Category: zerohedge

The Risk Of An ETF Driven Liquidity Crash

Authored by Lance Roberts via RealInvestmentAdvice.com,

Last week, James Rickards posted an interesting article discussing the risk to the financial markets from the rise in passive indexing. To wit:

“Free riding is one of the oldest problems in economics and in society in general. Simply put, free riding describes a situation where one party takes the benefits of an economic condition without contributing anything to sustain that condition.

This is the problem of ‘active’ versus ‘passive’ investors.

The active investor contributes to markets while trying to make money in them.

A passive investor is a parasite. The passive investor simply buys an index fund, sits back and enjoys the show. Since markets mostly go up, the passive investor mostly makes money but contributes nothing to price discovery.”

Evelyn Cheng highlighted the rise of passive investing as well:

“Quantitative investing based on computer formulas and trading by machines directly are leaving the traditional stock picker in the dust and now dominating the equity markets, according to a new report from JPMorgan.

‘While fundamental narratives explaining the price action abound, the majority of equity investors today don’t buy or sell stocks based on stock specific fundamentals,‘ Marko Kolanovic, global head of quantitative and derivatives research at JPMorgan, said in a Tuesday note to clients.

Kolanovic estimates ‘fundamental discretionary traders’ account for only about 10 percent of trading volume in stocks. Passive and quantitative investing accounts for about 60 percent, more than double the share a decade ago, he said.

‘Derivatives, quant fund flows, central bank policy and political developments have contributed to low market volatility’, Kolanovic said. Moreover, he said, ‘big data strategies are increasingly challenging traditional fundamental investing and will be a catalyst for changes in the years to come.’”

The rise in passive investing has been a byproduct of a decade-long infusion of liquidity and loose monetary policy which fostered a rise in asset prices to a valuation extreme only seen once previously in history. The following chart shows that this is exactly what is happening. Since 2009, over $2.5 trillion of equity investment has been added to passive-strategy funds, while $2.0 trillion has been withdrawn from active-strategy funds.

As James aptly notes:

“This chart reveals the most dangerous trend in investing today. Since the last financial crisis, $2.5 trillion has been added to “passive” equity strategies and $2.0 trillion has been withdrawn from “active” investment strategies. This means more investors are free riding on the research of fewer investors. When sentiment turns, the passive crowd will find there are few buyers left in the market.

When the market goes down, passive fund managers will be forced to sell stocks in order to track the index. This selling will force the market down further and force more selling by the passive managers. This dynamic will feed on itself and accelerate the market crash.”

He is correct, and makes the same point that Frank Holmes recently penned in Forbes:

“Nevertheless, the seismic shift into indexing has come with some unexpected consequences, including price distortion. New research shows that it has inflated share prices for a number of popular stocks. A lot of trading now is based not on fundamentals but on low fees. These ramifications have only intensified as active managers have increasingly been pushed to the side.”

“This isn’t just the second largest bubble of the past four decades. E-commerce is also vastly overrepresented in equity indices, meaning extraordinary amounts of money are flowing into a very small number of stocks relative to the broader market. Apple alone is featured in almost 210 indices, according to Vincent Deluard, macro-strategist at INTL FCStone.

If there’s a rush to the exit, in other words, the selloff would cut through a significant swath of index investors unawares.”

As Frank notes, the problem with even 35% of the market being “passive” is the liquidity issues surrounding the market as a whole. With more ETF’s than individual stocks, and the number of outstanding shares traded being reduced by share buybacks, the risk of a sharp and disorderly reversal remains due to compressed credit and liquidity risk premia. As a result, market participants need to be mindful of the risks of diminished market liquidity, asset price discontinuities, and contagion across asset markets.

The risk of a disorderly unwinding due to a lack of liquidity was highlighted by the head of the BOE, Mark Carney.

“Market adjustments to date have occurred without significant stress. However, the risk of a sharp and disorderly reversal remains given the compressed credit and liquidity risk premia. As a result, market participants need to be mindful of the risks of diminished market liquidity, asset price discontinuities and contagion across asset markets.’”

In other words, the problem with passive investing is simply that it works, until it doesn’t.

You Only Think You Are Passive

As Howard Marks, mused in his ‘Liquidity’ note:

“ETF’s have become popular because they’re generally believed to be ‘better than mutual funds,’ in that they’re traded all day. Thus an ETF investor can get in or out anytime during trading hours. But do the investors in ETFs wonder about the source of their liquidity?’”

What Howard is referring to is the “Greater Fool Theory,” which surmises there is always a “greater fool” than you in the market to sell to. While the answer is “yes,” as there is always a buyer for every seller, the question is always “at what price?” 

More importantly, individual investors are NOT passive even though they are investing in “passive” vehicles.

Today, more than ever, advisors are actively migrating portfolio management to the use of ETF’s for either some, if not all, of the asset allocation equation. However, they are NOT doing it “passively.”

