With fewer than 24 hours to go until 2019, millions of minimum-wage workers across the US are preparing for sizable boosts in their compensation thanks to wage hikes in 20 states and 21 cities – increases that were largely inspired by the ‘Fight for $15’ movement launched back in 2012 by fast food and retail workers in NYC.
The wage hikes will impact some 17 million workers across the US over the course of 2019.
The federal minimum wage has been stalled at $7.25 since 2009. At least 13 counties and cities will implement the higher wage laws immediately starting on Jan. 1, reaching or exceeding $15 an hour. The rest will gradually phase in higher minimums of between $12 and $15 an hour, NBC News reported.
In addition, eight states – Arizona, California, Colorado, Maine, Massachusetts, Missouri, New York, and Washington state – are phasing in increases that will eventually put their minimum wages at $12 to $15 an hour, according to the National Employment Law Project.
According to a statement published last week, NELP Executive Director Christine Owens said the increases would be a boon for hardworking Americans who “have little to show for it,” according to the Huffington Post.
“Working people are struggling to pay their bills, but they see that it’s the corporations and the wealthy CEOs who are getting the tax breaks,” Owens said. “It’s just not right. The American people believe in the value of work – and that workers deserve to be valued.”
One NELP policy director said that while these increases are tremendous victories for the workers, in high cost states like California, more wage hikes may be needed, while workers in low cost-of-living states will see an outsize benefit.
The complete list of states raising the minimum wage this year includes: Alaska, Arizona, Arkansas, California, Colorado, Delaware, Florida, Maine, Massachusetts, Michigan, Minnesota, Missouri, Montana, New Jersey, New York, Ohio, Rhode Island, South Dakota, Washington and Vermont.
While economic equality sounds like laudable goal on the surface, it ignores the fact that by raising costs, employers will be incentivized to hasten their adoption of automation. As McKinsey warned in a study published one year ago, automation will kill 800 million jobs by 2030.
Witches – those who follow the Wiccan religion, have their cauldrons bubbling over President Trump’s use of the phrase “Witch Hunt” to describe the ongoing Russia investigation which began more than two years ago.
As the Daily Wire reports, CNN ran a segment last week to report that witches – who “tend to side with liberals,” don’t appreciate the plight of their fore-witches being compared to an endless investigation based on flimsy evidence of alleged collusion between the Trump campaign and Russia – which has morphed to encompass everything from porn-star payoffs to nude selfies.
David Salisbury, the author of “Witchcraft Activism,” called Trump’s use of the term “really disgraceful,” adding that “thousands of people were executed on suspicion of witch hunt.”
Amanda Yates Garcia, who is known as “the Oracle of Los Angeles,” said: “There are a lot to be offended by by Donald Trump, and I think his use of the term ‘witch hunt’ is very low on the list of priorities for most witches, but nevertheless, it does demonstrate his ignorance, as usual.” –Daily Wire
The world’s central banks’ safety harness finally gave way and one by one the world’s markets started to plunge.
Global stock markets lost almost $12 trillion in 2018 – the largest market cap loss since 2008 (and second largest in history)…
In fact, from its highs in January, world market cap is down $20 trillion.
As global central banks ‘allowed’ their balance sheets to contract on an annual basis for the first time ever…
But they said “It could never happen again” … fortress balance sheets and all, and yet global systemically important banks collapsed in 2008.
No corner of the world escaped unscathed.
Asia Ex Japan was the worst year since 2008 (and 2nd worst on record)
This was China’s 2nd worst year on record (2nd to 2008).
All the major Chinese markets were a mess.
The only major Asian market in the black for the year was India, where the BSE was ahead by almost 6 percent.
Europe was a bloodbath with the Stoxx 600 down 13% in 2018, its biggest loss since 2008.
And as Project Fear kicked in, The FTSE 100 ended 2018 down 12% – also its worst year since 2008 – but Germany’s export-heavy DAX was even worse.
US equities looked unstoppable… until Humpty Dumpty fell off the wall.
… and December was a bloodbath (even with the last few days’ manic bounce):
And so, this is still the worst December for US stocks since The Great Depression.
Gold and bonds outperformed notably in December as stocks plunged.
But on the year, only the dollar survived unscathed…
This is the first time since the 1970s that the S&P 500 has slumped so much when earnings growth was more than 10%.
So what should retail investors do? Well don’t turn to the hedgies – Long-short equity fund performance in December is the worst since August 2011.
Bonds were all underwater on the year – despite a huge compression in yields over the last two months – with the short-end the worst performer on a yield basis.
In fact this is the Treasury market’s biggest monthly rally since Jun 2016.
And the yield curve collapsed further this year…(inverting in the 2s5s region)
And yields have a long way to fall if cyclical stocks are right.
While Treasuries were bid recently, corporate bonds were not… Junk bonds tumbled in December, for the worst month since Dec 2015.
And worst quarter for junk bonds since Q3 2015.
Investment Grade corporate bond prices suffered their worst yearly loss since at least 2002:
Meanwhile, the dollar rallied on the year to its best annual gain since 2015:
While all commodities ended the year lower, gold outperformed (and WTI did not):
“We are most likely past the peak of this long economic uptrend,” said analysts at JBC Energy GmbH in Vienna.
While gold is down in 2018 in dollar terms, it appreciated against the yuan:
US Economic data was the most disappointing since 2008:
“Simply looking at the markets would suggest that the global economy is headed into recession,” said Robert Michele, chief investment officer and head of fixed income at J.P. Morgan Asset Management.
“However, while we agree the global economy is in a growth slowdown, we don’t see an impending recession,” he added, looking at the Fed to provide a policy cushion.
“Already, commentary out of the Fed suggests that it is nearing the end of a three-year journey to normalise policy.”
And the market agrees that The Fed will cut rates more than hike them from here on out…
The question is – will the Fed’s policy error reversal crash stocks further amid a total loss of confidence in central command once again?
Finally, we note with a glass of champagne inches away from our hands, this will not end well for bond bears and if bond shorts are squeezed – what happens to stocks from there?
One year ago, when looking at the 20 most popular stories of 2017, we admitted that perhaps as a result of too many conflicting narratives and outcomes, it was difficult to find a coherent theme of the key events that shook the world, and which you, our readers, found most interesting and notable.
2017 was a year of continued populist upheaval and political shocks, twists, turns and unexpected outcomes, a continuation of the “unexpected” Brexit vote outcome and Trump’s shocking presidential victory, both of which forced many to re-evaluate what “expert”, “pundit” and certainly “opinion poll” means; it was also the year when the concept of “fake news” became ubiquitously used by the establishment to slam any reporting it disagreed with and to justify why it was so wrong about everything, yet which would boomerang and lead to an even greater collapse in mainstream media credibility.
2017 was year in which class warfare in the US approached unprecedented levels with antagonism between races, genders, ethnicities, ideologies, age groups and incomes all approaching peak levels, and spilling over, literally, on the street as the US public was inundated with reports of ordinary citizens snapping and killing their peers in cold blood, of petulant students demanding conformity, and culminating with the deadliest mass shooting event in US history when a Vegas gunman killed 58 people and injured 851. His motives are still unknown.
2017 was a year of perplexing market stability: despite daily news of political, geopolitical and social turmoil, the market ignored virtually any potential risks and chugged along ever higher, with volatility crumbling to an all time low as the VIX printed a record number of days in the single digits
it was a year in which the S&P closed far higher than many had speculated, and defied the doomsayers who predicted a crash after Donald Trump won the presidential election despite the ongoing pile up of various imbalances, thanks largely to an unprecedented credit injection by China which has single-handedly been the world’s biggest source of new debt creation since the financial crisis, as well as the now widely accepted support of central banks around the globe which injected a record amount of liquidity in 2017 and whose only mandate is to prop up asset prices or else risk another crash, a collapse in the pension system of an increasingly aging developed world, resulting in violent social upheaval.
it was a year in which the geopolitical situation outside of the U.S. continued to deteriorate, although as a result of non-US intervention in Syria, we also saw the end of ISIS even as the historic refugee crisis and immigrant wave that was unleashed as a result of Syrian proxy war would alter the ethnic and demographic face of Europe for years to come, while also unleashing a wave of terrorist events as governments across the globe sought to exploit the crisis for their own selfish reasons, while resulting in an even greater surge in Europe’s populist power
In summary, 2017 was a year of confused flux and of dramatic change: change which was largely amorphous and chaotic but which we said would crystallize over 2018, “in unpredictable and, sadly, violent ways.”
