Category: zerohedge

More than a year since the two world leaders reportedly engaged in a heated exchange that ended with President Trump angrily hanging up the phone, Australian Prime Minister Malcolm Turnbull and his wife are visiting the White House – and the two leaders are holding a joint press conference this afternoon.

The event begins at 2 pm. Watch live below:

Trump met Turnbull briefly when the two leaders boarded a US military ship the USS Intrepid. Turnbull later used this meeting as grist for a few jabs at Trump that leaked to the media last year. Trump is trying to safeguard the special relationship between the US and Australia and repair the damage caused by the US withdrawing from the TPP.

via Zero Hedge http://ift.tt/2CFBETq Tyler Durden

Authored by Pat Buchanan via Buchanan.org,

In days gone by, a massacre of students like the atrocity at Marjory Stoneman Douglas High School would have brought us together.

But like so many atrocities before it, this mass murder is tearing us apart.

The perpetrator, the sick and evil 19-year-old who killed 17 innocents with a gun is said to be contrite.

Having confessed, he faces life in prison. For the next half-century, Nikolas Cruz will be fed, clothed, sheltered and medicated at the expense of Florida taxpayers, including the families of those he murdered.

Cruz’s punishment seems neither commensurate with his crimes nor a deterrent for sick and evil minds contemplating another Columbine.

It didn’t use to be this way.

On Feb 15, 1933, anarchist Giuseppe Zangara tried to assassinate President-elect Franklin Roosevelt in Miami. His arm jostled, he killed instead Chicago Mayor Anton Cermak. Five weeks later, on March 20, 1933, Zangara died in the electric chair.

Swift, sure and pitiless, but that legal justice system worked.

With Cruz, the system failed up and down the line.

Cruz should never have been allowed to purchase or possess a gun. He was angry, alienated, isolated. Police had been to his family home to deal with complaints 39 times. Yet he had no arrest record when he purchased his AR-15.

Classmates at Douglas High had speculated that if there ever were a school shooting, Cruz would be the one to do it. The FBI was alerted a month before that Nikolas Cruz was a time bomb ready to explode.

The NRA was not responsible for the system-wide failure from Douglas High to the FBI. As the NRA’s Dana Loesch told CPAC Thursday:

“The government can’t keep you safe and some people want us to give up our firearms and rely solely upon the protection of the same government that’s already failed us numerous times to keep us safe.”

As for the AR-15, it is the most popular rifle sold. Five million to 8 million are in circulation. Veterans since Vietnam have trained with, and many fought with, the M16, which is first cousin to the AR-15. Veterans are among the millions who own them.

While all agree AR-15s should be kept out of the hands of crazies like Cruz, the establishment insists that it is the gun that is the problem.

We hear demands that AR-15s be banned and confiscated.

Proponents should put that proposition to a vote. But a prediction: The moment it is brought up for a vote, sales of AR-15s will explode, as they have before. If the weapon is banned, as alcohol was banned in Prohibition, millions of law-abiding Americans will become law-breakers.

And who will barge into America’s homes to seize and collect the rifles?

Moreover, if people have decided to mass murder classmates or co-workers, inviting “suicide by cop,” are they going to be stopped from acquiring a semiautomatic by a congressional law?

Have our drug laws halted drug use?

Many of the guns confiscated by police are in the possession of thugs, criminals and ex-cons who have no legal right to own them. Yet, if we are going to prosecute the illegal sale or transfer of weapons severely, we will have hundreds of thousands more in prisons, at a time when we are instructed to empty them of nonviolent offenders.

As for mental illness, it seems more prevalent than it used to be, and the numbers of those on medication seems a greater share of the population.

Do doctors decide which of their patients are fit to own a gun, and which are not? Should doctors be held criminally liable if they fail to alert police and one of their patients uses a gun in a violent crime?

Who will maintain the federal registry of the mentally sick unfit to own a firearm?

The anger and anguish of those who lost family or friends in this atrocity is understandable. But passion is not a substitute for thought.

There are twice as many guns in America as there were just decades ago. And a primary reason people acquire them is because they believe they need them to protect themselves and their families, and they no longer trust the government to protect them.

They view the demand for banning and confiscating specific weapons as a first step down the inexorable road that ends in the disarmament of the people.

Most mass shootings take place in gun-free zones, where crazed men of murderous intent know their chances of maximizing the dead and wounded are far better than in attacking a police station.

Our embassies are defended by Marines with M16s. Security guards with guns defend banks and military bases, presidents and politicians.

The best way to protect kids in schools may be to protect schools, and run down and incarcerate the known criminals and crazies who are the primary threats.

via Zero Hedge http://ift.tt/2GFWhkZ Tyler Durden

An associate of Sen. John McCain (R-AZ), David J. Kramer, has invoked his Fifth Amendment right not to testify over a November 2016 trip to London to retrieve a copy of the controversial Trump-Russia dossier and deliver it to the Arizona Senator. McCain then delivered it to former FBI Director James Comey, however the FBI already had a copy at that point in time – as Steele had been feeding the agency portions of the dossier beginning in July 2016. 

Kramer, a former State Department official, is a senior fellow at the McCain Institute for International Leadership at Arizona State University. 

