Category: zerohedge

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

“All assets are priced where they are today because of central banks. That’s modern finance — it’s not about psychology or flows anymore, it’s about what the central banks are going to do next.”

– Mark Spitznagel

Cause and Effect

Rene Descartes, a 17th-century mathematician, asked the fundamental question of how causal power functions. He was interested in how things relate to each other in terms of causality and how the thought of an action gets translated into a physical action. The theory he came up with, called “Interactionism,” affirms the relationship between thought and action. Importantly for our discussion, Descartes knew that any effect must have an antecedent cause.

When we are unclear about something, Descartes teaches us to search diligently for first principles, those things about which we are certain, and then explore what might have caused an event or observed the effect.

Warnings

In recent weeks, we have heard a variety of pundits, including a parade of Federal Reserve (Fed) officials speaking about mounting risks in the credit markets. Steve Eisman, who correctly pre-identified the magnitude of the sub-prime mortgage debacle, expressed confidence in commercial banks but worried that a U.S. recession would bring “massive” losses to the corporate bond market. The Fed published a report stating that there are meaningful risks in the corporate bond markets due to the amount of issuance that has occurred over the past decade and the weak credit quality of much of that issuance. As documented in many prior articles, we concur with those concerns and suggest the effect has a nasty way of sneaking up on central bankers. For our latest on the topic please read The Corporate Maginot Line.

The potential problems brewing in the credit markets are an effect. Corporations did not just decide to issue mountains of debt, much of which is low rated and of poor quality, for no reason at all. They did it, in large part, as a result of the economic and market environment created by the Fed through low interest rates and quantitative easing (QE).

The Fed removed over $4 trillion of the highest quality bonds out of the domestic market. In doing so, they pushed interest rates to historic lows. The combined effect all but forced investors to seek out higher-yielding, riskier instruments. As a result, the demand was ready and more than willing to absorb the on-coming wave of corporate supply and to do so at remarkably low yields and therefore very favorable terms for the issuers.

Cause

At the depths of the financial crisis, the Fed advertised QE as a means to boost asset prices, create a wealth effect, and fuel consumer borrowing and spending. It was sold as an economic growth booster that would benefit everyone. The ultimate objective was to staunch the crisis and foster an economic recovery.

Through QE, the Fed did this by acquiring mortgage and Treasury bonds from large banks and crediting those banks’ reserve accounts with digitally manufactured U.S. dollars. From September 2008 until January 2015, when the third round of QE was completed, the Fed balance sheet swelled by nearly $4 trillion while bank reserves grew from $2 billion (that’s $0.002 trillion) in July 2008 to almost $3.0 trillion.

As the Fed acquired vast amounts of high quality fixed-income securities from banks through QE, it created a vacuum in the bond market that had to be filled. The vanishing high-quality Treasuries and mortgages generated fresh demand for investments of lower-quality bonds.

Strong investor demand was met by corporations increasingly anxious to issue cheap debt to fund their activities. While those activities included capital expenditures, the debt increasingly was used to fund dividend payouts and share buybacks. Not coincidently, while the Fed’s balance sheet was expanding by $4 trillion, corporate debt outstanding exploded from $5 trillion to well over $9 trillion.

Debt-for-equity

As mentioned, the Fed removed high-quality securities from the market enabling corporate issuers to step in to fill the resulting gap. Since QE began, nearly 30% of the new corporate debt issued was used for stock buybacks. Putting the pieces of the mosaic together, it is fair to say the most intense corporate debt-for-equity swap in recorded history was enabled by the Fed via monetary policy and the federal government through tax-cuts.

This is symptomatic of a variety of issues that have been created by prolonged extraordinary monetary policy. In the same way that corporate behavior has been seriously altered as described above, every central bank in the developed world has undertaken even more extreme measures to foster growth, dictating that the behavior of market participants transform in some manner.

The chart below is a stark reminder of how the Fed has changed the natural order of the corporate debt market. Over the past 25 years, when corporate debt loads became onerous, investors required higher yields and wider spreads to compensate them for the added risks.

Today, despite the extreme amount of corporate leverage and the low quality of corporate credit, junk spreads remain near all-time lows. As shown below and highlighted by the red arrow, the long-standing correlation between leverage and high yield spreads is broken.

Data Courtesy: Bloomberg

This gross distortion and many others throughout the market offer clues and compelling evidence of a “cause.” Collectively, they point to a monetary policy that is manipulating the price of money and fostering irrational behaviors.

