Banks Seek Lower Credit Score Requirements, Targeting Over 50 Million New Subprime Borrowers
When the next bubble bursts – and it will – be sure to take a look back at this article. It might help explain some things. Lenders, seemingly unhappy with the vast avalanche of debt they’ve issued over the last decade, are now looking to “move the goalposts” in order to be able to lend even more money to even less creditworthy individuals.
Gone are the old days of relying on a consumer’s borrowing history to determine creditworthiness, and instead lenders now look at such bizarre trivia as magazine subscriptions and phone bills to decide how much should be lent to potential borrowers. Banks like Goldman Sachs Group, Ally Financial and Discover are now experimenting with the new metrics.
The changes are seismic for many large banks, who spent the last 10 years targeting only extremely credit-worthy borrowers. But, as we all know too well, when that pool runs out the show must go on by any means possible. And that is how we got to no-doc loans and subprime CDOs just before the last bubble burst.
At stake is a lot of potential money: banks are targeting the estimated 53 million U.S. adults that don’t have credit scores and 56 million that have subprime scores. The banks claim that many of these people don’t have traditional borrowing backgrounds, often times because they pay in cash or are new to the U.S. That doesn’t make them bad debt slaves prospects, however. Quite the opposite.
The timing also couldn’t be any better: US consumer debt is higher than ever, as Americans continue to borrow in order to finance everything from cars, college, housing and medical care.
Government officials have also encouraged, at times, changes to the information in credit reports and scores so that loans could be made to “deserving borrowers” who don’t fit a “traditional mold”. You know, like people that have the means to pay back their debt.
Banks like JPMorgan, Citigroup, American Express and Capital One have all been considering talking to FICO about whether incorporating new data into credit scores could help boost loan volume, as we have reported on Zero Hedge before. Lenders have also been pleading with Experian for ways to find new customers who are more financially responsible than their credit scores suggest.
Goldman Sachs started making personal loans in 2016, as part of a larger move to consumer banking. A spokesperson for the bank said it has “built a technology and data architecture that can ingest and use multiple sources of data to make the best decisions for the customer and the bank.”
The entire lending industry revolves around customer data and FICO scores. Dossiers are compiled on borrowers and the data is condensed through a score between 300 and 850. Last October we reported on FICO’s announcement of its “Ultra FICO” score that rigs factors in how applicants manage cash in their checking and savings accounts. And why wouldn’t FICO offer another score? About 37% of their revenue comes from the credit scores that it sells.
TransUnion also says it sells alternative data to U.S. lenders. Mike Mondelli, SVP, said: “It’s an indicator of stability”, although it was unclear for whom.
Critics state the obvious: the new scores could make tons of non-creditworthy borrowers look as though they are creditworthy when they aren’t. Other critics point out that a borrower’s propensity to pay bills necessary to live, like electric and water bills, don’t help distinguish whether or not they are likely to pay back unsecured debt.
And us? We remind these banks that those who fail to learn from history are doomed to repeat it.
Okay, so let’s talk about Thursday’s debate. Apparently, every month the Democrats are going to subject us to at least one of these debates, and I suppose that this time around we should be thankful that they did not stretch things out over two nights. All of the big news networks are covering the debate as if it was some sort of political playoff game, but the truth is that Thursday’s debate probably won’t move the numbers much at all. Nothing of substance was said that wasn’t said in previous debates, and there were no defining moments that will significantly change the course of the campaign.
So that is really bad news for anyone not named Joe, Bernie or Elizabeth. Real Clear Politics keeps a running average of all the recent major national polls, and according to them none of the other candidates is even close to double digits right now. It looks like it is going to be a three way race between Biden, Sanders and Warren, and Warren appears to be the one with momentum. Of course it is still possible that something huge could happen between now and the beginning of next year that could fundamentally shake up the race, but as it stands now the other seven candidates that were on the stage with them might as well pack up and go home.
So the truth is that the debate really wasn’t that important, but many Americans watch these debates for the sheer entertainment value. With that in mind, here is the most memorable quote from each of the 10 candidates during Thursday’s Democratic presidential debate…
–Cory Booker: “I’m the only person on this stage that finds (Justin) Trudeau’s hair very menacing”
–Joe Biden to Bernie Sanders: “For a socialist, you’ve got a lot more confidence in corporate America than I do.”
–Bernie Sanders: “It goes without saying that we must — and will — defeat Trump, the most dangerous president in the history of this country.”
–Kamala Harris: “But the bottom line is this, Donald Trump in office on trade policy, you know, he reminds me of that guy in “The Wizard of Oz,” you know, when you pull back the curtain, it’s a really small dude?”
–Amy Klobuchar: “What [Trump] has done here, has assessed these tariffs on our allies, he’s put us in the middle of the trade war and treating our farmers and workers like poker chips in one of his bankrupt casinos.”
–Pete Buttigieg: “Well, the president clearly has no strategy. You know, when I first got into this race, I remember president Trump scoffed and said he’d like to see me make a deal with Xi Jinping. I’d like to see him making a deal with XI Jinping. Is it just me or was that supposed to happen in like April?”
–Julian Castro to Joe Biden: “Barack Obama’s vision was not to leave 10 million people uncovered. He wanted every single person in this country covered. My plan would do that, your plan would not.”
–Elizabeth Warren: “I was in the United States Senate when 54 Senators said, ‘let’s do background checks, let’s get rid of assault weapons’ and with 54 Senators, it failed because of the filibuster. Until we attack the systemic problems, we can’t get gun reform in this country.”
–Beto O’Rourke: “We’re going to take your AR-15, your AK-47. We’re not going to allow it to be used against our fellow Americans anymore.”
–Andrew Yang: “My campaign will now give a freedom dividend of $1,000 a month for an entire year to 10 American families”
“Are you forgetting what you said 2 minutes ago?”
“For a socialist…”
“I am Asian so I know a lot of doctors.”
