Category: zerohedge

Remember that 2011 NY Fed study which found that since 1994, there was a distinct and observable tendency for the S&P 500 to rise in the period just before FOMC meetings. In fact, as authors David Lucca and Emanuel Moench found, a stunning 80% of all equity returns for U.S. stocks (in the 1994-2011 period) were generated over the twenty-four hours preceding scheduled Federal Open Market Committee announcements, a phenomenon called “the pre-FOMC drift.”

While the authors provided several possible explanations why this trade worked as well as it did, there was never a definitive agreement. In any case, the news of “drift” became so prevalent, and the trade so popular that eventually it became a self-fulfilling prophecy as traders bought into the “drift” ahead of the FOMC, expecting other traders to buy the trade, and so on, in the process becoming one of the “safest” trades in the stock market.

Yet cracks emerged earlier this year, when some analysts started questioning whether this strategy was indeed as fail-safe as the Fed, and subsequent trader lore, made it out to be, with Kevin Muir going so far as to compartmentalize the trade’s returns, finding that after a steady rise from 2009 to 2015, over the past three years, the strategy has flatlined, prompting the following conclusion:

the Federal Reserve made its first hike in almost a decade on December 15th, 2015 and this was also the point where the FOMC Drift stopped working

Perhaps hearing these trader complaints about their “strategy”, earlier today the NY Fed authors of the original study, Lucca and Moench, reran the data to update their original analysis with more recent data.

What they found was surprising: while there is still evidence of continued large excess returns during FOMC meetings in the period 2011-2018, it only occurs on those days featuring a press conference by the Chair of the FOMC. On days without a presser, not only has the upward drift disappeared, but market returns have actually been notably negative.

As the NY Fed authors note, the chart below updates their original analysis through the period starting in April 2011 and ending in June 2018. It is worth noting that since April 2011, the Fed Chair has been giving a press conference at every other FOMC meeting. At these meetings the FOMC also releases the summary of its members’ economic projections (SEP), so that three forms of communication take place: the FOMC statement, the SEP, and the press conference with the Chair.

In 2011 and 2012, FOMC statements (including the SEP) that were scheduled with a press conference were released at 12:30 p.m., and the press conference started at 2:15 p.m. FOMC statements without a press conference (and hence without SEP) were released at 2:15 p.m. as in the pre-2011 sample. Starting in 2013, FOMC statements are always released at 2:00 p.m., while press conferences start at 2:30 p.m. (and SEP material is released at the start of the conference). The chart below shows four vertical lines that mark each of these times.

The results of the study are summarized in the next chart, which shows the distinct outperformance on presser days, vs the clear underperformance on days without a press conference (or economic projections) when the market’s return is effectively as negative as it is positive during presser days.

This may explain why using a blended analysis of the “Pre-FOMC drift” trade shows that it no longer works: it does work, only not on non-presser days. Here is the authors’ take:

On days without a press conference, there is no longer any evidence of excess returns ahead of the release of the FOMC statement. While we see negative returns following the release of the statement, this effect is not statistically significant, as the gray shaded area encompasses the zero line. Instead we see large returns ahead of announcements for meetings with press conferences. Interestingly, these returns accrue a bit earlier than in the pre-2011 sample, and more specifically, in the morning of the day before the announcement.

In addition, there is some further appreciation at, and after, the announcement(s). On net, the pre-FOMC announcement drift on press conference days is about 40 basis points when computed from the open of the day before to about lunchtime of the day of the announcement day—in line with the pre-FOMC drift in the original sample. One can also see an additional 30 basis points return by the end of the press conference, which could reflect news released either in the statement, press conference, or SEP, or a risk premium as predicted by financial theory (see, for example, Ai and Bansal or Wachter and Zhu). What remains puzzling in the post-2011 period is the pre-FOMC announcement drift.

What may account for this bifurcation in returns on presser vs non-presser days? One possible explanation is that since the economic projections – which traditionally tend to be overly optimistic (as they are made by the Fed) – are only released at meetings with press conferences and since policy rate changes have only taken place at these meetings since 2011, the authors note that some investors have “reportedly discounted the amount of information that could be released at meetings without press conference.” And,consistent with this attention reallocation hypothesis, this may have reduced the amount of re-pricing ahead of the meetings absent press conferences.