It did indeed, because while many of the trends observed in 2017 were taken to their logical extremes in 2018, it is difficult to say that 2018 provided much needed closure to many of the themes and narratives that emerged in the previous year and earlier, most of which played out in the political arena, where for the first time in decades, the non-establishment president of the world’s biggest superpower, a manifestation of the “protest vote” that had built up over the past decade, shook to the core everything that the world had taken for granted, setting the stage for a dramatic revulsion from widely accepted norms and principles.
As we had warned for years, the vast if silent majority, feeling snubbed and neglected by the political oligarchy and the world’s central bankers, decided to take the power back which they did within the confines of the democratic process, sending the establishment reeling, by rejecting years of legacy narratives by replacing decades of a failed, and flawed, political regime in the US with something… different.
And yet, looking back over the past 12 months, it remains to be seen if these changes will be successful and bear fruit, or if they will be a change for the worse. To be sure, the defeated forces of established powers refused to go gentle into that good night and created an unprecedented McCarthyism 2.0 narrative that desperately hoped to make Trump’s victory appear as the outcome of collusion with Russia, yet now – 24 months after the election and half way into Trump’s presidential term – we still await the much-anticipated Mueller report that is expected to definitively prove the president colluded with Moscow in some capacity.
It is also true that while many had placed high hopes that Trump would prove to be an agent of substantial change, the president initially doused such expectations as he rushed to surround himself with Wall Street “experts” and corporate oligarchs who promptly hijacked the post-Obama transition process resulting in… more of the same. As such it is hardly a surprise that the biggest legislative achievement by the Trump administration heading into 2018, was a tax cut that benefits corporations and the wealthy first and foremost, even as it adds trillions more to the already record US debt.
That said, changes within the administration did start to emerge as the year progressed, when Gary Cohn, Trump’s chief economic advisor and former Goldman COO, resigned after repeated confrontations with Trump. Things only escalated from that point on as one after another prominent Trump advisor took the revolving door out of the administration, which saw the departure of Secretary of State Rex Tillerson, FBI Deputy Director Andrew McCabe and National Security Advisor HR McMaster, and which most recently parted ways with both its Attorney General, Jeff Sessions, its Chief of Staff, John Kelly and Defense Secretary, James Matthis.
Some called it Trump “draining the swamp.” Others saw the accelerating departures as clear evidence the White House had become a sinking ship. Whatever one wanted to call it, the simple reality is that as we entered 2018, people had enough and wanted change. This, in the words of the established media, was called “populism”, and the transformation process which allowed it to take place was maligned under the umbrella definition of “fake news.”
It is also why in a popular snapback of displeasure against the Trump administration, the Republican party suffered a major defeat in the House during the midterm elections, even as the GOP preserved their majority in the Senate, resulting in what is guaranteed government gridlock for at least another two years.
And while few would call Trump’s domestic or foreign policies a resounding success, the president did deliver on what may arguably have been his most important task, and accomplishment: placing a second conservative Justice in the Supreme Court – despite an unprecedented campaign by the left to smear Brett Kavanaugh – and with recent news of Ruth Bader Ginsburg’s deteriorating health, Trump may achieve an unprecedented trifecta, virtually assuring a conservative majority in the Supreme Court for years if not decades.
To be fair, Trump had another accomplishment in 2018: this was the year when the US economy decoupled from the rest of the world – if only briefly – as both the US economy and stock market grew at a remarkable pace for much of the year, even as the president waged an increasingly bitter trade war with both China and the rest of the world, and which brought China’s economic growth to the lowest in modern history while sending China’s stock market crashing. The counterargument is that this remarkable decoupling from the est of the word, and the impressive GDP growth in the US economy, was only possible thanks to Trump’s unprecedented fiscal stimulus which while providing a brief tailwind, will result in trillion-dollar budget deficits in coming years, a massive increase in US government debt, and could potentially risk a debt crisis should foreign and domestic investors balk and refuse to fund America’s profligate ways. Indeed, it was an inflationary and interest rate scare in October – coupled with Chairman Powell’s “long way to neutral” comment – that the defining moment for US capital markets in 2018, as it clearly delineated the two phases for US stocks: one of gradual ascent for the first nine months of the year, culminating with the S&P’s all time high hit on September 20, followed by a brutal selloff which has left countless traders dazed and confused as markets realized that the Fed may be tightening into a recession, and only recent comments by the Fed Chair have suggested that the Fed’s numerous rate hikes forecast into 2019 may in fact be zero.
Meanwhile, after a year of record low volatility largely on the back of 2017’s record $2.5 trillion in central bank liquidity injected at a time of the first coordinated global recovery in over a decade, 2018 was a mirror image from the very beginning, when a violent January meltup in stocks resulted in February’s violent VIX explosion as the “negative convexity” emerging from a record high vol gamma suddenly spontaneously combusted to destroy volatility sellers and overnight wiped out the universe of inverse VIX ETFs, leading to the first S&P500 correction since the Shanghai Accord of 2016. It wouldn’t be the last one, because while many optimistic pundits said not to dwell too much on it, the VIXtermination event of February 5 was merely a harbinger of the market chaos that would emerge toward the end of the year.
Another problem, as so many banks hinted across the year, is that some suspect that the sputtering global economic recovery may be the result of central bank liquidity which starting right about now, is finally being withdrawn after a decade of liquidity injections. And, as a record $1 trillion in global liquidity is pulled from the system by central banks which now realize they have created a massive asset bubble, the outcome could – according to countless skeptics – be dire.
Of course, 2018 is the year when in addition to a renewed focus on monetary stimulus, fiscal policies were great again, so to say, if only for the time being as Trump’s $1 trillion fiscal stimulus boosted the economy just as wage growth and inflation finally rebounded and the job market reached a critical point where there were more vacant jobs the unemployed workers; it is this stimulus that prompted Fed concerns about overheating late in the summer and culminated with Powell’s famous speech that “we’re a long way from neutral at this point” which as we noted correctly at the time “Fed Chair Powell Hints He May Soon Crash The Market.” We were correct, as just after that speech, the market tumbled into a historic swoon which briefly dipped into a bear market on the day before Christmas, when as a result of massive hedge fund liquidations saw the worst Christmas Eve on record for the stock market. Previewing just this outcome last year, we said that “it would be ironic if Trump’s greatest legislative achievement in 2017 is also the catalyst for the next American recession” and looking ahead, it has become a virtual consensus that a recession is looming, the only question is whether it hits in 2020 or as early as late 2019. Ominously, the market has already priced in the end of Fed rate hikes in 2019 and expects the first rate hike – a coincident indicator of a recession – to take place in early 2020.
And speaking of our year ahead outlook exactly one year ago today, we also said that “one of the biggest questions facing 2018 is whether this transition from monetary to fiscal policy will actually take place, and how smooth this a handover will be. For now optimism and hope prevail: global markets closed 2017 at an all time high with volatility just barely off record lows.” Needless to say, the handover has so far been anything but smooth as the fading effect of fiscal stimulus – and China’s inability to stimulate its own economy crippled by what is already a record high debt load – coupled with what is now a net drain on global liquidity by central banks has led to what has been the most turbulent stock market since the financial crisis, and resulted in the worst drop in global stocks in the past decade.
And speaking of China’s economy, in addition to the ongoing debate of fiscal and monetary stimulus, the biggest geopolitical event of 2018 was almost certainly the ongoing trade war between the US and China which has escalated to the point where virtually all of China’s imports (and US export to China) are or soon will be subject to tariffs, crippling global trade flows and forcing producers on both sides of the Pacific to seek alternative supply-chains. Should Trump and Xi fail to find an amicable resolution to this ongoing trade feud, we fully expect the trade war narrative to dominate capital markets in 2019, resulting in even more pain for stocks as globalization suffers its latest hit. Meanwhile, China’s economy continues to undergo an unprecedented slowdown, trapped on one side by deteriorating diplomatic relations with the US, and on the other limited by how much organic credit growth Beijing can inject to stimulate what is already an economy that is laboring under an unprecedented debt load.