“Hell yes we’re going to take your AR-15, your AK-47.”
“Hey, Joe…”
“We must and will defeat Trump, the most dangerous president in the history of this country.” https://t.co/UFLUcMEThS
Yes, we have literally gotten to the point where presidential candidates are trying to win votes by offering cash handouts. If he wins the election, Yang is promising to give $1,000 a month to everyone in America. Back during the founding of our nation, Benjamin Franklin warned that this would happen someday…
“When the people find that they can vote themselves money that will herald the end of the republic.”
Apparently Andrew Yang decided that he can’t wait until he is president to start handing out free cash, and his unusual announcement is making headlines all over the country.
While doing research for this article, I discovered that the Yang campaign has already begun running ads for this cash giveaway, and I was curious so I clicked on one of the ads.
I learned that you don’t have to actually donate any money to his campaign to qualify for the contest, and you don’t even have to be a Democrat to participate.
So I signed up.
If Andrew Yang wants to financially support my work for an entire year, I will gladly take his money.
Of course what I believe is diametrically opposed to just about everything he believes, and so he probably won’t be too thrilled if I win.
Personally, I think that Yang is making a mistake with his proposal to offer every American $1,000 a month if he becomes president. With the cost of living these days, $1,000 a month doesn’t really go that far.
If he really wanted to get votes, he should have set the bar higher. $5,000 a month would really start to get a lot of people excited, and $10,000 a month would be even better.
Yes, if we could all get $10,000 a month from the federal government each month we could all retire and nobody would ever have to work again and we could all spend our days frolicking in our new socialist utopia.
Isn’t that how it is supposed to work?
Sadly, our politicians seem to get more disconnected from the real world with each passing day. We are 22 trillion dollars in debt, our nation is falling apart all around us, and we are rapidly steamrolling toward oblivion.
But most Americans continue to fall for the con game that our political system has become, and so the endless parade of clowns will continue.
US Equity Futures Trade Near All Time High After ECB Goes All In
If it was Powell’s intention to have the S&P trade at an all time when he cuts rates by another 25bps next Wednesday, he achieved it.
S&P futures rose alongside Asian and European stocks as shares globally headed for a third weekly gain and a six week high as markets cheered signs of progress in US-China trade talks and the ECB’s just launched open-ended QE. Treasury yields climbed, with the US 10Y rising as high as 1.81%; the dollar slipped while the yuan rose and pound soared on easing no-deal Brexit fears.
The resurgent risk appetite was largely the result of renewed trade war optimism after President Trump said on Thursday he was potentially open to an interim trade deal with China, although he stressed an “easy” agreement would not be possible.
Following a muted Asian session where many markets in the region were closed, we saw a groggy start in European trading after Bloomberg reported that most core European nations did not want to restart the ECB’s money printing program, the main bourses eventually traded well in the green, as basic resources and auto sectors outperformed, adding to what was already set to be a fourth straight week of gains.
“We have quite an interesting reaction to the ECB meeting with the sense of the pushback from the core countries, and that essentially that the ECB has now thrown its last cards in,” said John Hardy, head of FX strategy at Saxo bank. “It looks like we are also getting to some pretty interesting levels for yields. If the consolidation continues, at some point you have to question whether the easing (from the central banks) is actually there.”
Earlier in the session, Asian stocks advanced, heading for a third day of gains and ending their week at a six-week high. Japan’s Nikkei did even better and scored a 4-month peak, after the ECB aggressively resumed monetary easing (even as it complains that not enough fiscal easing was taking place), cutting interest rates for the first time in five years further below zero, while a report said that U.S. officials considered an interim trade deal with China. Utilities and industrial companies were among the strongest sectors as most markets in the region rose. China and South Korea were closed for the moon festival. The Topix rose 0.9%, capping its best week since July 2016, with SoftBank Group and Toyota Motor among the biggest boosts. Hong Kong’s Hang Seng Index climbed 1%, buoyed by AIA Group and China Construction Bank. India’s Sensex added 0.4%, with ICICI Bank and Infosys offering strong support.
In addition to the boost from Trump trade signals and the ECB’s salvo of easing measures, sentiment was also boosted by a U.S. tax overhaul plan aimed at middle-income households next year.
“Risk assets should find further support from accommodative policies, which are set to remain in vogue for some time, and not just in Europe as seen in the global easing trend,” said Natixis market strategist Esty Dwek.
Looking ahead, fed funds rate futures now imply a 0.25 percentage point interest rate cut by the U.S. central bank next week but no probability of a larger cut. The Fed will announce its policy on Wednesday, followed by the Bank of Japan on Thursday. Sources told Reuters the BOJ is leaning toward standing pat next week if markets are calm, but is brainstorming ways to deepen negative interest rates at minimal cost.
“I think a rally in stock prices will run out of steam soon. It’s typical buy-on-rumor-sell-on-fact trade on central bank stimulus and will be over by the Fed and the BOJ’s meetings,” said Tatsushi Maeno, senior strategist at Okasan Asset Management.
In FX, the big mover was the GBPUSD, which soared through 1.2400 to outperform other G-10 peers amid short covering and speculation that a no-deal Brexit is becoming unlikely; gains in EURUSD were capped by 1.1100 level as resistance. The euro shuffled up to a two-week high in foreign exchange markets too, as traders there suspected the ECB may have now exhausted all ammunition going forward; meanwhile, rising risk on sentiment pushed the safe-haven Japanese yen to a six week low.
In rates, US, Japanese and European long-dated bond yields were all at six-week highs. Ten-year U.S. Treasuries were trading as high as 1.81% compared with just over 1.4% at the start of September, while Germany’s Bunds settled at the new ECB deposit rate of -0.5%, and Japanese JGBs traded up to -0.17% from as low as -0.29% last week. The German curve bear steepened, with the 30y yield +3.5bp. Peripheral spreads widened to reverse some of the pronounced tightening observed post-ECB yesterday.
