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Over the weekend we shifted our focus from the inverse volatility ETF complex and to credit ETFs, both IG (LQD) and HY (HYG and JNK), highlighting that at least according to Deutsche Bank, these have a decent chance of being the next synthetic products to suffer sharp deterioration following the next market tremor.

What Deutsche Bank found was that in light of the sharp move in the VIX, credit ETFs had shown a surprising resilience, which however would be tested if the VIX does not mean-revert from its current level around 20 back to its all-time “complacency lows.” Addressing this, Deutsche said that “if credit spreads do indeed reprice to higher volatility, the drawdown in credit ETFs could trigger meaningful liquidation, resulting in further pressure on spreads.” It then empirically calculated the adverse impact, if only in theory:

To attempt to put some numbers around it, empirically a 1% m/m selloff in IG ETFs is consistent with a 1.9% decline in IG ETF AUM (currently about $130bn), meaning a 0.9% liquidation; for HY ETFS, a 1% sell-off equates to a 2.8% drop in ETF AUM (currently about $45bn), and therefore a liquidation worth 1.8% of AUM.

It gets worse: assuming the full repricing implied by the move higher in volatility occurs, it would result in a $3.7bn redemption in IG funds, and about $6bn in HY ETFs (and the longer that VIX remains elevated, the more this risk grows). The acute risk for the credit market should such a flow materialize should be for HY, conditional on how concentrated it is – average daily volume in IG was about $17bn last year, whereas for HY is was $7.7bn.

DB’s conclusion: “Should credit sell-off to where the current level of volatility implies, liquidity would likely deteriorate anyway, and the added pressure from fund outflows would likely further exacerbate the spread widening.”

To this our response was to “follow the money” and specifically, the flows in, or rather out, of the bond ETF complex.

Today, Bank of America also takes a close look at recent ETF flows and finds two opposing trends, split between equities and debt.

First the good news: last week – during which the S&P 500 rebounded 4.3% (biggest weekly gain since Jan. 2013) – BofA’s clients were big net buyers of equities ($1.35bn) for the second week after near-record selling at the end of January (when the market hit its all time high). Here, clients bought both single stocks and ETFs (second week of single stock buying). While private client (i.e. high net worth retail investors) have led the buying over the last two weeks, institutional clients were also buyers for first time in 16 weeks, after having been the biggest sellers during the pullback. Meahwhile, the 3rd client group, hedge funds were sellers after buying equities the prior week. Clients bought large and small caps but sold mid caps. Meanwhile, corporate buybacks are tracking above typical Feb. levels as well as above year-ago levels. BofA notes that financials continue to dominate buyback activity, comprising 42% of total corporate client buybacks year-to-date (up from 38% last year).

To summarize equity flows (on a rolling 4 week basis):

• Hedge funds have been net sellers of US stocks on a 4-week average since late Jan. 2018.
• Institutional clients have been net sellers on a 4-week average basis since early Feb 2016.
• Private clients have been net buyers of US equities on a 4-week average basis since early Feb. 2018.

Now the bad news: while clients bought equity ETFs for the first time since the selloff began, BofA adds that “they sold fixed income ETFs for the third week, the longest selling streak since we began tracking ETF granularity in 2017 (driven by institutional and hedge fund clients)”.

This rising bond ETF selling begs the question: is it the result of concerns about a potential return of market volatility, or due to simply rising rates. If it is the latter, and if the selling continues – or accelerates – the reverse feedback loop from bonds to stocks will likely hit next, and what’s worse, should the weakness in equities observed earlier this month finally hit bonds, this time the volocaust will be far worse as it will originate not in equities, or rather inverse VIX ETFs, but the nexus of risk itself: synthetic credit instruments, a not so subtle repeat of what catalyzed the events of 2008.

via Zero Hedge http://ift.tt/2EX6SuI Tyler Durden

In his preview of today’s release of the January FOMC Minutes, which as a reminder were Janet Yellen’s last and took place just before the February market correction, Rafiki Capital’s Steven Englander wrote that “the most likely surprise in the Fed Minutes tomorrow is that they may be leaning to four hikes in 2018, but the biggest surprise would be growing support to aim for above two percent inflation temporarily to make up for previous misses to the downside.”