Effect

In his book, Economics in One Lesson, Henry Hazlitt states, “…the whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”

The side-effects of extraordinary monetary policy, especially those that have been left in place for a decade, have scarcely been considered by the Federal Reserve. What was great (as in “get filthy rich” great) for the banks and the wealthy was not such a hot deal for the rest of the American public. The side effects are becoming more apparent and serious every day. As an aside, the rolling wave of populism did not emerge unprompted. It too is an effect. As Deep Throat said to Woodward and Bernstein, “Follow the money.”

Instead of investing in new property, plant, equipment, innovation, and employee training for the long-term benefit of their shareholders, employees, and the communities in which they operate, companies instead are taking advantage of ultra-low funding costs to buy back expensive stock. In a desire to prop up stock prices to enhance their compensation and satisfy short term investors, corporate executives have and continue to make poor capital allocation choices.

If the goal was to increase shareholder value via a temporarily higher share price, then corporations succeeded, albeit temporarily. The goal always should be to increase long-term shareholder value via stronger growth; a goal corporations have largely ignored. After ten years of poor decision making, many companies are left with inflated stock prices but dim prospects for future growth to fund their obese debt structures.

Summary

A weak post-crisis economic recovery that hurt low income wage earners alongside monetary policy that fueled steady gains in the cost of living meant many people were going to be left behind. The calculus did not anticipate that effect would extend so far up into the middle class. Struggling to maintain their previous standard of living, consumers borrow at the Fed’s new cheap rates. Quoting from the book, The Big Short, “If you want to make poor people feel rich, give them cheap loans.”

That is exactly what the Fed did after the financial crisis for more than a decade and counting. That game has an unhappy effect as the economy loses productive capacity and has little fuel to spur organic growth and wage gains.

The series of events playing out right before us, like a pre-release movie trailer, reveals teasing fragments of information. The corporate debt market is today’s teaser. The set-up for that was the Fed-induced debt-for-equity swap. To anyone willing to pay attention to the data, it is again plain to see the excesses brewing in today’s environment which is eerily similar to those of 2005 and 2006. Even Dallas Fed President Kaplan has raised a warning flag by highlighting the amount and poor quality of corporate debt which could add to the burden on the economy in a downturn. He diplomatically understates the problem but at least he acknowledges it.

Monetary policies of the Fed are the cause. Those policies enable imprudent deficit-spending and accumulation of leverage at ultra-low interest rates.

Debt loads in the government, corporate and household sector, and various other hidden imbalances are the effect. What we know about circumstances is a concern, but what should be especially troubling are those things of which we are not even yet aware.

Turning back to Descartes, he offers this wisdom: “The senses deceive from time to time, and it is prudent never to trust wholly those who have deceived us even once.”

via ZeroHedge News https://ift.tt/2OvpbND Tyler Durden

For years, European banks were leery of passing on the ECB’s negative -0.40% deposit rate to their clients for fears of deposit flight and other unintended consequences, in the process being forced to “eat” the difference and impacting their interest income.

However, after five years of NIRP, and with the ECB set to unleash even more negative rates in the immediate future, one bank has finally taken a stand: according to the FT, UBS plans to charge a negative interest rate on wealthy clients, those  who deposit more than CHF 2 million with the largest Swiss bank. 

While several, mostly smaller, banks in Switzerland and the eurozone already pass on the cost of negative official rates to corporate depositors, most large players have refrained from doing so with individual clients. But with the ECB expected to adopt a “lower for longer” stance as soon as the next central bank meeting, starting in November, UBS Switzerland will charge -0.75% a year on individual cash balances above 2 million Swiss francs, the same rate as the SNB’s rate.

The move, as the FT notes, “underscores how banks in Europe and the US are scrambling to prepare for a protracted spell of lower rates that threatens their profitability, having previously wagered that central bankers would tighten monetary policy.”

Last month the Swiss National Bank said it would hold the negative rate it charges on commercial banks’ deposits at -0.75%, while the ECB deposit rate is -0.4%, but is widely expected to drop by another 10-20bps, which in turn will prompt even more negative rates in Switzerland. In a note to clients last month, UBS forecast that the SNB would lower its rate on deposits to -1% in September, approaching dangerously close to the infamous “reversal rate”, below which accomodative monetary policy reverse and once again becomes contractionary for lending, i.e., the true lower bound of NIRP.

“A year ago everyone thought interest rates would go up. Now it doesn’t look like that,” said one senior wealth manager at UBS quoted by the FT.

To preempt the inevitable howls of rage from wealthy clients who will soon see their total savings shrink by 1% (or more) every year just to hold their money in the bank, UBS relationship managers have started discussing the forthcoming charges with some wealthy clients and are preparing to issue a letter outlining the changes. Some of the bank’s smaller rivals, such as Julius Baer and Pictet, already charge some clients with large cash deposits.

