Category: zerohedge

Authored by Jason Ditz via AntiWar.com,

A new report from Brown University is aiming to provide a close estimate of the cost of the overall cost to the US government of its myriad post-9/11 wars and assorted global wars on terror. The estimate is that $5.933 trillion has been spent through fiscal year 2019.

This is, of course, vastly higher than official figures, owing to the Pentagon trying to oversimplify the costs into simply overseas contingency operations. It is only when one considers the cost of medical and disability care for soldiers, and future such costs, along with things like the interest on the extra money borrowed for the wars, that the true cost becomes clear.

That sort of vast expenditure is only the costs and obligations of the wars so far, and with little sign of them ending, they are only going to grow. In particular, a generation of wars is going to further add to the medical costs for veterans’ being consistently deployed abroad.

Starting in late 2001, the US has engaged in wars in Afghanistan, Iraq, Syria, Pakistan, Yemen, and elsewhere around the world. Many of those wars have become more or less permanent operations, with no consideration of ending them under any circumstances.

Those wishing to read the report can find it here.

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Given that the Swiss bank’s shares have fallen 40% since CEO Tidjane Thiam took over Credit Suisse three-and-a-half years ago, the fact that he has managed to hang on is a small miracle. But with shareholders growing ever more anxious as CS’s shares have slumped nearly 30% YTD, the embattled CEO is now taking a page out of Wells Fargo’s book and resorting to a tried-and-true strategy for boosting profits: Staff cuts.

Ahead of an investor day set for next month, Thiam is expanding his yearslong drive to cut costs by announcing possibly hundreds of job cuts, with some of the dismissals potentially beginning before the end of the year. The dismissals, Bloomberg said, will help the bank achieve its 2019 expense targets. Amazingly, while the bank’s struggling trading business won’t be effected, the cuts could come from its International Wealth Management and Swiss Universal Bank businesses, which have historically been money-makers for the bank. More confusing still, Thiam has said he doesn’t plan to cut any more trading jobs, while acknowledging that wealth management has been a money maker for the bank.

In a separate report, Wells confirmed that it’s planning to cut 1,000 jobs in the US, including 400 workers in Des Moines, Iowa, according to the Des Moines Register.  

Thiam’s decision to raise billions of francs in capital by offering new shares hasn’t helped the banks’ shares, and the volpocalypse blowup that killed XIV (which CS created) in February stoked fears of lawsuit-related payouts (despite being the largest shareholder of the ETN, the bank has insisted that it had been ‘completely hedged’).

But Thiam, who has cut some $4 billion of costs since the bank’s “restructuring” began in 2015, will still need to explain to investors next month how he plans to boost revenues as his pivot to emerging markets and wealth management has produced only tepid returns.

If Thiam doesn’t figure it out soon, he could be the next CS employee to pack all of his stuff into a cardboard box and turn in his security pass.

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As per an annual tradition, earlier today Goldman released two reports previewing what Goldman thinks will be the top 10 themes for the 2019, as well as its first release of “top trades” for the coming year.

While we will break out Goldman’s top themes in a subsequent post, Goldman strategist Charles Himmelberg – picking up on his ominous report from last week which warned that a “stocks may be about to enter a sustained bear market” – warns that following October rout, many investors appear to be questioning whether risk assets will find their footing in 2019.

He cautions that the US economic outlook “appears to be turning increasingly less friendly” and notes that after more than eight years of growth the business cycle has matured; domestic activity looks quite likely to slow next year as the effect of 2017’s tax cuts wanes and tighter financial conditions begin to bite; and the Federal Reserve seems intent on steadily raising interest rates due to tight labor markets and growing inflation pressures.

Add to this list an ongoing (and possibly escalating) trade conflict between the US and China, the budget tensions in Italy, and fragile growth in a number of emerging market economies, and it is not hard to understand market concerns about a challenging investing climate over the next 12 months.

Yet despite the uncertainties, Goldman thinks it is “too soon to head for the risk bunker” adding that “while some incremental caution is likely warranted in 2019, our view is that portfolios should maintain a modestly pro-risk tilt, for a few reasons.”