The rise of index funds has turned everyone into “asset class pickers” instead of stock pickers. However, just because individuals are choosing to “buy baskets” of stocks, rather than individual securities, it is not a “passive” choice, but rather “active management” in a different form.  

While the idea of passive indexing works while all prices are rising, the reverse is also true. The problem is that once prices begin to fall – “passive indexers” will quickly become “active sellers.” With the flood of money into “passive index” and “yield funds,” the tables are once again set for a dramatic, and damaging, ending.

It is only near peaks in extended bull markets that logic is dismissed for the seemingly easiest trend to make money. Today is no different as the chart below shows the odds are stacked against substantial market gains from current levels.

The reason that mean-reverting events have occurred throughout history, is that despite the best of intentions, individuals just simply refuse to act “rationally” by holding their investments as they watch losses mount.

This behavioral bias of investors is one of the most serious risks arising from ETFs as the concentration of too much capital in too few places. But this concentration risk is not the first time this has occurred:

  • In the early 70’s it was the “Nifty Fifty” stocks,

  • Then Mexican and Argentine bonds a few years after that

  • “Portfolio Insurance” was the “thing” in the mid -80’s

  • Dot.com anything was a great investment in 1999

  • Real estate has been a boom/bust cycle roughly every other decade, but 2006 was a doozy

  • Today, it’s ETF’s 

Risk concentration always seems rational at the beginning, and the initial successes of the trends it creates can be self-reinforcing.

Until it goes in the other direction.

The sell-off in February of this year was not particularly unusual, however, it was the uniformity of the price moves which revealed the fallacy “passive investing” as investors headed for the door all at the same time.

It should serve as a warning.

When “robot trading algorithms”  begin to reverse, it will not be a slow and methodical process but rather a stampede with little regard to price, valuation or fundamental measures as the exit will become very narrow.

Fortunately, while the price decline was indeed sharp, and a “rude awakening” for investors, it was just a correction within the ongoing “bullish trend.”

For now.

But nonetheless, the media has been quick to repeatedly point out the decline was the worst since 2008.

That certainly sounds bad.

The question is “which” 10% decline was it?

Regardless, it was only a glimpse at what will eventually be the “real” decline when leverage is eventually clipped. I warned of this previously:

“At some point, that reversion process will take hold. It is then investor ‘psychology’ will collide with ‘margin debt’ and ETF liquidity. It will be the equivalent of striking a match, lighting a stick of dynamite and throwing it into a tanker full of gasoline.

When the ‘herding’ into ETF’s begins to reverse, it will not be a slow and methodical process but rather a stampede with little regard to price, valuation or fundamental measures.

Importantly, as prices decline it will trigger margin calls which will induce more indiscriminate selling. The forced redemption cycle will cause catastrophic spreads between the current bid and ask pricing for ETF’s. As investors are forced to dump positions to meet margin calls, the lack of buyers will form a vacuum causing rapid price declines which leave investors helpless on the sidelines watching years of capital appreciation vanish in moments. Don’t believe me? It happened in 2008 as the ‘Lehman Moment’ left investors helpless watching the crash.

Over a 3-week span, investors lost 29% of their capital and 44% over the entire 3-month period. This is what happens during a margin liquidation event. It is fast, furious and without remorse.”

Make no mistake we are sitting on a “full tank of gas.” 

While “passive indexing” sounds like a winning approach to “pace” the markets during the late stages of an advance, it is worth remembering it will also “pace” just as well during the subsequent decline.

So, what’s your plan for when the real correction ultimately begins?

“If everybody indexed, the only word you could use is chaos, catastrophe. The markets would fail.” – John C. Bogle.

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Oil Is Surging… And So Are Gas Prices At The Pump

Brent Crude nears $85 as WTI tops $75 – at four year highs – as the tight oil markets continue to send gas prices at the pump to the highest in four years…

WTI is up over 2.5% today – spiking from $73 to $75 intraday – despite a report from Genscape that shows an 800k barrel inventory build at Cushing.

The FT notes that analysts said that frantic deal making by Asian buyers normally reliant on Iranian imports at an annual oil conference in Singapore last week indicated how tight the physical market was.

“The market is incredibly tight,” said Amrita Sen, founder of consultancy Energy Aspects, who noted that financial players were just realising the severity of the impact of Washington’s Iranian sanctions.

“People are distracted by various comments from [European] governments trying to set up alternative payment mechanisms, but the refiners and other companies dealing directly on the oil markets are saying it’s not worth the risk,” she added.

As AAA reports, despite gasoline demand dropping to 9.0 million b/d and inventories growing to 235.7 million bbl, according to the latest Energy Information Administration (EIA) data, the national gas price average has increased three cents on the week to land at $2.88 – a pump price not seen at the national average since mid-July.

“The last quarter of the year has kicked off with gas prices that feel more like summer than fall,” said Jeanette Casselano, AAA spokesperson.

“This time of year, motorists are accustomed to seeing prices drop steadily, but due to continued global supply and demand concerns as well as very expensive summertime crude oil prices, motorists are not seeing relief at the pump.”