Continuing on the themes from the prior year, 2018 also demonstrated how dominant the political narrative has become when it comes to finance and capital markets. For all those lamenting that relentless coverage of politics in a financial blog (which sadly also includes every tweet from Donald Trump), why finance appears to have taken a secondary role, and why the political “narrative” has taken a dominant role for financial analysts, the past year showed vividly why that is the case. After all, none other than the president rejoiced publicly at every new all time high in the S&P and, conversely, has been uncharacteristically silent during the recent sharp drawdown.
The reason for Trump’s recent self-imposed radio silence on all things market is simple: after declaring the S&P500 a “massive bubble”, Trump had pivoted to the point where he would take daily credit for the market’s record highs. And, as we said last year, “eventually, the time will come for Trump to pay the piper.” That time came in the fourth quarter of 2018 when the S&P, along with most other developed markets tumbled as suddenly what had worked for years, no longer worked, and the one dominant strategy of the past decade, namely “buy the dip“, finally failed and was replaced with “sell the rip.”
But if one had to summarize the dramatic market shifts in 2018 as simply as possible, it is that in the past year, and really just past three months, we observed a dramatic reversal in which traders, who had habituated to a world where nothing wrong can ever again happen, finally remembered – violently – that adverse newsflow and negative events have consequences, and that in a world where central banks no longer provide training wheels, one must take risk to generate return, something which most hedge funds had forgotten and as a result suffered the worst year for the “2 and 20” industry since 2011.
Another problem with this habituation that “no news can ever again be bad news” was that – as we said in our 2017 year end review – it was no longer clear what the market may or may not have priced in, absent hope and expectations of central bank intervention to arrest any future selling episodes; central bank intervention which in 2017 hit all time highs and numerically amounted to over $15 trillion in cumulative liquidity injections. And, as we said in December 2017, “with a major shift now taking place away from monetary and toward fiscal policy, the “assumption of hope” will be tested in 2018. Perhaps violently.”
That violence was on full display in the fourth quarter, and especially in December when volatility exploded and when the Dow moved by triple digits on no less than 13 days, leaving traders shaken, shocked, and paralyzed.
Another assumption that will be tested in the coming year is whether “China no longer matters” for US markets, something which was certainly not the case in 2018. Back in 2015, US futures would swoon the moment the PBOC announced even a modest drop in the Yuan. On the other hand, for much of 2017 and 2018, US equities could care less what Beijing did, how high NPLs among Chinese banks rose, how pervasive corporate defaults in China became, or what the future held for China, and its $40 trillion in financial assets. We have a nagging suspicion that whether or not the US manages to avoid a recession in 2019, and the business cycle is now so long in the tooth the current expansion is now the second longest in US history, any global shock will ultimately come out of Beijing, regardless of whether Trump and Xi manage to find a common language and put the trade war between the two nations aside.
Still, while many themes, both in the political and financial realm, did get some closure, dramatic changes in 2018 persisted, and will continue to manifest themselves in dramatic, often violent and unexpected ways – from the unprecedented obsession with everything Trump does, says and tweets, to “populist” upheavals in Europe and around the developed world, to renewed capital flight out of China. Perhaps these non-stop changes is the reason why 2018 was another record year for Zero Hedge, which recently crossed 5 billion cumulative page views since inception, just over five years after hitting our first 1 billion pageview milestone.
As always, we thank all of our readers for making this website – which has never seen one dollar of outside funding (and despite amusing recurring allegations, has certainly never seen a ruble from the KGB either), and has never spent one dollar on marketing – a small (or not so small) part of your daily routine. Which also brings us to another amusing topic: that of fake news, and something we – and others who do not comply with the established narrative – have been accused of. While we find the narrative of fake news laughable, after all every single article in this website is backed by facts and links to outside sources, we find it a dangerous development, and a very slippery slope that the entire developed world – is pushing for what is, when stripped of fancy jargon, internet censorship under the guise of protecting the average person from “dangerous, fake information.”
To preserve its counter-establishment aura, it goes without saying that the current administration should overturn this blatant attack on the First Amendment, and let people decide for themselves what is and isn’t fake news. If anything, it is the conventional, mainstream media, most of which is owned by a handful of corporations with extensive ties to the government, that demonstrated on many occasions in 2018 that it is the primary creator and distributor of “fake news”, something which has not escaped the broader US population the majority of which no longer has trust in the conventional news media.
In addition to the other themes noted above, we expect the crackdown on free speech to accelerate in the coming year, especially as the following list of Top 20 articles for 2018 reveals, many of the most popular articles in the past year were precisely those which the conventional media would not touch out of fear of repercussions, which in turn allowed the alternative media to find an entry point, and take significant market share from the established outlets by covering topics which the public relations arm of established media outlets refused to do, in the process earnings itself the derogatory “fake news” condemnation.
We are grateful that our readers – who hit a new record high in 2018 – have realized it is incumbent upon them to decide what is, and isn’t “fake news.”
* * *
Before we get into the details of what has now become an annual tradition for the last day of the year, those who wish to jog down memory lane, can refresh our most popular articles for every year during our no longer that brief, almost 10-year existence, starting with 2009 and continuing with 2010, 2011, 2012, 2013, 2014, 2015, 2016 and 2017.
So without further ado, here are the articles that you, our readers, found to be the most engaging, interesting and popular based on the number of hits, during the past year.
In 20th spot, with just over 600,000 page views, was a question affecting a company that investors either love or hate: Tesla. Elon Musk got in a lot of trouble with the SEC in 2018 after tweeting, without reason, that he had “funding secured” for an LBO deal, only for it to emerge that he was merely hoping to “burn the shorts” and force a short squeeze. Well the shorts enjoyed a brief moment in the sun as TSLA stock tumble, only to rebound after the company’s best quarter yet. However, questions have emerged when people asked “Why Are “Thousands” of Teslas Sitting In a Field in California?” prompting questions if Musk is merely stashing away excess inventory in order to represent ongoing strong ongoing demand for the Model 3. This, along with many other questions involving Tesla and its ongoing viability will hopefully be answered in the coming year.
In 19th spot, with just over 650,000 page views was a troubling report about the ubiquitous presence of big brother when “Police Raided The Home Of Man Who Posted Pictures Of His Mushroom Dinner On Facebook” in which we described the story of a man who posted photos of his homegrown morel mushrooms on Facebook, and which led to a visit to his home hours later from law enforcement apparently investigating possible use of psychedelic mushrooms. Increasingly, social media is becoming a giant privacy liability, as many around the world have learned in a year of scandals for Facebook and its peers, when it emerged that there is no such thing as “privacy”, and one’s data is sold with impunity to the highest bidder.
In 18th spot, with over 667,000 page views, was the latest story of economic collapse out of that Latin American “socialist paradise” – Venezuela – which as part of its ongoing hyperinflationary disintegeration succumbed to another round of “Chaos After Maduro Announces Massive 95% Devaluation” with the new FX Rate Tied, paradoxically, to the country’s Cryptocurrency. While the endgame for now officially bankrupt Venezuela is clear, the biggest question is just how much longer will the people tolerate Maduro at the head of what is now the worst instance of hyperinflation in world history, with Venezuela’s hyperinflation of 1,000,000% now surpassing even that of the Weimar Republic.
In 17th spot, over 687,000 readers were shocked to learn that in parallel to what Trump has dubbed the biggest “witch hunt in history”, the “DOJ’s Inspector General Horowitz Found that FBI, DOJ Broke the Law In Clinton Probe” and has refers to prosecutor for criminal charges. President Trump has repeatedly accused the DOJ of a campaign to spy and discredit his presidency, and has claimed that the “Russian collusion” is just an ongoing attempt to distract from the real story: the coverup of alleged crimes of Hillary’s email server. 2019 will provide some closure on this matter with the Mueller investigation expected to conclude early in the year. What happens next, and whether Trump is impeached as a result, remains to be seen.
In 16th spot, readers shifted their attention to yet another political crisis, this time in South Africa, where “As Land Confiscations Loom, South Africa Rules 300,000 Gun-Owners Turn Over Their Weapons.” While the South African economy was relatively stable in 2018, this may not persist next year especially if, as the ruling party has decided, white landowner lands are to be expropriated, potentially resulting in a nationalization of private assets. And since such an act may be accompanied with mass weapon confiscation, some see in current events in South Africa a preview of the worst case scenario for any developed nation in which the government becomes too powerful and seeks to pander to a specific group of voters.