Despite resurgent risk sentiment, oil prices were on course to post weekly losses. Traders have begun speculating that the U.S. may ease sanctions on Iran after Trump ousted his hawkish national security adviser John Bolton this week. Brent crude futures fell 0.25% to $60.21 a barrel while WTI crude was down 0.2% at $54.98. Gold ticked up to $1,503 an ounce.
Expected data include retail sales and University of Michigan Consumer Sentiment. Recently we showed that Bank of America card spending data indicated that August showed the biggest monthly drop in spending in 2019, so beware a big miss here.
Market Snapshot
S&P 500 futures up 0.2% to 3,017.50
STOXX Europe 600 up 0.1% to 390.93
MXAP up 0.7% to 160.02
MXAPJ up 0.6% to 515.71
Nikkei up 1.1% to 21,988.29
Topix up 0.9% to 1,609.87
Hang Seng Index up 1% to 27,352.69
Shanghai Composite up 0.8% to 3,031.24
Sensex up 0.2% to 37,179.77
Australia S&P/ASX 200 up 0.2% to 6,669.18
Kospi up 0.8% to 2,049.20
German 10Y yield rose 1.5 bps to -0.501%
Euro up 0.1% to $1.1081
Italian 10Y yield fell 10.1 bps to 0.528%
Spanish 10Y yield rose 2.5 bps to 0.246%
Brent futures down 0.4% to $60.13/bbl
Gold spot up 0.5% to $1,506.46
U.S. Dollar Index down 0.3% to 98.00
Top Overnight News from Bloomberg
China plans to encourage companies to buy U.S. farm products including soybeans and pork, and it will exclude those goods from additional tariffs, the editor-in-chief of a prominent state-run newspaper said.
Trump administration officials have discussed offering a limited trade agreement to China that would delay and even roll back some U.S. tariffs for the first time in exchange for Chinese commitments on intellectual property and agricultural purchases
The Times reported the Democratic Unionist Party, an ally of the ruling Conservative Party, would accept a new agreement to replace the contentious Irish backstop. The pound extended its rally even after some DUP members pushed back against the news
Mario Draghi is leaving the ECB with a final stimulus package that has divided colleagues and drawn doubts over its economic effectiveness, putting governments under renewed pressure to step up with fiscal police
Deutsche Bank AG will benefit the most by far from the ECB’s new tiered deposit rate, JPMorgan Chase & Co. analysts led by Kian Abouhossein said Friday. Germany’s largest lender stands to save roughly 200 million euros ($222 million) in annual interest payments
Joe Biden battled Bernie Sanders and Elizabeth Warren on health care in a fight emblematic of the Democratic Party’s deepest schism
Asian equity markets traded higher as the positive tone rolled over from Wall St where the major indices edged mild gains and the DJIA notched a 7-day win streak with sentiment underpinned on the improving US-China trade climate and after the ECB announced a package of stimulus measures. ASX 200 (+0.2%) and Nikkei 225 (+1.0%) were higher throughout the majority of session although Australia later returned flat as the outperformance in industrials and financials was counterbalanced by weakness in the tech and mining sectors, while the Japanese benchmark cheered the recent currency weakness and eyed the 22k level. Hang Seng (+1.0%) conformed to the positive risk tone as the recent encouraging trade developments spurred hopes for a ceasefire in the US-China trade war with Chinese negotiators said to be making plans to boost purchases of US agricultural products and with US President Trump suggesting he could consider an interim deal with China. However, gains were restricted in Hong Kong amid the absence of the mainland due to the Mid-Autumn Festival holiday and ahead of a potential weekend of further clashes after the police banned a planned march for Sunday. Finally, 10yr JGBs traded lower in an extension of the recent weakness to track the losses seen in global counterparts, with demand also sapped after a softer enhanced liquidity auction in the long-end and amid reports some BoJ members were said to believe JGB yields are close to a tipping point and would consider action with a move below -0.3%.
Top Asian News
Vietnam Central Bank Cuts Interest Rates as Global Risks Rise
India Is Said to Mull Selling Refiner Stake to Foreign Oil Firm
Turkey’s Jumbo Rate Cut Secures Uneasy Truce for Erdogan, Market
Major European bourses are modestly higher [EuroStoxx 50 +0.4%], following on from a similarly upbeat APAC session, in which sentiment was underpinned by optimism on the US/China trade front (US President Trump said he would consider an interim trade deal with China, while China appeared to recommence soybean purchases from the US) and following the ECB’s announcement of a package of stimulus measures. In terms of index performance, the FTSE 100 (is the laggard with Sterling strength weighing on exporters, although the index is somewhat underpinned with Credit Suisse now overweight in UK equities. Financials are the leading sector, aided by the recent rise in yields and curve steepening. On that note, according to JPM, Deutsche Bank (+3.4%) is set to benefit the most, with 10% relief (as a % of estimated 2020 profit before tax), although they do slightly lag the Eurostoxx banking index (+3.0%). Meanwhile, Materials are also higher, whilst the defensive utilities, consumer staples and health care sectors lag. In terms of individual movers; SSE (+0.9%) is up on the news that the Co. has agreed to sell its SSE Energy Services unit for GBP 500mln. Notable losers include Diageo (-3.3%), who are down after union strike threat relating to pay and Atlantia (-7.0%), who sunk on the news that Italian tax police are carrying
Top European News
Swedish Economy Grinding to a Halt on Trade War, Housing Slump
Kone CEO Wants Full Merger With Thyssenkrupp Elevator Unit
SSE Sells U.K. Retail Unit for 500 Million Pounds to Ovo
Pound Set for Best Week Since May as Brexit-Deal Hopes Resurface
In FX, the British Pound continues to piggy-back Euro gains in post-ECB trade, but with the added incentive of no deal Brexit risk declining further amidst reports that the EU could be poised to offer the UK yet another Article 50 extension, while the DUP shows signs of flexibility on the Irish border backstop. Hence, Cable has reclaimed another big figure and extended its stellar rebound from 2019 lows on September 3 to 500+ pips at circa 1.2476 vs 1.1959, while Eur/Gbp has retreated towards 0.8900 again as the single currency hits resistance just above 1.1100 vs the Dollar.