Today’s national gas price average ($2.88) is the most expensive for the beginning of October since 2014. The average is four cents more than a month ago and 32 cents more than a year ago.

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Here’s What Inside Trump’s “Wonderful” Trade Deal With Canada And Mexico

While Trump wasted no time in taking a victory lap for his “wonderful new trade deal” between Canada and the US, which was (literally) struck in the 11th hour on September 30 to save the North American Free Trade Agreement, henceforth called USMCA (even though it is called NAFTA 2018 in the legal document), and which saw Canada joining the previously reached US-Mexico agreement, there has been some confusion about what’s in it.

Below we provide a summary and detailed breakdown of the key components of the new trade agreement.

First, courtesy of BofA’s Carlos Capistran, here are the main points in the agreement, in which Canada conceded on dairy and the US on dispute resolution:

  1. Canada agreed to ease protections on its dairy market, among them, it will now provide US access to about 3.5% of the market (Canada is likely to compensate dairy farmers);
  2. The US relented on its demand to eliminate the dispute settlement system on Chapter 19, a big win for Canada;
  3. Canada agreed to the terms of the US-Mexico deal, among them a de minimis of US$100 (the amount of imports without duties, which in NAFTA is US$20), stricter rules of origin for autos, a 10 year sunset clause with a 6 year revision and an update on several topics from labor to commerce to intellectual property; and
  4. The US and Canada reached an agreement to protect Canada’s autos from high auto tariffs if the US imposes them under law 232 with a quota of 2.6 million vehicles exported. The latter is similar to the “side-letter” that Mexico agreed with the US that protects 2.4 million vehicles. So far there are no exemptions from steel and aluminum tariffs.

Some more details via the WSJ:

Automaking

The new three-country pact would require auto makers to build a greater portion of a car in North America and with higher-wage workers to avoid duties when a car crosses borders. That would be a relative win for Detroit’s Big Three auto makers, which rely heavily on factories in Canada and Mexico for the U.S. market and can now move forward with factory investments with greater clarity. Car makers from Europe and Asia with plants in Canada and Mexico would also get more clarity, but provisions about local components and export limits could complicate operations. The deal also would be a win for American auto workers and their labor unions.

New rules would require at least two-fifths of a vehicle that is eligible for duty-free trade in North America to originate from workers earning at least $16 an hour. Think of it as a cap on the amount of parts coming from low-wage Mexico. But companies would get credit for high-wage research and development.

Agriculture

Farmers and agribusinesses welcomed the agreement, as it would likely preserve tens of billions of dollars in farm goods traded annually across the countries’ borders. It also should prompt the U.S., Canada and Mexico to each remove tariffs on one another’s products that have hurt U.S. prices for pork, cheese and other foodstuffs. Mexico and Canada have become critical pillars of demand and supply for the U.S. food and agriculture industry since Nafta took effect in 1994.  Meanwhile, U.S. dairy farmers got what they asked for with Canada agreeing to drop its complex “Class 7” quota and pricing system, which limited imports of certain dairy products from the U.S. That is likely to win praise from lawmakers from milk-rich U.S. states, but it could have political ramifications in Canada.

Manufacturing

U.S. manufacturers welcome anything that precludes further disruption for companies that have spread their operations and supply chains across the continent in the past quarter-century. “Manufacturers are extremely encouraged that our call for a trilateral agreement between the United States, Canada and Mexico has been answered,” said Jay Timmons, chief executive of the National Association of Manufacturers, in a statement. Manufacturing trade groups said they would scrutinize specifics of the deal as they are released.

Steel

The agreement would leave in place Trump administration tariffs on imported steel and aluminum, as U.S. negotiators have insisted that any changes to U.S. duties on steel and aluminum that took effect in June be addressed separately from a broader trade deal. U.S. trade negotiators will face pressure from domestic steel producers to keep in place a tariff that has given them leverage to raise prices. Those higher prices have allowed U.S. producers to improve margins and expand production at domestic plants. Steel and aluminum trade groups didn’t respond immediately to requests for comment on Monday.

Sunset clause

The agreement would face a “sunset” in 16 years, if it isn’t actively renewed or renegotiated. The three countries would meet every six years to decide whether to renew the pact, potentially keeping Nafta-pocalypse 16 years in the future in perpetuity. Canadian and Mexican officials say the uncertainty of sunset clauses undermines investment in their countries. Still, companies are somewhat pleased the Trump administration didn’t get the five-year sunset clause it was seeking.

Exchange-rate curbs

In a global first, the new pact would include enforceable rules to deter countries from artificially weakening their exchange rates to gain trade advantages. While the U.S., Canada and Mexico aren’t regularly blamed for this kind of infraction, the auto industry and its allies hope the rules would be included in deals with Asian countries in the future.