In 15h spot, with just under 690,000 page views, was a surprising and in fact shocking admission by the Former Director of National Intelligence James Clapper who admitted in a CNN interview that former President Obama instigated the ongoing investigations into Donald Trump and those in his orbit. Meanwhile, instead of focusing on potential abuses by the prior administration, the US media and public dutifully follow every twist and turn in the most contrived narrative, that of Vladimir Putin somehow winning Trump’s election for him, which of course has been a recurring sideshow for the past two years, mostly meant to “explain” why Hillary Clinton lost an election which every expert said she was assured of winning.
In 14th spot, with over 738,000 page views, was the latest troubling development in Sweden, which in recent years had become a haven for immigrants with dire consequences for the local population, and which in mid-August was “burning”, after “Migrant Gangs Unleash Coordinated Fire-Bomb Rampage Across Multiple Cities.” And amid public calls for tougher policies on crime and immigration, 2018 saw yet another populist anti-immigrant party, the Jimmie Åkesson-led Sweden Democrats, storm the polls in the country’s September election, in the latest slap to Europe’s legacy establishment, an outcome that was only made possible, ironically, thanks to Angela Merkel’s liberal “open door” policies.
In 13th spot, over 787,000 readers were shocked to learn that a photograph of two migrant children sleeping in a cage at an ICE detention facility which quickly went viral on the net, and which served as the focal point of outrage du jour at President Trump’s immigration policy, had in fact been taken under Obama, prompting hilarious responses from blue checkmarked liberals, such as CNN’s Hadas Gold, who deleted her previous outraged tweet saying “Deleted previous tweet because gave impression of recent photos (they’re from 2014)”
The 12th most popular post of 2018, with over 804,000 page views, belonged to the Democratic Party’s rising socialist icon – Alexandria Ocasio-Cortez – who had been on an intense media junket since her upset primary victory over establishment Democrat Joe Crowley. The socialist phenom had told the Washington Post “I wasn’t born to a wealthy or powerful family — mother from Puerto Rico, dad from the South Bronx. I was born in a place where your Zip code determines your destiny.” Except that Ocasio-Cortez grew up in one of the richest counties in the United States, Yorktown Heights a wealthy suburb of Westchester County. There has been a lot of cognitive dissonance within America’s Democratic Socialists ever since.
More than 886,000 readers tuned in on November 7, when the midterms revealed that a significant portion of America had grown disenchanted with Trump/Republican policies and as a result the House flipped to Democrat control with a sizable majority even as the GOP retained control over Congress (and the all important Supreme Court decision process). The resulting gridlock assures that even less will be done for America’s middle class in the coming two years than was done in the prior two years.
In 10th spot, with over 935,000 page views, readers were amused to learn of the fall of one of the most prominent leaders of the anti-Trump resistance, prominent lawyer Michael Avenatti, who had risen to resistance defending porn star Stormy Daniels and staged a furious campaign to discredit Trump’s latest pick for the Supreme Court, Brett Kavanugh, only to see it backfire as “Michael Avenatti Turns Radioactive As Liberals Blame Porn Lawyer For Kavanaugh Confirmation” after many of the allegations from his client Julie Swetnick proved to be false, thereby discrediting much of the anti-Kavanaugh grassroots campaign, in the process also scuttling any hopes Avenatti may have had to run for president in 2020.
In 9th spot, over 964,000 readers were amazed to learn of a “modest proposal” floated by the Chicago Fed, which in May unveiled its “solution” to Chicago’s pension problem: as we reported, an “audible gasp” was heard from the audience when a speaker from the Chicago Fed proposed levying a special property assessment they estimate would be about 1% of actual property value for 30 years. In other words, the Fed had just floated to “confiscate wealth from current owners because they will pay, whether they stay or not, through an immediate reduction in home value.” While Wirepoints said that “It surely ranks among the most blatantly inhumane and foolish ideas we’ve seen yet” it may be a harbinger of the proposals the Fed will implement during the next financial crisis, especially if the Fed is unable to cut rates to negative or launch a new round of QE.
Nearly 1 million readers were surprised to learn, or perhaps not, that as diplomatic relations between Washington and Moscow deteriorated sharply in the spring, Russia – which had repeatedly warned it would pursue dedollarization, had quietly liquidated virtually all of its Treasury holdings, in the process setting off a sharp spike in Treasury yields. Indeed, from $96 billion in March, Putin shrank his US Treasury holdings to just $9BN in May, converting the bulk of the proceeds into gold and Chinese yuan. The bigger question remains: will China do the same?
1,147,000 readers may have been wondering if we were joking or not when we reported that “poop patrollers” in San Francisco make a cool $185,000 a year in salary and benefits. Alas, it was not joke, but merely the latest in a string of shocking revelations exposing how deep San Francisco’s crisis of vast amounts of vagrant-generated feces covering its public streets actually runs. It was also the 7th most popular article of 2018.
And speaking of San Francisco’s homeless problem, the 6th most popular article with over 1,167,000 page views was our report that “terrified” San Francisco tourists were shocked to find aggressive vagrants, discarded needles and dead bodies. “Is this normal or am I in a ‘bad part of town?’ Just walked past numerous homeless off their faces, screaming and running all over the sidewalk near Twitter HQ and then a murder scene. Wife is scared to leave hotel now,” a Reddit user wrote in shock. Meanwhile, despite its homeless crisis, San Francisco remains the city with the biggest real estate bubble in the US, courtesy of the unlimited dollars flowing through the Silicon Valley Venture Capital mecca.
In 5th spot, with over 1,240,000 page views, a troubling report involving California’s unstable geological foundations found that “California Was Hit By 39 Quakes In 24 Hours As Scientists Warn Of “Movement Along The San Andreas Fault“.” As we wrote at the time, when you live in an area that sits along a major earthquake fault, it can be easy to forget the potential danger if nothing happens for an extended period of time. But the danger is always there, and for many California residents the rattling that we witnessed was a clear reminder of that fact. The good news is that so far “the big one” has yet to strike.
In 4th spot, with 1,380,130 page views in 2018, readers were amazed to learn, at long last, that the CFO of the Clinton Foundation admitted to investigators that the charity had widespread problems with governance, accounting and conflicts of interest, and that Bill Clinton has been commingling business and personal expenses for a long time. In other words, confirming what for years the mainstream media has slammed as, you guessed it, “fake news.”
The third most popular article of 2018, with almost 1.4 million page revealed even more reader fascination with events in South Africa, where popular politician Julius Malema, aka “the Hitler of South Africa”, was recorded saying that “we have not called for the killing of white people. At least for now. I can’t guarantee the future.” It is unclear what will happen in the future if and when Malema does order the killing of white people.
In late April, in response to an incident in which a Philadelphia manager called the police on a pair of black men who were sitting in A Starbucks store without having purchased anything, the contrite coffee chain announced that as part of its “inclusiveness” training, it would allow vagrants to use the coffee chain’s bathrooms as they please. So, perhaps it wasn’t surprising, that with over 1,465,000 page views, the second most popular post of 2018 were the furious responses Starbucks employees to “becoming the world’s biggest public toilet” as yet another attempt at virtue signalling imploded spectacularly.
And speaking of “spectacular backfiring”, it is perhaps appropriate that the most popular article of 2018 was what happened in September when the head of the California Democratic Party called for a boycott of famed burger chain In and OUt after a public filing revealed that the company had recently donated $25,000 to the state’s Republican Party. The result was that instead of a boycott, a torrent of customers came to their favorite restaurant and bought extra food, resulting in a blockbuster revenue day for the private hamburger chain. Nearly 2.1 million readers got a chuckle out of that one.
* * *
With all that behind us, what is in store for 2019, besides our tenth year anniversary in just ten days of course?
We don’t know: as frequent and not so frequent readers are aware, we do not pretend to be able to predict the future and we don’t try despite endless allegations that we constantly predict the collapse of everything: we leave the predicting to the “smartest people in the room” who year after year have been consistently wrong about everything, and never more so than in the last three years, which destroyed the reputation of the conventional media and the professional “polling” and “strategist” class for ever. We merely observe, try to find what is unexpected, entertaining, amusing, surprising or grotesque in an increasingly bizarre, sad, and oftentime crazy world, and then write about it.