EUR/CHF/AUD/JPY – All firmer against the Greenback, but as noted above Eur/Usd has faded after crossing the 1.1100 line and failing to sustain its recovery momentum to challenge the 50 DMA at 1.1130, while the Franc faces some psychological obstacles at 0.9850 having breached 0.9900 in the run up to next week’s FOMC and SNB Quarterly Policy review. Elsewhere, the Aussie remains capped below 0.6900 and the 100 DMA (0.6904), with Aud/Usd currently holding between 0.6877-60 and more technical levels spanning 0.6880-67 including the 55 DMA and the apex of a daily chart formation. The safe haven Yen has pared some losses against the backdrop of improving US-China trade relations as prospects of an interim accord forged at the upcoming mid-level meeting grow on the back of latest tariff exemptions from Beijing. Usd/Jpy has slipped back through 108.00 from around 108.27, while Usd/CNH has retraced further towards 7.0000 without PBoC prompting given China’s mid-Autumn festivities, to sub-7.0400 and not far from the 50 DMA (7.0193).
CAD/NZD/NOK/SEK – Marginal G10 laggards even though the DXY has dipped under 98.000 from just over 99.000 at one stage in the fleeting ECB aftermath on Thursday, with the Loonie unable to retrieve 1.3200 against the backdrop of soggy crude prices and Kiwi pivoting 0.6400 as the Aud/Nzd cross finally breaks above 1.0700 and with conviction to just shy of 1.0750. Next up for the Kiwi, Westpac’s Q3 consumer survey after scant improvement in the manufacturing PMI overnight (still some way below 50) and house sales slumping in August. In Scandinavia, the Crowns are narrowly mixed after revised Q2 Swedish GDP data and amidst the aforementioned dip in oil, with Eur/Nok elevated within 9.9150-9600 range vs Eur/Sek closer to the middle of 10.6290-6775 parameters.
In commodities, choppy trade in the oil complex, albeit prices remain within yesterday’s ranges with WTI and Brent futures around 55.0/bbl above 60/bbl respectively. Looking at weekly performance, both benchmarks are poised to end the week in the red, with the the former closer to the bottom of the weekly range (USD 54-58.73/bbl) whilst the latter showed a similar performance within a USD 58.94-63.74/bbl weekly parameter. Over the week, EIA and OPEC downgraded their respective global oil demand forecasts for 2019 and 2020 whilst IEA maintain its forecast. Meanwhile, the JMMC saw little by way of major decision, although the energy ministers reportedly “unanimously” agreed to fully comply with the OPEC+ supply pact, which may see 400k BPD crude outflow from the market, given the undercompliance from some producers. A full review of the current pact will take place in December. Elsewhere, gold prices are on the rise as the USD is weighed on by a firmer EUR and GBP. The yellow metal remains above the USD 1500/oz, having visited a weekly base at USD 1484/oz earlier in the week (vs. weekly high of 1524/oz). Copper prices are poised to notch another day of gains, largely aided by the receding Buck as prices move further north of 2.60/lb ahead of its 100 DMA at 2.66/lb.
US Event Calendar
8:30am: Import Price Index MoM, est. -0.5%, prior 0.2%; 8:30am: Export Price Index MoM, est. -0.3%, prior 0.2%
8:30am: Retail Sales Advance MoM, est. 0.2%, prior 0.7%; Retail Sales Ex Auto MoM, est. 0.1%, prior 1.0%
Retail Sales Ex Auto and Gas, est. 0.2%, prior 0.9%; Retail Sales Control Group, est. 0.3%, prior 1.0%
10am: U. of Mich. Sentiment, est. 90.8, prior 89.8; Current Conditions, est. 107.8, prior 105.3; Expectations, est. 85.2, prior 79.9
DB’s Jim Reid concludes the overnight wrap
If you want the ultimate expression of middle class and middle age behaviour then the following sentence will tick all the boxes. Tonight (on a Friday) I’m going to a classical music recital at someone’s home near to where I live. I’ve been to about 2-3 classical music events in my life but I find myself more and more putting on a “relaxing classics” Spotify playlist at home to introduce calm into my life. I tend to also write research to it on my headphones these days. So hopefully I’ll know some of the hits tonight and can join in at the choruses.
The ECB impact on markets was anything other than calm. It was more like a death metal playlist with loud noises from all angles. So first what did the ECB announce? Well the more expected policy changes included the 10bp cut on the depo rate to -0.50%, better TLTRO3 terms and two-tier tiering – the latter being confirmed with a multiplier at six times banks’ required reserve levels. As for QE, while it was still expected, markets had started to water down expectations leading into the policy meeting so the €20bn per month announcement was the main talking point and ensured a big bond rally immediately following the statement release (subsequently reversed in a big way – see below). The fact that it was left open-ended (or until the ECB starts raising rates) was perhaps the biggest takeaway. QE infinity is back if that’s not an oxymoron. To be fair headlines came through on Bloomberg after the European close that the French, German and Dutch governors opposed more QE, as did Coeure and Lautenschlaeger and a couple of others. So this was a contentious move and rightly so. At the other end of the scale the one area of unanimity on the Council was over the need for fiscal policy.
Indeed the most interesting line in DB’s Mark Wall’s piece on the package was that for this not to be seen as a policy mistake, the ECB must expect fiscal easing with a strong degree of confidence. As such our economists are nervous that the indefinite QE risks flattening the curve and counteracting the stimulus, especially for banks. See the full piece here for more.
