Category: zerohedge

A lot can change in less than two months: back on October 18, when the initial market drop seemed like just another dip-buying opportunity, JPM predicted that the odds of a recession in 1 year were a modest 27.6%, rising to 60% if the forecast period is extended to two years.

Well not anymore, because according to JPM’s latest “real-time quant monitor”, the risk of a recession has since spiked to a no longer trivial 35%, the highest in series history (and up from 16% back in March)…

… while the probability that the next presidential recession will take place during a recession (i.e., recession odds in two years) has now surged to more than double that, or over 70%.

While in simple regressive quantitative terms, recession risk is expected to grow substantially by 2020 – assuming it does not strike in 2019 – a qualitative explanation for why a recession may strike then is because that’s when Trump’s fiscal stimulus is expected to shift from an economic tailwind to a headwind, all the more now that Democrats have won the House and have made any further fiscal stimulus virtually impossible

Meanwhile, some of JPM’s other near-term forecasts include:

• GDP growth nowcast drops to to 2.22% from 2.27%
• The forecast of average payroll growth over the next 12 months fell to 124k from 146k
• The forecast of core PCE inflation over the next 12 months was little changed at 1.92%

As a reminder, JPM calculates recession probabilities based on regression models, which track such indicators as prime-age male participation, consumer and business sentiment to prime-age male labor participation, compensation growth, and durables and structures as a share of gross domestic product.

Separately, Bank of America is out with its own latest recession forecast, and when looking at blowing out credit spreads and a yield curve which “has flattened like a pancake with part of the curve already inverting (the 2yr-5yr)”, notes that such moves are usually indicative of a weakening economy, prompting recession fears, and notes that its “recession models – which are a function of various market measures – show that the risk of a recession in 2019 is now between 20 and 37%“

To avoid scaring too many clients, BofA is clearly unhappy with its existing model, and in a Friday note writes that it is introducing a new big data recession probability model that accounts for a broader basket of indicators: the 3mo-10yr treasury spread, building permits, commercial & industrial (C&I) loans, S&P 500, real consumption, and corporate spreads. According to this model, the risk of a near term recession is far lower, predicting a 6-mo ahead probability of only 9%.

To underscore its (still) bullish bias, BofA urges clients to keep an eye on jobless claims which are among the five most relevant indicators of a coming slump: “In the last seven recessions, the 6-month growth rate of initial claims has, on average, jumped double digits heading into the recession.”

That said, claims have trended higher recently, with the 4-week moving averaging increasing from 206.5k in late September to 228k as of the latest data. While BofA observes that this is a noticeable upward trend in a short period of time, “it looks less frightening over a longer-period and part of the uptick can be explained by noise around holiday periods.”

Still BofA will continue to monitor claims as it has shown to be one of the best recession indicators and notes that “increasing claims would portend a slowing in hiring and rising unemployment. In our view, sub-125k on nonfarm payrolls would likely be sufficient to push the unemployment rate higher, which is a clear signal that the cycle is turning.”

Bank of America’s other top recession indicators are auto sales, industrial production, the Philadelphia Fed index, and aggregate hours worked. Some of those are weakening, but none are falling off a cliff according to the bank.

Another early indicator of a recession is business sentiment, which has softened recently, and is one reason for the increase in JP Morgan’s recession-predicting index, which is “getting close to the highest levels of the expansion so far,” analyst Jesse Edgerton says. The cycle peak came in 2016 when growth and markets wavered.

“The risks are drifting toward the economy being softer,” Edgerton said, adding that surveys aren’t uniformly weak, and his team still isn’t predicting a 2019 recession.

The third, and most relevant pre-recession indicator is of course the yield curve, for one simple reason: all the past 7 recessions were preceded by a yield curve inversion.

“We hardly have any empirical regularity that’s this regular,” said San Fran Fed President Mary Daly said in a November interview. Curiously, even with the 2s10s just 13 bps away from 0, Fed officials so far don’t sound overly concerned about the curve. They’re monitoring it, but they aren’t willing to focus on it exclusively so long as real economic data hold up as Bloomberg notes.

There is also the question of timing:while a yield curve inversion virtually assures a recession, the timing remains unclear, prompting UBS Global Wealth Management’s Chief Investment Officer Mark Haefele to write in a Dec. 5 note that inversions are a “flawed crystal ball” as the lag between inversion and recession was longer than 24 months on the last two occasions.