As a reminder, after tumbling to 4 year lows, the Dollar has been on a steady uptrend in recent days, while rate hike expectations are now at their highest of the cycle – 2.76 hikes in 2018 are priced in (despite stocks still not being anywhere near back to pre-Powell-put-implied levels).

Commenting further on the “most likely surprise”, Englander – the former head of FX at Citi – added the following:

The three versus four hike debate is already in the open with several FOMC participants referring to the possibility of four hikes. About 70bps are now priced in, versus around 65bps just before the meeting. The FOMC meeting occurred before high AHE and inflation prints, but in recent meetings the MInutes’ discussion has become more confident that inflation is picking up.  I think the risk is much greater that they signal growing confidence on inflation moving towards target more quickly than any indication that two hikes might be more appropriate than three.  This would not mean a strong, overt signal of four hikes but it is likely they could convey ‘three, maybe four’ as their stance.  They are unlikely to go full hawkish in the Minutes as there have been only moderate hawkish signals since, and monetary policy was probably discussed in between tinkling champagne glasses at Fed Chair Yellen’s last meeting.

Throwing his 2 cents into the hat, in his latest letter Dennis Gartman also lays out what he will be watching:

there are two words in them that we shall need to pay heed to: “Few” or “several.” That is, will the minutes suggest that there will be “few”… meaning three… rate increases through the remainder of this year or will there be “several” … meaning four. We hold with the latter.

While hardly as simple as that, these two excerpts effectively frame the big unknown behind today’s FOMC minutes, and the linguistic nuances that analysts will look for in the text: 3 or 4 rate hikes.

* * *

Number of rate hike aside, here’s what else to look forward to in today’s minutes, courtesy of RanSquawk.

BACKGROUND

The last FOMC meeting under Yellen’s tutelage saw the FOMC keep interest rates unchanged at 1.25%-1.50% and pave the way for further gradual rate hikes going forward. The statement was more hawkish than some had anticipated as the Fed altered their language around inflation, removing the phrase that inflation was “to remain somewhat below 2% in the near term.” The other important change was the addition of the word “further”, as in “further gradual increases” will be necessary.

“Given that the January FOMC statement upgraded the inflation language and the characterisation of economic activity, we would not be surprised to see the January Minutes also having a hawkish tone,” writes Société Générale. “Given that market participants are worried about the fact that the Fed may end up hiking four times in 2018 versus the median projection of three hikes, a hawkish tone in the January Minutes would be unsettling.”

The comments on inflation will likely take much of the focus given the language change in the statement as market watchers try to gauge how the much confidence they have in the inflation outlook. The January meeting pre-dates the latest CPI data from the US which saw the Y/Y rate hold at 2.1% despite expectations of a dip to 1.9%.

“It is clear that underlying inflation is accelerating,” said Capital Economics. “There are good reasons to expect this pick up in core inflation to run further in 2018.”

Markets are currently pricing in a near 100% chance of a rate hike at the March meeting and the Minutes will likely reinforce expectations of a 25bps hike if they appear positive on the inflation outlook

OTHER TOPICS

Capital Economics question whether there will be any discussion by the Committee on potentially reconsidering the Fed’s policy framework. Currently the Fed’s mandate is achieve 2% inflation and full employment in a balanced manner but recently some Committee members have voiced concern over that approach. Boston Fed’s Rosengren has suggested replacing the 2% target with a target range of between 1.5% and 3.0% while others have suggested targeting an average of 2% or even raising the target to 4%.

Another point to be aware of is the publication of new Fed Chair Powell’s first monetary policy report on Friday (Powell does not testify to Congress until 28th February). Powell’s Fed is widely expected to follow the same path that Yellen’s Fed had undertaken – gradually normalising rates – but this will be one of the first opportunities for Powell to stamp his mark on the Committee. Since the last meeting, US wage and inflation data has been stronger than expected, prompting some volatility in markets but it’s worth noting that the Fed will have another set of labour market data before the next meeting in March, which should show whether the higher than expected earnings in January were an anomaly or the beginning of an upward trend.

The recent market “turmoil” came after the Fed’s January meeting and so there should be no comments on the volatility that was seen in the first weeks of February.