• First, Goldman economists expect global growth to hold up reasonably well, and for activity outside the US to accelerate moderately on a sequential basis. This mostly reflects a rebound in several medium-sized emerging markets which struggled this year—Turkey, Argentina, Russia, South Africa and Brazil—and roughly steady growth in the rest of the world.
• Second, Himmelberg predicts that activity in China is likely approaching levels that are intolerably low for the government, and there is a good chance that growth momentum may bottom over the next few months on the back of more determined policy support. The current five-year plan underlying much economic decision-making in China includes a goal to double real GDP between 2010 and 2020. Based on growth since 2010, reaching this target implies a growth “floor” for the next two years of about 6.1%. As of the most recent data, growth appears to have slipped slightly below that level: Goldman economists estimate that Q3 GDP grew at an annualized pace of 6.0%. And while Goldman does not expect large-scale stimulus that would send Chinese growth on a meaningfully higher trajectory, because policymakers will likely balance near-term activity with medium-run concerns related to pollution, financial sector reform, and other issues, it thinks growth objectives are sufficiently important that officials will take steps to prevent the economy from slowing any further. Therefore, Chinese growth—and the many assets affected by its slowing in 2018—may be bottoming.
• Third, Goldman does not think additional Fed tightening presents insurmountable risks to markets. While the bank expects two more rate increases in 2019 than currently discounted by markets, 11 of the 13 hikes expected from the Fed this cycle have already occurred or are priced in. Therefore, financial markets have arguably “paid the price” of Fed hiking to a significant degree: since the end of 2015, US Treasuries have delivered sizable negative excess returns, global equity multiples have declined, and the currencies of emerging market economies with the largest foreign capital needs (e.g., Turkey and Argentina) have already depreciated sharply. Moreover, US inflation remains moderate enough that the FOMC still has room to pause if financial conditions were to tighten too abruptly. So, while we expect the committee to keep moving, they will not be hiking with blinders on—signs of a hard landing for the economy coming from markets and/or the incoming data would likely result in a Fed pause.

With that in mind, here are the specific “top trades” wrapped within key thematic groups:

US: Late-Cycle Dynamics

• Long 5-year n US inflation swaps
• Enter 2s30s UST flattener
• Long agency MBS vs. IG credit
• Short IG idiosyncratic risk funded with AAA CMBX

China: Growth Bottoming Out Soon

• Long AUD & NZD vs. EUR
• Long CLP funded out of CNY
• Long S&P GSCI Industrial Metals Index

EM: Pick Up Excess Risk Premium, Have Hedges

• Long MSCI EM hedged with MSCI EAFE
• Receive a basket of high-yielders 5-year swaps (ZAR, MXN, COP) vs. 10-year swaps in low-yielders (PLN, HUF, THB, KRW)
• Long IDR 10-year bonds
• Short KRW vs top-6 currencies in GS trade-weighted basket

Brexit: Deal Dividend

• Pay 2y1y SONIA versus receive 2y1y EONIA

Central Banks: Data Driving Divergence

• Short EUR/SEK
• Short USD/CAD
• Long PHP vs. top-7 currencies in GS trade-weighted basket
• Long SGD/THB

* * *

Below we lay out the specific details on each of these trades, as laid out by the bank:

US: Late-Cycle Dynamics

Long 5-year US inflation swaps; target: 2.35%, stop loss: 2.00%.

We think the US inflation premium is attractive across the curve, particularly given last month’s underperformance (Exhibit 1). In our view, this underperformance reflects concerns over potential overtightening by the Fed (we disagree with this view), weaker and volatile oil prices, and a recent string of misses in core inflation readings. On the last point, our economists have noted cyclical upside risks to these readings, given tight labor markets. Additionally, we think two factors strengthen the case for getting long US inflation: 1) our commodities strategists’ view that crude is oversold, and should rebound by year-end (Exhibit 2), 2) our US economists’ view that the trade war will likely escalate, causing the upcoming rounds of tariffs to find their way into inflation  readings faster than prior rounds.

 

Enter 2s30s UST flattener; target: 25bp (1Q2019), stop loss: 60bp.

We think the front end of the US Treasury yield curve is currently underpricing future Fed hikes, and expect further flattening of the 2s30s US Treasury yield curve in the next few months (Exhibit 3). In our view, the risk that the Fed gets derailed from its  intended path over the next 2-3 hikes is low. The trade carries negatively, but ex-ante carry at this stage of the cycle typically tends to be a contrarian indicator of performance as markets have typically underestimated the extent of a Fed tightening cycle (Exhibit 4). We see two risks to this trade. First, yields may turn much more sensitive to elevated supply levels, keeping the 5s30s portion of the curve steeper than usual. Second, a sizable exogenous shock to US economic momentum in the next few months could cause the front end of the curve to rally.

 

Long agency MBS vs. IG credit (rates-hedged); target: 4%, stop loss: -3%.

We recommend getting long 4.5% coupon 30-year conventional pass-throughs hedged with 2-year and 10-year Treasuries (at ratios of 1.0 and 0.25 respectively) vs. the IG corporate bond index (also rates-hedged); at a 2x to 1 notional ratio. The trade is carry positive and reflects two key ingredients. The first is the prospect of slower US growth, which typically allows Agency MBS to outperform IG credit (Exhibit 5). Second is our expectation of a relatively narrow range of outcomes for the Fed, and thus low interest rate volatility; a tailwind for agency MBS excess returns. As shown by Exhibit 6, agency MBS excess returns tend to be positive when interest rates are range-bound, a pattern that reflects the negative convexity of mortgages. We acknowledge that supply/demand technicals will likely remain challenging for the Agency MBS market, as the Federal Reserve’s portfolio holdings continue to run off. But we expect macro fundamentals will likely dominate supply/demand technicals as drivers of relative performance

 

Short IG idiosyncratic risk funded with AAA CMBX; target: +3%, stop loss: -2%.