* * *

And yet, despite the cautious optimism from the sell side, the Fed’s own Survey of Professional Forecasters is starting to sour on the economy’s prospects four quarters from now: the Survey puts the odds that economy will be shrinking in a year’s time at 23 percent, the highest level since 2008.

Even so, this implies a recession probability of less than 20% according to a Goldman Sachs analysis, with the vampire squid calling forecasts pretty inaccurate that far out, and respondents put a low probability on a recession within the next couple of quarters.

That “supports our view that a 2019 recession is unlikely,” economists Daan Struyven and David Mericle conclude. The wisdom of crowds can work, they say, “but primarily at relatively short horizons.”

In the end, as Bloomberg notes, markets and hard data are clearly diverging in their signals about recession odds as of this moment, with most economists – still stuck in a hopium mood – clearly sticking with the latter until a more decisive shift becomes obvious.

“The incoming data continues to be good,” Deutsche Bank’s perpetually cheerful Torsten Slok wrote last week: “Where is this recession the market is so worried about?”

Well, according to some it has already started… and judging by the market, traders don’t exactly disagree.

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Authored by Kenneth Rogoff via Project Syndicate,

The right way to think about cryptocurrency coins is as lottery tickets that pay off in a dystopian future where they are used in rogue and failed states, or perhaps in countries where citizens have already lost all semblance of privacy. That means that cryptocurrencies are not entirely worthless.

With the price of Bitcoin down 80% from its peak a year ago, and the larger cryptocurrency market in systemic collapse, has “peak crypto” already come and gone? Perhaps, but don’t expect to see true believers lining up to have their cryptocurrency tattoos removed just yet.

At a recent conference I attended, the overwhelming sentiment was that market capitalization of cryptocurrencies is still set to explode over the next five years, rising to $5-10 trillion. For those who watched the price of Bitcoin go from $13 in December 2012 to roughly $4,000 today, this year’s drop from $20,000 is no reason to panic.

It is tempting to say, “Of course the price is collapsing.” Regulators are gradually waking up to the fact that they cannot countenance large expensive-to-trace transaction technologies that facilitate tax evasion and criminal activity. At the same time, central banks from Sweden to China are realizing that they, too, can issue digital currencies. As I emphasized in my 2016 book on the past, present, and future of currency, when it comes to new forms of money, the private sector may innovate, but in due time the government regulates and appropriates.

But as I also pointed out back then, just because the long-term value of Bitcoin is more likely to be $100 than $100,000 does not necessarily mean that it definitely should be worth zero. The right way to think about cryptocurrency coins is as lottery tickets that pay off in a dystopian future where they are used in rogue and failed states, or perhaps in countries where citizens have already lost all semblance of privacy. It is no coincidence that dysfunctional Venezuela is the first issuer of a state-backed cryptocurrency (the “Petro”).

The ultimate obstacle for any cryptocurrency is that eventually there has to be a way to buy a range of goods and services beyond illicit drugs and hit men. And if governments ever make it illegal to use coins in retail stores and banks, their value must ultimately collapse.

Many crypto-evangelists insist that Bitcoin is “digital gold,” in part because the long-term supply is algorithmically capped at 21 million. But this is nutty. For one thing, unlike gold – which has always had other purposes and today is employed widely in new technologies from iPhones to spacecraft – Bitcoin has no alternative use. And even if Bitcoiners manage to find a way to lower the phenomenal energy cost of verifying transactions, the very nature of decentralized ledger systems makes them vastly less efficient than systems with a trusted central party like a central bank. Take away near-anonymity and no one will want to use it; keep it and advanced-economy governments will not tolerate it.

The evangelists dismiss such concerns: Bitcoin can still be incredibly valuable as long as enough people perceive it as digital gold. After all, they argue, money is a social convention. But economists (including me) who have worked on this kind of problem for five decades have found that price bubbles surrounding intrinsically worthless assets must eventually burst. The prices of assets that do have real underlying value cannot deviate arbitrarily far from historical benchmarks. And government-issued money is hardly a pure social convention; governments pay employees and suppliers, and demand tax payments in fiat currency.