While in London, Kramer met with former UK spy Christopher Steele – the author of the salacious and unverified dossier used by the FBI to obtain a surveillance warrant to spy on members of the Trump campaign, according to British court records obtained by Fox News. Steele was paid $168,000 by Democratic-linked opposition research firm Fusion GPS, which in turn was funded by the Clinton campaign and the DNC. 

Kramer was subpoenaed by the House Intelligence Committee in late December to discuss the trip, which he has now declined to comply with – however he gave a videotaped deposition last December in a separate litigation between Russian technology executives named in the dossier, and BuzzFeed News which published it in January 2017. 

The McCain associate is next expected to appear for a deposition in the BuzzFeed defamation suit on February 27, for which his attorney wants “his entire deposition as attorney’s eyes only confidential.” 

Christopher Steele, meanwhile, has also refused to testify before Congress – which resulted in a criminal referral issued to the Justice Department by Congressional investigators, requesting an investigation into whether Steele lied about the dossier’s distribution and his associated contacts with the media.

The “dossier” – a compilation of memos assembled by Steele, relied heavily on senior Kremlin officials – meaning Hillary Clinton, John McCain, David Kramer, top FBI officials, and every other link in the chain were directly involved in using Russian disinformation against a now-sitting President.

Moreover, Deputy Attorney General Rod Rosenstein, former Deputy Director Andrew McCabe and former FBI Director James Comey and Former Attorney General Sally Yates all signed off on the FISA surveillance warrant which used the Russian disinformation, according to a February 2 memo from the House Intelligence Committee. 

What’s more, according to the memo all of the officials who signed off on the FISA application were aware that the Steele dossier was highly unsubstantiated – and relied on the FBI vouching for the British operative. 

How’s that for collusion?

via Zero Hedge http://ift.tt/2CEfMrG Tyler Durden

Via GoldTelegraph.com,

Economists report the household debt to be at its highest in decades.  Yet, at the same time, we are being told that the economy is doing great. Does anyone see a serious contradiction?

In fact, the current economy only favors the wealthy owing to their flourishing financial assets such as stocks and bonds. Owing to the lack of real assets such as property and commodities, the middle and lower classes are becoming overwhelmed due to the serious consequences of the spending/debt cycle.

American consumers have a collective outstanding household debt of about $13.15 trillion of which nearly $1 trillion is the credit card debt alone, households are truly on a debt binge. These figures should be a wake-up call to all the Americans. The convulsive household debt has surpassed the bubble of 2008 and is still escalating. The economy may not be doing so great, after all.

Compared to 2008, the automobile credit balances have increased to $367 billion whereas the outstanding student loans are around $671 billion. Moreover, 67 percent of household debts belong to consumer mortgages. In 2016, twenty-five percent of all the Americans purchased a new or used vehicle and two-thirds of them are repaying through high-interest, long-term loans.

In fact, the consumer debt has exceeded their income for majority of the Americans.

Consumers have become accustomed using easy credit to maintain a lifestyle unaffordable for them otherwise. If this trend continues, and facts indicate that it will, we will be facing a monumental credit crisis in the near future.

A huge portion of credit card debt is the interest. Credit cards are a convenience and consumers readily pay for the privilege. However, it is necessary for consumers to know how credit card interest actually works.

Take the Smiths, a typical family with $2,000 in credit card debt. The Smiths don’t have a considerable cash reserve and only make a minimum monthly payment of $60.00 at 20 percent interest. The monthly payment against the principal is $26.67 while the interest amount is $33.33. With this payment schedule, the Smiths will pay $4,240 over a period of 15 years.

Mortgages are also a part of the household debt. While outstanding mortgages haven’t reached the bubble of 2008, they have still increased indicating  the possibility of another housing crisis in the not-too-distant future. Moreover, with the rising interest rates, the consumer credit may default. Some families rely on credit cards to meet the basic needs. This is the opposite of economic growth.

The decline in automobile sales is already an indication of the future consumer debt crisis. If lenders continue to provide easy access to credit regardless of its looming default and delinquent potential, retail purchase will face a sharp decline in 2018. This will have serious consequences on the overall economy.

The Federal Reserve and other global lenders are a significant contribution to the problem. They allow printing of trillions of dollars and yens for the lenders to distribute to the borrowing consumers at a high interest, leading to a worldwide inflation. All this printed wealth is merely an illusion yet it is raising the cost of living. Prices are rising at an alamingly faster rate compared to the consumer income. There is no increase in real assets. All this is but a mere mushrooming of debt.

The consequences of federal policy will be inescapable unless reversed and there are no signs of any reversal in near or distant future. At this rate, the consumers will soon face a critical financial bubble. Financial assets, such as stocks and bonds, risk losing substantial value. The wealthy can absorb the losses but the poor and middle class will face financial ruin. Consumers need to seriously consider the need to increase their “real” assets, such as real estate and commodities to prevent a long-term financial nightmare.

The chart below shows how the real assets have curved to an all-time low.

