Category: zerohedge

Equity traders have apparently given up on tracking the conflicting signals emanating from the White House ahead of President Trump’s long-anticipated meeting with Xi Jinping later this week, instead clinging to the best case scenario – that the talks will hopefully forge a “pathway” to an eventual deal. Few analysts expect any meaningful progress to be made in Buenos Aires.

And while the administration has insisted that it remains “open” to a deal with China, Trump stepped up the rhetoric last night when he said he plans to move ahead with a planned tariff increase in January regardless of what happens in BA – and that, if talks go badly, he wouldn’t hesitate to slap tariffs on the remaining $267 billion in Chinese goods flowing into the US economy. Reports circulated earlier claimed that Trump’s comments angered some of the most senior officials in his administration. But on Tuesday afternoon, his chief economic advisor Larry Kudlow parroted the president’s line during a talk with reporters – reaffirming that, if things don’t work out during the summit meeting, Trump will move ahead. So far, things aren’t looking good. As Kudlow pointed out, negotiations in the run up to the talks haven’t yielded any progress, and unless something changes, the administration will move ahead with the next phase of tariffs.

“Things have been moving very slowly between the two countries,” Kudlow said, adding that it was up to Xi to come up with new ideas to break the deadlock.

Echoing a report from the US Trade Representative published earlier this month, Kudlow said there hasn’t been much of a change in China’s approach.

“We can’t find much change in their approach,” Mr Kudlow told reporters. “President Xi may have a lot more to say in the bilateral [with Mr Trump], I hope he does by the way, I think we all hope he does…but at the moment, we don‘t see it.”

Still, Kudlow believes there’s a “good possibility” that a deal could eventually be made, assuming that China becomes willing to accede to some of the US’s demands.

Kudlow reiterated the oft-touted narrative that:

“Our economy is in good shape, China’s is not”

Which is a problem as based on Citi’s Macro Surprise indices, that is no longer true:

But regardless of what Xi does, the US will hold out, Kudlow said, because “we are in far better shape to weather this than the Chinese are” – echoing one of Trump’s most oft-repeated lines.

“If China will come to the table with some new ideas and some new cooperation…there’s a possibility that we can make a deal.

Kudlow’s comments suggest a shift in the days before the deal from a “good cop, bad cop” approach where trade hawks like Navarro and Lighthizer would present the hard line, while Kudlow and Treasury Secretary Steven Mnuchin would offer a slightly softer approach. Now, it appears the administration has united in presenting a hard line.

We’ll see if it works.

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Authored by Kevin Muir via The Macro Tourist blog,

The other day President Trump tweeted the following:

Contrary to some of his tweets, this one seems to make sense. After all, the price of energy goes into everything. From the cost of manufacturing household items to shipping foreign foreign-made goods from overseas to the price filling up the tank on the commute to work, it’s tough to argue that reducing the price of energy isn’t a huge wealth boost for the average consumer.

Surely this must be easy to observe in the economic data. A decrease in the price of energy must mean a bump in economic activity.

Well, unfortunately for the President, there is a relationship between energy prices and economic growth, and it is indeed negatively correlated, but the lag is long. Much too long for a President that measures his performance by the daily newscycle.

Let’s look at the data. Here is the chart of US Real GDP growth (lagged by 18-months) versus the inverted 18-month rate of change of WTI Spot.

So what’s this showing? The orange line is the inverse 18-month rate of change for WTI. So when it is going down, that means the price of WTI has been rallying for the past year-and-a-half. Look at the relationship between that change and the economy. Sure, there is a definite correlation, but the lag is… how would President Trump say it? Yuuuggggeeeee.

If this relationship continues, we should expect another 18 months of economic weakness before the benefits of the lower energy price kick in.

And far be it from me to question the President’s tactical decisions, but Trump seems intent on applying as much pressure as possible on China to extract a more fair trade deal. Last I checked, China was the largest importer of crude oil in the world.

I can almost hear the Chinese trader in the NYMEX pit come running out from his booth during the recent oil price decline with palms facing inwards screaming “BOUGHT FROM YOU!!!”

In the meantime, the U.S. has almost halved their net imports during the past decade.

The true extent of the benefits of the decline in the price of crude oil is difficult to judge, but here is another aspect where I happen to agree with the President. If the Fed doesn’t monetize the decline through marginally lower rates (it doesn’t have to be actually lower rates, but it does need be lower than would have otherwise been the case), then the decline in crude oil might not be as much a benefit as many of the economic bulls believe.

Now don’t misconstrue my remarks. Lower energy prices are a net benefit to the entire global economy. It’s just that it probably isn’t as immediately beneficial to America as the President wants…

I will leave you with one last chart. This one is Brent lagged versus G7 growth.

It certainly appears like the next ticks in the global economy are lower, not higher.

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After both investment grade and high yield bonds got crushed in the past month with spreads blowing out to multi-year wides and generated negative YTD returns as Morgan Stanley now sees the bear market gripping credit accelerating into 2019, many traders were wondering how long before the final bastion of the credit bubble – leveraged loans – would also pop.

It appears the answer may be “now” because as Bloomberg reports, no less than 4 leveraged loans have been pulled this month as a result of the turbulence gripping the broader credit market, the highest number of pulled deals since July when five deals were pulled. Expect more to come.

This comes as the price on the S&P/LSTA U.S. Leveraged Loan 100 Index has plunged since the start of October, when it was just shy of par, to 97.28, the lowest price since November 2006!

Diversified manufacturer Jason Inc. became at least the fourth issuer to scrap a U.S. leveraged loan this month according to Bloomberg, which writes that the company had kicked off the syndication process on its amend and extend on Nov. 13 was seeking commitments from new lenders by Nov. 20

Additionally, in the last two weeks, Perimeter Solutions pulled its repricing attempt, Ta Chen International scrapped a $250MM term loan set to finance the company’s purchase of a rolling mill, and Algoma Steel withdrew its $300m exit financing. Global University System last week also dropped its dollar repricing, but successfully completed a repricing of its euro tranche.

Prior to this string of deals getting shelved, the last pulled loan deal seen was Apergy’s $395m loan repricing in late October. Before that there hadn’t been a scrapped transaction in the market since late August.

The shift in market dynamics from sellers to buyers was on exhibit last week, when eight loans flexed wider while none flexed down – the first week when no borrower friendly changes were made since at least August.

Leveraged loans hitting a brick wall is bad news for CLO investors – the biggest source of leveraged loan demand – who should position themselves higher in quality in the face of late-cycle credit risks, credit curve steepening and spread widening, Morgan Stanley write in its 2019 outlook report on the CLO market.

According to MS analysts Johanna Trost and James Egan, the focus of the market will shift from technicals to fundamentals – the same argument noted by Adam Richmond in his broader credit outlook for 2019 – warnings that the risk/reward for CLO equity doesn’t look favorable against the late-cycle backdrop as “cash distributions have been trending lower and liquidation values are 10x exposed to deteriorating loan pricing and loan losses.“

Morgan Stanley also expects new issue supply to fall to $90 billion for 2019 from $126 billion this year, with less investor demand for equity cited by MS as the main risk factor to volumes, which may drive the difference between the base forecast and bear case of $60BN (the bull forecast $120BN). Meanwhile, the refinancing/reset split meanwhile will skew to more refis next year, as managers will need to “get more creative” in a challenging deal pricing environment and the cost savings to equity at the shorter end of the term structure will incentivize refi activity.