We recommend getting short the 3-7% CDX IG series 31 tranche, partly funded with a long position in the AAA CMBX series 11 index, with a 1 to 3.5x notional ratio. The trade is roughly vol-neutral but carry negative (Exhibit 7 for recent performance). In our view, elevated idiosyncratic risk in the low end of the CDX IG quality spectrum will likely cause junior tranches to underperform, while low recession risk should keep spreads on the AAA CMBX index well-behaved. While recent weeks have seen a sharp repricing of idiosyncratic risk in the IG market, the strong exposure of the widest names in the CDX IG index towards sectors facing cyclical and policy challenges such as Autos, as well as structural and late-cycle margin headwinds such as Consumer and Food & Beverage, leaves risk skewed to the downside. As for the long leg of the trade, AAA CMBX, we acknowledge that valuations in the CRE market remain stretched relative to historical norms as well as relative to the residential market. But unlike the low end of the IG quality spectrum, where structural and late-cycle headwinds challenges will constrain the ability to deleverage, there have been tangible signs of adjustment over the past few years, via lower LTVs and tighter lending standards (Exhibit 8).

 

China: Growth Bottoming Out

Long AUD & NZD vs. EUR; target: 106, stop loss: 97.

We recommend getting long AUD and NZD vs. EUR, indexed to 100 with a total return target of 106 and stop loss at 97 (Exhibit 9). Despite strong domestic fundamentals, AUD has weakened in lockstep with other EM assets this year against a backdrop of China slowdown concerns (Exhibit 10). NZD has faced similar headwinds, as well as additional jitters around political tensions and a more dovish perception of the central bank. Now, with China growth bottoming out and domestic inflationary forces starting to build, we think there is room for a rebound. We recommend funding the trade out of EUR, where a confluence of political risks and growth concerns is likely to cap performance over the next few months and carry is attractive.

 

Long CLP vs CNY; target: 108, stop loss: 96.

We recommend getting long the CLP funded out of the CNY, with a total return target of 108 and a stop of 96. We expect the CLP will likely outperform, for several reasons (Exhibit 11). First, in contrast to most EM economies, domestic growth and inflation pressures in Chile have inflected meaningfully upwards and are supporting a young, carry-rebuilding hiking cycle (Exhibit 12). Second, unlike other Latin American economies, the current administration’s market-friendly stance should keep uncertainty around investment and policy in Chile in check. Third, the trade provides exposure to copper prices, where our commodities team sees upside on both the 3- and 12-month horizons. Fourth, the CLP has priced in a significant deceleration in Chinese growth, and we expect the pace of deceleration to abate going into 2019. Fifth, the CLP is less exposed than other currencies, such as the KRW, to a weakening of the CNY. This should allow the trade to outperform if growth stabilizes in China but the CNY weakens further. Finally, funding the CLP with CNY provides a hedge against an escalation of trade tensions between the US and China. We would emphasize that this trade is about spot moves, not carry. While carry may gradually improve as the hiking cycle in Chile wears on, the trade implies a cost of carry of about 0.5% over a 6-month horizon.

 

Long S&P GSCI Industrial Metals Index®; target: 1400, stop loss: 1100.

Industrial metals declined sharply this year on trade fears, China concerns, and a stronger US Dollar. Contrary to the unfriendly macro environment, the micro fundamentals have been supportive (Exhibit 13). Inventories of copper, aluminum, zinc and nickel have all been falling, indicating that demand has been outpacing supply. While our economists expect continued year-over-year deceleration in China growth and trade disputes may be difficult to resolve in the near term, the market has largely priced in these headwinds, in our view. On the other hand, downward pressure on exports and consumption is likely to lead to more infrastructure investment in China, disproportionally benefiting industrial metals (Exhibit 14).

 

EM: Pick Up Excess Risk Premium, Have Hedges

Long MSCI EM hedged with MSCI EAFE (1 vs. 1.25); target: 105.5, stop loss: 96.5.

We recommend getting long EM equities hedged with non-US DM equities (MSCI EAFE) on a volatility-adjusted basis (1x long EM vs. 1.25x short EAFE) (Exhibit 15). EM equities have been hit harder than global peers this year primarily due to weaker growth outcomes than expected upon entering 2018; and we expect this to reverse next year (Exhibit 16). Specifically, we expect the sequential growth data in China to bottom out in coming months, and that the market will price this in sooner rather than later, particularly as policymakers have begun to show greater willingness to stimulate growth domestically.