“We assume that this period of low interest rates will last even longer and that banks will continue to have to pay negative interest rates on customer deposits at central banks,” UBS said. “Following similar moves by a number of other banks here in Switzerland, we confirm that we’ve decided to adjust cash deposit fees for Swiss francs held in Switzerland.”

The UBS announcement comes on the same day as Credit Suisse, UBS’s main rival, said it was also thinking about imposing a negative deposit rate on some wealthy clients: “In Switzerland, we are considering measures on deposits to mitigate pressure of negative interest rates,” Tidjane Thiam, Credit Suisse CEO said during a discussion of the bank’s half-year results. And like UBS, the Credit Suisse levy would be “targeted on people . . . that measure their cash balances in millions.”

UBS did provide one loophole, saying that clients who want to avoid the levy can move their balances into non-cash assets or into “fiduciary call deposits” that can be transferred back to the customer’s main account within 48 hours. Such FDCs are held in third-party banks or UBS entities based outside Switzerland, meaning the lender does not have to pay negative rates to the SNB.

However, the lack of immediate access to funds – as UBS implements the effective equivalent of a 2-day certificate of deposit – raises the risk of unintended consequences, such as runs on various other assets should there be a dramatic change in financial circumstances and depositors seek access to any and all liquidity at a moment’s notice.

Whether such negative rates encourage savers to spend their money as central banks have been hoping all along, remains to be seen. In any case, one thing is certain: the unintended consequences of passing on the most destructive monetary policy onto end consumers and savers, will be dire and widespread, and could potentially result in the next financial crisis which, with some luck, will also be the last one.

For now, however, keep an eye on cryptocurrencies: last we checked, there was no cost, and no way to impose punitive rates, to keeps one’s savings in bitcoin and its peers, which should have obvious consequences on its price.

via ZeroHedge News https://ift.tt/2Yx1LLv Tyler Durden

Ranges have been small. Asset price-wise, nothing especially untoward has happened. But, as former fund manager and FX trader Richard Breslow notes, it all feels remarkably sloppy.

Via Bloomberg,

The fact that it is month-end and the big news of the day won’t happen until the U.S. afternoon sets things up to have a skittishness that will drive people trying to follow the ins and outs of the day’s activity positively to distraction.

To make matters worse, we have two sets of traders operating uncomfortably beside each other.

• Some that will not change their views short of some — unlikely — major event that can’t be planned for anyway.

• And the others, who seem to be having the worst time holding onto anything. But more interestingly, they seem to change what they purport to be their big picture outlook based on the latest news and market gyration.

We are operating in an unusually uncertain world, but they seem to have taken it to the extreme.

The Australian dollar has had a rough patch. And for understandable reasons. Disappointing numbers at home. Not a great external environment. A dovish central bank. But after eight straight down days, it fell to a support zone that has meant something for the last three months. Frankly, it was due for a bounce. It got the excuse by a small beat from CPI. Fair enough and hardly a surprise.

Yet along with the modest bounce in the currency came a serious repricing of the likelihood of near-term interest-rate cuts. Short-dated OIS made a surprisingly swift move. That was simply too much from a statistically insignificant deviation from expectations. Especially with the rest of the newsflow of the day. And, to be fair, three-year yields were only fooled for a few hours.

Nevertheless, all eyes will now be on whether or not we close above Thursday’s high for the next technical sign to run with.

It did leave me wondering, however, how little it might take for traders to begin questioning the narrative about how the whole world is barreling toward lower official rates. Try to resist the temptation. My working assumption has to be that we very much are.

But for trading purposes, as the dog days of August are set to begin, it really does put a premium on how the Fed Chair explains whatever they end up deciding to do. This is not the time of year where short and medium-term players are apt to over-think things. For my money, the discussion around the balance sheet is an even bigger deal than it is being given credit. Although, how hard he hits the “U.S. is doing great” story line should also matter.

Global equity markets know what they want to hear. And they want simple and direct assurances that they will receive the rate support they have come to expect and demand. It’s a clear worldwide phenomenon. Just consider the blah reaction to this week’s Chinese Politburo announcement of economic plans for the second half of the year. You can clearly witness the sapping of momentum higher every time traders don’t receive comfort in the form they most want.

When it happens, you can almost imagine them telling the central bankers to go back and try again. Or face the consequences that we know they don’t want.

Looking at the charts, it seems odd to say after such a good year-to-date run that many indexes look to be at some sort of decision point. Now we’ll see how the next chapter of the story plays out.

via ZeroHedge News https://ift.tt/2OtozI8 Tyler Durden

Oil prices extended gains overnight off the back of API inventory data and a drop in Libya production

“I expect draws in crude stockpiles, but not as big as we’ve seen in the last few weeks,” says Mark L Waggoner, president at commodity brokerage Excel Futures.

