Category: zerohedge

A curious paradox has emerged in the stock market: with stocks refusing to drop no matter how bad the news (see today’s Chicago PMI print which dropped into contraction for the first time since 2015), and with the S&P near all time highs, investor positioning – as gauged by Bank of America CIO Michael Hartnett –  has “never been this negative amidst such strong equity & credit returns.”

It’s almost as if equity investors agree wholeheartedly with bond investors, who have dragged 10Y yields to recessionary levels, yet because of the Fed’s by now all too visible hand, are unwilling to sell even one share, resulting in a historic, and unsustainable, divergence between stocks and bonds.

Which brings us to the catalyst behind this increasingly more paradoxical market behavior: the Fed’s “Powellful Put” as Bank of America has called it.

As the bank’s economist Michelle Meyer writes, the Powell Fed has made a strong dovish pivot in only a matter of weeks. At the May 1st meeting, the message was one of patience, signaling comfort with the current stance of policy. Only 8 weeks later and Fed officials are signaling that rate cuts are on the horizon. What changed? Powell has pointed to three things:

1. global outlook has dimmed with an escalation in trade tensions and weaker global data;
2. the softness in inflation in 1Q which was believed to be transitory as of May could be more persistent;
3. uncertainties are higher, weighing on sentiment.

As BofA shows, there are data to support each of these points.

• First, on global growth, global PMIs have turned lower showing broad-based weakening in manufacturing (Chart 1).
• On inflation, the components which weakened in 1Q are still largely in the “transient” category but the concern is that as we showed recently, inflation expectations have dipped lower – according to both survey and market measures (Chart 2).
• And, on confidence, business sentiment continues to show concerns over trade with the number of mentions of trade-related comments in the Beige Book climbing (Chart 3).

Meanwhile, even as the level of consumer confidence is still elevated, the June Conference Board report showed the biggest monthly drop since last December and the labor differential narrowed.

Which is why among this growing weakness in the consumer sector, the Fed is particularly concerned about the weakness in manufacturing data spilling into the consumer figures.

In any case, for a Fed which has previously warned against moving abruptly in the face of one or two data points – or at least when the data points suggested further tightening –  this dovish turn shocked many. Amusingly, BofA notes that as Powell noted in his speech this week, “it’s important not to overreact in the short term to things that happen to be temporary or transient.” But then he reiterated his comments from the press conference that preemptive policy can be effective stating that “an ounce of prevention is worth a pound of cure.”

Well, which is it?

Here, BofA’s Meyer thinks that as of this moment, the “no longer patient” Fed is willing to move simply on heightened risks of below-trend growth but they do not need to wait for confirmation in the data. In addition, inflation is low and they are moving in the direction of embracing a more explicit “make-up” strategy for inflation to get it above the 2% target and have expectations move higher. Fed officials are concerned about limited policy space given the proximity to the effective lower bound (ELB), and the best chance of ultimately getting more policy space is to ensure that the recovery continues. In other words, “use bullets now with hopes that it helps get you even more ammo later.”

Of course, the Fed should be careful just how powerful the bullets are: as we wrote earlier, i) the Fed has never cut 100bp within a year in an easing cycle outside a recession, and ii) The Fed has never started an easing cycle with a 50bp cut outside a recession. But we digress.

Going back to the Fed, Powell now has to thread an especially thin needle or else risk upsetting the market, which is why  Fed officials will be monitoring every piece of data between now and the July meeting with a particular focus on the following: outcome of the G20 meeting around trade, ISM manufacturing and services surveys and the employment report. Let’s address these:

1. G20 (June 29-30): As we wrote in the G-20 preview, we expect a friendly meeting between Presidents Xi and Trump with both sides agreeing to delay further trade measures while negotiations continue. However, a substantial deal is unlikely to be reached. This would be a somewhat “neutral” outcome.
2. ISM surveys (July 1 and 3): Manufacturing surveys, declined further in June with several falling into negative territory (Table 1). After adjusting these to mimic the ISM measure-a simple average of five indexes: new orders, production, employment, supplier deliveries and inventories-the decline is not as stark as the headline readings suggest. That said, we expect the ISM index to decline in June to 51.0 from 52.1, with risks that it falls more.
3. Employment report (July 5): the early indicators are mixed. On the one hand, initial jobless claims have remained low and our internal data suggests private payrolls growth of 234k. On the negative front, the labor differential in the conference board survey narrowed significantly, showing a recession-type decline on the month (Chart 4). We forecast job growth of 155k, close to the 3-month average.

The Fed will also keep a close eye on the University of Michigan survey (released on Friday. June 28th after this goes to press), to see whether the drop inflation expectations is confirmed. The China PMI on June 29th will get some attention.