It is high time for the American consumers to wake up and stop believing in the magic of easy credit before it is too late. Their upgraded lifestyle is a bubble of an illusion that will burst soon enough.

via Zero Hedge http://ift.tt/2sVVXN9 Tyler Durden

In Goldman’s latest quarterly hedge fund trend monitor – a survey of 808 hedge funds with $2.1 trillion of gross equity positions ($1.5 trillion long and $649 billion short) – which analyzes hedge fund holdings as of Dec. 31, the bank makes some interesting observations about the current state of the hedge fund industry.

First and foremost, it finds that the “average” hedge fund is up a paltry 1% YTD as of Feb 20, underperforming the S&P for the 8th consecutive year. This follows on the heels of a 13% return for equity funds in 2017, the strongest annual absolute return since 14% in 2013

In terms of holdings, hedge funds stuck with the deflationary themes of growth and momentum despite 4Q tax and interest rate volatility. Tax reform and rising Treasury yields weighed on Technology and other fund favorites in late 4Q. Although funds trimmed their Tech overweight, Goldman found that the tech sector remains the largest net portfolio weight (24%) and the bulk of Goldman’s VIP list (38%). Financials remained the largest net underweight (-445 bp); even as hedge fund paralysis, first noted last quarter, remained as portfolio turnover hovered near record lows.

Below are Goldman’s 5 key observations from this edition of the HF Trend monitor:

1. PERFORMANCE AND SENTIMENT: The average equity hedge 1. fund has returned 2% YTD, matching the S&P 500. The most popular hedge fund long positions have resumed their 2017 outperformance in early 2018. Funds returned  13% in 2017. Our Hedge Fund VIP basket of most popular long positions has returned 4% YTD, outperforming the S&P 500 during the recent correction in contrast to its typical drawdown behavior. Our growth and momentum factors and the Info Tech sector have outperformed alongside our VIP basket, aiding fund returns following weakness in late 2017.
2. LEVERAGE: Hedge funds entered 2018 with near-record leverage and maintained risk despite the correction. Funds added nearly $20 billion of net exposure in two index ETFs alone (SPY and IWM) as ETF exposure rose to 3% of long portfolios. Although the S&P 500 suffered its first 10% decline in two years, funds maintained conviction in their positions. Portfolio turnover rose slightly but remained near recent record lows at 28%.
3. VERY IMPORTANT POSITIONS: Our Hedge Fund VIP list (ticker: GSTHHVIP) of the most popular long positions has led the S&P 500 by 170 bp YTD after outperforming by 450 bp in 2017 (26% vs. 22%). The VIP list contains the 50 stocks that appear most often among the top 10 holdings of fundamentally-driven hedge funds. The list’s top 5 stocks are AMZN, FB, TWX, GOOGL, and MSFT. The basket has outperformed the S&P 500 in 64% of quarters since 2001, generating an average quarterly excess return of 59 bp. 13 new constituents this quarter: AET, AGN, ATVI, BA, COL, CZR, JD, LSXMK, MA, NOW, PCLN, QCOM, and ZAYO.
4. SECTORS: Hedge fund sector allocations remained largely stable, with funds declining to rotate toward perceived “winners” of tax reform and rising interest rates. Information Technology remains the largest sector weight (24%) although funds trimmed the overweight tilt relative to the Russell 3000 to +107 bp from +307 bp last quarter. Consumer Discretionary is the largest overweight tilt (+432 bp), but positions in the Consumer Discretionary and Energy sectors remain near the smallest tilts that funds have held in those sectors during the last five years. Funds added to their overweight in Health Care (+354 bp) while Financials remains the largest net underweight (-445 bp).
5. HIGHLY CONCENTRATED STOCKS: The most concentrated hedge fund stocks have lagged the S&P 500 by 200 bp YTD following unusually weak returns in 2017. The basket of 20 firms with the largest share of market cap owned by  hedge funds (ticker: GSTHHFHI) lagged the S&P 500 by 11 pp in 2017, its worst annual performance since 2007. The weakness was driven primarily by two Health Care firms (EVHC and INCY). The basket had outgained the S&P 500 by an average of 9 pp in each of the five years from 2012-16.

One especially interesting observation is that the most crowded hedge fund positions, i.e. Goldman’s Hedge Fund VIP basket, outperformed, as it appears that hedge funds rushed to the “safety” of crowded positions during the recent market swoon, hoping that others had done their homework and that these stocks would not get sold. So far, this assumption has proven correct.

The outperformance of the most popular hedge fund positions during the recent correction underscores the technical nature of the drawdown and the resilience of investor sentiment. As the S&P 500 suffered its first 10% decline in two years, our Hedge Fund VIP basket declined in absolute terms but outperformed both the broad market and the largest short positions. This outperformance stands in contrast to the basket’s typical “high beta” behavior; the most popular stocks typically underperform during market drawdowns as investor selling weighs most heavily on their top positions

Goldman also touches on a topic we discussed earlier in the context of the Fed’s Monetary Policy Report, which warned about record hedge fund leverage.

To be sure, hedge funds continued the trend observed last quarter, as elevated investor positioning at the start of 2018, including hedge fund leverage, remained and according to Goldman’s David Kostin helped explain the sharp S&P 500 drawdown. Specifically, funds added net leverage entering 2018, “anticipating continued strength in equities following the passage of tax reform and a 7% S&P 500 return in 4Q 2017.”