We do know, however, that after $16 trillion in liquidity has been conjured out of thin air by the world’s central banks, and the tens of trillions of credit money created (and misallocated) by China – a country which was the world’s growth dynamo for the past three decades and which is now not only rapidly slowing down but engaged in a trade war with the US (there is a saying that shooting wars usually follow trade wars) – the entire world is floating on an ocean of excess money, which for one more year almost succeeded in masking just how ugly the truth beneath the calm surface is. Now, as the Fed hiking and actively shrinking its balance sheet and the ECB set to join in just a few days (with the BOJ not too far behind), as the liquidity tide starts to come out in earnest, those swimming naked will finally be exposed, especially if as we expect, the handoff from monetary to fiscal policy is far more volatile than what the market currently prices in.
The question we have: how far will the tide be allowed to recede before central banks step in again, or as has become topical recently, how long before Trump’s displeasure with the falling market finally manifests itself in a change among the Fed’s top echelons.
We are confident, however, that in the end it will be the very final backstoppers of the status quo regime, the central banking emperors of the New Normal, who will eventually be revealed as fully naked. When that happens and what happens after is anyone’s guess. But, as we have promised – and delivered – every year for the past nine, we will be there to document every aspect of it.
Finally, and as always, we wish all our readers the best of luck in 2019, with much success in trading and every other avenue of life. We bid farewell to 2018 with our traditional and unwavering year-end promise: Zero Hedge will be there each and every day – on most occasions with a cynical smile – helping readers expose, unravel and comprehend the fallacy, fiction, fraud and farce that the system is reduced to (ab)using each and every day just to keep the grand tragicomedy going for at least one more year.
After a wild 2018, Mark Orsley – Head of Macro Strategy for Prism (and formerly with RBC), is out with a review of his 2018 “Costanza Trades,” while offering his comprehensive thoughts for next year.
***
It’s that time of year again. Stockings, dreidels, Festivus poles, and, of course, the inevitable truckload of bank “2019 Year Ahead” pieces cluttering your inboxes which are about as attractive as getting coal in your stockings. However, these pieces are useful in some regards, as they are very good at nailing the consensus themes and are excellent counter-indicators. Long time readers will know that The Macro Scan takes another twist at year end, to present next year’s top “Costanza Trades.”
For those of you not familiar with George Costanza, his character on the sitcom Seinfeld could do no right when it came to employment, dating, or life in general. In one episode, George realizes over lunch at the diner with Jerry that if every instinct he has is wrong, then doing the opposite must be right. George resolves to start doing the complete opposite of what he would do normally. He orders the opposite of his normal lunch, and he introduces himself to a beautiful woman that he normally would never have the nerve to talk to. “My name is George,” he says, “I’m unemployed, and I live with my parents.” To his surprise, she is impressed with his honesty and agrees to date him!
I find employing the Costanza method to trading an interesting exercise. Ask yourself this: what are the trades that make complete sense and all your instincts say are right? Now consider the opposite. Basically what you end up constructing is an out of consensus portfolio.
Employing the Costanza method can identify interesting, non-consensus trade ideas that could kick in alpha. Last year’s top 7 Costanza trades netted 5 of 7 WINNERS (some with huge gains), and past years have all been successful: 2017 had 5 of 6 winners (and 1 tie), 2016 had 7 of 10 winners, and 2015 had 7 of 10 winners. Let’s quickly review last year’s trades…
2018 Costanza Trades:
Long UST 10yrs = trying to work now but a loser as yields were 35bps higher
Long Bunds = winner as yields were 18bps lower
Long EUR/USD = worked early in the year but turned loser, -5%
Short EEM = huge winner, EM crushed 19%
Long IG protection (IG spread wideners)/Short LQD = another huge winner, IG CDX 44bps wider (doubled)
Short Euro Stoxx and Nikkei = both big winners; each index was down 15%
Short Bitcoin vol = worked well all year but has risen recently, still 50-day is 22 vols lower
Bonus: Long active/short passive = going to put this as a tie. Passive won out most of the year, but is currently getting crushed/about to get absolutely rinsed. Also, in a classic bottom signal, active Hedge Funds/PM’s were shuttered around the street in Q4 at the absolute worse time. Active is now starting to have its day, and the passive tsunami is receding.
Last year’s list was one of the most difficult to develop. Going into 2018, the market was divided between those who thought risk assets had gone too far and were due for a correction, and those who believed the economy is booming so let the good times roll. To be fair, both turned out to be true at different points throughout the year.
This year is a piece of cake, as sentiment for risk assets have wildly shifted (for good reason) bearish. With that, I give you the 2019 Costanza trades in no particular order – or in other words, the trades that you absolutely feel pained to do right now:
2019 Costanza Trades:
Long FANGs
Receive credit protection in IG and HY (aka long LQD and HYG)
Long Eurodollar spreads (EDZ9/EDZ0)
Long Bunds
Short Gold
Long WTI crude
Long AUD/USD
Short EM
Long Bitcoin
Bonus: Long Trump
Let’s go through each and assess the probabilities of Costanza being profitable (probabilities are purely off the cuff estimates for arguments sake)…
1) Long FAANGs
Everyone loved them on the way up in 2018 and you had to own them to keep up with the market but now the FAANG’s, and tech broadly, are contaminated.
Although street research is once again roundly predicting higher equity indices in 2019 (as they always do – insert rolling eyes emoji), market consensus among those that take actual risk has shifted extremely bearish. Funds have grossed down or liquidated, RSIs are oversold, and DSIs are near 0.
However, the next shoe to drop is the retail investor exodus (it has partially started) that could lead to the mother of all passive unwinds. Imagine the horror on the face of the average investor as they open their Q4/year-end statement in a few weeks and sees the wealth destruction that has taken place in Q4. The natural investment psyche of the retail investor will be to sell and I think it’s hard for all of us to fathom just how widely owned FAANG’s are within index ETF’s. Therefore, I would have to imagine this trade will not work for Costanza right away, and there is severe risk that a deeper correction could continue into 2019.
What is the major headwind for Costanza with regards to his FAANG long and tech names more generally? Government regulation. Higher rates and wages have been a thorn in the side for margins but more than anything; it is the government’s involvement in Silicon Valley’s business model that has and will continue to be a major hindrance for tech multiple expansion. There is not much Congress agrees on these days, but Tech regulation, especially with regards to privacy laws, is the one thing. Ditto in Europe, where the governments are actually playing even rougher. Some recent data points:
Google CEO Sundar Pichai, who boycotted a Congressional hearing this summer, is now playing ball with Congress saying he supports regulation legislation.
The Federal Trade Commission still has an open investigation into whether Facebook’s conduct violated a previous settlement with the agency.
DC’s Attorney General is suing Facebook for “allegedly letting outside companies improperly access user data and for failing to properly disclose that fact.”
Europe’s new far-reaching privacy laws and anti-trust investigations on tech companies.
Uber being sued for anti-competitive practices.
President Trump has said his administration is seriously looking into monopolistic behavior of Facebook, Google and Amazon.
Those are just a few of many. The days of uninterrupted, carte blanche for Tech are a thing of the past, and thus a major regime change is happening. The only question is: is it all priced or not? The technicals indicate not.
FANG index formed classic head and shoulder top. The neckline is broken and the formation targets ~1500 which is still 30% lower form here…
Source: Bloomberg
Instinct: margin compression from higher yields/wages, global government scrutiny, and retail investor unwind will lead to a much deeper correction.
Costanza: funds have already purged these names, sentiment is at extreme lows, valuations more reasonable, and Tech is still the wave of the future.
Estimated probability of Costanza being right: 25%. The days of tech rising unadulterated are over. I think we can say that conservatively. In my opinion, the government’s involvement in their business puts a top in tech for quite some time, at least in regards to tech names that have thrived on the collection of consumer data and/or don’t pay enough tax/postage. If the chart above is proven right, that 30% hole will be tough to climb out of by year-end 2019. I would rather buy THAT dip than this current dip. Costanza is a braver man than I.
This also means broad US equity indices will struggle, albeit S&Ps not as much due to the “safe haven” names embedded within that index. However, since 2001 with similar extreme levels of being oversold, the market has been higher 100% of the time 1-year later, with an average return of 23%. So Costanza has hope given the magnitude of the selloff and poor sentiment; I just find it unlikely he will be happy in the first half of the year with his FAANG long.