Still, as the authors note, an “attention reallocation hypothesis” still begs the question as to why some sophisticated investors would not attempt to profit from the positive returns. Well, as we said up top, it appears that they do, and according to the NY Fed study, “the timing of the post-2011 returns suggests that such activities may have occurred.”

Pre-FOMC returns were positive in the post-2011 sample on press conference days from the open of the day before the FOMC, while cumulative returns were positive starting only in the afternoon of the day before the announcement in the pre-2011 sample. This suggests that some investors could be attempting to profit from the pre-FOMC returns, pushing prices up earlier than before.

And the punchline from the authors, who muse that if this arbing by sophisticated investors was the reason for the shift in the timing of the returns, “such a process would imply that the pre-FOMC returns should eventually disappear.“

In theory yes, but in practice it takes a lot of time to wean traders away from a trade, especially one as heavily incorporated into trader psyche as this one.

The silver lining here is that while the trade may no longer work – at least half the time, on those FOMCs when there is no presser – it will soon be retested in its full, 100% glory. The reason: as the Fed announced in June starting January 2019, all FOMC meetings will include a press conference.

As the authors conclude: “it remains to be seen if the pre-FOMC announcement drift is to again become a more regular phenomenon or the extent to which any future arbitrage activity could make the pre-FOMC drift disappear.“

Something tells us that in a world in which increasingly fewer “sure” trades work, it is only a matter of time before the market’s “safest trade” is back in vogue, even if there is really no fundamental reason why it should work… besides of course belief in the presence of even greater fools.

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Authored by Alex Kimani via Safehaven.com,

For investors looking for stability and income, bonds are usually considered an attractive proposition. In the current environment of rising interest rates, international bonds are likely to outperform U.S. bonds. At first glance, that might seem counterintuitive given that many international bonds offer lower yields than U.S. bonds with some even providing negative yields. Yet, rising yields usually lead to a fall in bond prices that’s usually more than enough to counteract higher yields thus leading to lower overall returns.

Case in point: the Vanguard Total International Bond ETF (BNDX) sports higher total returns compared to the U.S.-focused Vanguard Total Bond Market ETF (BND).

One such class of international bonds is Saudi bonds, which have been roiled by a sharp fall in oil prices as well as the ongoing outrage over the murder of international journalist and Washington Post columnist, Jamal Khashoggi.

Saudi Arabia is extremely reliant on oil, with oil revenue accounting for 90 percent of the nation’s export earnings and 42 percent to GDP. Oil prices have declined sharply, with WTI falling from mid-70s per barrel to mid-50s in less than two months, partly due to the U.S. granting surprise waivers for sanctioned Iran crude.

Meanwhile, international outrage on the role played by the Saudi government in the murder of Khashoggi in the Saudi consulate in Turkey seemed to increase the risk that the U.S. would impose stiff penalties on the country.

The confluence of these factors has led to Saudi bonds falling quite dramatically with yields climbing. Saudi Arabia’s $5 billion bonds due 2028 have recorded a sharp rise in yield during the last week. The bonds now yield 4.6 percent – significantly higher than the U.S. 3 percent yield for 10-year notes.

Source: Bloomberg

Meanwhile, the kingdom’s five-year credit default swaps jumped 41 percent during the last quarter to 99 basis points, the most among 40 contracts tracked by Bloomberg across the globe.

Source: Bloomberg

Good Entry Point

Despite the murky geopolitical situation in the country, it doesn’t seem very likely that the situation will deteriorate further.

Washington has already announced sanctions against 17 Saudi officials in connection with the murder of Khashoggi. However, it seems unlikely that President Trump’s administration will announce measures that target the Saudi regime more broadly despite some U.S. lawmakers calling for more punitive measures.

On Tuesday, Trump issued an extraordinary statement declaring that the U.S. will remain a steadfast partner to Saudi Arabia despite conceding that crown prince Mohammed bin Salman may have been aware of a plot to kill Khashoggi. Indeed, Trump has gone ahead and thanked Saudi Arabia for lower oil prices in a tweet on Wednesday:

The administration’s willingness to overlook human rights abuses—even the murder of a U.S. citizen—seems to be the latest twist in a tacit deal between Washington and Riyadh where the former is expected to eliminate or reduce Iran’s oil export revenue while the latter continues stabilizing prices in its traditional role as a swing producer. Nobody at this point expects oil prices to collapse to 2014 levels, so that provides a nice floor for investors.