Our analysis of fund filings and short interest data suggests that funds carried a net long exposure of 56%, above the long term average and nearly the highest level on record.

Furthermore, data from Goldman’s Prime Services on exposures showed extremely elevated net and gross leverages prior to the market correction. And although net leverage dropped briefly during the correction, Goldman Prime attributed the decline to mark-to-market dynamics in options positions. Meanwhile, both gross and net exposures currently remain close to recent highs.

Record hedge fund leverage occurred alongside unprecedented net length in US equity futures, historically low mutual fund cash allocations, and all-time high margin debt as a share of market cap.

Also notable: the lack of trading volumes continues to be explained with one simple observation: hedge funds continue to boycott turnover – and trading  even as they concentrate even more into the top 10 positions. The average hedge fund held 68% of its long portfolio in its top 10 positions, just below the record “density” of 69% in 1H 2016. The increase in hedge fund portfolio density in recent years mirrors the growing share of S&P 500 market cap accounted for by the 10 largest index constituents, which now sits just above the average level since 1990 (22%).

Separately, while hedge fund portfolio turnover rose slightly from a record low during 4Q, funds clearly remained committed to their top positions. “Across all portfolio positions, turnover registered 28%. Turnover of the largest quartile of positions, which make up the vast majority of portfolios, also rose slightly to 14% but remained near historical lows.”

* * *

So putting it all together, below are the 50 hedge fund positions compiled by Goldman which make up the latest GS VIP list, i.e., the 50 most popular hedge fund longs, also known as the “Hedge fund Hotel California.”

What is notable about this basket, is that it tends to outperform the S&P in most periods, and did so by 170 bp YTD (3.5% vs. 1.9%) and in 64% of quarters since 2001. But this outperformance comes at a cost: if the selling begins, as it has in the recent past, the basket tends to get hit especially hard: quote Goldman, “although the basket has been a strong historical performer, it suffered its worst historical underperformance vs. the S&P 500 in late 2015 and 1H 2016 (-17% vs. -3%). However, the basket then rallied back to outperform the S&P 500 by 21 percentage points (+52% vs. +31%) between 2H 2016 and early 4Q 2017.”

Conversely, below are the 50 most shorted positions, i.e., the stocks which represent the most important short positions.

And here are the 20 stocks with the highest positive and negative changes in popularity

Finally, beware entering extremely crowded “smart money” positions: Goldman writes that the most concentrated hedge fund stocks – those who have the highest portion of their market cap held by hedge funds- have lagged the S&P 500 by 200 bp YTD following unusually weak returns in 2017.

The basket of 20 firms with the largest share of market cap owned by hedge funds (ticker: GSTHHFHI) has lagged the S&P 500 by 11 pp in 2017, its worst annual performance since 2007. The weakness was driven primarily by two Health Care firms (EVHC and INCY). The basket had outgained the S&P 500 by an average of 9 pp in each of the five years from 2012-16.

via Zero Hedge http://ift.tt/2EO2nDp Tyler Durden

On his way to today’s CPAC conference, President Trump criticized the Florida deputy who didn’t confront Nikolas Cruz, the school shooter from Parkland, Fla., saying “he certainly did a poor job,” and insinuating that he was a “coward.”

 

President Trump criticizes Florida deputy who didn’t confront school shooter: “He certainly did a poor job. That’s the case where somebody was outside, they are trained, they didn’t react properly under pressure or they were a coward.” https://t.co/Gd5Oog3yjg pic.twitter.com/YQrpZwYbGE

— CBS News (@CBSNews) February 23, 2018

 

When a reporter asked about the security guard’s behavior and tried to cite it as a reason why school districts shouldn’t arm teachers, the president responded that the guard’s behavior was certainly inadequate.

“Deputy Sheriff Peterson I guess his name is they brought it out and I was surprised – he trained his whole life but when it came time for him to get in there and do something he didn’t have the courage or he didn’t react properly. But there’s no question that he did a poor job.”

“He certainly did a poor job. That’s the case where somebody was outside, they are trained, they didn’t react properly under pressure or they were a coward.“

Trump later made similar remarks during his CPAC speech – eliciting cheers of approval – though he refrained from referring to Peterson as a “coward.” He then segued into a discussion of his plan to arm teachers.

“He was not a credit to law enforcement,” Trump said. “He was tested under fire and that wasn’t a good result.”

“A teacher would have shot the hell out of him before he knew what happened,” he said. “I don’t want a hundred guards standing with rifles” but allowing “well trained gun-adept teachers and coaches” to have guns with them at school “would be a major deterrent.”

Trump made no mention of the other ideas he’s floated in the last week, including raising the age for buying rifles from 18 to 21, or banning bump stocks…

 

via Zero Hedge http://ift.tt/2EP6Wcy Tyler Durden

Exactly one week after Goldman became the first major bank to raise its 10Y yield target from 3.00% to 3.25%, this morning BofA was delighted to follow in Goldman’s footsteps and also revised its 10Y year-end forecast to 3.25%, given “above-potential growth and worsening supply/demand dynamic,” the bank’s rates strategist Mark Cabana wrote.