As for the leveraged loans underlying these CLOs, Morgan Stanley has been warning that covenant quality is weaker than 2007, as the cushion beneath the average loan is lower while 1st lien leverage levels are higher. As Richmond noted earlier, “48% of LBO transactions are levered over 6x versus 51% in 2007, but as a part of those leverage numbers, 27% of deals have Ebitda adjusted for prospective cost savings/synergies versus only 15% in 2007.”

Still, don’t expect a surge of lev loan defaults, yet: the 2019 leverage loan default rate is estimated to be at 2.7%, although as the bank cautions “spreads move before defaults.” These should rise more meaningfully in 2020 and peak in 2021 in a longer “but less steep default curve than in 2008/2009.”

As a result, the bank recommends defensive positioning “in AAAs instead of junior AAAs or AAs because of the better liquidity and lower spread duration, and in shorter-dated paper because of lower MtM risks and a relatively flat AAA term structure.”

Finally, in what may come as a surprise to some, the following table shows that in the lev loan market, the tech sector comprises the highest share, has grown the fastest, and has 29% B- or lower rated facilities by par.

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One day after GM CEO Mary Barra met with National Economic Council director Larry Kudlow at the White House, shortly after the US auto giant announced plans to shutter five factories in the U.S. and Canada and lay off over 14,000 employees, Donald Trump’s top economic adviser said he had conveyed to Barra the “president’s anger” over her plans to close U.S. factories and lay off thousands of workers.

“The president is very cross with her and of course I transmitted that,” Kudlow told reporters on Tuesday. “Tragically, they are going to lay off a whole bunch of workers.”

Kudlow also made it clear that the “angry” President feels betrayed, and believes that General Motors “turned their back on him” in announcing layoffs and plant closures. While investors cheered the news, sending GM shares higher, but in Washington there was bipartisan anger that the company is trimming its workforce in the midst of an economic expansion.

“These are their business decisions, I just think there’s a tremendous amount of disappointment, maybe even spilling over into anger. President Trump expressed his dissatisfaction, lots of other people did, this is a bipartisan thing”, Kudlow said.

“I met with [GM CEO Mary] Barra, whom I generally like. I have no idea if she’s made the right decisions or the wrong decisions, it’s not my business. I do think, however, the president’s point of view is, we concluded the USMCA deal which really helped the American auto business and American auto workers, and was designed to do that. And the car companies supported us” Trump top econ advisor told reporters according to Axios.

“So part of the disappointment is, ‘We made this deal, we worked with you along the way, we’ve done other things — mileage standards for example and other regulations. We’ve done this to help you, and I think his disappointment is it seems like they kind of turned their back on him.”

As Axios notes, since for Trump, politics is always personal, for GM this could mean less influence over future policy.

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Back in April, when very few were concerned about the fate of the US credit market where credit spreads were approaching all time tights, Morgan Stanley asked what would turn out to be a prophetic question: “Is the credit cycle about to crack“, and taking a contrarian position, answered in the affirmative.

Seven months later, as part of its 2019 Credit Outlook, Morgan Stanley takes its dismal take of US credit one step further, and in a report from strategist Adam Richmond, writes that “the credit bear market, which likely began when IG spreads hit cycle tights in Feb 2018, has begun and will continue in 2019, with HY and then eventually loans underperforming, as headwinds shift from technicals to fundamentals.”

To frame the temporal context of its gloomy assessment, Morgan Stanley writes that just one year ago not a cloud was to be seen on the credit horizon as “2017 was the ‘Goldilocks’ year” as growth expectations were rising on the back of a synchronized global expansion, investors could look forward to the possibility of tax cuts, and monetary policy remained very accommodative, aided by low inflation.

The picture started to change in 2018, when challenges began to mount, but remained mostly technical in nature. In other words, while the economy and earnings both boomed, in part due to fiscal stimulus, the Fed began stepping harder on the brakes, weakening the flows into US credit. As a result, IG spreads widened – blowing out sharply in October and November – and resulting in negative excess returns YTD. High yield was more resilient to weakening demand in part on the back of low supply, however it took cracked recently and the loan market bucked the outflow trend as investors searched for protection from higher yields.

While 2018 was the transition year, in 2019 Morgan Stanley things that “it gets tougher on both fronts – monetary policy should near restrictive territory for the first time this cycle, while the tailwind from a booming economy fades as growth decelerates and earnings growth potentially slows to a standstill.”

Hence, the bank’s credit strategist Adam Richmond believes the challenges will shift from just technicals (tighter liquidity conditions/ weaker flows) to also fundamentals (concerns around credit quality/ weakening growth), and as that happens, late cycle risks may turn into end-of-cycle fears, with the higher beta/ more levered parts of credit markets underperforming.

* * *

Looking at the key risk factors heading into 2019, Morgan Stanley first highlights tightening liquidity conditions “which should remain a headwind in 2019, at least initially, as the Fed pushes rates near restrictive territory, while continuing to shrink its balance sheet at the maximum rate, for now.”

Taking a step back, for most of 2018, we argued that a tightening in Fed policy, especially in the current cycle, was a material headwind for credit. In a nutshell, central bank stimulus was massive in this cycle, and highly supportive of credit. We thought the process in reverse, at the least, would weaken the flows into credit markets, driving higher volatility, with less of a “liquidity buffer” to cushion the shocks. In our view, these headwinds have materialized, just slowly and in stages.

And as the bank shows in Exhibit 2 and Exhibit 3, flows into credit markets did weaken notably in 2018 across multiple sources, including both mutual funds and foreign demand.

It was these weakening flows that initially hit global credit markets this past year, one-by-one. For example, Exhibit 4 shows the spread widening in 2018 in US IG, in EM credit, in European credit, and most recently in US high yield, with financial conditions tightening in the process.

The reason why flows and liquidity are critical for credit is that they help to mask adverse shifts in fundamentals, or as Morgan Stanley notes, “fundamental issues are easier to hide when liquidity is flooding into markets, and it is not anymore.”

Furthermore, as liquidity conditions get squeezed, it is natural for dispersion in performance across asset classes, regions, sectors, and single names to pick up, with the weak links breaking first. US high yield was more resilient for most of the year than other markets, in part due to very low supply, and in part given its  close ties to the strength in the US economy. But as Richmond notes, even HY, the “resilient” credit market, has only managed a roughly flat total return YTD, despite very strong earnings growth, a solid US economy, and supply down ~30%, which we think speaks to the importance of this tightening in liquidity conditions.

So looking to 2019, the banks notes that there are two points are key to remember:

1) The liquidity withdrawal is going to accelerate, at first, and

2) unlike in 2018, it will happen as growth is decelerating

The bank believes that these two factors will create an even more challenging backdrop, with the outperformance of higher beta credit fading as a result.