“Refinery run rates will be ramping up a bit because we’re still in the middle of summer and driving season”

API

• Crude -6.024mm (-2.75mm exp)

• Cushing -1.449mm

• Gasoline -3.135mm

• Distillates -890k

DOE

• Crude -8.50mm (-3.25mm exp)

• Cushing -1.533mm

• Gasoline -1.791mm

• Distillates -894k

Crude inventories have fallen – significantly – for seven straight weeks, but last week saw stocks dropping across the entire energy complex as Barry-driven shut-ins came back online.

After the prior week’s collapse in crude production (thanks to Storm Barry shut-ins), production rebounded as expected…

WTI hovered around $58.50 ahead of the DOE print and extended gains after the big draws…

Finally, Bloomberg Intelligence Senior Energy Analyst Vince Piazza says:

It’s surprising how well supported oil benchmarks are, considering much of the bullishness is engineered by tensions in the Persian Gulf and risk of bottlenecks in the Strait of Hormuz and despite resilient U.S. output volume.

Weaker petroleum demand is the overriding issue, yet recent refined product data seems to discount that concern, while expectations for interest-rate cuts supporting risk assets have reemerged as an investment narrative. Infrastructure additions expected in 2H should also support benchmarks.

via ZeroHedge News https://ift.tt/2K5p4UD Tyler Durden

Less than 48 hours after his disappearance under mysterious circumstances, Indian billionaire V.G. Siddhartha and founder of Starbucks’ biggest regional rival, the Cafe Coffee Day chain, has been found dead in a southwest India district near his home.

Police reportedly suspect suicide, especially given he went missing Monday night while walking across a bridge days after penning an “apology letter”, according to his chauffeur, who says he was given the unusual request to drop off Siddhartha at the bridge. His body was found Wednesday in the Netravathi river in Karnataka state.

The letter, written and signed by Siddhartha and dated July 27, was released by his company on Tuesday and said he was facing “tremendous pressure” from lenders that led to him “succumbing to the situation.”

“I would like to say I gave it my all,” the letter says. “I am very sorry to let down all the people that put their trust in me.” He further urged for the company to continue under new management, and expressed further, “I am solely responsible for all mistakes. Every financial transaction is my responsibility.”

Coffee Day shares had slumped 20% as the missing person case went public, according to a company filing. The holding company owns several businesses, including Cafe Coffee Day, which operates nearly 1,700 cafes around India.

The 59-year old had owned 33% of Coffee Day Enterprises, with his wife and family-owned entities totaling another 21%. According to Bloomberg, Siddhartha founded the coffee chain and opened cafes around the country more than a decade before Starbucks started expanding into India. The roots of Siddhartha’s company can be traced back to the IT hub of Bengaluru in 1996.

The company’s leadership team has promised to “ensure continuity of business,” a statement said prior to Siddhartha’s death being confirmed.

Coffee Day went public in 2015, nearly two decades after opening its first cafe in Bengaluru. A unit of KKR owns 6.07% of the company, while Nandan Nilekani, co-founder of Infosys Ltd., has a 2.69% stake. According to CNN:

Coffee Day Enterprises — the chain’s parent company — issued a statement expressing its condolences to Siddhartha’s family and hailing his “matchless energy, vision and business acumen.” 

The fund sold 4.25% of its about 10.3% stake last February and haven’t sold any shares before or since, the spokesman said.

Given Siddhartha’s very visible public status as a coffee tycoon and billionaire, investigators are unlikely to leave any stone unturned with a hasty suicide ruling. One international report, citing local Indian sources, suggests there are already significant holes in the case: 

Tax authorities, however, have called the authenticity of the signature into doubt – even as police sources insist the letter was given to them by members of Siddhartha’s immediate family and came from his assistant. A senior official pledged to have the letter examined by the Forensic Science Laboratory to be sure of its authenticity.

Siddhartha’s letter, which appears intended as a suicide note, said further that he “can help repay everybody” given his remaining assets. 

“My intention was never to cheat or mislead anybody, I have failed as an entrepreneur,” he added. “I hope someday you will understand, forgive and pardon me.”

via ZeroHedge News https://ift.tt/2ZlFsWn Tyler Durden

Authored by Charis Hamilton via Econimica blog,

• The Annual Growth Of Potential Home Buyers Is Decelerating To Near Zero And Will Remain There For The Next Decade.

• The Annual Growth of Potential Sellers is Surging and Will Continue To Do So Over The Next Decade.