But it is too soon to say how the new world of digital currencies will play out. Central banks will get into the game (their reserves are already a form of wholesale digital currency), but that is not the end of the story. US Treasury Direct, for example, already offers retail customers an extremely low-cost way to hold very short-term Treasury debt for amounts as little as $100, tradable to others in the system. Still, heavy security makes the system relatively cumbersome to use, and just maybe governments might adopt one of today’s private digital technologies.

For the moment, the real question is if and when global regulation will stamp out privately constructed systems that are expensive for governments to trace and monitor. Any single large advanced economy foolish enough to try to embrace cryptocurrencies, as Japan did last year, risks becoming a global destination for money-laundering. (Japan’s subsequent moves to distance itself from cryptocurrencies were perhaps one cause of this year’s gyrations.) In the end, advanced economies will surely coordinate on cryptocurrency regulation, as they have on other measures to prevent money laundering and tax evasion.

But that leaves out a lot of disgruntled players. After all, many today – including Cuba, Iran, Libya, North Korea, Somalia, Syria, and Russia – are laboring under United States financial sanctions. Their governments will not necessarily care about global externalities if they encourage cryptocurrencies that might have value as long as they are used somewhere.

So, while we shouldn’t be surprised by this year’s cryptocurrency price bust, the price of these coins is not necessarily zero. Like lottery tickets, there is a high probability that they are worthless. There is also an extremely small outside chance that they will be worth a great deal someday, for reasons that currently are difficult to anticipate.

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Accused Russian spy Maria Butina wants to change her plea to guilty according to a Monday court filing with a DC Court. 

Butina, who was arrested in July and remains in custody, is accused of working with South Dakota Republican Paul Erickson as a Kremlin spy. 

Erickson, who has strong ties to both the National Rifle Association and the Russian gun rights community, allegedly attempted to develop a back-channel between the NRA and the Russian government. In May, 2016, Erickson sent an email to Trump campaign adviser Rick Dearborn and Jeff Sessions with the title “Kremlin connection,” seeking a meeting between then-candidate Trump and Russian President Vladimir Putin at an annual NRA convention. 

Butina, meanwhile, allegedly tried to use Erickson to introduce her to influential political figures in order to arrange a meeting between Trump and her boss, Russian central banker Alexander Torshin.

The Trump campaign declined the invitation, however Torshin and Butina did have a brief interaction with Donald Trump Jr. at a dinner. 

Butina is accused of trying to cultivate “back-channel” relationships with the Republican Party’s leading presidential candidates and develop close ties to the NRA to provide Russian officials “with the best access to and influence over” the party.

Butina allegedly was assisted by Erickson, who helped introduce her to influential political figures and who sought to organize a meeting between then-candidate Donald Trump and Alexander Torshin, Butina’s colleague and a Russian central banker, at a May 2016 NRA convention. –Washington Post

US prosecutors on in September argued that Butina should remain in jail pending trial, providing additional evidence that Torshin coordinated her activities – claiming that at his direction she drafted language which would persuade the Russian foreign ministry to let him attend the meeting at the NRA event, which she called a “unique opportunity.” 

 

 

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Senior Communist Party officials let their frustration over the arrest and likely extradition of Huawei CFO Meng Wanzhou be known over the weekend during meetings with the American and Canadian ambassadors to Beijing where they threatened “severe consequences” if Meng isn’t released. But these threats haven’t blunted the Canadian government’s determination to prosecute Meng for fraud. And with the bail hearing for the executive and daughter of one of China’s most revered entrepreneurs set to begin a second day of proceedings on Monday, Bloomberg has published the most detailed report describing the defense presented by Meng’s lawyers.

As government lawyers argue that Meng should be held in lieu of bail because she is a flight risk with no close ties to Canada, the executive’s legal team is insisting that detaining Meng would be inhumane, citing her recent history of health problems, and the two multimillion dollar Vancouver homes owned by her family. According to her lawyers, Meng suffers from hypertension and a sleep disorder related to a recent bout with thyroid cancer. She also struggles to eat solid food. She needs daily medication to cope with her health issues.

The Canadian government has asserted that Meng would almost certainly slip back to China, which has no extradition treaty with the US, if released from her Canadian prison (and once back in China, Meng would have ample resources to evade capture).

“I’m not saying that wealthy people can’t get bail,” he said Friday at the six-hour bail hearing as more than 100 spectators watched from a glass-walled gallery. “But I’m saying in terms of magnitude to feel the pull of bail, we are in a different universe.”