Assuming there are no shock outcomes, a 50bp cut at the July meeting seems unlikely (although the market is pricing 30%+ odds of a double cut). But it will be a close call between a 25bp cut in July or September. It goes back to the push and pull of not “overreacting” and being preemptive on policy. But if the outcomes are more negative – tariffs go into effect for the remainder of Chinese imports, the ISM manufacturing survey slips below 50 and payrolls are under 100k – the Fed will not blink an eye at cutting 50bp and promising more (at which point the recession will be official)

How to avoid a Tantrum

With that said, BofA reminds us that there is an important variable missing from these scenarios: market expectations. As noted above, the bond market is virtually certain that the Fed will cut in July pricing in 32.5bp of cuts (implying a split between a 25 and 50bp cut). It is possible that the data and events over the next few weeks send a decisive message and either confirm or deny market pricing. But if the message is muddled, Fed officials will have to employ “open mouth operations.” This is particularly the case if they want the option of not cutting as quickly.

Of course, in a world in which only the Fed matters, with current pricing a failure to cut would cause a major shock to the markets.

This begs the critical question: is the Powell-Fed willing to push back against markets or are they too worried about a tantrum? As parents know well, when your toddler has a tantrum, there is one golden rule: ignore him and do not reinforce his bad behavior. The louder the toddler yells, the softer you should speak and the more calm you should be. Post-tantrum-once your kid is calm-you gently explain why you couldn’t meet his demands.

But, as Meyer correctly points out, it doesn’t seem that Chair Powell has studied parenting books. Instead this Fed is very concerned about markets behaving badly and, in turn, derailing the recovery. It is therefore possible that the Fed tries to talk the markets back from a cut in July, but if markets react badly to their guidance, they end up delivering the cut.

Which brings us to the final observation of the “Powellful Put” Paradox: how would one rate the Fed as a risk manager?

According to BofA, the Fed is supposed to be a master of risk management with the goal of achieving full employment and price stability. This means that the Fed will be weighing the costs and benefits of every policy decision. How is the Fed thinking about rate cuts:

Benefits:

• The recovery will be extended with growth back above trend as monetary policy successfully offsets the drag from the trade war and fiscal tightening.
• Inflation expectations turn higher on the view that the Fed is going to remain accommodative.
• Realized inflation moves higher as capacity is used and expectations head higher.

Costs:

• Financial market instability as rate cuts further inflate asset bubbles and feeds the “Fed punchbowl.”
• What if using these precious bullets does not yield desired results given the structural forces holding back inflation?
• Easier policy by the Fed “forces” other central banks to also ease. There are limited tools globally.

In a risk management world, if the Fed makes a mistake, they would prefer it to be in the order of cutting too much. The Fed has plenty of tools to tighten policy if they ease too significantly: just recall Bernanke’s “15 Minutes” comment. But if they wait and policy ends up being too tight, the tools are limited to ease. The Fed understands this constraint and it seems to be pushing them into the direction of cutting sooner rather than later.

Which brings us back full circle: the market, just like the petulant toddler named above, knows that the only reason why the market is at all time highs is because the  moment its cries, the Fed will cut rates. Of course, the market is also not stupid, and understands very well that the economy is on the verge of, if not already in, a recession, and that the Fed can only ease so far before the fundamental contraction take over, and results in a market crash (the type both Paul Singer and Goldman Sachs are now warning about).

But for now, as the Fed has removed the ability – or need – to act rationally, and will instead feed the toddler until it explodes, everyone continues to buy risk assets despite the clear knowledge that this will all end in disaster, which also explains why investor sentiment, as BofA noted at the very top, has never been more negative.

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

Via Economic Cycle Research Institute (ECRI),

De-globalization is deepening, and its roots run much deeper than the trade war. In fact, it was early 2016 when we explained that de-globalization had been going on for years. While ECRI does not offer policy prescriptions, de-globalization has important implications, and reports from sources ranging from the Council on Foreign Relations to the Bank for International Settlements have since echoed our findings.

To reiterate, there are cyclical and structural components to globalization. ECRI’s measure of globalization is the difference between the growth rates of world trade and GDP (chart), which experiences cyclical swings associated with global growth cycles. This is because, during an upturn in global growth, global trade growth tends to outstrip global GDP growth, while the opposite is true during a global growth downturn.

Quite separately, structural globalization or de-globalization occurs when this measure is substantially positive or negative, respectively, for extended periods. A wave of structural globalization dominated the 1990s and early 2000s, boosted by the 1994 North American Free Trade Agreement (NAFTA) and China’s 2001 entry into the World Trade Organization, unleashing what we dubbed “the globalization tsunami” at the time. The cyclical component of global trade overwhelmed structural globalization only around recessions, with our globalization measure going deep into negative territory around the 2001 U.S. recession and the Global Financial Crisis (GFC).