Given the late-cycle nature of the US economy and equity valuation ratios that remain high relative to long-term levels, we prefer a relative equity expression over outright longs; and we note that the current growth worries, which have been more US and DM focused (rather than incrementally EM focused), have been better captured in long/short equity trades. Furthermore, on a sector-neutral basis, we find that EM equities trade towards the lower end of their 10-year valuation range relative to MSCI EAFE, which suggests the bar for positive surprise is quite low. For example, MSCI EM bottomed relative to MSCI EAFE on October 11 but the most recent absolute trough was October 29; we suspect the relative outperformance trend to be longer-lasting than the upward trend in equities outright.

 

Receive a basket of high-yielders 5-year swaps (ZAR, MXN, COP) vs. 10-year swaps in low-yielders (PLN, HUF, THB, KRW); target: 4.3, stop loss: 5.25.

In our view, the risk premium embedded in the high-yielders’ local rates curves is elevated following this year’s repricing (Exhibit 17) . While this partly reflects idiosyncratic local risks and weak EM growth momentum, the bar for upside macro surprises seems low, especially taking into account that negative output gaps in South Africa and Colombia should limit inflation pressures, while policy rates in Mexico are already at high levels. By contrast, in the EM low-yielders (PLN, HUF, THB, and KRW) thinner value buffers, low policy rates and positive output gaps (in CEE) suggest less protection from the global rates repricing that we expect over the coming months (Exhibit 18). Choosing shorter tenors for the long leg (5-year) than for the short leg (10-year) improves the carry profile of the trade and allows for a positive 7bp carry per six months.

* * *

Long IDR 10-year bonds; yield target: 7.4%, stop loss: 8.6%.

We expect the macro backdrop to be more conducive for IDR bonds in 2019 (Exhibit 19). The sell-off in IDR markets this year has been primarily driven by the combined effect of the sharp back-up in US rates and the 10% rally in DXY. We think this is unlikely to  be repeated in 2019. For one, US Treasury yields are near their cycle peak (our 2019 year-end forecast for 10-year yields is 3.5%). Second, we expect the USD to depreciate by almost 6% vs. the DXY in 2019. Our fair value models that screen across EM  rates curves indicate that IDR bonds are cheap, and Indo real yields are the highest in the region at 3.3% (1-year IGB at 7.0% vs. 1y inflation expectations of 3.7%) and real rates are now at the top end of their range over the past 10-years (Exhibit 20).

 

Short KRW vs. top-6 currencies in GS trade-weighted basket; target: 106, stop-loss: 97.

A short position in the KRW hedges a wide range of global portfolio risks and is exposed to a weaker domestic outlook (Exhibit 21). Economic growth should be marginally weaker in 2019, with our forecast for GDP at 2.5% vs 2.7% in 2018, primarily due to weaker exports on the tech-cycle slowdown and exposure to China. Notably, chip exports alone accounted for 94% of ytd headline exports growth in 2018 and we forecast that the chip cycle will slow from +50% yoy in 2017, to +30% in 2018 to -3% in 2019 (Exhibit 22). We expect the current account to slow from 4.1% of GDP in 2018 to 3.6% in 2019. Private consumption should moderate following a slowdown in job growth to the weakest level since the GFC, affected by structural factors as well as large policy shocks (a cumulative 30% minimum wage hike over 2018-2019). A short position in the KRW also hedges the risk of a further tech-led equity sell-off since the Won is one of the most equity-centric currencies. Lastly, widening rate differentials with the US could also prompt further portfolio outflows.

 

Brexit: Deal Dividend

Pay 2y1y SONIA vs. receive 2y1y EONIA; target: 145bp, stop loss: 75bp.

Brexit risks are weighing on UK yields. We expect that an eventual deal will allow UK rates to move higher on both a reduction of uncertainty and upcoming fiscal expansion (Exhibit 23). At the same time, risks to Euro area activity remain skewed to the downside. While our modal case is for one ECB hike in 2019, we think the probability of a dovish revision to the EUR rate path is relatively high (40%). With Italy risks unresolved, we think UK rates can decouple from EUR rates in the wake of a positive Brexit outcome (Exhibit 24). The main risk is the Brexit deal itself, which is a digital event and so presents jump risk in both directions.

 

Central Banks: Data Driving Divergence

Short EUR/SEK; target: 9.60, stop loss: 10.60.