Dispute resolution

Nafta includes mind-numbingly complex systems to hold countries to account when they bend or break trade rules. Trump administration officials are wary of systems that can overrule the U.S. government and have sought to weaken the dispute-resolution systems. One system that allows foreign companies to challenge governments—investor-state dispute settlement, or ISDS—has been sharply scaled back in the new blueprint.

Tariff reviews

Canadian officials fought to keep another arbitration system that allows the country to challenge U.S. duties on allegedly dumped or subsidized Canadian imports, for example. U.S. trade representative Robert Lighthizer and American lumber producers had wanted to scrap the system, but in a victory for Ottawa, the U.S. agreed to keep the system, contained in Chapter 19 of the current Nafta.

Tariff relief

Under its agreement last month, Mexico would be protected from the brunt of any national-security tariffs the Trump administration is considering on vehicles and auto parts, and Canada got a similar deal, a U.S. official said late Sunday. But Mr. Lighthizer said Monday that any respite for Canada from steel and aluminum tariffs would have to be negotiated separately, and Mr. Trump defended his use of tariffs.

Deal preserves trilateral trade deal in North America

The USMCA preserves the trilateral nature of NAFTA, which reduces uncertainty in the region. At least some pent-up investment may be deployed as a result. The deal also reduces risk premium and is therefore supportive of Canadian assets such as CAD. It also clears the way for the Bank of Canada to continue hiking (we expect the next hike in October). USMCA constitutes a win for US president Donald Trump and reduces the risk of escalation of global trade wars, as it provides a path for other trade deals such as an eventual US-China agreement. David Woo believes this agreement could send US rates higher and that it is bullish for cyclical assets.

Next step is for 3 leaders to sign new NAFTA on Nov 30

The USMCA is expected to be signed by leaders of the three countries in 60 days, on November 30, and to be voted by Congresses/Parliament afterwards, most likely in 2019. In the meantime, NAFTA remains in effect. For USMCA to come into effect it will need to be approved by simple majority in both houses of US Congress (starting with the House), by simple majority in the Canadian Parliament and by qualified majority (2/3) in the Mexican Senate (which AMLO should be able to get without much trouble).

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McKinsey: Corporate Executives Increasingly Wary Of Global & Local Economy

Authored by Mike Shedlock via MishTalk,

Sentiment is down for the 3rd straight quarter in McKinsey survey of businesses. Trump’s trade policies at heart of it.

According to the McKinsey Economic Conditions Snapshot, September 2018, business sentiment is down for the third quarter. The global outlook is worsening at a faster pace than local conditions.

As they regard economic conditions at home and in the world economy, executives are warier than they have been all year. For the third quarter in a row, respondents to McKinsey’s newest survey of executive sentiment share less positive assessments of the economy’s current state, and their outlook for the months ahead is also cautious.

Expectations for trade activity are declining, trade-related risks are still perceived as top threats to growth, and for the first time this year, less than half expect the rate of economic growth, both at home and globally, will increase over the next six months.

The view from emerging economies is particularly downbeat. These respondents offer a more negative overall assessment of the global economy, economic conditions in their own countries, and their companies’ prospects. In a few cases, they are also more likely to cite the United States as the country with the best opportunities for their businesses, rather than their home countries or nearby economies.

Home Economies

The share of respondents saying conditions in their home economies are worse now than six months ago is nearly equal to the share saying conditions are better. Globally, things are worse.

In their assessment of the global economy, 38 percent of all respondents say conditions have worsened in the past six months, up from 26 percent in June. At 31 percent, the share reporting improvements is even smaller; it’s the first time since December 2016 that a larger share of respondents say global economic conditions have worsened than have improved.

Trade

36 percent of respondents say that in the past year, the level of trade between their home countries and the rest of the world has decreased, up from 22 percent who said so in June. In a few regions (North America, most notably), respondents have reported sizable declines in their countries’ trade levels in the past two surveys.

By contrast, those in India and in Latin America are the most likely to report an increase in trade levels, and they are the only two groups less likely to report declines in this survey than they were one year ago.

​Waning optimism

Looking ahead, respondents also report a progressively less positive outlook on the economy. Compared with the past two surveys, smaller shares predict that the global economy and their home economies will be better in six months than they are now.

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The Best And Worst Performing Assets In September, Q3 And YTD

After a turbulent summer, September was largely a calm affair for markets according to Deutsche Bank’s Jim Reid. Indeed volatility measures for most assets continued to remain subdued and concerns around the EM issues which haunted markets in August abated. Italy was always going to be the big risk however and it wasn’t until the budget was announced on the second-last trading day of the month that we saw vol return. That said the heavy falls for Italian assets, while also spreading to Europe, were still relatively contained. By the end of the month 20 of the 38 assets in Deutsche Bank’s sample finished with a positive total return and 21 did so in USD terms.