And while one can debate where monetary policy sits in relation to neutral, in the bank’s view “the flattening in the Treasury curve this past year, the tightening in financial conditions, as well as some of the weakness in key interest rate-sensitive parts of the economy, such as housing and autos, tells us that monetary policy is already pretty close to ‘tight.’”

Adding to the liquidity risks, Richmond reminds us that this tightening will not be just a US phenomenon going forward, as the ECB will be done buying bonds next year and hike in 4Q19, and the BoJ and BoE will hike in 2Q19, with the BoJ likely to reduce JGB purchase amounts as well.

There is another major threat, and it has to do with the US economy: throughout 2018, investors – also faced with the threat of shrinking liquidity – could consistently fall back on the idea that the US economy was booming with extremely strong earnings growth. Hence, Richmond writes, “it was easier to write off the multitude of macro headwinds (i.e, tighter Fed policy, tariffs, China/EM weakness, Italian politics, etc…) as “noise.”

But going forward, these dynamics are changing, with US growth expected by Morgan Stanley to decelerate notably, from 3.1% in 2018 to 1.7% in 2019, (with GDP growth of just 1.0% in 3Q19) as fiscal stimulus starts to fade, the interest rate-sensitive parts of the economy (i.e., autos/housing) continue to soften, financial conditions tighten, and tariffs weigh on business investment.

As shown in Exhibit 9, the global economy has already slowed, with the US bucking the trend so far, thanks in part to atypical late-cycle fiscal stimulus, but as even the Fed increasingly seems to concede, the US will converge to the downside as 2019 progresses.

Shifting attention from macro to micro, Morgan Stanley’s strategists expect a material slowdown in earnings growth, with the likelihood of an outright earnings recession for a quarter or two in 2019 reasonably high. In their view, comps get very challenging next year, and margins will compress, with slower top-line growth and costs rising in many places, despite consensus expectations for margin expansion. We think markets are finally waking up to these earnings/growth risks with this recent sell-off.

Adding everything up, Richmond thinks macro challenges will grow in 2019. Monetary policy will continue tightening, with global central banks committed to removing stimulus. During this time, the environment of very strong US growth and very robust earnings growth will fade, and this backdrop will become even tougher for credit, especially some of 2018’s outperformers like US HY and loans, and continue to expose the fundamental challenges in the asset class built up over nearly a decade-long bull market.

In short, as credit enters a bear market, it transitions from Late Cycle to End-of-Cycle. To be sure, a turn in the credit cycle is a long multi-year process, not a specific point in time, but the bank is confident think that process has begun. And while credit cycles are always different from one to the next, the cycle turns usually plays out in the following way:

1. Inflation pressures build, the Fed progresses in its rate hike cycle, and credit flows begin to weaken, in part as higher rates mitigate the need to reach for yield.
2. Financial conditions begin tightening, volatility rises, and spreads drift wider after hitting cycle tights, all while the economy remains strong.
3. Idiosyncratic problems pop up more frequently as tighter liquidity conditions start to break the weak links. The excesses that built up in the bull market slowly start to expose themselves.
4. Economic data begin to decelerate and growth expectations turn lower, slowly at first and then eventually much faster.
5. Market sentiment turns more sharply as end-of-cycle fears rise, credit conditions tighten quickly, spreads gap wider.
6. Companies retrench as earnings decline and the most levered credits lose access to capital – the credit cycle feeds into the business cycle.
7. Defaults and downgrades follow, peaking often after the point when spreads have already peaked

The chart below shows what this sequence looked like during the last credit bear market/recession.

Needless to say, Morgan Stanley is confident that this process has started, with price action in 2018 more consistent with the start of a bear market, than simply a bull market correction, because “the former starts slowly, can last years, and initially hits various markets in stages. The latter is much shorter (2-3 months on average), with markets often dropping much more in tandem.”

As a sidenote, Richmond notes that all but two of the past 15 credit bear markets (back to 1925) have coincided with recessions, with 1986 and 2016 the exceptions. However, the lag between the start of a credit bear market and the start of a recession can vary significantly, from just a few months, to several years, as shown in Exhibit 16.

* * *

Which brings us to the key question for 2019: When does the market realize that for the second year in a row, Morgan Stanley’s pessimistic outlook is correct, or in other words, when do growth expectations turn lower more significantly and when do credit conditions tighten faster?

As Richmond answers, that process can happen quickly, like in 2007 (Exhibit 16 above), or much slower with many twists and turns along the way, like in the late ‘90s/ early ‘00s; this time it will likely fall somewhere in between. Either way, given the bank’s forecasts for materially slower economic and earnings growth next year, growth expectations will decline more noticeably in 2019 as the year progresses.

In any case, the vulnerabilities, which are always tough to spot on the way up, will become increasingly apparent on the way down; as is always the case. In the final chart below, Morgan Stanley shows an updated version of a table it uses to monitor the excesses in this cycle. In short, the excesses/imbalances are very much present, driven in part by such a long period of extremely low rates, which drove investors to reach aggressively for yield, and non-Financial corporates, in particular, to issue significant volumes of debt. And here even more bad news from Morgan Stanley, which notes that in many cases these risks look even worse today than when the bank last ran the analysis at the end of 2017. Below Morgan Stanley provides a few examples why the bear market in credit will become increasingly more self-evident:

• In the leverage loan market, covenant quality is weaker than in 2007, the cushion beneath the average loan is lower and 1st lien leverage levels are higher. 48% of LBO transactions are levered over 6x vs 51% in 2007, but as a part of those leverage numbers, 27% of deals have EBITDA adjusted for prospective cost savings/ synergies vs only 15% in 2007. 22% of loan issuance was B- or lower in 2018 vs 15% in 2017 and 13% in 2007, driven in part by record CLO demand/issuance.
• IG debt outstanding has grown by 142% in this cycle and non-Fin BBB debt has grown by 181%. IG leverage is 0.68 turns above 2007 levels today. Non-Financial corporate debt/GDP has never been higher. And IG interest coverage, which used to be a bright spot is now below 2007 levels.
• The loan market has grown by 88% in this cycle, with 24% growth just since the beginning of 2017. Much has been made about a shrinking HY market. Remember, HY debt outstanding has still almost doubled in this cycle, just much of that growth occurred in the first half, not that different from how it played out in 2006/07, when most of the leveraged finance growth also came from loans.  Additionally, 64% of speculative grade debt has a corporate family rating of B2 or lower today vs 53% in 2007.
• 2018 was a record year for M&A loan issuance and 25% of IG supply was issued to fund M&A this past year, while stock buyback volumes (ex-fin) hit a record this past year.
• Certain investors have reached out the risk spectrum for yield aggressively in this cycle, given rates at or below zero globally for many years, with non-US ownership of US corporate bonds increasing to 30%, as one example, although declining in 2018 on the back of rising currency hedging costs.
• While consumer balance sheets are clearly healthier in this cycle, non-mortgage consumer debt/GDP is just off of record levels.
• CRE prices are ~25% above prior cycle peaks. We have seen lax underwriting quality in this cycle in pockets of consumer credit (e.g., autos), also shown in the table.

Finally, here is the Morgan Stanley credit cycle checklist. As the bank puts it, “a variety of indicators pointing to a very late-cycle environment, and in many cases at more extreme levels than even this time last year.”