The latest development, therefore, offers a good entry point for bargain hunters who are hoping that Saudi bonds will not continue dropping once they build positions.

But it’s not just Saudi bonds that have recorded rising yields.

Oman and Bahrain, two of the region’s weakest economies, have seen their bonds hit by the oil rout, with Oman bonds now yielding 6.6 percent. Despite the fall in crude prices, Gulf economies are expected to remain strong. GCC (Gulf Cooperation Council) economies are expected to expand 2.4 percent this year and 3 percent in 2019 after contracting in 2017.

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Unreasonably long wait times for parts and a lack of reputable Tesla-approved repair centers has been a glaring problem for many Tesla owners.

Across the internet, Tesla forums are filled with angry owners who regret even buying the electric car because a basic repair could take months. Some owners have reported 4 to 5 weeks, while others said six to nine months for repairs.

Tesla has gone from “production hell” to “delivery logistics hell,” and now it seems there is a new one: “repair hell.”

Electrek, one of the more popular electric vehicle websites and constant cheerleader of the automaker, recently tried to calm owners, who feared the slightest repair could take weeks if not months to fix.

The publication said Tesla has plans to launch its own in-house ‘Body Repair Centers’ to reduce repair time with the first nine locations scattered around the country.

Tesla owners had been complaining about repair times for years, but it came back to the forefront last year when Tesla blamed repair times on third-party body shops and the body shops blamed Tesla for an unreasonably long amount of time to receive a part. 

The most recent horror repair story is from Vancouver, where Rex Gao has been patiently waiting since February when he had a minor accident.

The Model S, which he purchased in early 2017, needed work on its suspension after a fender bender. He waited four months for parts to arrive from Tesla to his local body shop.

“I was so excited that I got the part. I ran into the body shop, but they said ‘Not yet. You cannot get your car repaired. There’s a car before yours.’”

Gao said the body shop only had one special lift for Teslas, and could not go to another body shop because no one else was Tesla certified.

Gao received a call from the body shop earlier this month to say work has begun.

“I said ‘That’s good news. When can we finish it?’ They said ‘We don’t know. We may need other body parts.’”

To make matters worse, Gao is paying $1,300 in lease payments every month. He said Tesla would not offer him a courtesy car but did compensate him for three and a half months of payments.

“If I knew that we would have to wait that long for repairs, I would never have bought a Tesla. You never know when you’re going to need repairs. When your repairs start, your nightmare starts. It’s exhausting, it’s frustrating, and I can’t sleep at night.”

ICBC insurance acknowledged there is a massive backlog for repairs on Teslas in the region. “For this reason, we stay in regular communication with these shops about their ability to take further vehicles for repairs and we have been storing vehicles on our property to help when the shops reach capacity,” ICBC said in a statement to CityNews. 

It also said the backlog is not specific to Vancouver and that the biggest challenge is the availability of parts – sometimes it takes months to get the most basic parts.

“We completely understand our customers’ frustration when they experience delays in getting their Tesla vehicle repaired,” the statement read.

“We’ve been exploring ways that we can help reduce wait times but the core issue is the availability of parts. When we receive a claim for a Tesla vehicle, we expedite the process when possible so these vehicles are estimated more quickly to determine whether they’re repairable.”

If owning a Tesla means repairs could take months. Is it worth even owning the car? 

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October presented rates traders with a bit of a mystery: virtually every Treasury auction saw a surprisingly low Direct takedown, in some cases Direct bidders taking down the lowest amount of paper offered in years. It now appears to be payback time.

Moments ago, the US Treasury sold $39BN in 2 Year Notes, a $1 billion increase from last month’s offering, which priced at 2.836%, stopping through the When Issued by 0.1bps, and below last month’s 2.881% as a result of the recent decline in rate hike odds.

And while the Bid to Cover was virtually unchanged at 2.65%, down from 2.67% a month ago and below the 2.76 six auction average, it was the internals that were of note because the previously noted collapse in Direct bidders is now gone, and instead in the just concluded auction Directs took down 19.5%, a nearly 4x increase from October’s 5.5%, and well above the 12.8% six auction average. As a result of the Direct surge, Indirects were awarded 44.9% of the final allotment, down from 52.6% last month, and in line with the 44.0% average, while Dealers took down just 35.6%, the lowest going back to January 2018 when they ended up with just 25.8% of the auction.