Going into Friday, BTPs and the FTSE MIB had actually delivered total returns of +3.4% and +6.5% respectively during September however the selloff post the budget announcement meant they finished the month +1.7% and +2.5% respectively. That resulted in heavy falls for most other European bourses too on Friday which pared what had been reasonable monthly returns. Indeed European Banks (+1.5%) and the STOXX 600 (+0.3%) just about closed with positive returns while the IBEX (-0.1%), DAX (-0.9%), Portugal General (-1.5%) and Greek ATHEX (-5.2%) all finished lower on the month. By contrast the S&P 500 (+0.6%) notched up yet another monthly gain (seventh this year) despite the NASDAQ (-0.7%) ending lower. The NIKKEI (+6.1%) was actually the top performing equity market, albeit boosted by a -2.3% decline for the Yen.

Meanwhile bond markets steadily sold-off during the month. Treasuries and Bunds finished -1.0% and -0.9% respectively while Gilts ended -1.6%. EM bonds actually returned +1.5% but still remain well down on the year. Speaking of which, EM currencies bookended the leaderboard in September. The Turkish Lira recouped +8.2% of its August decline however the Argentine Peso shed -10.7% as an extended IMF bailout plan highlighted the extent of the issues facing the country. The broader EM FX index did however return +1.6%.

Elsewhere credit markets ended the month broadly flat. European indices ended -0.4% to +0.2% with HY outperforming, with the story much the same in the US (-0.3% to +0.5%). Finally commodities were mostly stronger in September. Oil rallied with Brent and WTI returning +6.9% and +4.9% respectively with more and more talk of $100 Oil prices in the medium term, while Copper and Silver were +5.9% and +1.1% respectively. Gold did however fall -0.7%.

As for Q3, well it was a difficult quarter for Deutsche Bank’s sample of assets with only 15 of the 38 ending with a positive total return in local currency terms and 13 in USD terms. Excluding the obvious heavy falls for EM currencies like the Argentine Peso (-30.1%) and Turkish Lira (-24.2%), the biggest declines were reserved for commodities including Silver (-8.8%), Copper (-4.9%) and Gold (-4.8%). Equities were more mixed with returns ranging from -8.6% (Greek Athex) to +9.0% (Bovespa). The S&P 500 returned +7.7% and outperformed the STOXX 600 (+1.3%). Bond markets were slightly down in total return terms (Bunds -0.8% and Treasuries -0.7%) however credit had a reasonably solid quarter, with EU HY and US HY in particular returning +1.7% and +2.5% respectively.

In terms of where that leaves us YTD, 14 of the 38 assets have a positive total return in local currency terms but just 8 have in USD terms reflecting broad dollar strength this year. Oil leads the way (Brent +30.0% and WTI +21.2%) followed then by US equities (NASDAQ +17.5% and S&P 500 +10.6%). European Banks (-11.8%), Greek Athex (-12.5%) and Shanghai Comp (-12.6%) continue to languish near the bottom while Bunds (+0.8%) have outperformed Gilts (-1.4%) and Treasuries (-1.8%). With the exception of US HY (+2.8%), all credit indices have seen a negative total return this year ranging from -0.1% to -3.1%.

Source: Deutsche Bank

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Ron Paul: Venezuela’s Socialism… And Ours

Authored by Ron Paul via The Ron Paul Institute for Peace & Prosperity,

This week we witnessed the horrible spectacle of Nikki Haley, President Trump’s Ambassador to the United Nations, joining a protest outside the UN building and calling for the people of Venezuela to overthrow their government.

“We are going to fight for Venezuela,” she shouted through a megaphone, “we are going to continue doing it until Maduro is gone.”

This is the neocon mindset: that somehow the US has the authority to tell the rest of the world how to live and who may hold political power regardless of elections.

After more than a year of Washington being crippled by evidence-free claims that the Russians have influenced our elections, we have a senior US Administration official openly calling for the overturning of elections overseas.

Imagine if President Putin’s national security advisor had grabbed a megaphone in New York and called for the people of the United States to overthrow their government by force!

At the UN, Venezuela’s President Maduro accused the Western media of hyping up the crisis in his country to push the cause for another “humanitarian intervention.” Some may laugh at such a claim, but recent history shows that interventionists lie to push regime change, and the media goes right along with the lies.

Remember the lies about Gaddafi giving Viagra to his troops to help them rape their way through Libya? Remember the “babies thrown from incubators” and “mobile chemical labs” in Iraq? Judging from past practice, there is probably some truth in Maduro’s claims.

We know socialism does not work.

It is an economic system based on the use of force rather than economic freedom of choice. But while many Americans seem to be in a panic over the failures of socialism in Venezuela, they don’t seem all that concerned that right here at home President Trump just signed a massive $1.3 trillion dollar spending bill that delivers socialism on a scale that Venezuelans couldn’t even imagine. In fact this one spending bill is three times Venezuela’s entire gross domestic product!

Did I miss all the Americans protesting this warfare-welfare state socialism?