We recommend getting short EUR/SEK with a target of 9.60, or spot return of roughly 6.5% (Exhibit 25). The economy in Sweden is operating well beyond potential, inflation is on target, and yet policy remains accommodative (Exhibit 26). To be fair, this has  been the case for some time now, but we think “this time is different” as the Riksbank’s communication about normalization has become decidedly more concrete in recent months. Our analysis suggests policymakers in Sweden will ultimately need to tighten policy sooner and more aggressively than their counterparts at the ECB, and we expect this will include some SEK appreciation. While domestic policy should provide some protection, the main risk to this trade is a more marked deterioration in Euro area sentiment, which tends to weigh on SEK. This supplants our previous trade recommendation to go long an equally-weighted basket of SEK and NOK, which we close for a potential profit of 1.05%.

 

Short USD/CAD; target: 1.27, stop loss: 1.35.

We recommend getting short USD/CAD with a target of 1.27, or spot return of 4% (Exhibit 27). The US and Canada are at similar stages of the economic cycle, meaning the BoC is likely to remain hawkish in the near term and rates should converge to similar levels (Exhibit 28). Even though uncertainty lingers around the passage of USMCA, it should be less of a headwind to CAD than it had been prior to the deal announcement (due to lower tail risk), and our DC economists expect the agreement will eventually be approved. Our equity analysts also see scope for some improvement from current WCS spot levels—another recent headwind to CAD vs USD—on i) refineries coming back online from maintenance and ii) favorable seasonal production patterns. However, they expect the WTI-WCS spread to average $30 in 2019 (wider than consensus) as capacity constraints likely remain prominent, which could limit CAD outperformance in the medium term.

 

Long PHP vs. top-7 currencies in trade-weighted basket; target: 108, stop loss: 96.

We recommend going long the PHP versus the top-7 currencies in the GS trade-weighted basket (TWI), comprising CNY (27%), JPY (19%), USD (16%), EUR (13%), TWD (10%), KRW (9%) and THB (7%). The trade has a positive carry of 3.6% per annum (Exhibit 29). We think a combination of a hawkish BSP, lower inflation, higher real rates and the meaningful broader tightening in domestic financial conditions should turn the FX flow situation around and support PHP outperformance (Exhibit 30). And while the current account deficit will likely be pressured higher on public capex spending and rice imports, the tightening in financial conditions this year – as captured by higher rates, lower equities and wider CDS spreads, should slow domestic demand and import growth and eventually cap this deterioration in the current account.

 

Long SGD/THB; target: 25.50, stop loss: 23.00.

We expect the MAS to steepen its slope to 1.5% at its April monetary policy meeting and the SGD to stay at the strong end of the SGD NEER. We expect real GDP growth to decelerate to 2.9% yoy in 2019, from an estimated 3.5% in 2018, driven by a slowdown in net exports. However, inflation has picked up over the past few months due to energy prices. Our measures of the output gap and labour market indicators suggests the economy is now at, or slightly above potential, and the MAS expects wage growth to strengthen going forward. Above-trend growth and reduced slack in the economy suggests more durable inflationary pressures are forthcoming. Recent MAS commentary has been more hawkish, suggesting that, in their view, the slope of the appreciation band is still below neutral. As such, we expect the SGD to stay on the strong side of the SGD NEER (Exhibit 31).

* * *

What is Goldman’s track record on these top trades? It depends: last year, and the year before the bank hit its targets on roughly half of its trade recos. The year before that, however, Goldman became a laughing stock on Wall Street when it was stopped out on most of its trades within a few weeks of their publication. Therefore, it is difficult to gauge how this batch of top trades will perform, although if Goldman’s recent attempt to push clients into crude is any indication, just as oil suffered a record plunge over the past 3 weeks, traders may be better advised to take the other side of the trades that Goldman recommends.

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The hyper-trade-sensitive stock market jumped in the early afternoon after reports from The FT that USTR Lighthizer had told some industry executives the next tranche of levies was already on hold.   

While the reaction was slow to form, there is little other catalayst for the ramp narrative…

 

Bond yields inched higher and while Yuan gained, the usd was unchanged.

One thing is sure – manipulating the stock market over short periods of time with a fake trade-war headline is likely at its most profitable right now.

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In response to Wednesday evening’s New York Times exposé detailing Facebook’s ham-handed attempts to deal with Russian influence on their platform and a massive data-harvesting scandal, Facebook’s board of directors has issued a statement.

The board admits that the company was “too slow to take action” on Russian interference, however they took issue with the suggestion that the executives “either tried to ignore it or prevent investigations into what had happened.” 

Full statement: 

“As Mark and Sheryl made clear to Congress, the company was too slow to spot Russian interference, and too slow to take action. As a board we did indeed push them to move faster. But to suggest that they knew about Russian interference and either tried to ignore it or prevent investigations into what had happened is grossly unfair. In the last eighteen months Facebook, with the full support of this board, has invested heavily in more people and better technology to prevent misuse of its services, including during elections. As the US mid-term showed they have made considerable progress and we support their continued to efforts to fight abuse and improve security.” 