Overall, a rather unremarkable auction except to note that the it now appears that Directs are trying to overcompensate for their lack of participation in last month’s auctions. Whether this pattern sustains, check back after the 5 and 7Y auctions over the next two days.

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What goes up, must come down.

Over recent years, there hasn’t been a safer bet than big tech – specifically the FAANG stocks, which include Facebook, Apple, Amazon, Netflix, and Google’s parent company Alphabet.

But, as Visual Capitalist’s Jeff Desjardins notes, in the financial world, this feeling of euphoria can be turned upside-down very quickly.

Since the summer, the five tech giants combined have lost close to $1 trillion in market capitalization from their peaks. Now the FAANG stocks have officially slipped into a bear market, with investors blaming rising interest rates, slumping sales forecasts, possible government intervention, and bubble-like valuations as reasons for the reversal in fortune.

Courtesy of: Visual Capitalist

THE DAMAGE DONE

The generally accepted definition of a bear market is a 20% or greater decline from recent market highs.

Facebook and Netflix have been in bear territory for months, but the remaining members of FAANG only just recently capitulated. Apple was the last to go – but with -24% in lost value since its peak on October 3, it is now in trouble as well.

Interestingly, this is the first time that the FAANG stocks have been in a bear market together, meaning this is uncharted territory for big tech and the wider market as a whole.

AFTER THE GOLD RUSH

While FAANG represents a small fraction of tech stocks available on the market, they do make up a significant percent of indices like the S&P 500 or the Nasdaq Composite. As a result, this slump can impact the rest of the market – and it manifests a more general malaise that other, less-beloved tech stocks must deal with.

Unsurprisingly, the Nasdaq Composite – a technology bellwether – is feeling the pain as well:

The sentiment can also be seen in other tech names, some which have been slumping for awhile and others which have fallen into a funk only recently:

Even SaaS darlings like Salesforce.com can’t shake the trend – the stock entered bear territory itself on November 19th.

TELL ME WHY

Why have investors soured, at least temporarily, on the tech stock universe?

There are multiple narratives floating around, but the general gist is something like this: the current bull market in stocks is nine years long, and at some point the party will come to an end. Because the FAANG stocks traditionally trade at very generous valuations, they are likely to come back down to earth as economic conditions deteriorate.

Further, the fears around FAANG stocks are seemingly being confirmed by recent news. For example, there are reports of Apple slicing orders for iPhones, a stagnant Facebook userbase, and other growth hurdles being experienced by these companies – and these reports are helping to fan the flames.

Some experts see the slump as an opportunity to load up on discounted tech heavyweights – while others, such as early Facebook investor Jason Calacanis, say it is possible that the social network has already experienced its “Yahoo peak” in terms of relevance and valuation.

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Apparently, Malaysian Prime Minister Mahathir Mohamed isn’t the only one who thinks Goldman Sachs’s compliance controls “don’t work very well.”

As more details emerge about Goldman’s efforts to win deals to underwrite $6 billion in bonds for the doomed Malaysian sovereign wealth fund 1MDB, which was ransacked by former Prime Minister Najib Razak and his cronies to the tune of $4.5 billion, senior bankers’ ignorance of red flags is appearing increasingly deliberate.

To wit, a report in the New York Times published on Thanksgiving Day revealed that, in addition to attending meetings with Malaysian Prime Minister Najib Razak and a group of senior Goldman bankers in 2009 and 2013, former Goldman CEO Lloyd Blankfein also welcomed disgraced Malaysian financier Jho Low into Goldman’s opulent 200 West Street headquarters in December 2013 for a “one-on-one” sit-down, effectively confirming that the CEO was instrumental in helping suspend the bank’s compliance controls to ensure that the bank won the business to underwrite three bond offerings for Malaysian sovereign wealth fund 1MDB regardless of obvious evidence of corruption. This has made his departure at the end of September, just weeks before the DOJ charged  two senior Goldman bankers who helped bring in the business, appear increasingly suspect.

Malaysian Prime Minister Mahathir Mohamed isn’t alone in thinking that Goldman Sachs’ compliance controls “don’t work very well.”