Why all the neocon and humanitarian-interventionist “concern” for the people of Venezuela? One clue might be the fact that Venezuela happens to be sitting on the world’s largest oil reserves. More even than Saudi Arabia. There are plenty of countries pursuing dumb economic policies that result in plenty of suffering, but Nikki and the neocons are nowhere to be found when it comes to “concern” for these people. Might it be a bit about this oil?

Don’t believe this feigned interest in helping the Venezuelan people. If Washington really cared about Venezuelans they would not be plotting regime change for the country, considering that each such “liberation” elsewhere has ended with the people being worse off than before!

No, if Washington – and the rest of us – really cared about Venezuelans we would demand an end to the terrible US economic sanctions on the country – which only make a bad situation worse – and would push for far more engagement and trade.

And maybe we’d even lead by example, by opposing the real, existing socialism here at home before seeking socialist monsters to slay abroad.

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Emerging Markets Slammed By Soaring Oil Prices

US consumers may be cursing rising gasoline prices which are rapidly approaching an average of $3.00 across the nation as Brent hits a new 4 year high above $84, but that is nothing compared to the horror that motorists across most emerging markets are facing. 

With currencies across the developing world tumbling as a result of a toxic mix of global trade tensions, the strong dollar and rising U.S. interest rates, dollar-denominated crude has become all the more expensive. And while the price of Brent crude, the international oil price gauge, has risen by 22% this year in dollar terms, its cost has doubled if you’re buying in Turkish lira. It is up 39% in Indian rupees and 34% in Indonesian rupiah. And don’t even mention Argentina.

The soaring prices are forcing emerging-market countries and central banks to act. According to the WSJ, India, the world’s third-biggest oil importer, is weighing temporarily limiting oil imports, while Brazil and Malaysia have introduced fuel subsidies. On Thursday, central banks in Indonesia and the Philippines both raised interest rates to tame rising inflation.

In South Africa, where fuel prices are at a record high, the central bank said in a statement last week that “the impact of elevated oil prices and a weaker exchange rate on domestic fuel costs is increasingly evident.”

“Emerging markets already have a lot of problems as it is, and when you throw an oil price spike to the mix, that creates another big risk factor,” said Jon Harrison, managing director for emerging markets strategy at TS Lombard.

The sharp spike in oil – and gasoline prices – assures a double whammy to the economy as local infrastructure is forced to, literally, slow down. And absent a major change, such as a sharp drop in the dollar or oil prices, the large developing nations like Turkey, India, the Philippines and South Africa are out of luck as they import all or most of their oil.

This creates a feedback loop where rising prices are spurring higher inflation and expanding already large current-account deficits, further exacerbating the economic hit. An increasing import bill further widens the deficit, which puts further pressure on their currencies.

“Oil is definitely a risk for those pressured by current account funding issues,” said Sacha Tihanyi, deputy head of emerging-markets strategy at TD Securities in New York. “If we see oil continuing higher, we’ll have to see further monetary and nonmonetary measures in order to help stabilize the external deficit strain.”

The only option these countries have to normalize the surging import prices is to push up their currencies by raising rates. And that’s what they are doing: last Thursday, Bank Indonesia, the country’s central bank, raised rates for the fifth time since May. In a statement, the bank pointed to a “surge” in crude imports bringing the country’s trade deficit to over $1 billion in August.

Also on Thursday, the Philippine central bank raised its key interest rate, citing rising inflation. Speaking to Reuters, the country’s finance minister said that the recent rise in oil prices is his main concern now.

Unable to wait for monetary policy to funnel through to the broader economy, some companies are taking matters into their own hands. According to the WSJ, in August India’s Jet Airways reported a rise in fuel costs of more than 50% year-over-year in the three months to June. CEO Vinay Dube had already talked of “a tough phase” for the industry, singling out the depreciating rupee and high fuel prices. Meanwhile, Indonesian state-owned oil company Pertamina is facing a squeeze as the bill for importing foreign crude soars.

* * *

For politicians and governments across developed nations, where spending on gasoline is one of the biggest discretionary outlays, rising prices represent a major “career threat” as high oil prices tend to bring street protests and industrial action, leaving them with difficult choices and nowhere more so than in Asian economic powerhouses India and Indonesia, where pro-business governments face re-election next year.

The Indian government had rolled back state subsidies on fuel and introduced fuel consumption taxes as the oil price fell in recent years. Local media is already lobbying the government to reduce the tax. The Indonesian government has asked international oil majors in the country, including Exxon Mobil and ConocoPhillips , to sell their local output to Pertamina rather than export it, in an attempt to support the local currency. More from the WSJ:

In India, which imports around 80% of its oil, refiners met in Mumbai earlier this month to discuss reducing the country’s reliance on imported crude, a spokesperson for Indian Oil Corporation, the country’s largest state-owned refiner, said. That could, for instance, include running down inventories rather than buying new oil, he said.

But the problem may be especially acute in Turkey, where energy makes up roughly two-thirds of the nation’s current account deficit. Addressing the threat of soaring prices, last week, Turkish Finance Minister Berat Albayrak said the only long-term solution was greater energy independence, and he pledged to boost renewable sources of energy.