Her lawyers have argued that she has many important connections with Canada, and that her health should at least give her reason to remain on house arrest. As we’ve previously pointed out, the process of extraditing Meng could take years.

“I continue to feel unwell and I am worried about my health deteriorating while I am incarcerated” she said in a filing. “I currently have difficulty eating solid foods and have had to modify my diet to address those issues. My doctor has for years provided me with daily packages of medications.”

Vancouver, her attorneys argued, plays a “special role” in the relationship between Meng and her family. She often spends time in the city with her four children (at least one of whom is attending boarding school in the US).

The other prong of the argument revolves around how Vancouver plays a special role for Meng – as it does for many a wealthy Chinese – a place to buy property, educate her children and just let her hair down from time to time. Meng would carve a few weeks out of her punishing travel schedule every year for a break in the city, according to court documents. She’d time it for the summer, when her children would be there. Just last August, she was seen strolling through a local park, snapping photos with her in-laws.

Meng and her husband also own two homes worth roughly $16 million combined.

Meng, who first visited Vancouver about 15 years ago, bought a six-bedroom house with her husband Liu Xiaozong in 2009 that’s now assessed at C$5.6 million ($4.2 million), according to property records and an affidavit by Meng read aloud in court. In 2016, they bought a second property, a brick-and-glass mansion set in a 21,000-square-foot lot assessed at C$16.3 million. Purchased with mortgages from HSBC, she’s offered to post the family’s equity in both as part of her bail.

“She would not flee,” Meng’s defense lawyer David Martin responded. “She has a home here.”

Her lawyers even submitted photocopies of documents they said illustrated Meng’s ties to Vancouver.

Of course, the value of these homes is peanuts compared with her father’s estimated wealth of $2 billion.

Meng’s attorneys have also attacked the crux of the prosecution’s case – namely, denying that Meng knowingly misled banks about transactions involving Huawei subsidiaries that violated US and EU sanctions against Iran.

Meng is “an accomplished individual of previous good character, who has strong roots and ties to Canada and to the Vancouver community,” Martin wrote in a filing. “She presents no threat to public safety, and due to her health issues incarceration would be extremely punitive.”

But many doubt this argument will find much sympathy with a Canadian judge. After all, the Canadian government has already considered whether the allegations against Meng constituted a violation of Canadian law, and they decided in the affirmative. Monday’s bail hearing is expected to take most, if not all, of the day. But a decision is expected. And if Meng is held, expect another round of threats from the Communist Party.

 

 

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All the major US equity indices are now underwater for the year as Nasdaq finally joined the S&P, Dow, Small Caps, and Trannies…

Overnight saw early derisking on a multitude of factors, but the machines gently levitated futures into the open, before flushing at the open (not helped by AAPL)…

And that has driven Nasdaq into the red for 2018…

This is the worst performance for this time of year since 2008…

Who could have seen that coming?

 

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After the ubiquitous ramp into the US cash market open, things have gone a little pear-shaped, with stocks tumbling back below last week’s lows and pushing critical 2018 support levels.

As BMO’s Russ Visch writes,

It’s a “make or break” day for the S&P 500, which closed right at key support at its October/November lows (2630) on Friday. If support holds here over the next few days it would build the case that a bottom is beginning to form here. Alternatively, a close below that level would signal a resumption of the long-term downtrend with a measurable downside swing target of 2445. There is support at the early 2018 lows in the 2530-2560 zone but in our opinion it will take a close below that level to cause the volatility/capitulation spike that’s been missing so far.

In our opinion, a breakdown appears to be the most likely outcome given that other, broader measures of equity participation such as the Russell 2000 and Value Line Composite indexes have already broken down.

At the same time NYSE breadth data is getting worse, not better.

Late last week the number of stocks making 52-week new lows on the NYSE jumped to its highest reading in nearly three years.

The deterioration “underneath the surface” which these indicators reflect typically only accompany continuation patterns (pauses within downtrends) not bottoming processes.  

And that’s what just happened…

Breaking below the Oct lows…

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Having correctly predicted the broader market dump last week, and – more importantly – accurately defining the key CTA selloff levels much to the embarrassment of some of his peers who keep making wrong calls and, unable to make an accurate forecast for month instead chose to blame “fake news”, Nomura’s Charlie McElligott is out with an unexpected warning this morning, just as speculation of broad based capitulation is finally gripping markets.