MARKET REACTION

Markets are currently pricing in approximately 65% chance of three hikes in 2018 and 22% chance of four hikes this year. If the FOMC Minutes reaffirm the latest statement and show they are confident in the inflation outlook, markets may begin to fully price in four hikes in 2018 and US yields could continue the meteoric rise seen recently. However, the correlation between rates and the USD has broken recently and higher yields may not necessarily translate into a stronger USD. ING note that as long as the rise in yields is orderly, this is likely to translate into ongoing broad-based USD weakness, while EM FX should retain support.

* * *

We close with an anecdote from Dennis Gartman, highlighting that if the Fed really wants to shock inflation into submission, it will certainly try:

… we’ve all grown far too accustomed of late with rates moving 25 bps when in the past rate changes were many times 50 and 100 bps… or more! Indeed, there were times when the o/n fed funds rate moved 200 bps as happened at the July meeting in ’71 when the funds rate rose from 3.5% to 5.5% and in August of ’73, moving several times from the level prevailing at the April meeting of 7.25% to 11.0%! In ’74, between the February meeting when the funds rate was 9% it rose to 13%, and it fell to 8% by the December meeting.

Further still, there are other examples of such now seemingly “impossible,” material changes in the funds rate. Thus, it is worth remembering that from the  April meeting in ’79 when the funds rate was 10.25% it rose in large increments to 15.5% by the October meeting. Finally and most impressively from the January meeting in ’80 through the March meeting… a scan six weeks… the Fed funds rate soared from 14.0% to 20.0%. We remember it well for it set the stage for an even larger rise between the June meeting when the funds rate had fallen to 8.5% to 20% again at the December meeting.

We bring these “tales” of volatility to the fore this morning for the simple reason that we have all become too complacent when it comes to the Fed’s history. The past decade’s non-volatility is an anomaly… a long one to be certain, but an anomaly nonetheless. When we said several weeks ago for the first time that we thought the o/n fed funds rate would be taken higher four times this year and that it would move in the aggregate by more than 100 bps we were laughed at. We stand by our forecast, laughter be damned.

And with that in mind, it is perhaps time to start worrying about the Fed cutting rates in the not too distant future…

via Zero Hedge http://ift.tt/2BGRIri Tyler Durden

Via GoldTelegraph.com,

The economy has been showing great gains, and that positive trend is fueling fears of a surge in inflation. The Consumer Price Index, the key predictor of inflationary trends, rose .05 percent in January, which greatly exceeded the anticipated rise of 0.2 percent. The market reacted as expected as stocks fell, and government bond yield rose.

The Fed is keeping a close eye on these developments, and that could fuel the inflation fears. The fear of rising prices includes most economic sectors, from gasoline, housing, food, healthcare, to clothing.

Predictably, the market reacted immediately to the CPI rise with a 100-point loss after opening, even though the decline was quickly reversed. Investors are anticipating that the Federal Reserve could raise their interest rates three or more times by year-end.

As the economy continues to grow, unemployment has fallen to a record low and the sale of tangible goods is up. Economists are anticipating the economic upswing to continue as the GDP is expected to grow by 3 percent, faster than anticipated. Since 2009, the GDP has only risen by an annual average of 2.2 percent. As a result, prices for consumer goods have risen predictably and steadily. The Federal Reserve is setting policy with a 2 percent inflation in mind. A higher-than-anticipated inflation rate could raise interest rates, making it more difficult for companies to borrow needed funds. Following the passage of a $300 billion spending package, market-watchers are now convinced of a 62 percent chance that the Feds will raise interest rates three times by December. Rate hikes in March and June are almost a certainty, with the third hike a high possibility. A fourth hike is not out of the question and becoming more likely. This is seen by many as the real problem.

On top of the $300 billion spending package, the government has signed off on a $1.5 trillion tax cut over the next ten years. President Trump has also promised more funding for large and long-overdue infrastructure improvements.

All the signs for economic growth are in place, and economists such as Joel Naroff of Naroff Economic Advisors, Inc. are anticipating the consequences of “too much of a good thing” to be rising costs and rapid inflation.

Between 2000 and 2016, food prices have increased by almost 40 percent. This number is within the norm as it comprised a reasonable 13.1 percent of household income in 2016. For a household in a lower-income bracket, however, this amount jumps to 36.6 percent, making it far more significant to poorer consumers. The chart below from zerohedge depicts the rise in food prices since 2007 and the actual impact of inflation for staples at the dinner table.