To be fair yields and the curve were all over the place yesterday with Mr Draghi’s press conference leading to a sharp reversal of the post announcement trends. Prior to the statement, 10y Bund yields were trading at -0.591%. By the time the statement was announced and Draghi started to speak, yields had fallen to -0.654%. However by the time the press conference had finished, bonds had made a complete reversal and in fact yields finished at -0.516% – so +6.5bps above where they were at roughly 12.44pm BST and +13.1bps off the lows at 1.06pm BST. The high-to-low range was also the most since May 1 while the 2s10s curve flattened 7.3bps to (at 20.3bps), just 4bps off its cyclical low – probably the biggest negative of the package. In fact, two-year yields rose +11.8bps, their sharpest selloff since December 2015 when the ECB disappointed markets. Looking at two-year z-scores, that equated to a pretty shocking 7.6 standard deviation move. One positive note was the rebound in inflation expectations, with 5y5y inflation swap rates rising +8.0bps to 1.30% but only back to post Sintra levels.
It was a similar volatile day across the rest of European bond markets but with various different magnitudes. To be fair BTPs only retraced partially after the large initial rally. They ended -10.3bps lower at 0.867% but that was after hitting 0.749% at the lows. Italy was a big winner overall on the day. Meanwhile the euro traded in a range of 1.45% but ultimately ended up +0.50% after completing a similar u-turn. European banks meanwhile ended up a modest +0.24% after being up as much as +1.77% and then down as much as -2.68%. Tiering was a positive, and yields eventually rose, but if curves flatten further then this won’t go down as a successful meeting for banks. The STOXX 600 ended +0.20% also after similar intra-day swings.
The U-turn seemed to come with the strong emphasis on both the negative side effects of monetary easing and the stressing of the need for fiscal policy. Specifically, Draghi referred being “very concerned about the pension industry” and also suggesting that the answer to speeding up positive side effects as being fiscal policy. Draghi’s repeated recognition of the side effects on banks implies that in his eye the reversal rate is not much lower than where we are today.
It’s hard to therefore get away from feeling that even the ECB feel we’re nearing the end game in terms of the limits of monetary policy. Something that has been obvious to the outside world for sometime. To be fair to them, if there is no fiscal policy of any note they could argue they have little choice but to ease, however it’s clear that easing in its own right is now at the edge of being counterproductive.
Meanwhile on the CSPP, Michal in my credit strategy team has published a piece called “The ECB CSPP Is Back, Indefinitely” in which he estimates the likely size of the upcoming corporate purchases in light of buying in various historical episodes, provides commentary on other measures within the stimulus package, incl. tiering and its P&L impact on the banking sector, discusses the odds of the ECB expanding the eligibility criteria for the CSPP such as by including bank senior preferred bonds, and finally he offers a broader assessment of the impact on credit, incl. relative value views on CSPP-eligibles vs. ineligibles. You can find the full note here.
To throw a spanner into the global fixed income works yesterday, the US August core CPI print came in higher than expected at +0.3% mom (vs. +0.2% expected). The unrounded number was ‘only’ +0.2565% but it was still enough to push the annual rate up two-tenths to +2.4% yoy and to a post-crisis high. Ultimately Treasuries tracked the move for European bonds and 10y yields ended +4.3bps while the 2s10s curve finished a bit flatter at 5.9bps. It’s worth noting that we’re now down to pricing 25bps of cuts for the Fed next week and 52bps for the rest of the year. As for equities, the S&P 500 finished +0.29% – just 0.54% from its all-time high – and the NASDAQ closed +0.30%, with both boosted somewhat by the trade chatter which we’ll come to shortly.
Overnight in Asia markets are following Wall Street’s lead with the Nikkei (+1.03%), Hang Seng (+0.36%) and Australia’s ASX (+0.14%) all up. Markets in China and South Korea are closed for a holiday. 10y JGB yields are up +5.4bps this morning at -0.170% after recently hitting a three year low of -0.295% on September 4th. So a big move. Elsewhere, futures on the S&P 500 are up +0.11% while 10y UST yields are up another +1.6bps.
In other overnight news, the US President Trump said that he’s planning a tax cut directed at the middle class that will be announced in the next year. He added that, “It will be a very substantial tax cut,” and would be “very, very inspirational” without providing details. The statement comes after the White House decision, earlier in the week, of not going ahead with cutting the tax on capital gains by indexing gains to inflation. Elsewhere, the Treasury Secretary Steven Mnuchin had told CNBC earlier that the administration has also put off the idea of a possible cut in payroll taxes while adding that Trump was focused instead on a second round of proposed tax cuts. However, delivering on the tax cut ahead of the 2020 election is likely to face stiff opposition in Congress. Elsewhere, the IEA warned overnight that OPEC+ faces a significant challenge in managing the market in 2020 as production surges from their competitors. WTI oil prices are down -0.33% this morning.
Back to yesterday, where on the trade subject, Bloomberg reported that the Trump administration have “discussed offering a limited trade agreement to China that would delay and even roll back some US tariffs”. The story goes on to say that this would be in exchange for commitments from the Chinese side on intellectual property and agri purchases. The story did however suggest that the Huawei issue would remain. Interestingly CNBC downplayed the story later saying that the White House is not considering an interim deal but subsequently while speaking to reporters at the White House, President Trump said that it is something he will consider. He said, “A lot of people are talking about, and I see a lot of analysts are saying: an interim deal, meaning we’ll do pieces of it, the easy ones first. But there’s no easy or hard. There’s a deal or there’s not a deal. But it’s something we would consider. ”
Prior to that story, China’s Commerce Ministry confirmed that working teams will meet soon to prepare for the next round of high-level meetings. The Dow Jones later reported that China was seeking to narrow trade talks with the US “to only trade matters” and “putting thornier national-security issues on a separate track.” Again though, it was not clear if this possible olive branch would allow the Huawei issue to be separated from the tariff discussions, since national security could also refer to Hong Kong and arms sales to Taiwan. Still, the rhetoric continues to point in the right direction for now and towards a more positive outcome.