Observing the weakening global growth signals, which as we noted earlier dragged both Europe and Asia lower, in his latest note McEllgiott warns that despite the fading inflation impulse and slowing global growth due to “restrictive financial conditions,” which has further depressed risk-taking sentiment across trading desks on Monday morning, he sees near-term macro and positioning catalysts “for a powerful blast of Equities upside” for the following reasons:

• The recent overshoot in US Rates has been more about positioning stop-outs and performance destruction (especially with the unfortunate proximity to funds’ year-end) than a “pure” read on the “end-of-cycle” US economy alone (despite clearly weakening global growth and fading inflation impulse)
• In addition, large long-end buying (in turn, bull-flattening the curve) is acting to EASE U.S. financial conditions as a near-term catalyst for Equities
• Additionally, the obvious “dovish pivot” from Fed removes the “policy error” left-tail from market
• The potential for the crowded “Long Dollar” trade to “tip over” with on the end of policy normalization and data weakness will help feed higher “inflation expectations” as a POSITIVE macro factor sensitivity for SPX
• Finally, there is an enhanced-risk of positioning squeeze in Equities as the performance purge across fundamental and systematic strategies has seen them slash net exposures, while our CTA model shows nearly consensual “Max Shorts” across global Equities now…but SPX within reach of again tactically pivoting from “Max -100% Short” to again “+21% Long” ~ 2668

Furthermore, the proximity to the year-end “shut-down,” which means active/fundamental hands are largely “tied” and not in position to chase into an upside Equities trade this calendar year, the “chop” is not yet done according to McElligott.  But, as the Nomura quant adds, there is scope for something developing thereafter, counterbalanced by the peak of the China slowdown in 1Q/2Q19 and it’s “drag” on global growth and inflation.

Commenting further on the first bullet point, McElligott points out the dramatic repricing in rate hike odds seen last week, when Eurodollar futures volumes exploded to a record high, and notes that rates capitulation is “maxing”—EDZ8-Z9 now only pricing 10.25bps of hikes next yr / Mar 19 hike probability is now just 25% likely, while EDZ9-Z0 now shows -13.5bps of FED EASING in 2020.”

And yet, the cross-asset quant asks if this is all truly about an “end-of-cycle” view? Here are McElligotts counters what has rapidly become conventional wisdom, noting that instead of reflecting fundamentals, the move is merely a technical “push”, and explains why as follows:

• My belief is that while we are absolutely repricing due to lower growth- and inflation- expectations on account of rapidly deteriorating US financial conditions (in-line with my long-held “Two Speed Year” thesis), it is the unwind of enormous legacy “Bearish Rates” positions which is the larger catalyst behind this “overshoot” and is now perhaps sending a FALSE SIGNAL to Equities, over-stating the scale of the “imminent” recession risk
• Recent flow-driven “bull-flattening” in US curves and the knock-on into front-end inversions (with many U.S. Rates front-end curves at 90%+ R Sq to US 5s30s)—which has then perpetuated the risk-negative “growth-scare” / “end-of-cycle” overshoot as global data has clearly deteriorated—instead acts to offset and “ease” recently tighter US financial conditions, especially with the move occurring in the most economically sensitive long-end bucket

Arguably his strongest argument, one also made last week by Jeff Gundlach, is that there were simply “MASSIVE shorts” in the front-end which facilitated this beyond-epic trade unwind, i.e. a much discussed position (and one of many similar structures in the market) accumulated across the first half of 2018 where somebody was long approx. 900k long-dated red and green Eurodollar options Put ratios, “which has embedded enormous gamma-risk in the market and thus exacerbated the insanity of the short-squeeze (and corresponded talk of ‘stop-outs’ through buyside fixed-income pods in recent weeks).“

Finally, when evaluating yield curve signals, it’s not just the violent squeeze on the short end, but also rising organic demand for the long end: this according to McElligott was due to larger entities (as per the “Others & Non-Reportables” category of long-end futures OI data) now again buying the long-end.

To this point, our Nomura QIS Risk Parity model shows as estimating MASSIVE buying in DM Sovereign Bonds totaling +$42B MoM and looking almost entirely concentrated in JGBs and USTs

And while McElligott also comments on the limited upside in the USD, what we find most interesting – and his competitors most controversial – is the latest CTA positioning. According to McElligott CTA positioning, much of it exhausted to the upside, confirms similar USD length “which could also boost risk assets / inflation expectations on potential deleveraging.”