The board’s statement notably fails to address the data harvesting scandal, GOP PR firm hired to smear liberal detractors as Soros operatives, or their efforts to denigrate tech competitors Google and Apple.  

Developing…

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After October’s “bloodbath across all strategies” resulted in the second-worst monthly hedge fund performance of the decade, many in the 2-and-20 crowd are bracing for the industry’s worsening capital bleed to accelerate on Thursday as LPs scramble to request redemptions ahead of Thursday’s deadline to get their money back before the end of the year. But as overpaid hedgies’ paranoia about a feared culling of the herd reaches a fever pitch, one of the industry’s most infamous figures isn’t doing his competitors any favors.

During a talk at the 92nd Street Y on the Upper East Side of Manhattan on Thursday, former SAC Capital founder Steve Cohen revealed that he had successfully raised $5 billion in outside money since opening Stamford Harbor Capital (Cohen’s new fund, which opened to outside capital earlier this year after a temporary ban on Cohen running outside money was lifted). Cohen raised this money at a time when redemptions for the industry as a whole had accelerated through the end of Q3.

While most funds have been struggling to keep the money that they already have, Cohen said he didn’t have to try hard to raise the money.

Here’s the FT:

“It was actually not hard,” Mr Cohen told a sold-out audience of his fund-raising at a 92nd Street Y event, which included former New Jersey governor Chris Christie.

“I did only 10 or 15 meetings, it was really easy,” he said. “I made one trip overseas to see one client and my staff did an amazing job and we raised probably $5bn.”

Cohen said he’s happy to be taking outside money again, because it has allowed his firm to grow.

“It never bothered me not having other people’s money because I had a lot of my own money” but “frankly we couldn’t grow.”

But for any LPs who might have been in the room (Chris Christie reportedly attended the event), Cohen shared his market outlook, which was notably similar to that of his Fairfield County neighbor Bridgewater.

Like a growing number of funds, Cohen believe the US economy is “late cycle” and that a bear market could arrive some time within the next two years.

Mr Cohen said he sees the US economy as “late cycle”, and predicts a possible bear market in the next year and a half to two years.

“I’m not comfortable, I’m not uncomfortable, I’m somewhere in the middle,” he said.

“I don’t think returns over the next two years are going to be very good. If the market hangs in there, there’s just going to be marginal returns.”

According to the investing theory that helps hedge funds justify their existence, hedge fund investors see the most benefit during down turns, when their sophisticated stock pickers can more easily choose outperformers, allowing their ability to pick winning stocks to truly shine. In other words, as Cohen implied, everybody who is pulling their money from hedge funds is merely succumbing to panic. Now’s the time to get in before the market’s bottom falls out.

In what sounded like an attempt to check Cohen’s ego, his interviewer jokingly pointed out during the talk that Cohen “isn’t Warren Buffett.”

“And Warren Buffett’s not me,” he replied.

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Authored by Adam Sabes via Campus Reform,

North Carolina State University announced a Ph.D. in social justice education on Monday.

The program, which will debut in fall 2019, aims to teach educators, or “scholar-activists,” about social justice and how they can bring about change in the classroom setting, according to an NC State news release.

“The goal of the program is to help educators recognize and disrupt systems of oppression by helping to foster and create equitable learning environments,” Jessica DeCuir-Gunby, a professor of educational psychology and director of graduate programs for the Teacher Education and Learning Sciences Department, said in the news release.

Faculty will come from various research areas, such as “social justice teacher education, multicultural education and literacy, education and immigration and diversity and equity in schools and communities,” according to the Ph.D. program’s webpage. The program also claimed it would focus on “equity in STEM” and “scholar activism.”

“This program area of study promotes social diversity while naming, interrogating and challenging oppression, exploitation and marginalization within education at the local, state, national and international levels,” the website states.

Courses that are required to attain the Ph.D. in social justice education include “Social Justice in Education,” “Diversity & Equity Scholar Leader Course,” and more.

NCSU College Republicans chairman Kye Laughter told Campus Reform he views this new Ph.D. program as a way to push social justice on future students.

“I think any person pursuing a degree or a Ph.D. in social justice already has an agenda in mind and this field will only allow bias to grow not only among those in academia but for those being taught this dangerous ideology,” Laughter said.

The chairman also suggested that the program shows that the university has a double standard, contending that a Ph.D. in a conservative thought field would never be created.

“Our university should not be afraid of discussing different ideas, but I am doubtful we will see any Ph.D. programs in conservative ideologies anytime soon, as academia has been infested with liberalism,” Laughter said, while noting that the university excels in fields like agriculture, engineering, and architecture. 