Meanwhile, here in the UK, The Times has reported overnight that the DUP has said it would accept North Ireland abiding by some European Union rules after Brexit as part of a new deal to replace the Irish backstop which includes dropping objections to regulatory checks in the Irish sea. However, the DUP leader Foster subsequently tweeted that the UK must leave the EU as one nation while adding that the DUP is keen to see a sensible deal but not one that divides the internal market of the UK. So take whichever side of that that you’d prefer. However it’s obvious talks are going on to try to find common ground between the government and the DUP.
As for the data in Europe yesterday, the July industrial production was a fair bit worse than expected at -0.4% mom (vs. -0.1% expected) however this was countered by upward revisions to the prior month. Meanwhile there were no final surprises in the August CPI readings for France and Germany and +0.5% mom and -0.1% mom respectively, both unrevised from the initial readings.
Finally to the day ahead where data this morning includes the July trade balance and Q2 labour costs print for the Euro Area. In the US it’ll be all eyes on the August retail sales report while the August import price index and preliminary September University of Michigan consumer sentiment survey are also due. Recall that last month, the headline UoM survey fell -8.6 points, the most since 2012, to its lowest level in almost three years. Our economists have noted that when the UoM falls far below the Conference Board survey, it tends to be a recession indicator. While that is worrying, they do forecast a slight pickup in tomorrow’s print to 92.0, which would be up +2.2 points and slightly above consensus which is for 90.8.
Beijing Exempts US Pork, Soybeans From Trade-War Tariffs
Confirming reports from earlier in the week, Beijing announced on Friday that it would indeed encourage state-owned companies to begin “goodwill” purchases of US soybeans, pork and other farm goods by imposing waivers from trade-war tariffs, according to the South China Morning Post.
The decision was characterized as the latest in a series of tit-for-tat trade war deescalations by Beijing and Washington (though Beijing is struggling with a deadly outbreak of swine flu that has killed off nearly one-third of the country’s pigs, and also has been struggling to find replacements to source soybeans, it’s funny how importing stuff they need has been characterized as “goodwill”).
Still, China’s Xinhua News Agency reported on Friday that China’s National Development and Reform Commission and the Ministry of Commerce had decided to make the exemption in response to the US’s decision to postpone a hike in the tariff rate on $250 billion of Chinese goods from October 1 to October 15.
As always, Global Times editor Hu Xijin was among the first to report the news, adding that “it is hoped the US side can keep goodwill reciprocity with China through practical actions.”
Based on what I know, Chinese govt encourages Chinese companies to buy certain amount of US farm products, including soybeans and pork, which will also be exempted from additional tariffs. It is hoped the US side can keep goodwill reciprocity with China through practical actions.
Beijing will allow Chinese businesses to purchase a “certain amount of farm products such as soybeans and pork” from the US, according to Xinhua. “China’s market is big enough and there’s great potential to import high-quality US farm products.” Chinese officials added that “the US will honour its word and fulfil its promises to create favourable conditions for cooperation for the two countries in the agriculture sector.”
Hua Changchun, an economist at Guotai Junan Securities, a brokerage in the PRC, said Beijing’s latest ‘gesture’ has increased the prospects for a narrow trade deal with the US.
“But it’s a small deal,” Hua said. “It means that there would be no escalation of tariffs as China has agreed to make more purchases. It could provide a certain level of comfort to US farmers and give Trump something to brag about” It marks the latest in series of rapid-fire developments this week that suggest a concerted effort by China to push for a partial, or interim, trade deal.
Trump said Thursday he preferred a broad deal, but left open the possibility of a more limited deal to start. Beijing’s confirmation comes after Reuters confirmed that several state-owned firms had purchased “at least 10 boatloads” of US soybeans.
Carl Icahn Planning Move To Florida For Lower Taxes, “More Casual Pace”
Billionaire investor Carl Icahn is reportedly planning to move his business – and his home – to Florida, one of seven US states with no personal income tax, to avoid New York taxes, according to Bloomberg.
The 83-year-old, who was born in the Far Rockaway neighborhood of Queens, has been a major figure on Wall Street for decades, and back in the 1990s, he bought a mansion on the Indian Creek island enclave in Biscayne Bay in Miami. Icahn expects all of his employees to make the move with him: Those who don’t “won’t have a job”, according to several sources from within his firm.
Carl Icahn
According to the New York Post, any employees who aren’t ready to leave their offices in New York City and White Plains on March 31, 2020 and start work in the Magic City on the next day will be let go without severance. To “sweeten” the deal, Icahn promised that everyone who makes the move will earn at least as much in salary and bonus next year as they did in 2018, and that anybody who is fired before March 31, 2023 would get an “immediate payment” equal to that amount. He also offered employees a $50,000 “relocation benefit” that will be “payable in April 2020 once you have established your permanent residence in Florida,” according to internal memos seen by the New York Post.
For those who don’t make the move: “The company will not contest your unemployment claim.”
“The current maximum weekly Unemployment benefit rate is $450, which you can receive for a total of 26 weeks,” the letter went on to note.
More than half of the company’s employees accepted their bosses offer by the July 1 deadline.
Icahn told the Post that though he is a lifelong New Yorker, he’s ready to retire and enjoy a “warmer climate”.
“After spending my entire career in New York, while I certainly do not wish to retire, I’ve decided that at this point in my life I’d like to enjoy a warmer climate and a more casual pace year-round,” he said in a statement.
Icahn is hardly the first to move to Florida for the sunshine and lower tax rates: Hedge fund billionaires David Tepper, Paul Tudor Jones and Eddie Lampert are some of the more prominent examples. But the state has been aggressively pushing Miami as a hotspot for the asset-management industry since President Trump signed his tax overhaul into law. It notable featured a $10,000 cap for state and local deductions.