Here are BofA’s highlights:

• We revise our 10y forecast to 3.25% for end of year driven by above-potential growth and a worsening supply/demand dynamic.
• We switch our position on the curve to a 5y-30y curve flattener given Fed tightening and pension demand.
• Regulatory changes may also end up being supportive of higher rates.

BofA’s rate forecast consists of two parts: one for the first quarter, where the bank expects 2.85% to hold, and then for year end, which it now sees as rising to 3.25%.

Coming into this year, we had an out of consensus US 10y rate forecast of 2.85% for end 1Q18. Our thesis was that rates were set to rise as a result of improved growth and inflation via tax reform as well as a worsening supply picture. The market has caught up with our view and we continue to believe rates can reprice higher. We adjust our forecasts to remain above consensus and forwards.

We now expect the 10Y rate to reach 3.25% by the end of the year driven by above-potential growth and a worsening supply / demand dynamic. However, this transition will likely be a bumpy one due to the interplay between rates and risk assets. We continue to believe the 30Y part of the curve will be well supported as a result of ongoing pension-related demand.

Looking at the recent rip higher in yields, BofA believes that “rates in the US can continue to reprice higher and adjust our forecasts to remain above consensus and forwards (Table 1, Chart 1)” as a result of “the combination of solid growth, normalizing inflation, and higher deficits / Fed portfolio reduction should see yields rise further.”

The highlights from the bank’s revisions:

• Long end: Our end Q1 10Y forecast remains at 2.85% given positioning and the potential for additional near-term risk off as rates shift higher. We now expect the 10Y rate to reach 3.25% by the end of the year driven by improved growth and a worsening supply / demand dynamic but expect the push and pull between rates and risk assets to make this transition a bumpy one. We continue to believe the 30Y part of the curve will be well supported as a result of ongoing pension-related demand.
• Front end: We see the front end of the curve (2Y & 5Y) as having the greatest potential to rise in relation to forwards as the Fed continues on their gradual rate tightening path. The concentration of front-end US Treasury issuance will also likely contribute to further short-dated Treasury cheapening in the near term. We have also revised higher our LIBOR forecasts given the recent tightening in USD funding and the potential for funding to remain strained in the near term due to elevated front end supply, repatriation uncertainty, and Fed reserve draining.

To summarize, the Bank maintains its view noted at the start of the year that improving U.S. growth and inflation – given the Trump tax cuts – would be met with more supply to push yields higher.  And with 10Y rates already trading beyond their 2.85% forecast for end of 1Q and 2.9% for end 2018, the bank is boosting the year-end call to 3.25% “to remain above consensus and forwards.”

On the supply side, echoing a warning made by Goldman a month ago, BofA warns that the Treasury needs to increase borrowing substantially in the current and next fiscal year as a result of worsening deficits and the Fed B/S unwind, and that US borrowing needs “to nearly double versus last year to be over $1t in each of next two fiscal years,” to wit:

We believe the US Treasury needs to increase net borrowing substantially in FY ’18 & FY ’19 as a result of worse fiscal deficits and the Fed balance sheet unwind. We expect that Treasury’s total borrowing needs will need to nearly double versus last year to be over $1tn in each of the next two fiscal years. This issuance is slated to be most concentrated towards the front end of the curve and should contribute to a further cheapening of short-dated Treasuries.

From the demand side, we continue to hold the view that existing Treasury buying won’t be sufficient to make up for the increase in supply at the current level of rates. We expect 2018 to see lower demand from foreign private and domestic banks compared to the past few years. Regulatory factors could also worsen Treasury demand. While this will likely be partially offset by foreign official and pension buying, we think rates will need to rise to attract sufficient demand.

Putting a number to the forecast, BofA predicts that $1.45 trillion in 10Y equivalent duration will come into the market in calendar year 2018, an increase of $165b from last year.

On the demand side, Bofa continues “to hold the view that existing Treasury buying won’t be sufficient to make up for the increase in supply at the current level of rates” and expect 2018 to “see lower demand from foreign private and domestic banks compared to the past few years” as regulatory factors could also worsen Treasury demand.

The bank keeps a close eye on Japanese demand which could be the wildcard:

Foreign private investors, particularly Japanese banks and life insurance companies, would have to face increasingly challenging funding pressure (Chart 5) as the Fed continued to hike rates, as well as a less favorable currency-hedged yield level compared to JGBs (Chart 6). Japan private investors have turned net sellers of overseas fixed income in 2017, and the latest data (as of 2/16) shows the largest 4-week net selling flow since December 2014, according to Japan Ministry of Finance data.

The domestic side is also problematic:

Within domestic banks, HQLA requirements may decline as regulations are tweaked, and as the Fed continues hiking, higher IOER rates may increasingly compete with front-end US Treasuries. By the end of this year, IOER should yield above 2% and may cannibalize demand for 2-5Y Treasuries given that reserves are virtually risk free and zero duration. Year to date, banks have only bought roughly $2bn Treasuries, compared to $17bn in 2017 and $13bn in 2016 over the same period.

BofA then lists the following adverse regulatory developments:

Supplemental leverage ratio: Recent reporting indicates that the Fed may be leaning towards only adjusting the SLR numerator and not exempting Treasuries from the SLR denominator. This may result in less bank demand for Treasuries vs what some market participants may be expecting. This possibility led us to recently close our 30Y swap spread widener view.