• A Surplus of Homes Are Being Built Versus The Minimal Growth In Buyers.

• The Fed Will Cut Rates In Pursuit Of Prolonging The Housing Bubble.

US Births, Fertility – 1950 to Present

From 2008 through 2018, there were 4.4 million fewer births in the US than the US Census estimated there would be in its 2008 projection.  2018 US births were over 500 thousand fewer than those seen in 2007.  The sharp and ongoing 12% decline in births since 2007 is entirely contrary to the sharp increases in asset prices and economic activity…and the Census and Federal Reserve expectations.  The chart below details annual births (blue columns) and the fertility rate (black line).  During each previous economic upturn and financial bubble, the gains were widespread enough to incent a higher fertility rate and higher quantity of births…until the opposite result has been observed for over a decade in the current cycle.  Whatever policies are in place are not translating to economic and financial well being among the child bearing population…and fertility and births reflect this.

Below, births (blue columns) versus the population segments.  The dark blue line representing the 0-14yr/old population versus the 45+yr/old population (red line) is so telling.  Since 1962, the 0-14yr/old population is essentially unchanged while the 45+yr/old population has more than doubled…rising by +76 million.  Meanwhile, the minor increases in the 15-45yr/old childbearing population (yellow line) continue to be overridden by falling fertility rates.  Thus a childbearing population that is nearly double the size it was in 1957 is having 12% fewer total births…and births continue falling fast.

Ok, you get the idea.  Total births in 2018 were 12% below the 2007 and 1957 double birth peaks and 17% below what was projected by the Census just a decade earlier.  The vast majority of population growth is now among the 65+ year old population…in particular, the fastest growing segment by percentage and also in total numbers is the 75+ year olds.

Home Buying Population, Housing Permits, Interest/Mortgage Rates

So, what does this mean for housing?  On a net basis, nearly all housing is purchased by the 20 to 64yr/old population segment…so, the chart below shows their annual change (blue columns), housing permits (black columns), Federal Funds rate (yellow dashed line), and the 30 year mortgage (red dashed line).  The 20 to 64yr/old population saw twin annual growth peaks in 1981 and 1998, adding in excess of 2.2 and 2.4 million during those two years.  As for housing permits, they vacillated from 1 to 2.2 million annually from 1965 to 2005. 

But the core population and housing permits essentially haphazardly mirrored one another from ’65 through ’05.  However, since ’05 permits tanked unlike anything seen since 1950 while growth among potential buyers has fallen to levels unseen since prior to 1950.  Of course, the adoption of ZIRP by the Fed and record low 30 year mortgages have spurred home builders…in conjunction with investors looking for a cash flow vehicle and foreigners looking for a safe place to park excess cash.  However, now all three sources of buying have their own problems…population growth among buyers is falling away, foreigners have been spooked by currency and administration actions, and investors facing rent-to-property valuation ceilings.

And everything, save for one, is about to get worse aside from the Federal Funds rate (and resultant mortgage rates) going down.  While valuations are through the roof, annual growth of potential buyers is a fraction of that seen in ’98 or ’05, foreigners have net ceased their purchasing partly due to relative dollar strength, and whether foreign or domestic, investing at these valuations with flattening rents simply no longer pencils.

As the blue columns in the chart above from 2019 through 2030 show, the annual growth of buyers will be at a level unseen since before WWII.  By 2021, 20 to 64 year old growth is projected to be just 200 thousand annually (and this is entirely dependent on immigration, otherwise declines will rule).  On a monthly basis, this means less than 20 thousand new potential employees, less than 20 thousand new potential homebuyers, car buyers, etc. per month.  So, the next decade is one of essentially little to no growth among buyers (blue columns below) while potential sellers (65+ year olds, red columns) surge.  The case for full employment and minimal further working age population growth (and thus, minimal further jobs growth) is made HERE.

Anyone unsure of the Fed’s motives in cutting interest rates need only look at the primary pillar of the US economy, the housing market, the decline of potential buyers versus surge in sellers. 

The only remaining tool the Fed has is ZIRP and more likely NIRP to hammer mortgage rates to new record lows in an attempt to continue blowing the housing bubble and save the banks from their fate, otherwise.

Birth data is via the CDC, population data via the UN report, World Population Prospects 2019.

via ZeroHedge News https://ift.tt/2K9d4QA Tyler Durden

Despite some rebounds in regional Fed surveys, Chicago PMI has fallen for five of the seven months so far in 2019, collapsing in July to 44.4 – the second weakest since the financial crisis.

This is the worst drop since the financial crisis.

This was dramatically below the 49.5 lowest analyst estimate.