In the latest indication of just how blatantly the bank flouted compliance best practices in pursuit of the deal, the Financial Times reported overnight that the New York Fed approached the bank in 2013, after the three bond deals – which netted a staggering $600 million fee for the bank on $6 billion of business – had been closed, to demand that Goldman tighten its compliance controls. What’s more, the changes demanded by the New York Fed weren’t directly linked to 1MDB, but instead were the result of a “wider questioning of controls,” the first indication that the bank may have repeatedly bent its own rules to win other business around the same time as 1MDB. This suggests that more shady deals could eventually come to light.

The changes reportedly affected all of the Goldman’s investment committees around the world after the Fed asked why so few deals had been rejected on grounds that they were too risky or inappropriate. 

Goldman implemented sweeping changes to how the powerful internal committees that oversee how its operations work, under pressure from the New York Federal Reserve. The reforms were agreed in 2013 after the Fed pressed Goldman to be more transparent, but were not publicly disclosed.

[…]

The changes, which included rewriting of the charters of Goldman committees that approved three 1MDB bonds, were not directly linked to those deals. They resulted from a wider questioning of controls, including concerns that committee minutes did not record debate in sufficient detail.

All of Goldman’s company-wide and regional committees were affected by the reforms, which were introduced shortly after the bank financed the last of the 1MDB bonds in March 2013, receiving a total of $600m in fees. They included its capital and client suitability committees, which oversaw the 1MDB financing, and approve all such deals.

One person close to its Asia Pacific capital committee, which initially reviewed the first 1MDB deal in 2012, said that the Fed questioned why committees seemed to reject very few deals as being too risky or inappropriate. The bank then instructed its committees to record proposals that it had turned down at earlier stages.

One example of how these lax controls played out, according to the FT, is the fact that Tim Leissner, the former Goldman partner who pleaded guilty and has agreed to cooperate in the DOJ’s investigation of Goldman, was allowed to remain in the room during a meeting of the bank’s Asian investment committee where it eventually approved one of the bond offerings. Leissner stayed in the room, even as the minutes of the meeting recorded him as having recused himself. This was reportedly standard practice at Goldman before it implemented the changes requested by the NY Fed.

The report also offered more previously unreported details about the role that former senior Goldman dealmkaer Andrea Vella played in winning the business. Vella also remained in the room with Goldman’s investment committee while the 1MDB deal was being pitched. Vella has been put on leave at Goldman following revelations that he had been caught up in the DOJ’s probe.

In other 1MDB-related news, Bloomberg reported that Malaysia’s former finance minister scrubbed the presence of Low, who is believed to have facilitate the siphoning of more than $2.5 billion from 1MDB money to pay bribes and for other purposes, from an 1MDB board meeting where members expressed concerns about “anomalies” in 1MDB’s accounts (which is a kind term for a black hole purportedly larger than $4 billion).

Jho Low

The scrubbing of Low’s attendance, as well as alterations meant to mask the questions about 1MDB’s financial accounts raised by a team of auditors. These changes were justified by Razak, who argued that both details could be used as ammunition by his political enemies.

The rationale was that mentioning Low would be sensitive, and omitting the information would prevent the opposition from using it against the government, Madinah said. Najib also ordered that paragraphs containing two versions of 1MDB’s financial statements for the year ending 2014 be removed from the document, which was prepared by Madinah’s predecessor Ambrin Buang.

The previous administration categorized the 1MDB audit report as a crisis, Madinah said, which led to a meeting between the audit team and representatives of the government and 1MDB, including then president and CEO Arul Kanda, in late February 2016. A number of changes were made to the report as a result of those discussions.

The final report was presented to a select parliamentary committee in March of that year but it remained protected by the Official Secrets Act until Najib was defeated at the May 2018 general election. Days after he was sworn in as prime minister, Mahathir Mohamad ordered a renewed probe in 1MDB and declassified the document.

The report showed investigators expressed concern about anomalies in 1MDB’s accounts, and that officers on several occasions undertook investments without the full knowledge of the board and at other times acted against their advice.

Today, Low is a fugitive from justice who is waging an expensive PR battle to clear his name even as he hides from prosecutors from multiple continents. If anybody still believed Goldman CEO David Solomon (who is looking increasingly like a patsy who was set up to take the heat for the scandal) and his claims that the 1MDB scandal “isn’t us” – these latest details should quickly disabuse readers of that notion.

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Authored by Simon Black via SovereignMan.com,

Think back to this time last year, around 2017’s Thanksgiving holiday in the US. . .

As you probably remember, BITCOIN was the dominant theme of the day, whether around the dinner table or in the news headlines.