2) Receive credit protection in IG and HY (aka long LQD andHYG)
A similar call to the above long equities, since correlations run high with credit. However, there are other issues with credit besides general risk sentiment, namely the massive amount of outstanding corporate debt, the large percentage of that debt that will need to be rolled, and the potential for credit downgrades should the economy enter a recession (which is what the front end rates market is pricing).
The amount of non-financial corporate debt-to-GDP has never been higher…
The US corporate refi tsunami is upon us…
Source: Holger Zschaepitz
This “maturity wall” which spikes next year and will likely need to be rolled comes at the inopportune time of the collapse in crude oil prices. The energy sector is a big user of the US credit market. Thus the risk for 2019 is the US credit market seizes up in the face of the refi wave into a recession. A toxic combination and we can add in the fact that the European credit market will have less support going forward with the ECB stepping back next year.
ITRAXX Xover Total Return Index is rolling over…
Source: Bloomberg
Instinct: the US economy is saturated with corporate debt and it is time to pay the piper with the coming refi wave. Everything gets exasperated if the US economy slips into a recession which will lead to higher default rates.
Costanza: the worst is priced in, GE credit widening is a one off non-systemic issue, and the economy will regain traction especially if Trade Wars are settled in 2019
Estimated probability of Costanza being right: 35%. I will assign this a little higher probability of working than tech longs. I am definitely concerned about the “maturity wall” and the trajectory of the US economy in 2019. For IG to widen out from here, you have to really believe the economy is falling off a cliff in such a way that defaults will finally rise, which then leads to even higher spreads and more defaults. It is not unrealistic, thus why I believe it is more likely that credit tightening won’t work.
The one major point the credit market has going for it is the technical chart, which says that most of the move is played out. As opposed to tech charts, IG has reached its spread widener target. Thus Costanza could argue during his “airing of grievances” that all the bad news is priced.
IG CDX reached the 94bps target on its inverse head and shoulder pattern…
Source: Bloomberg
3) Long Eurodollar spreads (EDZ9/EDZ0)
What a difference a year makes. Last year at this time, I was pounding the table on the coming resurgence of inflation and how the market was underpricing Fed hiking risk. That successfully played out, but now post-stock market carnage, oil collapse, and peak economic data; Eurodollar spreads are pricing in a recession and rate cuts! Oh my. So this again continues the theme we have seen in the first two Costanza trades, revealing a market that is very worried about the trajectory of risk assets and the US economy as a whole.
When you look at Fed Fund futures pricing for 2019 (using FFF9/FFF0 spread as my guide), you have 1bps of cuts priced into futures, versus an FOMC dot plot that is projecting 50bps of hikes (past ’19 you will discover even more rate cuts are priced in). So there is quite a gap that will need to be reconciled. Will the equity market collapse help to slow an already fizzling economy or is there a possibility the economy recovers (China deal?) and the Fed continues on its course to normalize policy?
Using Prism’s PAM charting tool, we can see the constant maturity equivalent of EDH9/EDH0 has only gone negative 2x in the past 15 years. In 2006, it continued to flatten hard, but in 2011 it was a false breakdown and recovered higher…
Costanza’s “feat of strength” is taking the other side of the conventional wisdom that the housing, auto, and coming PMI slowdown due to the oil collapse either won’t alter Powell’s mission or will prove to be a head fake like in 2011. The slowdown in the data this year was likely caused by a front loading of activity pre-tariffs/trade wars (i.e. buy everything Q2 and then sit tight the rest of the year), so there is a chance that the higher economic trend reemerges, especially if the trade talks with China go well early next year (something Trump warned about this weekend). Costanza could be laughing at the thought he was able to buy ED spreads negative.
Instinct: the US economy has peaked, the fiscal impulse dissipates early next year, QT increases, and regional surveys are already showing a coming slowdown. This will lead to a Fed pause now and possible cuts by end of 2019.
Costanza: Powell is still indicating rate hikes and the economy is projected to grow 2.2% with CPI remaining around the 2% target. The kicker will come if Trump, feeling pressured by lower equity markets, makes a trade deal with China. The market will be caught wrong footed as the Fed continues to tighten as activity picks up again.
Estimated probability of Costanza being right: 55%. Will give a slightly higher nod towards Costanza being right. Remember, he doesn’t need hikes to win, just no cuts which is a plausible scenario if Trump delivers a market friendly trade deal with China.
4) Long Bunds
There is no possible way Bund yields could go any lower in the face of the ECB ending its asset purchase program, right?? Costanza is saying “easy big fella” (side note: can you name that episode?). There are plenty of indicators that the Eurozone is careening towards major economic issues. I want to give a nod to Danielle DiMartino Booth, who is doing excellent, non-consensus economic research over at Quill Intelligence. She points out that the chemicals sector is “arguably the most hyper-cyclical leading indicator,” and using BASF stock as her guide, suggests the Eurozone economy is “poised to hit the skids.” In fact, she declares Germany to be the “most underpriced recession risk in 2019.”
Interestingly, if you graph BASF stock in Germany (black line) versus Bund yields lagged 100 days (orange line), it would suggest potential financial crisis in the Eurozone which will lead to Bund yields going negative again…
Source: Bloomberg
Instinct: ECB, while still reinvesting, ended its APP, Draghi will want to get one hike off before his reign ends towards the end of 2019, the ECB desperately needs to get out of negative rates, Draghi will likely be replaced by someone more hawkish or at least less dovish, and fiscal stimulus to counter the populist movement will all lead to higher rates.
Costanza: growth has already fallen off sharply, forward indicators suggest potential economic crisis, the ECB is already noting risks shifting to the downside, and there are major political hurdles next year with EU elections
Estimated probability of Costanza being right: 60%. If there was ever a Costanza trade it is this one. I am not sure there are many Bund bulls out there at 24bps so this is ripe for Costanza to be right. The chart is saying he will nail this one.
German 10yr yields have formed a head and shoulder pattern that targets -40bps if the 15bps neckline gets taken out to the downside…
Source: Bloomberg
Quick side note…
Idea #3 (long Eurodollar steepeners) and #4 (long Bunds) are basically implying that the US/German yield spread will widen once again in 2019 (assuming the ED steepeners are akin to higher US rates which has been the correlation). I would surely say that even combined, that idea is a Costanza trade. Most expect a narrowing of the US/German 10yr spread going forward.
Since I hit on the Bund side of the US/German 10yr spread, what could drive US rates unexpectedly higher in 2019 and thus help to widen the US/GE spread?
Increasing deficits leading to increasing supply
That increasing supply has already led to sloppy UST auctions
At a time the rate of change on foreign demand of UST has moved lower
With wages still remaining firm
All equal the need for higher term premium in the US
Now back to the list….
5) Short Gold
This has been an interesting correlation shift. For most of the year, Gold has been a pure Dollar play (especially vs CNH), but more recently Gold has picked up risk aversion, namely HY credit according to the Quant Insight macro PCA model.
Gold correlation to DXY (blue) and USD/CNH (green) has gone from negative to zero…
Source: Quant Insight
Now Gold is most correlated to VIX and HY credit…
Therefore, Costanza shorting Gold is another bet that risk assets will stabilize and the Gold bulls will be told “NO SOUP FOR YOU!”
Instinct: risk assets continue to trade poorly and Gold offers portfolio protection for the apocalypse.
Costanza: gold is losing its luster as a safe haven asset and, if the markets turn 2008-style ugly, it will get liquidated as well.
Estimated probability of Costanza being right: 51%. No strong conviction here but Costanza is right more than wrong so a slight edge to risk assets stabilizing and Gold returning to its Dollar correlation.
6) Long WTI
One of the most epic selloffs I have seen with a high-to-low collapse of 45% in just two months. The market narrative is now back to “elevated US production,” and more importantly, the Saudis, post-Khashoggi murder, have increased supply to push prices down for President Trump.
Costanza would be quick to point out that spare capacity is low and the oil market suffers from chronic underinvestment. That underinvestment only gets amplified with oil prices sub-$50, and we are already seeing Permian producers cut back on capex plans. Additionally, the widening in credit markets only makes it harder to obtain capital for capex. So you have the double whammy of lower prices and wider credit spreads, which will feed into the underinvestment theme. The days of capital inflows are back to 2008 levels.