Only a handful of food items fell in price, with meat prices increasing by an average of 50 percent.

Consumers are also subjected to higher prices due to tariffs on imports. As a matter of fact, tariffs can double the cost of certain items. The price of certain fruits and vegetable, leather goods, chocolate and dairy products, to name a few, are inflated due to import taxes, or tariffs. The government imposes these tariffs to protect local industries and jobs from unbridled foreign competition.

The import of steel and aluminum has some major financial and security implications. The US is a major steel buyer from across the world, while we only export 25 percent of the amount of the steel we produce. That makes the US a major global player in the steel market. President Trump is considering a tariff of up to 25 percent for worldwide steel imports and a 53 percent tariff for steel imported from 12 specific countries. Aluminum will face a general worldwide tariff of around 8 percent and a 23.6 percent tariff from specific countries. Both steel and aluminum imports will also face import quotas, thus raising prices even more.

Global steelmaking capacity is up 127 percent from 2000, but the demand for steel has not kept up with capacity. Currently, the worldwide capacity for steel production is at 700 million tons; however, this number is 7 times the amount of steel used in the US.

China is the world’s major steel exporter. Its monthly steel production equals the US’s entire annual production of steel. This situation has lead to the demand for a 53 percent import tariff and quotas on all major steel producing countries, including China, Vietnam, Brazil, Thailand, Costa Rica, Turkey Malaysia, Russia, Egypt, Republic of Korea, India, South Africa and India. The purpose of these strict new measures is to increase US steel production from its current 73 percent capacity to 80 percent.

During 2013 to 2016, aluminum suffered the loss of 6 smelters in the US as demand fell by 58 percent. New plans for an improved infrastructure should raise demand considerably. Currently, the government is recommending a minimum 7 percent tariff on all aluminum imports, with a 23.6 percent for aluminum imported for Vietnam, China, Russia, Hong Kong and Venezuela. Imports from all countries can expect an import quota.

All these anticipated measures are expected to benefit the US steel and aluminum industries and raise consumer prices for commodities using these materials. While prices drop in the US, the quotas will help decrease aluminum prices in China, thus allowing for cheaper exports of items manufactured with steel and aluminum. Our policies focus on manufactured good rather than raw material, so the US needs to consider that the quota of these materials will result in cheaper products. The usual remedy is higher tariffs to allow competition with locally-produced goods.

These signs of impending inflation have investors taking another look at gold as the historically most reliable hedge against inflation.

We could be facing a major gold bull market soon. This one will be quite different from the bull markets in the 1970s or the post-2000 market. An entirely new factor is being introduced into the global gold markets with potentially huge consequences. This time, it includes the Islamic factor in the gold trade. One-quarter of the world’s population is Islamic, and investing in gold has been against Islamic law. This is changing, and one-quarter of the world’s population could be infusing the gold market with $3 trillion of investments.

In addition, China has opened the Shanghai Gold Exchange. China has huge gold reserves and wants prices set in actual gold value instead of paper futures. Currently, for each physical ounce of gold, there are 252 ounces of contracted futures on paper. This could change drastically if China has its way, and it could create a gold bull market of historic proportions.

Our growing economy, along with anticipated changes in tariff regulations and entries into the gold market make inflation in 2018 almost a certainty.

via Zero Hedge http://ift.tt/2EX3G2c Tyler Durden

One month after Project Veritas revealed that Twitter was indeed “shadow banning” and blocking views critical of Hillary Clinton, the social network appears to have done it again, and overnight Twitter appears to have suspended thousands of accounts overnight, infuriating conservatives on the platform.

As Bloomberg reports, prominent conservative pundits and activists said Wednesday that thousands of their followers had been deleted overnight.  Other users said they received messages from Twitter asking them to confirm they were real people before being allowed to keep using the service.

“The twitter purge is real,” conservative podcast host Dan Bongino said on Twitter. “Twitter blocked me from twitter ads last night and purged thousands of followers.”