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After yesterday’s strong 2Y auction which saw a surge in Direct Bidders after the unexpected October plunge, rates traders were looking forward to today’s sale of $40BN in 5Y paper ($1BN more than last month) to see if the Direct bidding normalization continued. It did.

Pricing at a high yield of 2.880%, today’s 5Y auction priced on the screws with the When Issued trading at 2.880% at 1pm ET. The yield was a modest drop from last month’s 2.971% and the cycle high of 2.993% hit in September.

As the yield dropped, the bid to cover rose to 2.49 from 2.30 last month, and in line with the 6 auction average of 2.48.

The internals however were most interesting, specifically in their answer to whether the October collapse in the Direct take down to just 1.9% would rebound, and just like in the 2Y auction yesterday, it did, rising to 10.3%, above the 8.1% 6 auction average , while Indirects took down 59.9%, leaving 29.8% to Dealers.

And so the mystery of last month’s plunge in Direct demand may remain unanswered, now that Direct bidders are back to taking down numbers in line with their historical average. As for the auction: steady as she goes.

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Authored by Charles Hugh Smith via The Daily Reckoning blog,

Markets everywhere are gagging on something: they’re sagging, crashing, imploding, blowing up, dropping and generally exhibiting signs of distress.

Does the market need a Heimlich Maneuver?

Is there some way to expel whatever’s choking the market?

So what’s choking the market?

There are a number of possibilities. Somewhere near the top of most observers’ lists are:

Rising interest rates, weakening credit growth in China, the slowing of China’s economy, trade wars, European uncertainties, currently centered around Italy but by no means restricted to Italy, Japan’s slowing economy, an over-supply of oil, the rolling over of global real estate markets, geopolitical tensions and various technical signals that suggest the 10-year Bull market in just about everything financial is ending.

That’s a lot to gag on.

The Fed funds rate is up, up and away, accelerating to the moon. No wonder Mr. Market is holding his throat and making panicky motions of distress.

Which is worse — too much oil or a scarcity of oil? Depends on who you ask.Suppliers are panicking with prices pushing $50/barrel while consumers were anxious when prices pushed $80/barrel.

Who can perform the Heimlich Maneuver on Mr. Market?

The European Central Bank has been “doing whatever it takes” for 6+ years, and the central banks of Japan and China have had the pedal to the metal of credit expansion / asset purchases for years.

That pretty much leaves the Federal Reserve as the only rescuer who has a chance to perform the Heimlich Maneuver, which in this case would be some forceful ejection of the fear that the Fed will keep raising rates aggressively even as Mr. Market is writhing on the floor gasping.

For all we know, the panic selling is Wall Street’s way of forcing the Fed’s hand:

Stop with the rates increases already or Mr. Market expires. And as we all know, Mr. Market is everything to those managing perceptions of the economy.

But 2019 is shaping up to be the year in which all the policies that worked in the past will no longer work.

As we all know, the Global Financial Meltdown/recession of 2008-09 was halted by the coordinated policies of the major central banks. They lowered interest rates to near-zero, bought trillions of dollars of bonds and iffy assets such as mortgage-backed securities, and issued unlimited lines of credit to insolvent banks, i.e. unlimited liquidity.

Central governments which could do so went on a borrowing/spending binge to boost demand in their economies, and pursued other policies designed to bring demand forward, i.e. incentivize households to buy today what they’d planned to buy in the future.

This vast flood of low-cost credit and liquidity encouraged corporations to borrow money and use it to buy back their stocks, boosting per-share earnings and sending stocks higher for a decade.

The success of these policies has created a dangerous confidence that they’ll work in the next global recession, currently scheduled for 2019. But the next time around, these policies will just be doing more of what’s failed.

The global economy has changed.

Demand has been brought forward for a decade, effectively draining the pool of future demand. Unprecedented asset purchases, low rates of interest and unlimited liquidity have inflated gargantuan credit/asset bubbles around the world, the so-called everything bubble as most asset classes are now correlated to central bank policies rather than to the fundamentals of the real-world economy.

Keenly aware that they’ve thinned their policy options and financial buffers to near-zero, central banks are struggling to normalize their policies by raising rates, reducing their balance sheets by selling assets and tightening lending conditions/liquidity.

Unfortunately for central banks, global economies are now junkies addicted to zero interest rates and central bank stimulus/support of bond markets, stock markets and real estate markets.

The idea of normalization is to slowly inch the financial system and economy back to levels that were normal in previous eras, levels that allowed some room for central banks to respond to recessions and global financial crises by lowering rates and extending credit to insolvent lenders.

But reducing the drip of financial heroin hasn’t ended global economies’ addiction to extraordinary easy financial conditions. Rather, it’s illuminated the dangers of their continued addiction.

As soon as authorities attempt to limit their support, markets wobble into instability. The entire economic structure of “wealth” is now dependent on asset bubbles never popping, for any serious decline in asset valuations will bankrupt pension funds, insurers, local governments, zombie companies and overleveraged households.

So how do central banks normalize their unprecedented policies without popping the asset bubbles they’ve created?

The short answer is: they can’t.

Rising interest rates are a boon to savers and Kryptonite to borrowers — especially over-leveraged borrowers who must roll over short-term debt and borrow more just to maintain the illusion of solvency.

As if this wasn’t enough to guarantee recession in 2019, there’s the unintended consequences of capital flows. Capital famously flows to where it’s treated best, meaning wherever it earns the highest yields at the lowest risk.

When all central banks pursued roughly the same policies, capital had options. Now that the Fed has broken away from the pack, capital has only one option: the U.S.

The Federal Reserve should have begun normalizing rates etc. back in 2013, and if they’d been wise enough to do so then even baby steps over the past 5 years would have led to a fairly normalized financial environment.

But Ben Bernanke and Janet Yellen blew it, so it’s been left to the current Fed leadership to do the heavy lifting over a much shorter timeline. Predictably, pulling away the punch bowl has spoiled the asset-bubble party, and now all the asset bubbles are increasingly at risk of deflating.

Owners of assets notice this decay and so they decide to sell and move their capital to safer ground. Selling begets selling, and pretty soon nobody’s left to catch the falling knife.

This is what surprised Alan Greenspan (by his own account) in 2008: bubbly markets quickly become bidless, that is, buyers vanish and sellers who want to unload their assets for cash find nobody’s willing to part with cash for a plummeting asset.

When markets turn and confidence is lost, sentiment can’t be restored so easily: sensing their last chance is at hand, sellers dump assets at a quickening pace, overwhelming the modest central bank buying.

The central bank “solution” to bidless markets is to become the buyer of last resort: when no sane investor will buy bonds, stocks or real estate, then the central bank starts buying everything in sight.

This leaves the central bank with a stark and sobering choice: either let the asset bubble collapse and accept the immense destruction of “wealth,” or buy the whole darn market.

This is the unintended consequence of employing unprecedented policies for a decade: like using antibiotics every day for years, eventually resistance develops and the “fix” no longer works.

Now that central banks have inflated assets into the stratosphere, there’s $300 trillion in global financial assets sloshing around seeking higher yields and capital gains.