Medium size bank oversight: Senate bill 2155 currently proposes reducing enhanced oversight for medium sized financial institutions and raising the bank asset threshold for enhanced prudential oversight from $50bn to $250bn. This would reduce the amount of liquidity and HQLA that medium sized banks need to hold, potentially cheapening front end USTs.

Liquidity coverage requirements: Any reduction in HQLA need or a broadening of the HQLA definition to incorporate agencies, supranationals, or municipalities as higher quality assets could serve to reduce the amount of USTs that banks hold and be negative for USTs on net.

In terms of trades, BofA started the year favoring a steeper yield curve yet their “conviction in that view has faded with some of the recent re-pricing we have seen. With the Fed set to continue gradually tightening policy, we see the front end of the curve (2Y & 5Y) as having the greatest potential to rise in relation to forwards.”

This leads to the new trade reco: a 5s30s flattener:

In a higher rate scenario, we think the 5y-30y flattener would also benefit from increased pension demand in the 30y sector due to improving funded ratios.

A simple model of yields based on the path of policy rates gives a framework to compare rate changes versus forwards in various Fed policy scenarios. In this context, if 3 hikes are delivered this year and expectations are priced for 3 hikes in 2019 and 1 more in 2020, the 5y rate could be 40bp higher than forwards by year-end (accounting for rolldown) while 2y rates and 30y rates would potentially rise less versus forwards. A more hawkish scenario in which 4 hikes are delivered in 2018 and 4 hikes are priced for 2019 would, in this framework, put 5y rates about 70bp above forwards by year-end, with 2y rates 50bp above forwards and 30y rate 40bp above forwards. As a result, we would expect the 5y point to underperform on the curve, and our preferred curve view would be a 5y-30y flattener. We think 5y-30y can also flatten in the more dovish scenario where only 2 hikes are delivered this year and market prices no further hikes in the future.

In a higher rate scenario, we think the 5y-30y flattener would also benefit from increased pension demand in the 30y sector. At higher rate levels, funded ratios improve as liabilities are discounted at higher rates, and this could lead to a stickier 30y sector in a rising rate environment.

Given these views, we are switching our position on the curve. We initiate a 5y-30y cash curve flattener at current levels of 55 bps with a target of 15 bps and a stop of 75 bps. Risks are discussed in greater detail below, but are related to a sharp risk off episode or shift to Fed price level targeting. We close our previously held 2y-10y swap curve steepener at 47bps after having initiated it at 45bps in November.

Finally, listing the risks, BofA highlights that the biggest threat to its bearish view is a sharp unwind of the near record shorts, causing a squeeze anda a “rapid unwind”:

Positioning data captured by the CFTC indicates a large net short in Treasury futures across the non-hedging segment of futures positions. Our study of futures positioning shows that extreme positions can be vulnerable to a rapid unwind which in this case could aggravate a rate rally. However, extreme positioning does not necessarily imply a rate rally and short spec positions could be sustained for a prolonged period if justified by strong fundamentals.

In addition, BofA notes lingering uncertainties around the global economic sensitivity to higher interest rates, and especially the overlevered US consumer, something we touched upon earlier this week:

“While US consumers deleveraged following the 2008 crisis, current levels of consumer credit relative to GDP are now at an all-time high, substantially above levels seen in the 2004-2006 rate cycle. With a higher consumer beta on financial conditions, the ongoing unwind of easy policy may produce unexpected disruptions to consumer spending. It is not just the level of rates, however, that will impact consumers, but also the pace of rate changes. As the Fed remains committed to a slow pace of hikes (quarterly at most), we think the consumer will adjust accordingly.”

Finally, a key risk to the bank’s 5y-30y curve flattening view “is a potential shift in Fed policy towards price-level targeting. While Fed discussions around such a policy change are still at the early stages, the market appears very sensitive to such a shift.” The good news is that for now, an “actual change in framework is unlikely for some time, making this a relatively small near-term risk.”

via Zero Hedge http://ift.tt/2BM1iJw Tyler Durden

Authored by Tom Luongo,

That’s exactly what Congressional Democratic Leadership wants done. House Minority Leader Nancy Pelosi and Senate Minority Leader Chuck Schumer have redefined chutzpah to the point of insanity.

Not three days after the FBI’s gross malfeasance and incompetence in their mishandling of the Parkland Florida massacre, these cretins have the unmitigated gall to publicly ask for another $300 million to add to the FBI’s budget.

But, is that $300 million to deal with real domestic threats to the lives and safety of Americans?

No.

It’s to combat Russian Trolls.

Seriously, I kid you not.

This is a classic example of these people having a narrative prepped and scheduled to wrest control of the news cycle regardless of the optics. The goal is to create layer upon layer of fake news replete with fake (read: paid by George Soros) outrage — that’s what RussiaGate is all about.

Robert Mueller’s indictment of 13 Russian individuals and entities in connection with election tampering is a joke.

And not even a good one by Washington D.C. standards.

This is the kind of joke that hits the audience like a lead zeppelin and the production crew has to foley in a laugh track for the Netflix special.

It’s cruel and disgusting display of lawlessness masquerading as investigation.