Conservatives have long accused – and in retrospect, with reason – Twitter of targeting them specifically. EvenAjit Pai, the chair of the Federal Communications Commission, has said the service discriminates against conservatives. On the flip side, progressive users say Twitter doesn’t do enough to stop harassment against women and people of color. Some argue President Donald Trump, Twitter’s most influential users, should be banned for bullying opponents.

While Twitter has yet to make a public statement about the issue, Gizmodo reports that right-wing users believe that they’re being targeted in a mass purge of suspected conservatives under the guise that they are “Russian bot” accounts.

As Bloomberg adds, Twitter has been seeking out and shutting down automated accounts that pretend to be real people as pressure mounts to purge the service of “bots” that artificially inflate follower counts and advertising metrics.

Other fake accounts have been traced to Russian-backed agents that the U.S. government says are working to sow political discord in the country. Researchers say as many as 15 percent of users could be fake, a number Twitter says is much lower.

It’s unclear if the latest loss of followers is related to bots. A Twitter spokesperson didn’t immediately return a request for comment

In response, a hashtag called #TwitterLockOut was launched by conservatives to talk about the purge, with some claiming that real people (as opposed to bots) were locked out of their accounts. On Wednesday morning The hashtag “TwitterLockOut” was trending in the U.S.

Everyone from well known figures of the alt-right, like neo-Nazi Richard Spencer, to people with Twitter handles like @Isa4031AMP, @DonofJustice, and @Patriotsavior seem to have been impacted by the move—at least when it comes to their follower counts.

As has happened on previous occasions, conservatives claim that they’ve lost hundreds and sometimes thousands of followers overnight.

Apparently Twitter likes working in the dark (did this late at night) Many are unaware that twitter locked 🔒 accounts thinking we were bots
Anyway, I know who I am but Twitter has messed with my followers Please be patient as we try to reconnect #TwitterLockOut pic.twitter.com/dbohXnlcae

— EAGLE WINGS (@Isa4031AMP) February 21, 2018

Bill Mitchell, a popular voice within the community known for his tweets defending President Trump, claims that he lost roughly 4,000 followers overnight.

I lost around 4000 or so. https://t.co/HZRz0y4aJM

— Bill Mitchell (@mitchellvii) February 21, 2018

Many people who are angry with Twitter are advocating for a move to Gab, a competing social media platform that has become the preferred alternative to Twitter among conservatives.

The best thing you can do to fight Twitter censorship is to create a Gab account and start using it regularly. The more people do so, the more useful Gab will become.

— Jared Beck 🔹 (@JaredBeck) February 21, 2018

Some Trump supporters have even blamed the Twitter account purge on Russia.

We’re all Americans who voted for Trump, without being influenced by commies, yet every major Trump supporting account was locked out overnight. Unbelievable!!!#TwitterLockOut pic.twitter.com/xJk1H5ROdA

— TrumpIsMyPresident™ (@Trumpism_45) February 21, 2018

Mike Flynn Jr., son of the former Trump national security advisor, also claims that Twitter is targeting conservatives, though he claims he’s given the company the “benefit of doubt.”

Did anyone get a “heads up” up from @Twitter @TwitterSupport prior to them purging followers?

I’d give them benefit of doubt but they’ve been caught too many times censoring conservative accounts#TwitterLockOut https://t.co/Wi1q9KdAb7

— 🇺🇸MFLYNNJR🇺🇸 (@mflynnJR) February 21, 2018

Gizmodo said it has reached out to Twitter and will provide an update if @Jack’s company – whose stock in recent days has soared on the back of its first ever profit and a short squeeze – responds.

via Zero Hedge http://ift.tt/2HBg6uU Tyler Durden

Authored by Irina Slav via OilPrice.com,

Canadian oil producers can’t get a break.

First it was the pipelines – there are not enough of them to carry the crude from Alberta’s oil sands to export markets. This pipeline capacity problem has been forcing producers to pay higher rates for railway transportation, which has naturally hurt their margins in no small way.

Now, there is a shortage of rail cars as well.

The situation is going from bad to worse for Canadian producers who can’t seem to catch a break. Canadian railway operators are fighting harsh winter weather and finding it hard to supply enough cars to move both crude oil from Alberta and grain from the Prairies.