Former Governor – now Senator – Rick Scott, a one-time resident of Greenwich, Conn. made frequent trips to New York and elsewhere to court investment firms during his tenure in office.
Icahn’s decision result in serious savings. Icahn is the world’s 47th richest person, with a personal fortune of more than $20 billion, according to Bloomberg’s Billionaires Index. The market value of his publicly-traded firm, Icahn Enterprises, is $13.6 billion: It reported adjusted earnings before interest taxes depreciation and amortization of $1.6 billion in 2018.
2) The ECB has not abandoned its stimulus. It repurchases all maturities, launched a liquidity injection (TLTRO) in March 2019 and balance sheet stands at almost 40% of eurozone GDP.
3) Excess liquidity is 1.7 trillion euro. More liquidity does not lead agents to spend/invest more.
There is no higher solvent credit demand because monetary policy perpetuates overcapacity and zombifies the economy. Share of zombie companies has soared c30% since 2013 (BIS)
4) Interest rates are already negative. This has caused a 23 billion euro loss for banks (according to Scope Ratings) and a worrying rise in junk debt demand.
5) There is no evidence of a need for more credit growth. Rather the opposite.
The ECB believes the eurozone problem is one of excess saving and lack of demand when it is of excess debt and oversupply.
6) Negative rates zombify the economy and are a massive transfer of wealth from savers and productive sectors to the indebted and inefficient.
7) The ECB already accumulates a disproportionate amount of sovereign debt as well as corporate bonds of issuers that never had a problem financing themselves at low rates.
This disguises risk and creates an enormous bubble.
8) The problem of the eurozone is not one of lack of stimuli, but an excess of them.
Governments burden the productive private sector with higher taxes and unnecessary regulations, so economic surprise falls despite massive stimulus.
9) When this fails or -even worse- explodes, central planners will likely blame “markets” or “lack of stimulus” to repeat.
10) Saying that negative rates are “demanded” by investors is a sad excuse.
Financial repression leads economic agents to take more risk for lower yields and central banks go from lenders of last resort to enablers of financial bubbles.
The ECB should have:
Raised rates modestly to show signs of normalization putting rates closer to inflation, as well as giving the opportunity to understand what is the real demand in the secondary market for sovereign bonds.
Condition all asset purchases on governments implementing structural reforms and delivering on deficit targets.
Redirected the liquidity injections to a broad-based asset purchase system for specific requirements with a dividend and solvency commitment from financial entities (so the ECB gets liquidity back in dividends) and eliminate the negative rate on deposits.
Increased detail on forward guidance to monitor the level of success of measures.
The UK had made progress recently in bringing down the suicide rate in the country.
As Statista’s Martin Armstrong notes, figures from the Office for National Statistics (ONS) showed that in 2016 the rate experienced its largest decrease for twenty years. In 2017, the figure fell even further to 10.1 – the lowest it had been since 2007. Unfortunately, 2018 saw annual increases across the country (with the exception of Wales), taking the rate to 11.2.
While the stark difference in rates between men and women remain – 17.2 compared to 5.4 – there are also sizeable gaps in the rates between the countries of the UK.
The highest rate is in Northern Ireland with 18.5 (2017), and the lowest in England with 10.3.
This hasn’t always been the case though. When looking back to 1997, Northern Ireland actually had the lowest rate (9.6) and England the second-lowest (10.6).
Nigerian-born rap artist Jesse Ekene Nweke Conable called for his fans to “shoot” white people while urging, “Take them as slaves and treat them even worse.”
What a fantastic role model for the kids.
The comments were made in a rant posted on a closed Instagram group called Barasvarta (“Blacks only”), according to news outlet Samhällsnytt.
“We, blacks” will “become number one and take over these whites,” said Conable, adding, “Like these whites took us as slaves we should take them as slaves and treat them even worse.”
“We’ll take their bitches and we’ll take their money,” he continued. “To be perfectly honest, we will be the best race ever. We are African warriors, they are not on our level. This is just the beginning, black power.”
Making the shape of a gun with his hand, Conable asserted, “If any white guy or white girl is trying to talk shit about you, shoot them! If they talk shit about your family, shoot them!”
The rapper appears to think he has carte blanche to make violent racist threats against white people, posting a meme that says, “You cannot be racist if you are not white.”
After Conable’s comments were reported on by the media, he announced that he would ‘delete’ the “snitch” who leaked them.
Conable, who emigrated to Sweden in 2008 and now has citizenship, has a combined total of 280,000 subscribers on YouTube.
As we reported earlier this year, another rapper in France released a track in which he sings, “I fuck France, I burn France,” as he is portrayed strangling a white woman meant to symbolically represent France.
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Disturbingly, the main concern of Blair’s think-tank appears to be the online verbal “hatred” displayed by citizens in response to terrorist attacks — not the actual physical expression of hatred shown in the mass murders of innocent people by terrorists. Terrorist attacks, it would appear, are now supposedly normal, unavoidable incidents that have become part and parcel of UK life.
Unlike proscribed groups that are banned for criminal actions such as violence or terrorism, the designation of “hate group” would mainly be prosecuting thought-crimes.
Democratic values, however, appear to be the think-tank’s least concern. The proposed law would make the British government the arbiter of accepted speech, especially political speech. Such an extraordinary and radically authoritarian move would render freedom of speech an illusion in the UK.
The Home Office would be able to accuse any group it found politically inconvenient of “spreading intolerance” or “aligning with extremist ideologies” — and designate it a “hate group”.
The problem, as the think-tank defines it, is “the dangerous nature of hateful groups, including on the far right like Britain First and Generation Identity. But current laws are unable to stop groups that spread hate and division, but do not advocate violence”. The think-tank defines what it sees as one of the main problems with hate crime the following way:
“A steady growth in hate crime has been driven by surges around major events. Often this begins online. Around the 2017 terror attacks in the UK, hate incidents online increased by almost 1,000 per cent, from 4,000 to over 37,500 daily. In the 48-hour period after an event, hate begins to flow offline”.