Crypto prices had soared throughout 2017, climbing from $1,000 at the beginning of the year to around $7,500 by last November’s Thanksgiving holiday.

Then, over the course of that single weekend, Bitcoin jumped to nearly $10,000 as the buying frenzy heated up.

In a matter of days, crypto-broker Coinbase opened hundreds of thousands of new accounts during the 2017 Thanksgiving weekend.

Mobs of speculators were piling in, bidding the price up to new highs on a daily basis, until it cracked $20,000 a month later.

We started warning about this in early November last year, arguing that, while crypto represented great technology to improve the financial system, Bitcoin’s rapid price rise was “purely speculative… not sustainable demand,” and “anything that’s pure speculation is eventually going to pop.”

At the end of 2017, we told you about Saxo Bank’s prediction that Bitcoin would collapse to $1,000 in 2018.

If things keep up this way, they may be proven right.

Bitcoin peaked in early January and has declined throughout 2018 along the lines of Hemingway’s famous quote about going broke: “gradually, then suddenly.”

Over this past weekend (ironically, the 2018 Thanksgiving holiday), Bitcoin’s price fell from $6,000 to less than $4,000.

What a difference a year makes.

Last December and in early January we wrote about how this could happen, explaining that crypto prices were ‘reflexive.’

In other words, as Bitcoin’s price rose rapidly, more people wanted to buy it because they believed the price would continue rising. This created a ton of demand.

But at the same time, very few people were willing to sell. Anyone who owned Bitcoin saw that the price was rising so rapidly and figured, “Why sell today if I can sell tomorrow at a higher price?”

This mismatch of extreme demand and reduced supply caused the price to jump, which created even more demand and reduced supply.

It was all based on a belief that crypto prices would continue rising.

And as we wrote last year, it would work the same in reverse: everyone selling and few people buying causes huge price declines, which makes even more people want to sell and fewer people want to buy.

That’s exactly what we’re seeing now.

I personally know several die-hard Bitcoin fanatics who have finally capitulated and are selling out, getting whatever they can, while they can.

That’s because a lot of folks who profited from crypto’s price rise never actually cashed out.

They believed that the Bitcoin price would continue rising and made blanket assertions like “Bitcoin is going to $1 million. . .”

In the meantime, they loaded up on expensive houses, cars, boats, etc., much of it financed by debt.

Yet while the value of their crypto assets has collapsed 80% from the peak, they still have to service that debt.

So now even some true believers are selling in a panic, simply so that they won’t have to declare personal bankruptcy.

Does that mean it’s over? Are Bitcoin and its cousins headed for the historical dustbin alongside Dutch tulips and Pets.com?

There are so many worthless coins and tokens out there, and many of them are absolutely headed to zero.

Perhaps Bitcoin too. I’ve discussed a few times that Bitcoin is one of the most technologically INFERIOR cryptocurrencies, so it makes little sense that it should be the most valuable.

Personally I think there will continue to be demand for niche, utility-specific coins for things like privacy or more secure e-commerce.

The concept itself is still sound: a medium of exchange that isn’t controlled or manipulated by central bankers, that’s widely accepted across the world for online transactions with minimal costs.

That was the original idea behind Bitcoin as described in its first white paper a decade ago. And some iterative cryptocurrency may still realize that vision some day.

(This is no more far-fetched than Amazon.com gift cards being used as a form of money. . .)

As we’ve written a number of times, though, the bigger opportunity in crypto is in applying its core Distributed Ledger Technology (DLT) to the countless ways it can be used in commerce and finance.

Look at the banking system as an example: It’s almost 2019. Yet it still often takes 3-5 days to transfer money, whether it’s a domestic ACH transfer in the Land of the Free, or a cross border wire internationally.

Seriously. Are these banks loading crates of cash onto a boat and shipping money via sea freight to one another? It doesn’t make any sense.

Sending money should be as easy as sending email. And the Distributed Ledger Technology that was created around cryptocurrencies makes this possible.

Shockingly, banks are hard at work to make this a reality. It’s as if the rise of crypto finally scared them  into raising the bar and improving their services.

But there are countless other industries where these types of applications are sorely needed.

A few decades ago, entrepreneurs (and the investors who funded them) made vast fortunes applying the new technology of the consumer Internet in ways that fundamentally changed our lives– how we shop, share and store information, consume media, engage in personal relationships, etc.