The harsh weather is just the latest factor, however. Before that, there was the 45-percent surge in demand for rail cars from the oil industry, Bloomberg reports, citing Canadian National Railway. The surge happened in the third quarter of last year, and Canadian National’s chief executive Ghislain Houle says that it took the company “a little bit by surprise.” This surprise has led to “pinch points” on the railway operator’s network, further aggravating an already bad situation.

As a result, crude oil remains in Alberta and prices fall further because Alberta is where the local crude is priced, Bloomberg’s Jen Skerritt and Robert Tuttle note. In fact, Canadian crude is currently trading at the biggest discount to West Texas Intermediate in four years, at $30.60 per barrel. The blow is particularly severe as it comes amid improving oil prices elsewhere driven by the stock market recovery.

The light at the end of the tunnel is barely a glimmer. Despite federal government support for the Trans Mountain pipeline expansion project, it is still facing obstacles that may result in it never seeing the light of day. The project that would boost the current pipeline’s capacity from 300,000 bpd to 890,000 bpd, accommodating much of the increased Alberta bitumen production, is being challenged in court and Kinder Morgan has yet to collect even half of the necessary permits to proceed with it. There are no other major pipeline projects in Canada that have been approved.

Meanwhile, the news from the research front is not good, either. Back in September, media outlets reported on an accidental discovery that could make transporting bitumen by rail much safer by turning the crude into pellets. This would minimize the danger of a spill but, some said at the time, would increase transportation costs.

Canadian national Railway is also working on its own bitumen pellet technology it calls CanaPux, but for now it has not yet been commercialized, perhaps for the same reason of cost. Yet bitumen pellets, some observers note, could be the best solution to the current conflict between Alberta and British Columbia. The latter is doing everything it can to stall Trans Mountain’s expansion citing environmental concerns.

Alberta stopped importing B.C. wines in retaliation.

But bitumen pellets are safe, their creators say, so B.C. would have nothing to worry about. And yet, like grain, these pellets would need rail cars to transport them should this option be chosen despite cost considerations. Canadian National says it plans to hike its capex to $2.6 billion this year in response to the shortage. The effect of the surprise jump in demand for railcar capacity from the oil industry should also subside eventually. The only question is how much all these factors would hurt Canada’s oil production growth in the meantime.

via Zero Hedge http://ift.tt/2sKUw3F Tyler Durden

Nearly a decade after the US unleashed its biggest debt-issuance binge in history, made possible only thanks to the Fed’s monetization of nearly $4 trillion in deficits (and debt issuance), the Fed is starting to get nervous about the (un)sustainability of the US debt.

The Federal Reserve should continue to raise U.S. interest rates this year in response to faster economic growth fueled by recent tax cuts as well as a stronger global economy, Dallas Federal Reserve Bank President Robert Kaplan said on Wednesday.

“I believe the Federal Reserve should be gradually and patiently raising the federal funds rate during 2018,” Kaplan said in an essay updating his views on the economic and policy outlook.

“History suggests that if the Fed waits too long to remove accommodation at this stage in the economic cycle, excesses and imbalances begin to build, and the Fed ultimately has to play catch-up.” The Fed is widely expected to raise rates three times this year, starting next month.

Kaplan, who does not vote on Fed policy this year but does participate in its regular rate-setting meetings, did not specify his preferred number of rate hikes for this year. But he warned Wednesday that falling behind the curve on rate hikes could make a recession more likely.

Echoing the recent Goldman analysis, warning that the recently implemented budget could lead to an “unsustainable” debt load, Kaplan – who previously worked for Goldman – also had some cautionary words about the Trump administration’s recent tax overhaul, which he said would help lift U.S. economic growth to 2.5% to 2.75% this year, pushing the U.S. unemployment rate, now at 4.1% down to 3.6% by the end of 2018.

On the all important issue of inflation, he projected it would firm this year on route to the Fed’s 2-percent goal.

But the most ironic warning came when Kaplan predicted the US fiscal future beyond 2 years: he said that while the corporate tax cuts and other reforms may boost productivity and lift economic potential, most of the stimulative effects will fade in 2019 and 2020, leaving behind an economy with a higher debt burden than before.

“This projected increase in government debt to GDP comes at a point in the economic cycle when it would be preferable to be moderating the rate of debt growth at the government level,” Kaplan said.

He was referring, indirectly, to the following chart from Goldman which we showed previously, and which suggests the US will become a banana republic in just a few years.