Specifically, the report mentioned as problematic the rise online in “hate incidents” after three Islamic terrorist attacks in the UK in 2017 — the Westminster car-ramming and stabbing attack in March by Khalid Masood, who murdered pedestrians and a police officer; the Manchester arena bombing in May, at the end of an Ariana Grande concert, in which Salman Abedi murdered 22 people — the youngest only 8 years old — and injured more than 200 people; and the London Bridge ramming attack in June, in which Rachid Redouane, Khuram Butt and Youssef Zaghba drove a van into pedestrians on London Bridge and then proceeded to stab people in nearby Borough Market. Eight people were murdered in that attack.
Disturbingly, the main concern of Blair’s think-tank appears to be the online verbal “hatred” displayed by citizens in response to terrorist attacks – not the actual physical expression of hatred shown in the mass murders of innocent people by terrorists. Terrorist attacks, it would appear, are now supposedly normal, unavoidable incidents that have become part and parcel of UK life.
The report claims:
“Divisive groups – especially increasingly mainstreamed far-right groups – spread hatred with relative impunity because responses to nonviolent extremism remain uncoordinated; hate incidents spike around major events, leaving communities exposed; and perpetrators of religious hate are rarely prosecuted due to gaps in legislation”.
The problem, according to the report, is that “current laws are unable to stop groups that spread hate and division, but do not advocate violence”.
One of the think-tank’s suggested solutions to this problem is to:
“Create a new law to designate ‘hate groups’. This new tier of hate group designation would be the first of its kind in Europe and would help tackle nonviolent extremist groups that demonise specific groups on the basis of their race, religious, gender, nationality or sexuality … Powers to designate would, like proscription powers, fall under the Home Office’s remit and require ministerial sign off”.
The report defines a hate group as:
“Spreading intolerance and antipathy towards people of a different race, religion, gender or nationality, specifically because of these characteristics; Aligning with extremist ideologies… though not inciting violence; Committing hate crimes or inspiring others to do so via hate speech; Disproportionately blaming specific groups (based on religion, race, gender or nationality) for broader societal issues”.
It would be up to the government to define what is understood by “spreading intolerance”, or “blaming specific groups for broader societal issues”.
Being designated a “hate group”, it is underlined in the report, “would sit alongside proscription but not be linked to violence or terrorism, while related offences would be civil not criminal”.
Unlike proscribed groups that are banned for criminal actions, such as violence or terrorism, the designation of “hate group” would mainly be prosecuting thought-crimes.
The groups that Blair’s think-tank mentions as main examples of those to be designated hate groups are Britain First and Generation Identity. Both are political; Britain First is also an aspiring political party with parliamentary ambitions. If the report’s suggestions were to be adopted into law, these movements, if designated as “hate groups” would not be allowed “to use media outlets or speak at universities”. They would also not be allowed “to engage, work with or for public institutions”.
However, the report tries to assure us, “hate designation would be time-limited and automatically reviewed, conditioned on visible reform of the group”.
Although the report would still allow designated “hate groups” to “meet, support or campaign”, such a law would mean that the political speech of designated groups would be rendered null and void. The European Convention on Human Rights and the jurisprudence on the convention from the European Court of Human Rights puts a special premium on political speech, which enjoys particular protection: it is so fundamental to the basic workings of a democratic society. In its case law, the European Court of Human Rights has stated that the convention
“…protects not only the information or ideas that are regarded as inoffensive but also those that offend, shock or disturb; such are the demands of that pluralism, tolerance and broad-mindedness without which there is no democratic society. Opinions expressed in strong or exaggerated language are also protected”.
Even more important is that, according to the European Court of Human Rights’ case law,
“…the extent of protection depends on the context and the aim of the criticism. In matters of public controversy or public interest, during political debate, in electoral campaigns… strong words and harsh criticism may be expected and will be tolerated to a greater degree by the Court”. [emphasis added]
The European Court of Human Rights may therefore find aspects of the proposed law problematic precisely because of concerns with free speech and basic democratic values.
Democratic values, however, appear to be the think-tank’s least concern. The proposed law would make the British government the arbiter of accepted speech, especially political speech. Such an extraordinary and radically authoritarian move would render freedom of speech an illusion in the UK. The Home Office would be able to accuse any group it found politically inconvenient of “spreading intolerance” or “aligning with extremist ideologies” — and designate it a “hate group”.
Ron Paul: Will Another John Bolton Replace John Bolton?
Bolton may be gone, but Boltonism lives on.
Those believing that the end of Bolton would signal a return to the foreign policy of candidate Donald Trump, however, may be disappointed.
President Trump has appointed Charles Kupperman to temporary fill in for John Bolton as National Security Advisor. Kupperman is one of Bolton’s closest friends and allies in Washington. Plus – What have we learned since 9/11? Tune in to today’s Ron Paul Liberty Report:
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According to CNN, the following have been mentioned as possible candidates to replace Bolton as national security adviser:
Brian Hook, US Special Representative for Iran and senior policy adviser to Mike Pompeo
Ricky Waddell, Major General in the US Army Reserve who served a year as Trump’s Deputy National Security Adviser to Trump
Steve Biegun, US Special Representative to North Korea
Rob Blair, national security adviser to acting chief of staff Mick Mulvaney
Richard Grenell, US ambassador to Germany
Pete Hoekstra, US ambassador to the Netherlands
Keith Kellogg, national security adviser to Vice President Mike Pence
Douglas Macgregor, retired US Army Colonel
Jack Keane, retired four-star general
Fred Fleitz, former chief of staff to Bolton at NSC
CNN further reports on Thursday that the administration is considering “double-tapping” Secretary of State Mike Pompeo for national security adviser.
“Under this scenario, the country’s top diplomat would absorb the national security adviser role and do both jobs, according to a senior administration official and a source familiar with the possibilities,” report adds.