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After years of resolutely ignoring any adverse macro news and negative fundamental developments, bonds – whose spreads had touched decade tights at the start of October amid an unprecedented scramble for yield within the fixed income community – are suddenly being dumped with a passion. Indeed, it appears that the good times for bonds – both investment grade and high yield – are coming to an end, with this week’s turmoil in General Electric credit – first profiled here and subsequently in the WSJ – a clear sign that things can and likely will get much worse.

To see the sudden revulsion surrounding junk bonds in action, look no further than the spread on the Bloomberg Barclays Corporate High Yield index, which has spiked from a decade low of 3.03% on October 3 to 3.92% overnight, the widest since April 2017.

To be sure, there is some good news. According to Bank of America, it is far too soon to panic, because when the next slowdown strikes, investment-grade bonds will see a record-low rate of cuts to junk.

“The credit quality of high-grade companies is the best it has been in decades, as companies and industries have been tested and forced to improve,” BofA credit strategist Hans Mikkelsen wrote in a Nov. 14 note. And that’s “one key reason that in the next downturn the rate of downgrades to high yield is likely to be the lowest ever.”

According to Mikkelsen, who dedicated his entire note to placate panicked bond investors, the reason not to worry about the energy sector – one of the biggest subsectors of the US high yield market – is because 4 years ago “it went through a major stress-test” when oil prices last plunged. “That forced companies to deleverage, be conservative about capex and work to aggressively lower break-even oil prices.” Additionally, Mikkelsen argues that the financial crisis and Dodd-Frank greatly improved the credit quality of banks.

Of course, one could easily argue the opposite, namely that artificially low interest rates enabled a massive debt-issuance spree which has left most companies burdened with more debt than they can handle either during the next financial crisis or as rates keep rising, resetting the cash interest rate ever higher on existing debt along the way. This was precisely the argument behind Jeff Gundlach’s most recent warning to corporate bond investors.

And while BofA’s complacent take may be the good news, the bad news is that the market – having engaged its semi-panic puke mode, refuses to step off the gas and even though oil has stabilized in the past 48 hours after a record, 12-day rout, that’s not helping high-yield energy.

As shown in the chart below, Bloomberg’s HY Energy OAS Index soared this morning to the highest in 12 months, at just shy of 500 bps. And since energy is the third-largest sector in U.S high yield indexes, it’s now dragging the whole market wider.

Commenting on this blow out, Bloomberg’s Sebastian Boyd writes that while it’s tempting to argue that bondholders are anticipating further declines in oil prices, the index has tracked oil prices pretty closely in the past 12 months, so “it’s hard to say which one leads and which lags.”

Separately, CreditSights analysts have joined Bank of America in advising bondholders to hang on and wait for the pain to pass while Wells Fargo also agrees with Mikkelsen that high-yield oil and gas companies are better placed to get through a price slump now than they were in 2014 after deleveraging and improving balance sheets.

As a counter to this optimism, Boyd presents the following chart showing ratings of bonds in the ICE BofAML index over time. While ratings are a simplistic reflection of reality, if one accepts that they’re a decent enough proxy for credit risk then “the data does not show credit quality in the sector improving over time.“

Boyd is not the only one who is skeptical on credit, which has been hammered not only in junk, but more notably also in high grade. In the aftermath of the previously noted rout in the bonds of GE, which is facing weak demand for gas turbines, high debt levels, a federal accounting probe and is no longer eligible for commercial paper issuance and so has to rely on bank revolving credit facilities…

…blue-chip company debt has been clobbered this week, and is on track for its worst year since 2008, largely due to concerns about some $2.5 trillion in BBB-rated bonds – more than double the size of the entire high yield bond market – which risk being downgraded to junk during the next crisis resulting in a yield explosion across the high yield space.

“GE is a harbinger for what’s going to happen when large capital structures get downgraded,” said Josh Lohmeier, head of U.S. investment-grade credit at Aviva Investors, which manages more than $480 billion. “It’s going to be messy, and it’s going to be painful.”

Lohmeier isn’t the only one flagging such risks. Earlier this week, Guggenheim CIO Scott Minerd said that GE’s selloff is just the start of a “slide and collapse” in investment-grade credit. As we previously noted, Jeffrey Gundlach said corporate debt is the “most dangerous” part of the high-grade bond market.

What is notable is that for years, virtually nobody had anything bad to say about credit, whether IG or HY, and now – following the blow out in yields – it suddenly seems that everyone, with a few exceptions, is bearish as commentary once again follows price action (as usual).

Which is not to say that the bears are wrong: in fact, if the Fed indeed continues to hike rates and if oil continues to slide, if vol continues to rise and stocks continue to sell off, it is only a matter of time before the selling across credit hits a tipping point and the next widespread market puke hits, sending yields to levels that will force either the Fed, or other central banks, to step in and buy what investors have to sell. Because 10 years into the biggest central planning experiment in capital markets history, expecting traders to be able to price assets only on fundamentals, may be asking too much.