A higher debt burden will make it less likely the federal government will be able to deliver fiscal stimulus to offset any future economic downturn, he said, and unwinding it could slow economic growth.

“While addressing this issue involves difficult political considerations and policy choices, the U.S. may need to more actively consider policy actions that would moderate the path of projected U.S. government debt growth,” he said.

So to summarize: when US debt doubled in the past decade the Fed had no problems, and in fact enabled it. And now, it’s time to panic…

Finally, going back to Kaplan’s point that fiscal stimulus may no longer work during the next downturn covered by a record mountain of debt (which according to Trump’s budget will hit $30 trillion by 2028), we agree, and is why we suggested a few days ago that the next crisis will lead to – what else – even more QE, which also explains why Goldman has been so desperate to get its clients to sell all the Treasurys they have now, as Goldman’s prop desk keeps adding to its inventory…

via Zero Hedge http://ift.tt/2EIhbDt Tyler Durden

David Einhorn’s performance woes keep getting worse.

One month after the Greenlight founder sent a letter to clients disclosing that the fund had declined 1.6% in Q4 (bringing its total 2017 return to just 1.6%, below the average hedge fund’s 6.5% return and the S&P’s 22%) saying “this must be frustrating to you“, he proceeded to have an abysmal January, in which his main hedge fund lost another 6.6%, its worst monthly loss since 2008.

At the time, the firm attributed most of its poor performance to losses in the last week of the month, when the market melted up, led by the stocks that comprise Einhorn’s short basked: “Our long portfolio only achieved about half the S&P 500 return, while our short portfolio went up more than twice the index,” Greenlight wrote, adding that many shorts rose 15 percent or more. “We believe the valuation spread between our longs and shorts is as wide as we can remember.“

While all of Greenlight’s five top disclosed long holdings – AerCap Holdings, Bayer, Brighthouse Financial, General Motors and gold – made money in January, they were more than offset by declines in the short portfolio, according to the note. Netflix, a member of Greenlight’s “bubble basket,” surged more than 40% in January, while shares of Amazon.com and Tesla also soared.

Well, fast forward one month when Einhorn’s recurring message to his investors was once again quite applicable.

During a conference discussing results for the Cayman-based Greenlight Capital Re, Einhorn had more “frustrating” news to investors: “While we’ve never underperformed like this, our prior worst underperformance compared to the S&P came in March of 2000, which was a similar environment.”

Repeating the mantra from his recent letters, Einhorn expressed hope that value stocks will once again be bought… soon… maybe: “While the environment has remained difficult with growth stocks accelerating their outperformance against value stocks this year including February, we think a reversion may finally be coming soon.”

Now all that Greenlight needs for this prediction to come true is a market crash .

* * *

And while Einhorn clearly needs some luck from a harsh market which keeps rewarding money-losing tech stocks while punishing undervalued cash cows, it could have been worse: as we showed this morning, nothing compares to the bloodbath experienced this month by the systematic, CTA, trend-following quant community which got smoked after the VIXplosion in early February, as shown below.

via Zero Hedge http://ift.tt/2GxRnXl Tyler Durden

One of the most underreported commodity stories of the past year has been the staggering climb in the price of cobalt – a metal that’s an essential ingredient of everything from smartphones to electric cars, as BusinessWeek pointed out in a feature about the looming cobalt crisis published last month.

For example, both cobalt and lithium are key components of lithium-ion batteries used in smartphones. And as global demand for electric vehicles is expected to explode thanks to China’s heavy handed inducements for urban car owners, cobalt traders have moved quickly to price this in.

According to Global Energy Metals, total global cobalt demand is on track to exceed 120,000 tonnes annually by 2020, up approximately 30% from the 93,950 tonnes consumed in 2016. The bulk of this is due to the lithium ion battery.

…And it has sent the spot price of cobalt traded on the London Metals Exchange to just shy of $80,000 per tonne, its highest level since the financial crisis. The price has more than tripled over the past 18 months.

And what we’ve witnessed so far is likely only beginning.

With electric vehicle sales “growing at double-digit compound growth rates and the costs of renewable energy continuing its deflationary cost crash, the raw materials critical for the lithium-ion battery are in the early stages of a growth cycle that may continue well into the next decade,” Chris Berry, an advisor to Lithium Americas Corp., told MarketWatch recently.