Of course, this is hardly the first time that a surging dollar and high oil prices have coincided with falling currencies and widening trade deficits for emerging markets.

In 2013, when Bernanke unleashed the “Taper Tantrum”, concerns that the U.S. would unwind monetary stimulus sooner than expected prompted selling in emerging market currencies during a period when Brent was trading at over $100 a barrel. Given such experiences, some of the more prudent companies have used derivatives to hedge their exposure to just this kind of outcome.

The more prudent are even benefiting from rising prices: “The fact is that we have dealt with higher oil price before,” says Satrio Tjai, managing director at Rajawali Corp, Indonesia’s mining to palm oil group. Tjai says his company is even benefiting from the rising oil price, given a new government mandate that requires diesel fuels to be blended with the biodiesel that Rajawali supplies palm oil to.

Unfortunately, for every Rajawali that hedged, there are 99 other companies that did not, and the economic slowdown, coupled with political chaos that may soon result unless oil prices drop, may be the next trigger of emerging market turmoil in the coming months.

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‘Sunday Night Football’ Ratings Hit Season Low As Stadiums Fail To Fill Seats

The NFL suffered another blow this weekend after ratings for its most watched program, Sunday Night Football, hit a season low according to Deadline – thought metered market results are up year-over-year 12% after last year’s SNF aired one day after the Las Vegas shooting at Mandalay Bay. 

In a 26 -14 win on SNF, the Baltimore Ravens are now 3 – 1 this season and the Keystone State team are hung near the bottom of the AFC North. The game in Pittsburgh also saw another type of bottoming out in the ratings for the league and the NFL.

The primetime Week 4 match-up drew a 12.3/21 in metered market results

…

Last year’s Week 4 game went on to earn 16.7 million viewers and a 5.8/21 rating among adults 18-49 in the final numbers. Last week’s SNF scored a 6.4/25 in the key demo and 19.5 million sets of eyeballs. –Deadline

Empty seats

Meanwhile, as TV ratings dwindle, stadiums suffered from low attendance this weekend – as photos of thousands of empty seats made their way around Twitter – such as the Bengals vs. the Falcons game (Bengals won 37-36): 

The Indianapolis Colts also failed to draw much of a crowd at Lucas Oil Stadium for their 37-34 loss to the Houston Texans. 

The LA Chargers 29-27 win over the 49ers at StubHub stadium drew a similarly sparse crowd of mostly 49ers fans: 

The Cowboys didn’t fare much better in their 26-24 win over the Detroit Lions at AT&T Stadium: 

(h/t Warner Todd Huston @ Breitbart)

Lastly – we come to the matter of the Packers use of a “creative” American flag which drew harsh rebuke over Twitter: 

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Georgetown Prof: White GOP Senators In Kavanaugh Hearing “Deserve Miserable Deaths”

Authored by Abigail Marone via Campus Reform,

Georgetown University Distinguished Associate Professor Christine Fair tweeted that white Republican senators in the Brett Kavanaugh hearing deserve to die. 

“Look at thus [sic] chorus of entitled white men justifying a serial rapist’s arrogated entitlement,” Fair tweeted on Thursday.

Referencing a video of “Lindsey Graham’s tirade,” Fair, who is a victim of sexual assault, added, “all of them deserve miserable deaths while feminists laugh as they take their last gasps.”

“Bonus: we castrate their corpses and feed them to swine? Yes,” she concluded the tweet.

“Professor Fair’s extremely offensive and violent remark goes against everything in line with Georgetown’s values,” TJ Collins, a recent Georgetown graduate told Campus Reform. “President DeGioia should immediately issue a statement condemning the tweet, and Professor Fair should not be permitted in the classroom ever again,” Collins added.

“As a student applying to this school, I wouldn’t have dared use that kind of language on a social media platform, especially surrounding a sensitive and controversial issue. Georgetown wouldn’t have admitted me if they had seen stuff like that,” a current Georgetown student who wished to remain anonymous, told Campus Reform. 

“I don’t think people that Georgetown actually employs should be held to a significantly lower standard. And clearly, any of her students that see this rant are going to feel threatened if they have opinions that differ from hers” the student continued. 

Upon being contacted by Campus Reform to comment for this article, Fair stated, 

“There is a war going on against women and you, and your despicable herd of so-called journalists seeking to protect male privilege and shame women for our victimization or our rage are complicit in this war.” 

Days before, Fair tweeted, “GOP doesn’t care about women. We knew this. Fuck them.”

In addition to her colorful Twitter timeline, Fair also runs a blog called ShitMenSay. “This is where I post snarcastic missives based upon the shit men (and sometimes woman-hating women) say to me via email, voicemail and comments ‘deposited’ on my various social media like celestial droppings of stupidity,” Fair writes in the blog description.

“This blog is not about “doxxing” foes or people with whom I disagree politically or otherwise. This blog is about ACCOUNTABILITY,” she continues. She has published home addresses, phone numbers, and places of employment of people who contacted her. Fair has also bragged about emailing the spouses and employers of those who contact her. 