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Authored by Mike Shedlock via MishTalk,

Throughout his career, Greenspan has mostly been a contrarian indicator. But he has been consistently right about trade.

Alan Greenspan says Trump’s Tariff Policies are ‘Insane’ and I agree.

Former Federal Reserve Chairman Alan Greenspan called President Donald Trump’s tariff policies “insane” and said “why we’re doing it probably is very deep in the psyche of somebody.”

Responding to a question about China at an event in New York on Wednesday, he said both sides lose out in such a clash.

“It’s an excise tax, and people think of tariffs other than what it is, it’s a tax and everybody engaged in warfare of this type, it would mean that you’re withdrawing credit or purchasing power from a whole series of countries,” Greenspan said at New York University. “There are victors and there are losers in a tariff fight, but that doesn’t say that a more important issue is both are losing, it’s just the winner loses less.”

Greenspan also said the notion that China would outrace the U.S. in all economic respects “is a mistake,” pointing to their lower gross domestic product per capital.

Greenspan is correct on that as well.

Greenspan BS Detector

It’s usually easy to detect when Greenspan is right or wrong about something.

Generally, if the public agrees with what Greenspan says, he’s wrong, and vice versa.

Art of the Deal

In this case, Trump’s die hard supporters believe the crazy notion that Trump really understands the “Art of the Deal”.

Trump did not even wrote the book.

Please note the ‘Art of the Deal’ Ghostwriter Says Trump is ‘Deeply Disturbed’ and ‘Utterly Untrustworthly’

Arguably, that is carrying things too far, but Trump is no brilliant deal maker or businessman.

Enter the Democrats

The Democrats generally want to support the unions, and that’s always the wrong thing to do.

The Wall Street Journal provides an interesting case in point: Democrats’ House Victory Complicates Passage of New Nafta, Trade Deals

Most Democrats, backed by unions, have voiced skepticism about liberalizing trade unless the deals allow workers in the other countries to take advantage of higher labor standards and wages. Passage “will depend on whether unions will want to push it,” a senior White House official said.

NAFTA liberalized virtually nothing. Rather, it is essentially the same deal we had before.

So here we are. Trump is bragging about a deal that changed nothing and Democrats want even more Tariff stupidity.

Democrats and Republicans Skeptical

With Democrats and Republicans skeptical of free trade but Greenspan an advocate, we have a clear winner.

Not only does this setup fit my Greenspan rule, it fits a more obvious rule:

When Democrats and Republicans both want the same thing, it’s nearly always worth taking the opposite side.

EU Silliness

Note that the EU and UK just finalized a 585 page document on a “customs union”.

Yes, it’s asinine.

Good Free Trade Agreement

A good free trade agreement can be written on a napkin with a crayon.

“Effective today, all tariffs and subsidies on all goods and services are eliminated“

That holds true no matter what any other nation does. The first nation to do so will have a monstrous advantage in jobs and wealth creation.

Greenspan was generally wrong!

Absolutely
Greenspan was generally wrong!

He warned of Irrational Exuberance years early, then embraced the productivity miracle in 2000.

Consistently right about free trade. https://t.co/dKYP1XQ8IU

— Mike Mish Shedlock (@MishGEA) November 15, 2018

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“The end of the 10-year run is going to be a really challenging time for policymakers going forward,” warns billionaire hedge fund manager Paul Tudor Jones.

Speaking at at the Greenwich Economic Forum this morning, Jones explained to investors that another hike in interest rates triggered by faster growth from U.S. tax cuts may cause the bubble in credit to pop.

“We’re going to stress test our whole corporate credit market for the first time…”

“From a markets perspective, it’s going to be interesting. There probably will be some really scary moments in corporate credit.”

And thos cracks are starting to show – dramatically…

And unless The Fed stops its so-called ‘normalization’ of the balance sheet, yields are going to explode and credit conditions will collapse:

The hedge fund manager said the next trade will be a “front-end rates trade” of figuring out when policymakers will cease interest rate hikes.

Jones is not alone.

As Josh Lohmeier, head of U.S. investment-grade credit at Aviva Investors, which manages more than $480 billion, notes:

“GE is a harbinger for what’s going to happen when large capital structures get downgraded,” said.

“It’s going to be messy, and it’s going to be painful.”

Additionally, Guggenheim’s Scott Minerd said Tuesday that GE’s selloff is just the start of a “slide and collapse” in investment-grade credit.

 Jeffrey Gundlach, CEO of DoubleLine Capital LP, said corporate debt is the “most dangerous” part of the high-grade bond market.

Distressed-debt investor Marc Lasry is eyeing an eventual sell-off in the investment-grade market for his next opportunities, including bonds sold by GE if they become even cheaper.

It had better be different this time – or credit is in big trouble!!

Credit markets are fundamentals have never been more decoupled.

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