So it shouldn’t come as a surprise that Apple, the world’s most valuable company, whose offering of consumer products represent one of the world’s largest markets for cobalt, is in talks to purchase long-term supplies of cobalt directly from miners for the first time, according to a Bloomberg report.

The company is hoping to secure a sustainable supply of the metals as electric cars continue to consume a growing share of the global supply. Apparently, CEO Tim Cook can no longer stomach leaving such a crucial issue in the hands of Apple’s suppliers, which have traditionally been responsible for securing supplies of cobalt.

The talks show that the tech giant is keen to ensure that cobalt supplies for its iPhone and iPad batteries are sufficient, with the rapid growth in battery demand for electric vehicles threatening to create a shortage of the raw material. About a quarter of global cobalt production is used in smartphones.

The iPhone maker is one of the world’s largest end users of cobalt for the batteries in its gadgets, but until now it has left the business of buying the metal to the companies that make its batteries.

The talks show that the tech giant is keen to ensure that cobalt supplies for its iPhone and iPad batteries are sufficient, with the rapid growth in battery demand for electric vehicles threatening to create a shortage of the raw material. About a quarter of global cobalt production is used in smartphones.

Apple is seeking contracts to secure several thousand metric tons of cobalt a year for five years or longer, according to one of the people, declining to be named as the discussions are confidential. Its first discussions on cobalt deals with miners were more than a year ago, and it may end up deciding not to go ahead with any deal, another person said.

An Apple spokesman declined to comment. Glencore Plc Chief Executive Officer Ivan Glasenberg late last year named Apple among several companies the miner was talking to about cobalt, without giving further details.

It wouldn’t be much of an exaggeration to say that, in retrospect, miners might remember today’s announcement as the start of the great cobalt scramble, as Apple competes with carmakers like BMW and Volkswagon (not to mention other smartphone manufacturers) to lock up a long-term supply of the metal. Of course, Apple isn’t the first company to try and develop a direct relationship with miners.

Australian Mines Ltd., developing the Sconi mine in Queensland state, this week agreed a cobalt and nickel supply deal with SK Innovation Co., South Korea’s top oil refiner, that’s worth about A$5 billion ($3.9 billion) at current prices, the Perth-based company said Wednesday in a presentation.

SK Innovation, which plans to use the raw materials at an EV battery manufacturing plant in Hungary, agreed to buy all of the project’s planned output for up to 13 years, according to the filing.

BMW is also close to securing a 10-year supply deal, the carmaker’s head of procurement told German daily FAZ in early February.

Cobalt is an essential ingredient in lithium-ion batteries for smartphones. While those devices use about eight grams of refined cobalt, the battery for an electric car requires over 1,000 times more. Apple has around 1.3 billion existing devices, while Apple Chief Executive Officer Tim Cook has been bullish about the prospects for electric vehicles.

Another issue for companies like Apple that purport to be “socially responsible” (even as the company has proven over and over again that it will countenance a wide variety of labor abuses at its partners’ factories, as long as they’re happening far away from prying American eyes) is that the mining of cobalt is fraught with human rights abuses.  Two-thirds of supplies come from the Democratic Republic of Congo, where there has never been a peaceful transition of power and child labor is still used in parts of the mining industry.

In recent years, Apple has stepped up its engagement with cobalt suppliers after the origin of the metal in its supply chain came under scrutiny from human rights groups. In a report in early 2016, Amnesty International alleged that Apple and Samsung Electronics Co.’s Chinese suppliers were buying cobalt from mines that rely on child labor.

Last year, Apple published a list of the companies that supply the cobalt used in its batteries for the first time, and said it would not let cobalt from small-scale mines in Congo into its supply chain until it could verify that “appropriate protections” were being followed. However, if Apple were to break this promise, it wouldn’t be the first time the company failed to follow through with its “commitment” to human rights.

We’re now waiting to see if reports about Tesla, BMW and other automakers and smartphone makers seeking similar deals will follow accordingly – or if cobalt will be attract the kind of frenzied attention that bitcoin did last year when it’s torrid rally started accelerating.

via Zero Hedge http://ift.tt/2omKDnC Tyler Durden