Only 2 components rose month-over-month and New orders, Employment, Production and Order Backlogs all contracting

• Business barometer fell at a faster pace, signaling contraction

• Prices paid rose at a slower pace, signaling expansion

• New orders fell at a faster pace, signaling contraction

• Employment fell and the direction reversed, signaling contraction

• Inventories rose at a slower pace, signaling expansion

• Supplier deliveries rose at a faster pace, signaling expansion

• Production fell and the direction reversed, signaling contraction

• Order backlogs fell at a slower pace, signaling contraction

This is the worst start to a year for Chicago PMI in at least 30 years…

Time to cut rates!!

via ZeroHedge News https://ift.tt/314dxuj Tyler Durden

Newly surfaced text messages between Former FBI Deputy Director Andrew McCabe and his counterpart at MI-5, the UK’s domestic security service, have cast new light on Britain’s role in the FBI’s 2016 ‘Russiagate’ investigation, according to The Guardian. 

Two of the most senior intelligence officials in the US and UK privately shared concerns about “our strange situation” as the FBI launched its 2016 investigation into whether Donald Trump’s campaign was colluding with Russia, the Guardian has learned.

Text messages between Andrew McCabe, the deputy director of the FBI at the time, and Jeremy Fleming, his then counterpart at MI5, now the head of GCHQ, also reveal their mutual surprise at the result of the EU referendum, which some US officials regarded as a “wake-up call”, according to a person familiar with the matter. –The Guardian

McCabe and Flemming’s texts were “infrequent and cryptic,” but “occurred with some regularity” after the June 2016 Brexit referendum. 

In his text message about the August 2016 meeting, Fleming appeared to be making a reference to Peter Strzok, a senior FBI official who travelled to London that month to meet the Australian diplomat Alexander Downer. Downer had agreed to speak with the FBI about a Trump campaign adviser, George Papadopoulos, who had told him that Russia had dirt on Hillary Clinton, the Democratic nominee in the race. –The Guardian

In 2017, The Guardian reported that Britain’s spy agencies had played a key role in alerting their American counterparts of communications between members of the Trump campaign and “suspected Russian agents,” which was passed along to the US in what was characterized as a “routine exchange of information.” 

UK begged Trump not to declassify

In May, President Trump issued a sweeping declassification order on materials related to the DOJ/FBI Russia investigation – leaving it in the hands of Attorney General William Barr to determine exactly what happened to Trump and his campaign before and after the 2016 US election. 

“For over a year, people have asked me to declassify. What I’ve done is declassified everything,” said Trump, adding “He can look and I hope he looks at the UK and I hope he looks at Australia and I hope he looks at Ukraine.” 

via ZeroHedge News https://ift.tt/2Zn9WHo Tyler Durden

Blain’s morning porridge, submitted by Bill Blain of Shard Capital

“Weebles Wobble but they don’t fall down..” 

I oft get accused of being too bearish, too miserable, and too gloomy.  That’s not true!  I’m a very happy, smiley, even jovial chap.  I’ve learnt it’s better to look at the facts, assume the worst and not be surprised. 30 plus years in markets also teaches me no matter how awful it looks, it’s never as bad as it might be, and it always gets better.  So being aware of just how bad it might get, rather than fooling ourselves how good we hope it might be, seems the best plan.

And, on the subject of self-delusional behaviour, from today “Blain’s Brexit-Watch” will be a regular part of the daily porridge – at the bottom, after the Fun-Stuff.

The Fun Stuff today will be the Fed decision.  Just how will the Fed frame a 25 basis point ease? Regular readers will know my view is a Fed ease is a pointless sop. The Feb will ease because they expect a now pretty-much unavoidable trade war and global slowdown, and really ought to be seen to be prepared for it.

The real issue isn’t even why we’re heading for global slowdown.  These include Donald Trump’s tweets y’day accusing the Chinese of reneging on their “agreement” to buy more US agricultural products – effectively scuppering the resumed trade talks before they started.  (Serious question to my US Republican friends: are you even remotely concerned about Donald’s increasing randomness?)

The real threat is China’s response.  Thus far they have avoided saying anything that might overtly damage the current meetings, but equally they made clear they are not going to respond to threats. Yesterday’s responses were coded, but re Trade they effectively asked what “agreement to buy US agricultural products” is Trump talking about?  At the Osaka G20 Trump demanded China bought more from US Farms, but they simply agreed to enter into a new round of talks.  While Trump accuses the world’s second largest and fastest growing economy of lying, Xi is talking about how China must now rely on domestic demand to manage current “risks and challenges”.  Xi is making clear he has no intention of pandering to Trump, and sending a clear signal Beijing is prepared for trade war if Trump presses the button.