How much of this $300 trillion can central banks buy before they destabilize currencies? How much can they buy before they run out of political goodwill?

Isn’t it obvious that repeating the policies of 2009 won’t be enough to save the system from a long-delayed reset?

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One day after Goldman muppet’d its clients with a reassuringly bullish note, WTI Crude has crashed back to a $50 handle near its lowest levels since Oct 2017 (sending HY credit risk spiking near two-year wides)

 

USD strength is not helping…

As a reminder, here is Goldman:

Goldman Sachs Group – which has been urging its client to keep buying oil all the way down from its recent highs and well into the current bear market – remains undaunted by the sell-off in raw materials and is forecasting returns of about 17 percent in the coming months, describing the current situation as unsustainable and touting this week’s G-20 meeting in Buenos Aires as a potential turning point; specifically the bank expects an OPEC supply cut and its announcement will lead to a recovery in prices. It advises going long on short-dated Brent.

“Given the size of dislocations in commodity pricing relative to fundamentals — with oil now having joined metals in pricing below cost support — we believe commodities offer an extremely attractive entry point for longs in oil, gold and base,” Goldman’s chief commodity strategist Jeffrey Currie said in a report. 

The note listed its top 10 trade ideas for 2019, including a rebound in Brent as OPEC cuts supply.

And WTI’s plunge back to $50 is a big red flag for HY Credit markets…

And OilPrice.com’s Nick Cunningham notes, $50 oil puts shale to the test.

U.S. oil production has skyrocketed this year, leaving even the most optimistic forecasts in the dust. But, the recent crash in oil prices could do what the much-hyped pipeline bottlenecks could not – slow down shale production.

Between 2015 and 2017, shale drilling activity fluctuated with oil prices (though on a several-month lag), with drillers deploying rigs and adding output when prices rose, and scrapping rigs and dialing back on activity when prices dipped. Drilling and production has always fluctuated with prices, but the much shorter lead times for shale compared to conventional drilling, meant that the oil market was responding much quicker to price changes.

The ebb and flow of drilling activity gave rise to the “shale band” theory, which dictates that oil prices had an upper and lower bound, largely decided by shale output. Whenever prices tested one of those limits, U.S. shale would steer them back into the middle of the range.

More specifically, if prices rose to, say, $60 per barrel, shale activity would ramp up and new supplies would come online, dragging prices back down below that threshold. If prices fell to $40 per barrel or below, drilling dried up and the drop (or slowdown in growth) tightened the market just enough to push prices back up.

Since late 2017, when the OPEC+ production cuts really began to bite, Brent prices reliably rose above $60 per barrel and stayed there. While prices bounced around this year, they did so above the roughly $40-$60 price range that dominated the oil market over the last several years. As such, U.S. shale continued to grow rapidly and consistently. Outages elsewhere in the world, combined with OPEC+ action, kept prices from falling.

Until this past month. The crash in oil prices – down more than a third since October – could make the shale band theory relevant again. WTI is down in the low-$50s per barrel, and is starting to flirt with levels that could impact drilling operations. At $50 per barrel, “we generate enough cash to still grow our production single digits within our cash flow,” Whiting Petroleum’s CFO Michael Stevens said at an industry conference this month, according to the Wall Street Journal. “So $50 is an important floor for us.”

Moreover, while many shale drillers have cut their breakeven prices over the past few years, pressure from shareholders on capital discipline is much stronger than it used to be. In years past, shale drillers could pile on the debt, promising to eventually be profitable, and investors went along. That is no longer the case.

That means that the pressure to cut back in order to preserve profitability is potentially higher than it used to be.

On top of that, some shale regions are still suffering from discounts because of pipeline issues. So, while WTI is now in the low-$50s, some shale operators might be fetching even less. Earlier this year, Permian discounts exceeded $10 per barrel. The Bakken is expected to see its discount worsen as pipelines fill up. The flip side is that drilling techniques have advanced considerably over the last few years, boosting production rates and lowering cost. That could allow E&Ps to weather the current downturn – should it stick around – much better than last time.

As the WSJ notes, the shale industry is in the midst of putting together drilling plans for 2019. Up until now, very few industry insiders or analyst forecasts had prices falling below $60 per barrel next year. The recent plunge could force a rethink. If the industry goes in a more conservative direction, shale output might not grow as much as previously thought.

With all of that said, OPEC+ could put an end to the latest slide in prices as early as next week. Rumors of a large production cut began circulating a few weeks ago, and the lower prices go, the more likely it is that the cartel will take action. At this point, with expectations of some sort of action largely priced in, inaction would likely drag prices down much farther. As such, it seems highly unlikely that OPEC+ will do nothing.

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Jack Dorsey stood up under oath before the House Energy and Commerce Committee back in September and said with a straight face that neither Twitter’s algorithm nor the company’s policies target individual users due to their political orientation.

It doesn’t take a deeply researched understanding of Twitter’s persistent shadowbanning – and outright banning – of conservative voices like Laura Loomer to see that this is patently untrue. And while Dorsey was willing to concede during the Sept. 5 hearing that Twitter wrongly shadowbanned some 600,000 accounts, many of which belonged to conservatives using the platform, his insistence that Twitter was free of bias (something he was willing to acknowledge back in July during an interview on CNN) clearly unnerved several Congressmen, who suspected that Dorsey wasn’t being entirely truthful.

And after Dorsey and Twitter ignored follow-up questions from the committee – making their disdain for the Republicans who grilled Dorsey clear – the committee is finally doing something about it.

According to a committee aide who leaked news of the investigation to the Federalist, the Energy and Commerce Committee is now investigating Dorsey over allegations that he lied to Congress during the September hearing about the social media company’s seemingly arbitrary banning of conservatives.

During testimony before the committee, which has broad authority to oversee and regulate telecommunications companies and social media publishers like Twitter, Dorsey repeatedly claimed that neither Twitter’s policies nor its algorithms took users’ political views into account when censoring content published by the site.

“I want to start by making something very clear,” Dorsey testified on September 5, 2018. “We don’t consider political viewpoints, perspectives, or party affiliation in any of our policies or enforcement decisions, period.”

“Our policies and our algorithms don’t take into consideration any affiliation, philosophy, or viewpoint,” Dorsey claimed again later in the hearing.

But a simple review of Twitter’s conduct policy shows that certain political viewpoints are embedded in its rules of conduct. One example is the company’s treatment of “misgendering” or “deadnaming” transgender individuals.

A review of Twitter’s so-called hateful conduct policy, however, shows that the company has explicitly codified political views into its policies. For example, the social media publisher states that it will ban users if they accurately refer to the biological sex of “transgendered” individuals who believe without evidence that biological men can become biological women, and vice versa.

“We prohibit targeting individuals with repeated slurs, tropes or other content that intends to dehumanize, degrade or reinforce negative or harmful stereotypes about a protected category,” Twitter’s policy states. “This includes targeted misgendering or deadnaming of transgender individuals.”