That same opportunity exists today with crypto and DLT.

So from that perspective, this ride is far from over. It’s just beginning.

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While the G-20 summit starting this Friday is certainly the week’s top market-moving event as investors and pundits will be closely watching the outcome of the meeting between Trump and Xi for any signs of a thaw in diplomatic relations and trade war rhetoric, just as important will be speeches by the Fed chair Powell and vice-Chair Clarida over the next two days for some much needed guidance on the Fed’s next steps.

The reason: as the chart below shows is that following the recent slump in the market, coupled with rising fears of an economic slowdown in the US next year, traders have sharply cut their expectations for Fed rate hikes in 2019, and from as high as 60bps two months ago, markets now price in just 29bps of rate hikes in the coming year, or in other words just over “one and done”, a sharp disconnect with the Fed’s own dot plot which still anticipates no less than 3 rate hikes next year. In fact, if the Fed does not “guide down” to the market, odds are that risk assets are set for another major negative surprise, pushing stocks even lower.

This is the quandary discussed by SocGen’s Albert Edwards in his latest note, in which he accurately observes that investors are beginning to believe that the Fed is nearing the end of its metronomic tightening cycle.

As shown above, Edwards notes that “market confidence that the Fed will deliver the promised three rate hikes next year is evaporating and recent CFTC data confirms that speculators have begun to unwind their gargantuan short Treasury positions. And yet, despite wild gyrations in the oil price, US CPI inflation expectations remain well anchored around 2% mirroring subdued actual inflation.

But why, Edwards asks, would the Fed end its tightening cycle prematurely when it has been so hawkish in recent months, and follows up with the question answered overnight by Morgan Stanley “Is economic growth about to slump?” (To Morgan Stanley, which expects Q3 2019 GDP to tumble to just 1.0%, the answer is a resounding yes).

At a basis of Edwards’ confusion he refers to a recent speech by Fed Vice Chair Randy Quarles, in which he noted that the relationship between output gaps and inflation has become looser than usual, and then goes on to “sow doubt on whether the Fed should be reassured by the continued quiescence of actual and expected inflation.”

“Something along these lines could be happening to inflation, especially given the important role of expected inflation in the behaviour of actual inflation. Perhaps inflation is just sending a signal of people’s trust in the Fed’s ability to meet its inflation objective. If so, no complaints here. That is a good thing. However, a problem does arise if the Fed remains reliant on inflation as our only gauge of the economy’s position relative to its potential. There are risks in pushing the economy into a place it does not want to go if we limit ourselves to navigating by what might be a faulty indicator. Anchored inflation expectations might mask the inflation signal coming from an overheated economy for a period, but I have no doubt that prices would eventually move up in  response to resource constraints. The ultimate price, from the perspective of the dual mandate, would be an un-anchoring of inflation expectations.”

Here Edwards presents two counter arguments: the first showing the NY Fed Underlying Inflation Gauge, which as frequent readers know well, leads CPI by 18 months with an uncanny correlation, and which suggest further upside to core CPI. Here Edwards comments that while he believes the US and eurozone will experience Japanese-style outright deflation in the next global recession “that does not preclude a late-cycle cyclical uplift well above the current 2% target rate.”

On the other hand, the sudden slump in the oil price – which has been driven as much by an unwinding of extreme long speculator positions, as by the fundamentals – is a flashing red signal that headline inflation prints are set to come down sharply in the coming months. In fact, the weakness in the commodity complex – which has caused many a sleepless nights for Goldman which overnight went so far as to “explain” why the market is so very wrong in sending commodities tumbling – goes far wider than just oil, and is a clear indicator that the global economy is slowing sharply, with Edwards showing the commodity correlation to the recent decline in global PMI.

Of course, there is the possibility that the US economy is indeed slowly rapidly into a contraction, with a recession possible as soon as next year. The represent this possibility, Edwards shows recent charts from both David Rosenberg (which shows the latest FIBER economic index which is on the verge of the lowest print since the financial crisis), as well as the latest ECRI index, also set to plumb new multi-year lows.

Edwards proposes that if indeed the US economy is slowing as rapidly as the ECRI suggest, “then we might indeed find that the Fed has already overdone the tightening and is now forced to stop. That is exactly what the market is beginning to think  but not what the Fed’s rhetoric to date suggests. Indeed it may continue tightening and hard-land the economy in 2019, far sooner than any market participants expect.”