Or does China now take the initiative? They are sounding increasingly confident. Yesterday they accused the US of provocation in “creating” the Hong Kong protests. This gets dangerous. Tensions are building over Hong Kong – which I warned could become a flashpoint. Bloomberg reported The White House monitoring a “congregation of Chinese forces” (Military or Armed Police) on the Hong Kong Border. Speaking to a former colleague yesterday, he confirmed a very nervous mood and a general exodus of risk capital to Singapore.  If China intervenes, they are betting Trump the Bully will stomp and shout, but stop short of a meaningful response.

With the election coming up, the risk is Trump feels he can’t afford to not to act.  Then it potentially gets very messy.

Trump is acting like he holds all the cards.  He doesn’t.  He needs to understand who does.  Watch Hong Kong

Interesting results from Apple y’day as they beat expectations.  They are managing the process of switching revenues from the increasingly commoditised mobile phone space into services rather well. They are retaining the allure of the Apple ecosystem, which ensures customer loyalty.  The prices of cheaper models may fall, but they will retain the must have buyers who will pay premium new model prices, and continue to attract wearables and services. It’s interesting Cook declined to say much of commoditising Apple services or wearables by making them more compatible with other operating services.  Disclosure: I am an Appleholic.  I can’t resist.  

Blain’s Brexit Watch

As the Sterling Time Bomb ticked down to $1.22, yesterday’s Brexit highlights included the threat of insurrection in the Valleys if the Welsh find it difficult to export Lamb to Europe. “Come home to a real fire… buy a cottage in Wales!”  Folk are getting nervous about weakening sterling, hence the BBC interviews with pensioners in France complaining they can’t go on holiday on their state pension because everything is so expensive.  Wait till import inflation really hits…

Today, Boris is in Norn Iron and about as welcome as a Lannister in Winterfell.

More hopeful were Boris’ comments about staying in the customs union for a time if a Brexit Deal can be struck. It’s a clear signal to Europe. He’s confirming his position clearly – give me some compromise and a deal Parliament can accept, and we can agree a Brexit agreement that benefits everyone.

But yesterday showed Europe aint for turning…

The secret of good comedy is timing..  I was talking to a client about Sterling weakness. We were wondering if Sterling weakness was overplayed, and my chap asked what would be the most obvious buy-signal? I suggested Boris Johnston’s refusal to pick up the phone to Leo Varadkar, the Irish Taoiseach, was telling – I opined the moment to buy Sterling would be Varadkar calling him, a clear sign Ireland, and therefore the EU, understood the dangers of No-Deal and would be willing to compromise on the backstop.

Little did we know that Boris has already called Leo, and the two of them were having a “frank exchange”. Boris politely asked for a renegotiation. Leo said no (actually I suspect it was blunter than that). “Uncompromising” was the official view.

A No Deal causes massive problems if the border is “closed/slowed” for customs. The political dimensions for the UK are enormous; risking the Good Friday peace agreement, encouraging Sinn Fien and its associated Thugocracy to reopen “operations” against the crown, and general distraction.  Nasty, but containable.

For Ireland a No-Deal is a nightmare.  Aside from the freight going across the Norn Iron border, the real issue is 88% of Ireland’s freight goes from Dublin to Hollyhead in Wales then onto Europe. (2017 numbers).  The ports with direct links to the continent are too small to handle Ireland’s trade with the EU – and take double the time of direct UK access to Europe, which is critical for agricultural exports.  There are solutions.  New ships would take time to arrange.  Logistical solutions are possible, such as “Authorised Economic Operators” to allow closed truck access through the UK – it works for Switzerland.  But will an angry UK let them work for Ireland, when Europe won’t let work for the UK?

A deal is much better than no deal.. what’s the current betting Boris can get a deal? 20/1 on a No Deal at the bookies does not equate to the 1 million to one Boris thinks likely….

Oh, what fun…

via ZeroHedge News https://ift.tt/2Yvk13D Tyler Durden

Two days after the Treasury announced that in the aftermath of the debt ceiling deal reached last week between Trump and democrats, it would rapidly rebuild its cash balance back up to $350 billion by borrowing a whopping $433 billion in debt in the current quarter…

… a massive $274 billion higher – or more than doubling – its prior forecast announced in April 2019…

… in the process significantly tightening up liquidity in the banking system and potentially resulting in turmoil in funding and money markets as the world is flooded with an issuance of T-Bills…

… the Treasury issued its quarterly refunding statement in which it revealed that it will keep its auctions of nominal coupon and floating-rate debt at a record this quarter as the US budget deficit continues to grow.