“Deadnaming” is the use of an individual’s name on his or her original birth certificate that generally corresponds with the individual’s immutable biological sex, and “misgendering” is the accurate reference to an individual’s biological sex. Contrary to Dorsey’s claim before Congress that Twitter’s content and user censorship policies don’t take political viewpoints into account, a policy that discriminates against those who convey indisputably accurate scientific and historical information is by its very nature exclusively political.

Since the hearing, Twitter has refused to respond to dozens of questions for the record posed by the committee, ignoring an Oct. 15 deadline, according to the aide.

“Twitter has not yet provided responses to members’ questions for the record, despite an October 15th deadline,” the aide said. “It is important that Congress receive this requested information to ensure we are able to properly perform our oversight responsibilities.”

Twitter refused to answer any of the Federalists’ questions. But assuming the investigation moves forward, perhaps it will inspire their Democratic colleagues to apply similar scrutiny to Mark Zuckerberg.

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Authored by Dog Kass via RealInvestmentAdvice.com,

White House Politics:

(When asked what he wanted to give thanks for during a press gaggle Thanksgiving Thursday, Trump responded), “for having a great family and for having made a tremendous difference in this country. I’ve made a tremendous difference in the country. This country is so much stronger now than it was when I took office that you wouldn’t believe it… And I mean, you see, but so much stronger people can’t even believe it. When I see foreign leaders they say we cannot believe the difference in strength between the United States now and the United States two years ago.” – President Trump (Comments on Thanksgiving) 

Policy:

“You only think I guessed wrong! … You fool! You fell victim to one of the classic blunders – the most famous of which is “never get involved in a land war in Asia” – but only slightly less well-known is this: Never go in against a Sicilian when death is on the line!” – Vizzini,The Princess Bride

The Economy:

“The missing step in the standard Keynesian theory (is) the explicit consideration of capitalist finance within a cyclical and speculative context… finance sets the pace for the economy. As recovery approaches full employment… soothsayers will proclaim that the business cycle has been banished (and) debts can be taken on. But in truth neither the boom nor the debt deflation… and certainly not a recovery can go on forever. Each state nurtures forces that lead to its own destruction.” – Hyman Minsky

The Markets:

“Every new beginning comes from some other beginning’s end.” –Seneca the Elder

Contrary to the expectations of many (including myself), the uncertainties following the surprising Trump presidential election victory, which produced a number of possible outcomes (some of them adverse), was enthusiastically embraced by investors in 2017 and in the first month of this year. A market on steroids was not a conclusion or forecast by any mainstream Wall Street forecaster that year. There was no sell side strategist who expected equities would rise anywhere near the 20%+ gains in the major indices recorded in 2017, nor do I know any who predicted that the S&P Index would make more than 70 individual highs a year ago.

As I expected, that enthusiasm continued in and through most of the month of January, 2018. But, after a year of historically low volatility and ever-rising stock prices, the bullish consensus became troubled as the complexion of the market changed throughout most of 2018 .

As I noted in last year’s commentary, I thought that the biggest surprise in 2018 would be that extrapolation of the market uptrend didn’t work after many years of working, and that we will witness the emergence of multiple non-consensus developments, including:

• A dramatic drop in the price of bitcoin (to under $2,000)

• A devastating decline in many bitcoin collateral plays

• A much higher oil price

• A slowing (not expanding) rate of economic domestic growth as the tax bill “trickles up,” not down

• A mean reversion higher in volatility

• The bursting of the global short volatility bubble which serves up a 20% drop in equities (aided by both weaker earnings results and lower valuations).

• And, of course, I anticipated that there would be an abundance of surprises in the fertile political arena with the incalculable Orange Swan at the helm in Washington, D.C., and in his role as the “Supreme Tweeter.”

“Expect the unexpected and, whenever possible, be the unexpected.” – Kurt Vonnegut, Breakfast of Champions

As we enter 2019, the scent of “Group Stink” is still thick despite a heady list of multiplying uncertainties. Nevertheless, while the Bull Market in Complacency has been pierced in October, 2018, most market forecasts remain optimistic.

Warren Buffett once observed that a bull market “is like sex. It feels best just before it ends.’” While some of us in the ursine crowd debate whether the investment orgasm has already passed, in the extreme it finally may be Minsky’s Moment and year after nine years of recovery and prosperity following The Great Recession.

This year I have decided to publish my “Surprise List” a bit earlier than usual.

As you all know, my Surprises are what I term to be Probable Improbables – events that have a greater possibility of occurring than are seen by the consensus. I try to make you think apart from that diabolically dangerous “Group Stink” and, particularly as it relates to politics (but with other subjects as well), I feel that I should offend you at least once, or I am not doing my job. But, any offense is meant in the spirit of the great Romantic poet William Blake who taught us that “Opposition is true friendship.”

My Surprises are shorter in length than in previous years. (I want to quickly get to the important points of the Surprise List – available on one or two pages – rather than deliver a more flowery prose and bunch of stories that I have commonly done in the past).

We will start the new investment year about one month from now with a completely different “feeling” of previous years – as I mentioned previously, the complexion of Mr. Market seems to have changed:

• Investors (retail and institutional), previously comfortable being among the herd of optimism, are beginning to panic.

• The dominant investors of the decade – Exchange Traded Funds and Quantitative Strategies and Products (e.g. risk parity) – are selling into weakness (just as they bought into strength) – serving to overwhelm active investors.

• Hedge funds are completing another unfavorable year in which their investment performance is poor. Against a backdrop of a high fee structure (at a time in which passive management fees are “moving to zero” ) – redemptions are growing and even some of the most competent managers are hanging up their spikes and closing down.

• Public companies, in some measure to increase the value of their stock options) who have gone on a massive buying streak of their own securities (propping up stocks and nominal EPS at the expense of building their businesses and improving productivity) may begin to get second thoughts as stocks founder and interest rates have risen.

• The two “shiny objects” crypto currency and FANG – revered and hyped by the many – is likely having a more profound impact on the herd’s newly found negative sentiment than many realize.

• Global economic growth prospects continue to grow more ambiguous – with the schmeissing of the price of crude oil another warning and conspicuous signpost of a broadening slowdown.

• The Federal Reserve has made a profoundly important change from easing to restraint.

“In ambiguous situations, it’s a good bet that the crowd will generally stick together — and be wrong.” – Doug Sherman and William Hendricks

The core themes and roadmap for 2019 is that a standard run-of-the-mill Bear Market may run into something bigger in a year enveloped in unprecedented political turmoil (and electorate disgust and anger), an escalating trade (and cold) war with China and continuing global economic disappointments — dragging down a mature, an extended and fully exploited economic growth and market cycle.

Not surprisingly, my Surprise is that a slightly down year of performance for the S&P Index in 2018 may turn out to be something worse in 2019.

But the biggest and most provocative surprise is the decline and fall of President Trump in 2019 – in which an anti-imperial rebalancing is successfully mounted by a more assertive Congress, bringing the country back into constitutional equilibrium.

Without further fuss, here are my outside of consensus 15 Surprises for 2019:

1) A U.S. Recession in 2019 Followed by Stagflation:

We learn, in 2019, the extent to which economic activity was pulled forward by the protracted period of historically low interest rates – as capital spending, retail sales, housing and autos founder further.