CTA Position Estimates

Further to potentially bullish CTA positioning, Nomura notes that “as a bullish (risk) “tell” and against this legacy “Max Long” Dollar position in the market (vs broad G10), we are beginning to see Commodities positioning pivoting back towards “Neutral” vs broad “Shorts” just one-month ago—this is another signal of potential upside for inflation expectations, especially as “trade-war thaw” begins to seep into US Aggs as China flips the switch and resumes purchases of US ags and energy, where a gradual daily improvement on continued “tangible” improvement with China buying can boost generalized risk-sentiment further.”

CTA Position Estimates

The biggest risk for bears, however, is that CTAs, having flipped “max short” may now be squeezed higher, as a result of a rate selloff/reversal (into higher yields):

Our Nomura QIS CTA model now show “Max Short” positioning re-established across nearly all global Equities futures it tracks, with -100% Short positions in SPX, Russell, Eurostoxx 50, Nikkei 225, DAX, FTSE100, CAC40, Hang Seng, Hang Seng CH, ASX 200 and KOSPI 200 (NASDAQ the last remaining U.S. Equities “Long” but at a very scaled-down +21% long / 3.1% overall portfolio size, while Bovespa actually remains “Max Long”)

Indeed, as the following table shows, the equity positioning in the bank’s trend model is now almost entirely “Max Short” across the world (except the stubbornly green Bovespa):

CTA Position Estimates

As such, using the S&P as chief equities proxy, McElligott would see CTA Trend begin to cover and “flip” LONG again at 2667—with potential estimated notional on the cover from “-100% Max Short” to go back a “+21% Long” position (based off of Friday’s closing spot level—which, as he reminds, these estimated levels are not static).

In short, S&P CTA are currently -100% “max short”, but would be buying over 2,667.54 to get to -39.5% – a buying volume of $45BN – and another $45BN at 2,667.8 to get to 21% long, with the model estimating “Max Long” accumulatve above 2,771.6.

It’s not just trend-followers who are positioned for a bullish reversal: so are trading desks, with McEllgiott calculating that the SPX/SPY net Delta is now -$451B (and front-month -$306B of that as hedges are held and “kicked in”) but notional bias is to the upside.” That said, offsetting this upward bias, we are also back to negative Gamma, with the move per 1% move + or – now -$9B and across strikes bias to downside.

Finally, the key S&P levels that matter for “Greeks” are the 2600 strike with $4.4B gamma and 2650 with $4.3B gamma, “although that 2500 strike is ‘creeping’ with $3.0B of gamma.”

* * *

In parting, McElligott does a post-mortem of the Friday equity flush, noting that it was consistent with that of “risk management” -dictated behavior (especially due to the proximity to year-end), with funds showing zero tolerance for further drawdown: by the end of the day, Equities Long-Short and Market-Neutral performance looks to have made fresh YTD lows.

However, contrary to some erroneous report in the financial press, Friday’s exposure reduction wasn’t about a broad “gross-down”, and instead it was about taking down your “nets” (long exposure less short), with popular longs being “hate sold” while at the same time seeing shorts pressed hard in a clearly more defensive posture as funds look to “shut it down” through the end of the year.

In short, another day in which the “max pain” was to the downside (sorry JPMorgan quants).

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Authored by Irina Slav for Oilprice.com,

The U.S. Geological Survey has revised the technically recoverable reserves in the Wolfcamp Basin, in the Permian shale play, to 46.3 billion barrels of crude and 281 trillion cu ft of natural gas. That’s up from 20 billion barrels of crude and 16 trillion cu ft of gas in recoverable reserves in late 2016.

It’s worth noting, however, the new estimate also includes the Bone Spring formation that makes up part of the Delaware Basin in the Permian. This is the first time this formation is included in the USGS oil and gas reserves assessment.

Recoverable reserves are calculated based not just on exploration results and geology but also on the price level that makes the oil and gas commercially viable for extraction. The USGS carried out its revision earlier this year, so it must have reflected the improvement in oil prices, notably West Texas Intermediate that has now largely disappeared, sparking worry about the sustainability of production growth, which has been steady throughout the year.