“Despite what some clowns have said, NO ONE finds themselves mocked and outed on #ShitMenSay without harassing me. No one. Some men have had the audacity to whine that I am outing my poor, defenseless harassers. I tell these weasels to take their (almost always) white, male privilege and kindly deposit it in the only orifice that doesn’t embarrass them when it’s open” she says in her blog description. 

Fair runs a second blog titled Tenacious Hellpussy, which she describes as “a nasty woman posting from the frontlines of fuckery.” Fair published Campus Reform’s request for comment and her response on her blog in a post titled: When “Aunt Lydia” of Campus Reform Tried to Launch Another Harassment Campaign: This is what she got.

“Dear Aunt Lydia (or perhaps, more appropriately, Rachel Mitchell? Which do you prefer? I prefer Aunt Lydia, so I”ll roll with that. Cool?)” she says at the start of her response.

“You don’t like my violent words – which in fact are not posing a threat to anyone. I am not calling for violence. I merely speaking to what my spirituality says these vile souls deserve.” Professor Fair writes.

“Surely, as a fine upstanding Christian, you condemn the goddless heathens like me to an afterlife of hell? You can micturate in your yoga pants at my WORDS, but I am angry at the VIOLENCE done to women and children in this country and the preponderant complicity of ONE political party right now” she continues.

Her full response can be viewed here.

Georgetown University did not respond to the request for comment in time for publication. 

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Italian Yields Blow Out After Europe Says Budget “Almost Certainly Violates Rules”

After posting strong gains in early trading, the rally in Italian stocks has faded sharply, with the FTSEMIB index now down 0.6% after rallying 1.8% earlier and Italian bonds tumbled to session lows after Italy’s proposal for a 2.4% budget deficit saw a frosty reception at the European finance ministers gathering in Luxembourg.

Italy’s embattled finance minister, whose proposal for a 1.6% deficit was overruled by the ruling coalition last week, Giovanni Tria was greeted with little enthusiasm from his counterparts; France’s Bruno Le Maire said that the European Union’s budget restrictions must be respected by everyone while European Commissioner for Economic and Financial Affairs Pierre Moscovici said that Italy’s budget amounts to a “very, very significant” deviation from its previous projections and almost certainly violated the rules.

The last statement echoed an earlier report in the Italian press according to which Europe was certain to reject the Italian deficit proposal, throwing the budget process in limbo, and potentially leading to another debt (and currency) crisis.

Perhaps in response to the latest snub, Bloomberg reported that Tria would will cut short his attendance at the Eurogroup to return to Rome Monday night to finalize the government’s budget outline for 2019 which has so far only released the deficit target.

“I will try to explain what is happening and how the budget plan was formulated,” Tria said on his way into the meeting. Fellow ministers can stay “calm” about Italy’s budget as the government is committed to reducing its debt burden in 2019, he added.

After Moscovici’s statement hit the wires, selling resumed in Italian bonds with the curve flattening led by front-end losses as risk aversion picks up with FTSE MIB paring gains. BTP futures broke earlier lows at 122.80 on a sharp pick up in volumes with 3% of daily volumes trading on the decline. 5y yields broke above Friday’s high at 2.40%, followed by 2y yield above 1.24%, while the yield on 10-year notes rose 11 basis points to 3.26 percent just after 4pm in Rome, hitting session highs. The spread over German bunds reached 278 basis points.

Indicating that relations between Italy and Europe are set to get worse, Italy’s Deputy PM Di Maio said that EU’s Moscovici spoke out against Italy’s budget plan to “upset markets”, adding that there is no reason to question the 2.4% budget deficit.

He also said that the government “will never sacrifice workers on the altar of the spread and of the crazy rules which have been imposed on us,” during a conference with reporters on the sidelines of a conference in Rome. “This government doesn’t butcher people, the music has changed.”

Needless to say, European disagreed, with French finmin Le Maire saying that “I just want to be very clear, that there are rules. And rules are the same for every state. Our futures are linked. All the futures of the euro zone are linked.”

Others quickly piled on: Moscovici doubled down, saying that the Italian authorities’ announced targets appear to be not “compatible” with the EU requirements. “It’s not in the interest of anybody to have a crisis in Italy, with Italy, on the markets or between Italy and the European Commission ,” Moscovici said. “Let’s keep our nerves.”

Dutch Finance Minister Wopke Hoekstra echoed the general concern: “The signals we’ve been getting so far aren’t very reassuring, at the same time many of the details are still unclear,” he said. Although Italy isn’t part of the Eurogroup’s agenda “you can rest assured that this will be a topic on everyone’s mind,” he added.

To summarize: anyone who thought that Europe would greet Italy’s budget with a wink and a smile will be disappointed as it now appears that Brussels will take the process personally, if only to teach Italy’s upstart, populist leaders just who’s the boss.

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