With U.S. Real GDP growth dropping to +1% to +2% in the first half of 2019, inflation remaining stubbornly high (especially of a wage-kind as the labor market remains tight) and with cost pressures unable to be passed on, the threat of recession intensifies.

By the third quarter of 2019 U.S. Real GDP turns negative. Tax collections collapse as government spending continues to rise. The budget deficit forecasts are lifted to over $2 trillion.

The U.S. falls into a recession in the last half of 2019 – followed by a lengthy period of stagnating economic growth and higher inflation (stagflation).

A dysfunctional, non-unified and discombobulated Europe also falls into a recession in 2019 – with significant ramifications for U.S. multinationals that populate the S&P Index.

U.S./Chinese trade tensions push the global economy down the hill as the year progresses and GDP growth in China comes in below +5.0%. The IMF reduces it’s global economic growth forecast three times next year.

S&P per share earnings fall by over -10% in 2019.

2) The Federal Reserve Pauses and Then Cuts as Currencies and Interest Rates Swing Wildly: 

It’s a wild year for fixed income and currency volatility.

The Fed cuts rates in 3Q2019 and by year-end announces that QE4 will commence in January, 2020.

The 2018 tantrum in Italian bonds is just a precursor for hissy fits throughout the European bond market as the ECB is no longer expanding its balance sheet and tries to get out of NIRP.

The BoJ throws in the towel on their drive for higher inflation. The Japanese bond market sees sharp selloff.

During 2019 the yield on the ten year U.S. note falls to 2.25% before ending the year at over 3.50% as the selloff in European and Japanese bonds and the announcement of QE4 drive our yields higher. Gold falls to $1050 before ending the year at over $1700.

3) Stocks Sink:

Though the third year of a Presidential cycle is usually bullish – it’s different this time.

Trump confusing brains with a bull market can’t fathom the emerging Bear Market. At first he blames it on Steve Mnuchin, his Secretary of Treasury (who leaves the Administration in the middle of the year). Then he blames a lower stock market on the mid-term election which turned the House. Then he blames the market correction on the Chinese.

The S&P Index hits a yearly low of 2200 in the first half of the year as the market worries about slowing economic and profit growth and a burgeoning deficit/monetization. The announcement of QE4 results in a year end rally in December, 2019. In a continued regime of volatility (and in a market dominated by ETFs and machines/algos), daily swings of 1%-3% become more commonplace. Investor sentiment slumps as redemptions from exchange traded funds grow to record levels. The absence of correlation between ETFs and the underlying component investments causes regulatory concerns throughout the year.

Congress holds hearings on the changing market structure and the weak foundation those changes delivered during the year.

Short sellers provide the best returns in the hedge fund space as the S&P Index records a second consecutive yearly loss (which is much deeper than in 2018).

As the Fed cuts interest rates the US dollar falls and emerging markets outperform the US in 2019.

I, like many, are concerned about corporate credit (See Surprise #8) and though credit is not unscathed, it is equities that bear the brunt of the Bear since they are below credit in the company capitalization structure.

Bottom line, after a steep drop in the first six months of the year, the markets rise off of the lows late in the year in response to this shifting political scene (the decline of Trump) and a reversal to a more expansive Fed policy – ending the year with a -10% loss.

4) Despite the Appearance of the Bear, FANG Stocks Surprisingly Prosper (Both Absolutely and Relatively) as Investors Seek Growth (at any cost) In a Slowing Economy – Facebook’s Shares Rebound Dramatically:

While there is a growing consensus that FANG will lead a Bear Market lower – that is not the case as growth, in a general sense, is dear and cherished by market participants next year. Among FANG, Facebook‘s shares have a reversal of fortune (and is the best performing FANG stock) as the company announces aggressive management changes and moves to remedy the misinformation trap.

As more previously unrevealed information reduces her valuation, Sheryl Sandburg’s special status as a female leader (in a seascape of men at Facebook and in industry) is questioned. In the first half of 2019, Sandberg becomes a sacrificial lamb and is sacked – and is forced to lean out after leaning in.
At the suggestion of Warren Buffett (who has accumulated a sizable stake in the company), former Board Member Donald Graham is named as the new, independent and Non-Executive Board Chairman of Facebook.

This unexpected move encourages FB investors to believe that the company is quickly moving to fix its multiple data and privacy issues.

Fewer (than feared) Facebook members opt out and growth in usage resumes in the back half of 2019.

FB’s stock popularity (and market capitalization) increases as it becomes a more dominant holding in “value investors” portfolios – the shares trade above $200/share late in the year.

5) “Peak Trump” – the President Bows Out in His Pursuit of a Second Term:

The President’s dismissal of the murder of Washington Post reporter Jamal Khashoggi is seen as delivering tacit support to Saudi Arabia’s MBS – it is a pivotal turning point in Trump’s popularity and ultimate reputational decline in 2019. “Pay enough and you can get away with murder” becomes the mantra of the Progressive Left. Trump acceptance by his Republican party peers quickly diminishes as they are further worried about his motivation to side against the findings of his own intelligence department. After Trump’s personal dealings with authoritarian and autocratic countries are revealed in the Mueller probe (along with possible emoluments violations), Trump’s popularity fades further as Lindsay Graham and other prominent Republicans repeal their support and denounce the President.

An anti-imperial rebalancing is mounted, in which a more assertive Congress brings the country back into constitutional equilibrium.

Though the public and political leaders (even on the right) increasingly reject the President, there are no impeachment efforts by the Democrats. Instead (and surprisingly), House Speaker Pelosi (recognizing that constructive steps are the recipe for a Democratic 2020 Presidential win) exacts discretion and stops the Democrats from moving on an impeachment in the House. Democratic leadership turns to reforms and a torrent of new legislation in the areas of improving the environment and climate control (and the halt of growth in fossil fuel by the development of alternative energy programs), the opioid crisis, education, crime, voting rights, healthcare and prescription drug prices, immigration, etc.- showing the electorate that their Party can demonstrate the framework for a positive agenda, a vision and a social contract (and can rule instead of obstruct).

But, most importantly… With real GDP turning negative in 2019’s second half, Democrats attempt to replace Republicans’ supply-side economics with a smarter theory of growth. Recognizing just as inflation and other ills opened the door for criticism of Keynesian economics in the 1970s, so have inequality and disinvestment done the same for critiques of supply side today. In 2019, the Democrats turn the table on the supply-siders and give a voice through thoughtful proposed legislation (making the affirmative case for the Democratic theory of growth geared to raising wages and putting more money in the hands in working- and middle-class people’s pocket and investing in their needs). Americans enthusiastically embrace this alternative (of how the economy works and grows and spreads prosperity) and reject and defeat the long standing Republican economic narrative – seeing it as a better way to spur on the economy (than giving rich people more tax cuts). Asking the question “has it worked for you?” and given the fairy tale of added revenue from growth (and the widening hole in the deficit), rampant inequality, the fear of being bankrupted by medical catastrophe and massive student debt obligations Democrats provide a practical alternative to cutting taxes for the rich and decreasing regulation which has failed to unleash as much innovation and economic activity that was promised by the Administration. The legislation, which puts more money in middle class pockets, defends and supports the notion that the public sector can make better decisions than the private sector. Referred to as the “middle – in economic bill,” is cosponsored by a leading, conservative and respected Republican member of Congress and begins to gain bipartisan support in Congress, driving a stake through the supply-side’s heart.