The national total hit 11.7 million bpd last month, an all-time high and also the highest in the world and the Permian was the major driver behind this growth. It is the shale play that produces the most oil and also boasts the fastest rate of production growth: in November the Permian yielded 3.63 million bpd of crude and the Energy Information Administration expects this to rise further to 3.695 million bpd this month.

So, the Permian is already a star, but now it will shine more brightly. The USGS numbers mean it is the largest single reservoir of oil and gas in the United States and one of the largest on a global scale.

The Albuquerque Journal quoted the head of the state’s Oil and Gas Association as saying:

“Even for someone who understands the resources and potential of the Permian Basin, I can’t help but be surprised by the sheer enormity of what the USGS has reported.”

\Ryan Flynn added “The Permian resources shared by New Mexico and Texas make this area one of the most important places in the world in terms of oil production.”

While this is true, this rush to the Permian, aptly dubbed Permania, has led to some problems, namely price discounts as there are not enough pipelines to get the product to refiners and export markets. However, these problems are being addressed already and the Permania looks like it will only intensify unless prices slump below US$50 a barrel for WTI.

 

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As we reported earlier, after acknowledging that her Brexit deal faces the possibility of an “overwhelming” defeat in the House of Commons, Prime Minister Theresa May has reportedly finally caved and is expected to call off the planned Tuesday vote in a speech before Parliament.

The speech is slated to start at 10:30 am ET. Watch it live below:

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In a dramatic reversal to market sentiment that JPM’s head quant could only ascribe to even more “fake news“, SocGen’s Kit Juckes writes this morning that “a week ago, market sentiment was optimistic after the G20 meetings in Buenos Aires. That’s a reminder not to read TOO much into Monday morning markets!”

Picking up on this, another SocGen strategist, Andrew Lapthorne, writes that “having bounced back strongly post-Powell, equity markets slumped last week as the mood turned decisively bearish. MSCI World dropped 3.7%, leaving it 12.6% down from its late January peak.”

It gets worse: as Lapthorne adds, the DAX, China A, Emerging Markets and a host of other markets are now in bear market territory; must be all the fake news out there that is preventing JPM’s optimistic forecast from materializing. Putting the ongoing carnage in context, stock-wise 52% of MSCI World companies are down by more than 20% from their 52-week high, but only 38% of the market cap.

To make that point, Lapthorne notes the drawdown Basic Materials and Industrials sectors: they have already lost over 20% from their 2-year peak – in previous bear markets this usually bottomed out around 30% (GFC excluded). Meanwhile, in Europe, Basic Materials are down almost 30% and Industrials are off 26%. For a while now equity investors have been concerned about a whole gamut of macro issues; it was just the US equity market ignoring them until now, according to the SocGen strategist.

So strong the previous week, the US reversed those gains with the S&P 500 off 4.6%, Nasdaq down 4.9% and the Russell 2000 losing 5.6%, its sharpest weekly decline since the first week of 2016.

So what to do next? As we noted over the weekend, Goldman’s reco to clients was to rotate exposure, turn more cautious and allocate to stocks with a high sharpe ratio, those that offer a mix of both Growth and Value. Lapthorne has a slightly different take, and urges readers to shun anything with a growth/quality tilt and emphasize value. As he reminds readers, “we have spent most of the year worrying about the effects of higher US bond yields on equity markets, and, in particular, how that would affect expensive Quality and Growth stocks, and conversely how it might benefit ‘beaten-up’ Value stocks.”

Our aversion to expensive Growth and Quality stocks and our relatively sanguine view on global Value despite significant economic slowdown concerns, is that Value stocks and cyclicals more generally have spent much of the year pricing in a slowdown already.

So with the majority of world stocks now in a bear market, Lapthorne’s reco is simple: over the last few months, the slowdown has largely played out for Growth, but Quality has remained defensive and Quality Income (i.e., defensive with a high yield) has proved its relative worth during the sell-off.

Then again, as 2008 taught us, when faced with a liquidity crunch, asset managers will paradoxically hold on to their losers in hopes of getting better prices, while dumping winners. Which is why all those traders who have stocially waited for the past ten years for a renaissance in value stocks may finally enjoy a moment in the spotlight, only to suffer an even bigger hit in the coming months if the global economy is indeed about to sink into a market-crushing recession or worse.

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