By most analyst forecasts, even just a flat line of current production will cause a deficit in the supply/demand imbalance in 2019. We don’t need to be oil experts to know that when oil prices fall as precipitously as they did; rig counts fall and production declines. Now sprinkle in capex intentions being cut, along with credit issues, and that is Costanza’s recipe for higher oil prices. And, oh yeah, let’s not forget about the coming IMO 2020 regulations (sulfur emission reduction in cargo ships which will require heavy crude to be drawn from supplies to comply).
Instinct: US is oversupplying the market with its light crude, and the Saudis are more than making up for Iran sanctions to appease President Trump in light of the Khashoggi killing.
Costanza: low spare capacity will eventually catch up to the Saudis, and lower prices, lower capex, and a credit crunch will cause US production to flat line at a time when it needs to be increased (plus, the light API grade the US produces is not sought after).
Estimated probability of Costanza being right: 70%. I think much of the oil decline was technical fund liquidations (most likely large Risk Parity types that were long WTI as their inflation hedge), and all the forward looking supply issues not only remain, but are amplified with lower prices and wider credit. Costanza is usually right and I think this one is a layup. Oil prices will be higher than $45 come this time next year.
Use WTI time spreads as your signal when to get long. As we saw in the fall, time spreads (candles) led spot prices (green line) by about a week. Thus, if time spreads can break the downtrend, that will be your “tell” to get long WTI like Costanza…
Source: Bloomberg
7) Long Aussie$
A slowing Chinese economy and therefore slowing commodity demand, trade wars, and a decelerating domestic housing market have all led to a steady decline in the Oz in 2018.
Will keep this one short and sweet, as it is really the same idea as the other long risk asset trades. The AUD will really benefit from anything positive around the China/Trade War negotiations. Some sort of deal and the Aussie$ will scream higher. It’s that simple.
There is one micro issue Costanza should be concerned about and that is the Interest Only (IO) refi wave which will convert those IO mortgages into principle + interest loans. The reset wave started in 2018 and will increase in intensity in 2019. This will cause the average borrower to pay about $7,000 more per year in additional payments. That is a major hit to the housing market via delinquencies, and may be a crushing blow to consumers’ discretionary spending.
The one saving grace for Australia has been the RBA remaining on hold for (jokingly) 37,000 consecutive meetings. As the below chart shows, at this level of housing collapse, the RBA tends to cut.
Source: AMP
Instinct: Australia has felt the effects of the China slowdown and trade wars, along with its own domestic issues. The currency will need to continue to depreciate to offset that pain.
Costanza: the equity market weakness will force Trump to play ball with the Chinese which will reverse the AUD higher. Additionally, the new economic weakness in the US and a Fed that could move to cut rates should weaken the USD.
Estimated probability of Costanza being right: 55%. Basically a better long than FANGs and credit, as being long AUD$ could also benefit if the Fed moves to an outright easing bias (which will depreciate the USD vs. the AUD). Apparently, long USD is now the most crowded trade in the market (according to a BAML survey). A housing crisis in Australia will be the major headwind for the Costanza long.
8) Short EM
This would be Costanza’s hedge against all the long risk asset bets above. So why is being short EM anti-consensus at a time risk assets are getting rinsed and everyone has turned bearish? Through conversations with street analysts and clients, there is, for whatever reason, an insatiable demand to buy the EM dip. After all, EM has been selling off since January so it should be the first to bounce, right? That thought is “making George angry” and why he is going to take the other side of that.
In a world where the China Manufacturing PMI just went into a contraction, European data is falling off a cliff, and US regional surveys are all pointing to a coming slowdown; is EM growth going to be booming and the place to allocate risk? I understand that it is a short dollar play, but 2019 could be marked by a major global growth slowdown and balance sheet recessions. That is not the ideal environment for EM.
The technicals say the selloff is not yet complete, as a bearish head and shoulder pattern has formed targeting an additional 6% lower…
Source: Bloomberg
Instinct: EM has already taken its pain, Trump/China deal likely in 2019.
Costanza: global growth slowdown will hurt EM the most, especially if USD funding issues reemerge. EM has never been a safe haven during growth scares and recessions.
Estimated probability of Costanza being right: 55%. All signs point to a poor global growth trajectory in 2019.
9) Long Bitcoin
That potential bottom has formed a bullish inverse head and shoulder pattern that sets up for a retest of the 1-year downtrend…
The selloff in bitcoin in 2018 was an once-in-a-lifetime move. From the highs just after New Year’s, Bitcoin spiraled 85% lower to take over as the largest historic bust since the Tulip crisis. The crypto naysayers had a field day this year.
Costanza would hypothesize that if you believe the US Dollar is losing its hegemony, the US government debt issue is ballooning to unsustainable levels, Europe is in the midst of a populist meltdown, and China is on the verge of a hard landing; why aren’t crypto currencies like Bitcoin as viable a store of value as a yellow rock?
Interestingly, Bitcoin has started to potentially bottom during the December equity meltdown, lending some credence to the theory that investors are becoming concerned with the global environment and searching for new stores of wealth.
That potential bottom has formed a bullish inverse head and shoulder pattern that sets up for a retest of the 1-year downtrend….
Source: Bloomberg
Instinct: crypto currencies have no use and are on their way to near worthlessness.
Costanza: Bitcoin is starting to rediscover its use as an alternative to traditional stores of value.
Estimated probability of Costanza being right: 50%. No clue and no edge here. However, it is hitting support levels, it has a bullish formation, and there is extreme bearish sentiment which all reek of a Costanza trade.
Bonus: Long Donald Trump
I cautiously put this in here hoping to avoid all political conversations and opinions, but I think this is an interesting nonmarket, yet market relevant idea.
I don’t think many expect much from POTUS next year, given the House swung to the Democrats and many folks (mostly on the liberal side, to be fair) believe there is looming tail risk that Mueller has enough evidence of some sort of wrongdoing that Trump’s presidency could be in jeopardy.
One could argue whether less Trump or no Trump is good or bad for risk assets. On the one hand, the more stable Pence could be welcomed by markets, and perhaps if Trump goes, trade war issues dissipate. On the other, the market rallied on his election victory in 2016, his policies are mostly reflationary, and China has become a legitimate nonpartisan issue. Therefore, even if Trump is ousted, trade wars likely continue unabated.
The surprise, non-consensus idea would be that Trump crosses the aisle to enact Infrastructure. Couple that with an earlier than expected China deal, and that is how Costanza will be paid out on a lot of his risk-on calls. Perhaps the market is underestimating Trump, and he ends up delivering a great deal vs. expectations of a lame duck presidency.
Summary:
As opposed to last year, this year’s Costanza trades (non-consensus calls) have a simple theme. Costanza is looking for a bounce in risk assets. What are the realistic paths to get there versus a market that expects more pain? At least one or more of these have to happen…
Cessation of tariffs/trade wars, which leads to a bounce in Chinese growth and a resumption of the positive growth momentum in the US
A Fed that ends the rate hike cycle and Balance Sheet reduction **coupled with growth remaining ok** (if growth softens further, equities could actually still sell off)
Rebound in the energy complex
US Infrastructure + EU fiscal stimulus + Chinese stimulus (all being discussed currently)
What are the glaring issues that will prove Costanza wrong for the first time in the history of this piece? To name a few…
US Fiscal Impulse dies out in early ’19 + global QT picks up in intensity
Government intervention in Silicon Valley
Passive unwind into a resumption of the explicit and implicit short vol unwind
The potential for a corporate credit blowup in the US and Europe
Housing busts in Australia, Canada, the US, and Asia
There is a lot of be worried about in 2019, and I believe we are only in the beginning stages of a risk asset purge. Costanza is much less worried.
I want to wish everyone a Happy New Year! I look forward to speaking with everyone again soon and telling you more about Prism’s exciting business model.
With the 10Y Treasury yield, fittingly enough, sliding to the lowest level since January, closing Friday trading at 2.6842%, some 55 bps below where it traded less than two months ago when it peaked at 3.2373% on November 8, a more interesting move in TSYs has been observed in the short end where the 1 Year (or 52 Week Bill) closed at 2.590%, up 1.81bps, while the 2Y yield, seen by many as the bond market’s estimation of what the Fed will do in 2019, has continued to slide, and on Friday closed 2.8bps lower at 2.4878%, the lowest since the start of June.