Despite his loss of popularity (which plummets to 25%) and the push back from the Republican establishment, Trump declares he is still planning to run for President. Nevertheless, a challenge from Senator Mitt Romney (who’s motto is “Make Republicans Great Again”) gains steam as McConnell, Graham, Kennedy Et al. throw their support for the Senator.

As Trump’s problems multiply, Romney becomes the heavy favorite to defeat Trump in the Republican primary.

Recognizing a sure election defeat, by year-end the President announces that his medical team has disclosed a health issue and he is advised not to run for office. Reluctantly, Trump agrees and bows out of the 2020 Presidential race late in the year.

The Trump mantra of “Make America Great Again” is replaced by “Make Economic Uncertainty and Market Volatility Great Again.”#MAGA/#MUVGA

6) The Year of the Woman:

With a Trump withdrawal from 2020 the election is wide open.

The arc of history influences the Democratic Presidential nomination march and the leading candidates that emerge for 2020 are mostly women. The potential contenders include progressive firebrands like Elizabeth Warren, Stacey Abrams, Kristen Gillibrand and Kamala Harris, and moderates like Senator Amy Klobuchar and Rhode Island Governor Gina Raimondo.

Michael Bloomberg, Howard Schultz and Joe Biden bowout from the race by year end 2019 By year-end, Klobucher, Harris and Warren surface as the three leading Democratic Presidential candidates.

It appears that an all women Democratic ticket (President/Vice President) is increasingly likely.

Nationally, several high profile sexual harassment suits are disclosed. Allegations against a number of well known television, other entertainment and political icons/leaders serve to reinforce the candidacy of the above women who aspire to gain the Democratic Presidential nomination. After Congressional hearings, non partisan and strict harassment legislation are introduced forcing several well known male politicians to resign from office.

7) A New (But Old) Shiny Object Appears As A Stock Market Winner in 2019:

Bitcoin trades close to $3,000 in December, 2018 and spends most of 2019 under $5,000 (as numerous trading irregularities, thefts and more frauds are exposed).

England’s Financial Conduct Authority (FCA) takes the lead, in instituting a comprehensive regulatory response to regulating the crypto currency markets. The U.S. follows by imposing broad-based crypto currency regulation in 2019.

A leading business network (who’s bitcoin “bug” has become the new cover of magazine contrary indicator!) faces a class action suit for their seeming encouragement in buying into the asset class in their too frequent broadcasts during 2018. Several crypto currency guests who were prominent on the network’s coverage are indicted for fraud. In an agreement with regulatory authorities, the biz network’s programming is reconstituted.

Marijuana stocks, after a weak final few months in 2018 (are down by over 50% from their highs), explode back to the upside reflecting a quickened pace of alternative health applications. (MJ) is the single best performing exchange traded fund and (TLRY) makes another move to $300/share.

8) Private Equity, High Yield Debt and Leveraged Loan Problems (Which Have Doubled in Size Over the Last Ten Years) Emerge as the Resurgence of Leveraged Finance Comes to An End:

Private equity, in particular, the biggest winner in the decade long cycle since The Great Decession of 2007-09, suffers – and so do the endowments at several prestigious universities. Covenant- lite financings in junk and leveraged loans – often in opaque and complex structures – topple under the weight of loan defaults. (HYG) (last sale: $83.17) trades $75-$80 as redemptions spike.

Publicly-held private equity shops (KKR) and Blackstone (BX) are among the largest percentages losers in 2019, High yield bonds fulfill their characterization as “junk,” and are among the worst performing asset classes. The spread between junk bonds and Treasuries more than doubles – widening dramatically during the summer months.

9) The China/U.S.Rift Intensifies as Trump’s Anger Shifts Towards That Region: 

The trade war with China goes into full effect with 25% tariffs. Walmart (WMT) is adversely impacted and its shares fall by -20% from the recent highs. The Chinese retaliate against major American brands like Apple (AAPL) . (“Peak Apple” actually happens and its shares fall below $125/share).
Peter Navarro resigns.

A major cyber-attack against the U.S. financial system, who’s source is initially not diagnosed, is ultimately reportedly to have been delivered by China. The U.S. enters a cold war with China that resembles the emergence of the cold war with Russia in 1948 – it becomes clear it will be lengthy, nasty and unfriendly to the trajectory of worldwide economic growth.

10) Bank Stocks Are Surprising Winners in 2019:

Despite some pressure in net interest margins (and income), sluggish loan demand and a pickup in loan losses – bank stocks (and EPS) are surprisingly resilient and manage to have a positive return next year as better relative EPS growth is supported by aggressive buybacks and (starting) low valuations. Investors look forward to a recovery in economic growth in 2020-21 and bank stocks (flat for most of the year) have a vigorous move in the last few months of the year and are one of the few sectors to advance in 2019.

Oil stocks, depressed from the late 2018 crude oil price fall also recovery mightily in the later months of 2019 as the price of oil advances coincident with dovish turn in monetary policy.

11) Tesla’s Problems Shift From Production to Demand to Financial:

Tesla (TSLA) loses its tax subsidy in the U.S. and in the Netherlands (a large market for them).

European competition grows.

Europe doesn’t allow the Tesla Model 3 due to safety reasons. The Chinese won’t let an American company have video data over millions of miles of roads and bans Tesla. Lenders balk and access to the public debt market evaporates. The company’s financial position deteriorates and its credit default swaps widen dramatically.

An accounting “issue” surfaces – and it morphs into an accounting fraud. Elon Musk, who has leveraged his TSLA equity holdings, faces margin calls and is forced to sell Tesla shares.

After being rushed to the hospital after an overdose, Musk leaves his CEO post to enter drug rehab.

12) Berkshire Hathaway (BRK.A) (BRK.B) Announces the Largest Takeover in History – The Transformational Acquisition of 3M for $150 billion.

13) Amazon (AMZN) Makes a Bid for Square (SQ) but Alphabet/Google (GOOGL) Eventually Acquires Both Square SQ and Twitter (TWTR)

14) With its Share Price Consistently Trading Under Its Book Value During the First Few Months of 2019, Goldman Sachs’ (GS) Partners Take the Brokerage Private in a Leveraged Buyout at $238/share.

15) Brexit Happens: The world continues and the pound is the best global currency.

Here Are 5-“Also Eligible” Surprises:

• AE1) Ford (F) defaults on its loans. Steve Rattner again becomes the “car czar.”

• AE2) A major and unexpected global event judged to be impacted by climate issues causes a massive amount of health problems and deaths. Demand for a reversal of Trump policy on climate change comes from his within his own Party and represents another fissure between the White House and the legislative branch.

• AE3) Warren Buffett announces his successor. The name, however, is no surprise.

• AE4) Angela Merkel doesn’t make it thru the year and Germany has a new leader.

• AE5) As is typical with maturing economic cycles, two large accounting frauds of S&P Index constituents are uncovered late in the year. A previously “sainted” and revered CEO does a prep walk.

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