Schumer and Pelosi need a wedge issue for the mid-terms elections. And absent anything else to wield against Trump – the economy is good, tax cuts are popular, gun control is going nowhere – Russophobia is it.

And they will run with this all the way to a crushing defeat at the ballot box.

No one in the right mind believes there is anything between Trump, his staff and the Russians. At best all they can conjure up is guilt by association and alternative facts.

What is there was the beginnings of contacts designed to open lines of communications between the U.S. and Russian leadership that would fulfill Trump’s campaign pledge to improve relations with Russia.

Something that we elected him to do, if you can remember back to 2016.

And that is now treason in the minds of grand-standing, hyper-partisan Baby-Boomers like Pelosi and Schumer.

The Real Reason

This is the modus operandi in all statist politics.

If there is government failure it’s not because of incompetence. It’s because the taxpayer is too cheap to give them the right tools for the job.

So, give us more money because we are government and have the moral high ground.

Deflect blame back onto the taxpayer while using the taxpayer’s money to inculcate their children into believing this tripe.

If there is anything this sordid period of U.S. history should teach the average person it is that these people work for themselves and not for us.

We elected Trump and the FBI took it upon themselves to doctor evidence, harass and indict his staff, and collude with members of the executive branch and a private organization (DNC, Fusion GPS) to overturn that election.

Instead of expanding the FBI’s budget by $300 million, it should immediately be cut by $300 million and everyone involved fired and indicted.

If found guilty they should be publicly hung or shot for treason.

If Pelosi and Schumer had an ounce of shame in their family tree going back three generations (because both their parents and grandparents share responsibility in their fecklessness) they would sit down and shut up. But, they can’t.

Winning in Washington is all that matters, no matter the cost, no matter the optics.

Our government is the single biggest organization ever to stride this planet in terms of manpower, real power and consumption of resources.

It employs more than 20% of the U.S. workforce, consumes around 25% of GDP (which shouldn’t be added to the calculation in the first place) and makes a mess of everything it touches.

So, why would we give an obviously corrupt and politicized FBI another $300 million to combat 80 Russians armed with Tweetdeck and Photoshop?

The number is so outrageous it must have a different purpose.

The most obvious purpose is to expand surveillance and curtailment of political activities of Americans, not Russians.  This is about us, not them.  Their real enemy is anyone with enough brain power left to see through their lies.

Another scenario is even worse. This $300 million could be spent to intervene overseas through inter-agency operations, allowing the FBI to pay the CIA to expand operations in Russia.

Neat trick to get around Trump’s proposed agency budget cuts, no?

It also would obfuscate the money path by sticking it behind the wall of ‘current operations’ to stifle FOIA requests.

Mr. President, Tear Down this Blue Wall

No, what needs to be done here is a clean sweep of all of these departments. What needs to happen is election reform to ensure that Schumer, Pelosi and their backers don’t steal twenty House seats in November through more blatant ballot stuffing like what occurred in Alabama in December.

Trump needs to go on the offensive about election fraud, FBI malfeasance and Department of Justice corruption now.  He has the opportunity, politically, in 2018 to crush the Democrats and, by extension, parts of the Deep State and Shadow Government into bits.

Mueller’s investigation is nothing more than a headline generator to assist a broke and busted DNC fund raise for the mid-terms. Why do you think they’re already floating names like Oprah Winfrey and George Clooney for 2020?

This is to give Progressives hope.

But you know what hope is right?

Hope is the thing you have when you have nothing else.

With this latest blatant shill for more taxpayer-funded political witch-hunting, the Democrats expose just how little they have.

*  *  *

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via Zero Hedge http://ift.tt/2F2r2TU Tyler Durden

During his speech at the Conservative Political Action Conference – his second as president – President Donald Trump warned his audience not to become complacent because Republicans control all three branches of government in Washington. Because complacency leads to voters staying home, especially during mid-term elections where voter turnout is typically lower.

Instead, voters need to come out this fall and vote for Republican candidates, Trump said. Otherwise, the Democrats will regain control in Washington – and the first thing on their agenda, according to Trump, will be to strip Americans of their second amendment rights.

“Don’t be complacent,” Trump said. “If they get in, they will repeal your tax cuts, they will put judges in that you wouldn’t believe, they’ll take away your Second Amendment, which we will never allow to happen.”

After teasing the crowd about breaking from his script, Trump asked what they would prefer: Would they rather see Democrats take away their gun rights? Or the Trump tax cuts?

The crowd exploded into cheers over protecting gun rights.

“They’ll take away your Second Amendment,” Trump said. “Remember that.”

Trump, of course, just announced that he would support a ban on bump stocks and raising age restrictions to buy long guns. He also supports more involved background checks.

 

Trump leads the crowd in a cheer-off. “If you only had a choice of one, which would you rather have? Second amendment or tax cuts?” Crowd roars for the second amendment.

The Parkland high school massacre was last week. pic.twitter.com/6PNGSCr0cN

— Tom Namako (@TomNamako) February 23, 2018

 

The NRA was one of his biggest backers during his presidential campaign. He says he’s been in contact with the NRA and that they will support his proposals.