As a result, the 1s2s curve has inverted to a whopping -10.8bps.
What the reason is for this bizarre divergence in preference for 2Y paper over 1Y we are not sure, however we will point out that the last time the 1s2s traded almost this negative, when it touched -10.2bps, was in October 2008, just after the government announced it had bailed out AIG.
Despite last week’s dramatic pension-fund rebalancing, which salvaged December from being the worst month since the Great Depression, hedge funds are still looking at a dismal performance for both the month and the year. As Deutsche Bank notes, long/short equity Hedge Funds are on track for worst month since 2011, with equity hedged strategies down -5% MTD, on track for the worst monthly performance since August 2011.
The ongoing rout has forced hedge fund managers to hunker down, resulting in multi-year low gross leverage even as net exposure has been relatively stable as the market sold off.
Last week we showed a detailed breakdown of the best and worst performing hedge funds according to HSBC, with Odey proudly leading the pack, while a variety of systematic hedge funds (and Greenlight) on the tailing end.
We also showed the performance of some of the most recognizable hedge fund names. It is clear that almost none of the “hedge” funds was hedged for the events that took place in Q4.
Meanwhile, the recent surge in volatility both – implied and realized – has spooked the other major marginal investor, systematic funds, who have officially thrown in the towel on 2018. VIX spiked above 35, and 1M realized volatility is now above 30, with the resulting jump in realized volatility triggering additional selling by vol control funds.
According to Deutsche Bank, vol control funds sold an additional $25bn in equities on the volatility spike. The higher volatility also prompted risk parity funds to further trim equity allocations, which is approaching 5 year lows.
Meanwhile, as we noted last week, CTAs remain net short S&P 500, which however prompts risks of a short squeeze.
Not surprisingly, the market turmoil led to renewed outflows from equity funds, led by the US. Outflows from equity funds totaled -$9bn last week with -$6.5bn from US. Japan (+$3.6bn) and EM (+0.1bn) continue to see inflows amid outflows from other regions.
Curiously, equity ETFs saw outflows on Thursday after strong inflows during most of December, even as the Dow had just enjoyed its biggest point gain ever.
Meanwhile, outflows continue from Credit and Bank Loan funds, while Government bonds see inflows. Outflows from bond funds slowed this week (-$5bn), with Europe bond funds seeing a small inflow. Outflows were led by Corp HY (-$4.5bn), Bank Loans (-$3.4bn), Corp HG (-$2bn), and EM bonds (-$1.5bn) while inflows to Govt bonds picked up (+$6.4bn).
Finally, ETF and futures volumes were normal, stock volumes were light. Daily futures and ETF volumes were normal despite the holiday week, however stock volumes were quite light. Because of the light stock volumes, ETFs were a near record 43% of total cash volumes throughout the week.
UK Defence Secretary Gavin Williamson has evoked controversy by suggesting Britain take aggressive steps toward a post-Brexit expansion as a “global player” all the while waxing nostalgic about the glory days of the world-wide British Empire during a weekend interview with the Sunday Telegraph. This included floating the idea of establishing UK bases in the Caribbean and Asia, and vowing to build at least two foreign bases “in a couple of years.”
“This is our biggest moment as a nation since the end of the Second World War, when we can recast ourselves in a different way, we can actually play the role on the world stage that the world expects us to play,” the British Conservative MP and Secretary of State for Defence said. “For so long — literally for decades — so much of our national view point has actually been colored by a discussion about the European Union.“
UK Defence Secretary Gavin Williamson during a prior visit to the Imperial War Museum at its main site in Lambeth, London. via the office of Michael Ellis MP
And while discussing future military bases abroad, he said:
This is our moment to be that true global player once more – and I think the Armed Forces play a really important role as part of that.
The 42-year old Williamson, in his second year as Defence Secretary, added of the post-Brexit future that, “We have got to be so much more optimistic about our future as we exit the European Union.”
Suggesting a reversal of policies active during the final decades of the decline of the British Empire, he said under his watch the 1960s policy of pulling back from areas “east of Suez” has been scrapped and expressed a desire to “recast” the UK’s role and leadership in the world.
On this point, Williamson hearkened back to the empire, saying “the rest of the world saw Britain standing 10 feet tall –when actually we stood six feet tall– Britons saw us standing five feet tall, not the six, and certainly not the 10.” He said further, evoking British settlement in Canada, New Zealand, and “nations right across Africa” – that they “look to us to provide the moral leadership, the military leadership and the global leadership.”
“They realize that we are good partners and actually the values that we stand for, of tolerance, democracy and justice, these are the values that they hold dear to their hearts,”said Williamson.
Concerning military bases, perhaps to more controversial part his interview, he proposed Singapore or Brunei in the Pacific – deep in what China consider’s its sphere of influence – as potential sites for a base, asserting that“if we have economic interests there, we should have a military interest there.” He also mentioned a potential base in the small South American country of Guyana, or on Montserrat in the Caribbean islands.
But many populations across the globe might be confused on the basic assumption that Britain is currently not imperial, given that merely within the past two decades it has joined allies like the United States in military adventurism and occupation in places like Iraq, Afghanistan, Syria, Libya, and Kosovo, and while increasingly sailing near China, testing Beijing’s resolve to defend its claims in the South China Sea.
Shortly after the release of the latest round of disappointing economic data which confirmed that China’s economy likely continued to slow in December, President Xi Jinping delivered a speech to the nation where he defended his economic policies, saying China’s economy expanded “within a reasonable range” during 2018, despite the fact that its stock market was the worst performer among major economies and the rate of growth of its massive economy slowed for the first time in a decade.
On Monday, China’s official manufacturing PMI fell to 49.4 in December, from 50.0 in November, the lowest reading since February 2016, and the weakest reading for a December since 2008 (to be fair, some weakness in the December PMI is typical due to seasonal factors).
Factory orders and other economic indicators released so far this month suggest that China’s economy has slowed for the seventh straight month in December. This comes after China’s GDP grew 6.5% during the third quarter, the slowest rate since 2009.
With negotiations over the US-China trade truce expected to start shortly after the first of the year, Xi insisted that China would remain “resolute” in defending its sovereignty – a reference to China’s dominance of the South China Sea – and press ahead with its “One Belt, One Road” initiative.
“Looking at the world at large, we’re facing a period of major change never seen in a century. No matter what these changes bring, China will remain resolute and confident in its defence of its national sovereignty and security,” he said.
On the domestic front, Xi touted China’s success at lifting another 10 million people out of poverty this year, while praising its efforts to curb pollution in its air, water and soil.
“The improvement of the people’s well being speeded up and their living standards were steadily improved,” he said. “We have also made great strides in our poverty alleviation efforts in the past year. Another 125 poor counties and 10 million poverty-stricken rural residents were lifted out of poverty in 2018,” he said referring to progress to his pledge that China will eradicate poverty by 2020.
Xi’s remarks come after he confirmed that he had a constructive conversation with President Trump over the weekend about a trade war and urged the US to “meet China half way” when striking a trade deal.
Watch Xi’s address (with English subtitles) below:
I’m going to break my personal convention and use the bulk of the colors in the eurodollar futures spectrum, not just the single EDM’s (June) contained within each. The current front month is January 2019, and its quoted price as I write this is 97.2475. The EDH (March) 2019 contract trades at 97.29 currently and it will drop off the board on March 18.
Three-month LIBOR was fixed yesterday at a fraction higher than 2.80%, meaning that if it stays around or above that level someone is losing money on it. The futures price isn’t directly translatable but back-of-the-envelope it works out to an expectation for 3-month LIBOR on that date in March to be less than what it is fixed now.
In other words, the market is seriously betting LIBOR is coming down not two years from now but in the short run. That expectation only grows the further out in time (down the curve).
Inversion, as noted earlier today, had been limited to more distant years centered around 2020. The eurodollar curve now sports inversion from the front month all the way out to September 2020.
This is not a curve, not a normal one anyway, it is a clear signal of trouble right in front of us.
In fact, almost the entire curve is currently below yesterday’s 3-month LIBOR. But strong economy or something. They really don’t know what they are doing.
Central banks are not central.
Happy New Year Jay Powell, the curve sarcastically frowns upon your ridiculously overoptimistic forecasts.