As a final point, Edwards references a report which we discussed this past June by SocGen’s Solomon Tadesse, in which he showed that the Fed’s monetary tightening from the QE-implied rate bottom was already close to what would historically trigger a recession.

Edwards reminds us that back in May, Solomon wrote that “we expect an additional 75bp from the current level, which translates into about three Fed hikes” to which the permabearish SocGen analyst writes that if the Fed indeed stops tightening after the  December hike, “Solomon will be spot on and win my forecaster of the decade award!”

Which brings us to the $64 trillion question asked by Edwards: while the Fed will note that implied inflation expectations have dipped below 2%, mainly on the oil price slump, is it really going to take its foot off the brake pedal as investors increasingly seem to think?

While he has no answer at this point his advise is to listen to the fForward guidance’ at the December Fed meeting: “it could prove crucial in determining whether the current equity correction turns into a slump.“

Of course, if much anticipated “Powell put” fails to make even a thinly veiled appearance, or if Powell remains steadily hawkish in his outlook, prepare for much more pain as stocks realize that the Fed will not deviate from its plans for 3 more rate hikes in the coming year, if only to demonstrate that it is “independent” and will not comply with Trump’s increasingly frequent demands that the Fed put its tightening cycle on hold (or better yet, launch QE4).

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Apple shares have tumbled into the red after reports that the Supreme Court sounds open to allowing a lawsuit to go forward that claims Apple has unfairly monopolized the market for the sale of iPhone apps.

As AP reports, the court has heard arguments in Apple’s effort to shut down an antitrust lawsuit.

Chief Justice John Roberts was alone among the nine justices in seeming ready to agree with Apple.

The suit by iPhone users could force Apple to cut the 30 percent commission it charges software developers whose apps are sold exclusively through Apple’s App Store.

A judge could triple the compensation to consumers under antitrust law if Apple ultimately loses the suit.

Justice Stephen Breyer used to teach antitrust law at Harvard Law School. He says the consumers’ case seemed straightforward.

Apple argues it’s merely a pipeline between app developers and consumers.

And the drop in AAPL has weighed on the broad US equity markets…

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Authored by Mike Shedlock via MishTalk,

Macron threatens the UK with perpetual delays unless the UK gives the EU fishing rights.

Today’s story from France is exactly what I have predicted about Theresa May’s acceptance of a kluge backstop that is unlikely to end without escalating demands from the EU.

French president Emmanuel Macron’s Blunt Brexit Warning to UK Over Fishing Rights is precisely what I had in mind.

Several EU leaders highlighted fishing as a particularly sensitive issue. German Chancellor Angela Merkel said talks on fisheries were “undoubtedly going to be an area where negotiations are going to be tough”.

But the bluntest warning came from the French President Emmanuel Macron, who suggested that if the UK was unwilling to compromise in negotiations on fishing, which would need to make rapid progress, then talks on a wider trade deal would be slow.

“We as 27 have a clear position on fair competition, on fish, and on the subject of the EU’s regulatory autonomy, and that forms part of our position for the future relationship talks,” he said.

“I can’t imagine that the desire of Theresa May or her supporters is to remain for the long term in a customs union, but (instead) to define a proper future relationship that resolves this problem.”

Temporary Permanence

Theresa May already sold the farm for a pittance.

The EU agreed to an Irish backstop but it’s temporary. Details will follow.

Trust me, there will be lots of following details. Here are three key blackmail items.

1. Fishing rights

2. Gibraltar

3. Corporate tax rates

4. Climate change

It won’t stop there.

I Tweeted about this on November 18 before Macron’s fishing threat.

Not the Final Deal

France Has More Demands Already

That’s just France!

Wait till Germany and Spain and all 27 EU nations get into the act.

Theresa May supports the stupidest trade deal in history.

Brexit Musical Tribute

The 585-page Brexit deal was so one-sided that 6 UK ministers resigned and Parliament openly laughed at PM Theresa May.

On November 16, I offered a musical tribute: Smiling Faces Show No Traces of Evil That Lurks Within

It’s fitting that I ended with this comment “The UK should take a pass on this rotten kettle of fish.”

And here we are, talking about fish on top of climate change demands.

This admission of the obvious truth from Macron may very well tip the UK parliament into rejecting the deal.

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