“I can speak for all of the senators and congressmen and congresswomen, all the people in this room that are involved in this decision, that we will act, we will do something,” Trump said. “We will act.”

Trump has also proposed arming some teachers and offering a bonus to teachers who agree to carry a concealed gun.

“Why do we protect our airports and our banks, our government buildings, but not our schools?,” Trump said. “It is time to make our schools a much harder target for attackers. We don’t want them in our schools. We don’t want them. When we declare our schools to be gun free zones, it just puts our students in far more danger.”

Trump added that “there aren’t enough tears in the world” to express our sadness over the shooting at a high school in Parkland, Fla.

“There are not enough tears in the world to express our sadness and anguish for her family, and for every family that has lost a precious loved one,” Trump said. “No family should ever save and ever have to go in and suffer the way these families have suffered. They have suffered beyond anything that I have ever witnessed.”

Meanwhile, Florida Gov. Rick Scott on Friday he was banning sales of bump stocks and raising the age limit to buy a rifle.

via Zero Hedge http://ift.tt/2Fq0km1 Tyler Durden

Back in November we reported  that when combing through the hedge fund Q3 13Fs, Goldman Sachs cautioned that even as smart money turnover had tumbled to all time lows, net hedge fund leverage – both net and gross – had hit all time highs.

Today, in its latest quarterly “hedge fund tracker” this time for Q4 Goldman doubled down (we will have more on the full report shortly), and made the same observation:

LEVERAGE: Hedge funds entered 2018 with near-record leverage and maintained risk despite the correction. Funds added nearly $20 billion of net exposure in two index ETFs alone (SPY and IWM) as ETF exposure rose to 3% of long portfolios. Although the S&P 500 suffered its first 10% decline in two years, funds maintained conviction in their positions. Portfolio turnover rose slightly but remained near recent record lows at 28%.

David Kostin then notes that while “net leverage dropped briefly during the correction”, Goldman’s Prime Services attribute the decline to mark-to-market dynamics in options positions, in other words hedge funds were not actively deleveraging, something Kostin confirms, stating that “both gross and net exposures currently remain close to recent highs.“

We bring this up because in a section in the just released Monetary Policy Report, entirely dedicated to “financial stability”, the Fed makes an explicit warning about precisely this: “there are signs that nonbank financial leverage has been increasing in some areas—for example, in the provision of margin credit to equity investors such as hedge funds.” The Fed continues:

… there is some evidence that dealers have eased price terms to hedge funds and real estate investment trusts, and that hedge funds have gradually increased their use of leverage, in particular margin credit for equity trades…. such easing of price terms has taken place against the backdrop of building valuation pressures.

And speaking of building valuation pressures, this time the Fed does not mince its words, and makes a clear warning just how overvalued risk assets have become:

Over the second half of 2017, valuation pressures edged up from already elevated levels.

Visually, the Fed’s lament is shown below:

What is just as surprising is the Fed’s admission that equities are overvalued even if look at just relative to Treasury yields, i.e. the “Fed model”:

In general, valuations are higher than would be expected based solely on the current level of longer-term Treasury yields. In part reflecting growing anticipation of the boost to future (after-tax) earnings from a corporate tax rate cut, price-to-earnings ratios for U.S. stocks rose through January and were close to their highest levels outside of the late 1990s; ratios dropped back somewhat in early February.

Another way of stating this: US stocks no longer yield more than treasuries.

Then there was the now traditional CRE warning:

In a sign of increasing valuation pressures in commercial real estate markets, net operating income relative to property values (referred to as capitalization rates) have been declining relative to Treasury yields of comparable maturity for multifamily and industrial properties. While these spreads narrowed further from already low levels, they are wider than in 2007.

In its litany of warnings, the Fed did not spare corporate credit, and especially focused on junk bonds:

In corporate credit markets, spreads of corporate bond yields over those of Treasury securities with comparable maturities fell, and the high-yield spread is now near the bottom of its historical distribution.

For the first time, the Federal Reserve even took aim at covenant lite loan and CLO deals:

Spreads on leveraged loans and collateralized loan obligations—which are a significant funding source for the corporate sector—stayed compressed. In addition, nonprice terms eased on these types of loans, indicating weaker investor protection than at the peak of the previous credit cycle in 2007.

And in the most bizarre admission, the Fed said that risk appetite is so elevated – thanks to the Fed of course – it helped unleash the cryptocurrency bubble.

Consistent with elevated risk appetite, virtual currencies experienced sharp price increases in 2017

Looking forward, the Fed warned that rising rates could result in a serious hit to bank P&Ls:

If interest rates were to increase unexpectedly, banks’ strong capital position should help absorb the consequent losses on securities. About one-third of the losses that could be experienced by banks would affect held-to-maturity securities. While these losses would not reduce regulatory capital, they could still have a variety of negative consequences—for example, by worsening banks’ funding terms. The large share of deposits in bank liabilities is also likely to soften the effect of an unexpected rise in interest rates on banks.

Depositors, you have been officially warned: you are first on the hook when banks start suffering trillions in paper losses to the tune of $1.2 trillion for ever 100 bps…

The full report can be found starting on page 24 of the Fed’s report – link.

 

via Zero Hedge http://ift.tt/2EPXRAf Tyler Durden