “painful” if not accompanied by much stronger economic data.“

Case in point, banks, homebuilding stocks, US dollar, EM, yield curve all suggested 3% on the 10-year Treasury yield was the magic number.

  • Lower US bank stocks: rise in rates was shifting from a “good” rise to a “bad” rise (financials underperformed utilities by 1250bps since mid-March)
  • Lower US homebuilding stocks: a good lead indicator of interest rates, homebuilding stocks are saying the Fed is making a “policy mistake”

But the biggest “tell” that any increase in the dollar – and the 10Y yield above 3.00% – would be a market destabilizing event, came from the Emerging Markets, where “exhibit A” was the following amazing chart showing an unmistakable correlation between the outperformance of the Dollar, and the underperformance of Emerging Market Debt.

Here, as Hartnett again chimes in, the higher US rates finally caused higher US dollar (courtesy of the PBOC), at which point “EM started to crack.“

But while many have pointed at the collapse in the Turkish Lira, the Argentine Peso, and, more recently, the Indonesia Rupiah, as cracks in the EM narrative, the truth is that many of these are idiosyncratic stories.

So how can one decide if the Emerging Market turmoil is about to sweep across the entire sector, and result in DM contagion? According to Bank of America the answer is simple:

“EM FX never lies and a plunge in Brazilian real toward 4 versus US dollar is likely to cause deleveraging and contagion across credit portfolios.”

In other words, the best indicator of imminent emerging market turmoil is shown in the chart below: if and when the BRL starts sliding, and approaces 4, it may be a good time to panic.

And just in case that was not enough, Hartnett also has a secondary “fail safe” EM-stress indicator:

Tremors in the periphery: 3% + rally in US$ has caused EM tremors (ARS, INR) at a time of peak EM debt/equity inflows ($371bn)…EMB <107.50 contagious

This means that once EMB, the JPM Emerging Market Bond ETF, drops to 107.50 – the level it hit right after the Trump election – it will be time to get out of Emerging Dodge.

 

 

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