Specifically, the Treasury will offer $84 billion of Treasury securities – matching the amount sold in each of the last two quarters – to refund approximately $57.3 billion of privately-held Treasuries maturing on August 15, 2019, which will raise new cash of approximately $26.7 billion.  The securities are:

• A 3-year note in the amount of $38 billion, maturing August 15, 2022;
• A 10-year note in the amount of $27 billion, maturing August 15, 2029; and
• A 30-year bond in the amount of $19 billion, maturing August 15, 2049.

The 3-year note will be auctioned on August 6, 2019, the 10-year note will be auctioned on August 7, 2019, and the 30-year bond will be auctioned on Thursday, August 8, 2019.  All of these auctions will settle on Thursday, August 15, 2019.

The balance of Treasury financing requirements over the quarter will be met with the weekly bill auctions, cash management bills, the monthly note auctions, the August 30-year Treasury Inflation-Protected Securities (TIPS) reopening auction, the September 10-year TIPS reopening auction, the new October 5-year TIPS auction, and the regular monthly 2-year Floating Rate Note (FRN) auctions.

The US government is scrambling to finance a soaring budget deficit that is set to surpass $1 trillion in coming years as President Donald Trump is set to approve a bipartisan deal to suspend the debt limit until mid-2021 and boost spending. As a result, Wall Street analysts are predicting that auction sizes will need to be lifted again within about a year’s time. The deficit was $779 billion in fiscal 2018.

Meanwhile, commenting on the recent latest debt ceiling deal, members of the Treasury Borrowing Advisory Committee wrote to Steven Munchin that they were “pleased that you were able to negotiate a debt limit suspension bill with Congress well in advance of the deadline and are optimistic that the bill will become law in short order. It was noted, however, that this would mark the 7th debt limit suspension in less than 7 years.” and added that as debt limit suspensions expire, “Treasury has been required to employ extraordinary measures – increasing market volatility, operational risk and ultimately taxpayer cost.” And since the Committee strongly believes that “discussions on total borrowing are more appropriately considered when making appropriations rather than when funding previously approved appropriations”, the Committee “urged Congress to consider a repeal of the debt limit well ahead of the proposed 2021 expiration of the suspension.” Of course, that will never happen and instead there will be yet another debt limit suspension in due course, now that the debt limit has become nothing more than a farce.

Going back to the refunding announcement, the Treasury said it currently anticipates no further changes in issuance sizes for nominal coupon and floating-rate securities for the rest of the calendar year. The department also detailed changes to sales of Treasury Inflation-Protected Securities, or TIPS, over coming months as it continues plans it originally laid out last year to bolster its use of the securities.

Specifically, as Bloomberg notes, the Treasury said that it expects to increase the August TIPS 30-year reopening auction size to $7 billion, raise the September 10-year TIPS reopening auction size to $12 billion, and introduce the new October five-year TIPS at an auction size of $17 billion. The overall increases are consistent with the department’s prior guidance, the Treasury said.

Also of note was the discussion on potential turmoil to the money market as a result of the accelerated Bill issuances to rebuild cash balances, to wit:

A trimmed mean of primary dealer responses indicated that Treasury is anticipated to increase the supply of Treasury bills outstanding by $178 billion over the eight-week period following resolution of the current debt ceiling impasse.  In comparison, primary dealers estimated market capacity to digest bill issuance without a significant price adjustment or deviation from fair value over the same period to be $210 billion.  Furthermore, the primary dealers generally expected Treasury to resume meeting its cash balance policy at some point between September mid-month, related to the receipt of corporate taxes, and the end of the month. Committee members discussed the Treasury’s cash management policy, noting both the policy’s benefits related to risk management as well as the potential market disruptions that could occur if bill supply were increased too rapidly.  Smith emphasized that Treasury carefully balances these considerations when making its issuance decisions.  The Committee generally agreed that Treasury’s projected measured increases in bill supply balanced these factors well.

In other words, the Treasury doesn’t expect any disruption in money markets as a result of the planned increase in bill sales aimed at reaching the cash-balance goal. The net amount of bill sales at about $160 billion is seen as within the limits of what primary dealers have indicated the markets can handle and is less than what was issued following the previous suspension of the debt limit, according to an official who spoke to Bloomberg.

Finally, there was no mention of how the coming end to QT, or the Fed’s drawdown of its bond holdings, will affect debt sales. The Treasury also said it “continues to evaluate the possibility” of issuing a floating-rate security linked to the Secured Overnight Financing Rate, and here too no decision has been made. The government is interested in adding new securities that would bring in incremental demand for Treasury debt, Bloomberg reported.

via ZeroHedge News https://ift.tt/2ypea5B Tyler Durden