Since the GFC, however, structural de-globalization has emerged as the dominant force, as our measure has been almost exclusively negative since 2011, with a brief foray into positive territory due to the cyclical upturn in global growth around 2017 – which we correctly forecast in 2016.

As the ongoing cyclical global growth downturn has taken hold, de-globalization has expanded sharply, subsequently being exacerbated by the trade war. In turn, our globalization measure has plunged to its lowest reading since the GFC, and its worst reading on record away from recessions.

However, the pains of de-globalization are not shared equally. Exports account for only 12% of GDP in the U.S., and less than 20% of GDP in the major Asian economies of China, Japan and India. Meanwhile, in the Eurozone, exports account for roughly 30% of GDP in France, Italy and Spain, and a whopping 50% of German GDP.

Therefore, in the longer run, the ebb tide of globalization is more likely to leave the major European economies high and dry, while hurting, but not wrecking, the big Asian economies, and posing a modest headwind to U.S. growth. And, as de-globalization predates the trade war, any resolution to the trade war may offer a relatively small boost, but not enough to offset structural de-globalization.

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Click here to review ECRI’s recent real-time track record. For information on ECRI professional services please contact us. Follow @businesscycle on Twitter and on LinkedIn.

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Former New Jersey Gov. Chris Christie (R) weighed in on Thursday night’s Democratic primary debate on “The Late Show With Stephen Colbert,” showering 2020 candidate Kamala Harris with praise while knocking ‘stuttering, stammering’ frontrunner Joe Biden and ‘too old’ Bernie Sanders who ‘talks weird.’ 

Christie then singled out MSNBC host Chuck Todd, who he called “the most pretentious know-it-all on network news.” 

“The guy is just a complete ass,” Christie continued. 

The former New Jersey governor also had a hilarious take on Rep. Eric Swalwell and other candidates he considers weak. 

Christie also noted that post-debate spin room analysis that usually chalks up winners and losers on debate nights was almost just as important as performances during the debate itself. 

“So for instance, like tonight? Say goodbye, right, to [author] Marianne Williamson. Say goodbye to [entrepreneur] Andrew Yang. Goodbye Andrew.”

“Say goodbye to [Rep.] Eric Swalwell,” he said of the California congressman. “I mean, ‘we’re going to break up with Russia and we’re going to make up with NATO?’ His mother is embarrassed by his performance tonight.” –The Hill

Scarborough apologizes

Following the dismal debates, MSNBC host Joe Scarborough apologized, calling them a “disaster for the Democratic Party,” while hoping that voters didn’t watch. 

“With apologies to our friends and watching, last night was a disaster for the Democratic Party,” Scarborough said on “Morning Joe” Friday. “My only hope is people were not watching and I will tell you why.”

Scarborough said that the infighting among candidates was less than stellar. 

“So they’re lined up in trench warfare, ready to get out of the trenches and charge Donald Trump. Instead, they all turn their guns on each other and shoot each other, and everybody is yelling at each other all night,” he said, adding “If you’re an American and this is your introduction to these candidates and the Democratic Party, and all you see are 12 people yelling at each other, trying to interrupt each other, insulting each other, you’re like, ‘You know what. I thought Donald Trump was a clown show. I’m changing the channel.'”

Scarborough called former Vice President Joe Biden’s performance one of “the most disturbing debate performances” he had seen, and questioned Biden for sticking closely to the debate’s rules and not focusing more specifically on issues in his answers.

“It was one of those moments where you’re going, ‘My God, is he going to complete his sentence?‘” Scarborough asked. –The Hill

Scarborough also laid into Bernie Sanders (I-VT) who he accused of not being prepared and using recycled talking points employed against Hillary Clinton in 2016. 

“Bernie Sanders was yelling all night. Bernie Sanders didn’t prepare for the debate,” said Scarborough. “It showed because he basically gave the same debate performances this year that he gave four years ago. It may have worked when it was Bernie Sanders against Hillary Clinton. It did not work last night.” 

Scarborough also criticized the Democratic candidates for adopting a slate of progressive policy platforms, including decriminalizing border crossings and providing health insurance through a public option to undocumented immigrants, suggesting that they would not be able to beat Trump with that focus.

“It was a bad sign for me, as someone who desperately wants to see Donald Trump taken out of office,” Scarborough said.

He slammed Sen. Kamala Harris (D-Calif.) for calling out Biden on his history of opposing the policy of busing black students to predominately white schools. One of the most heated moments of the debate came as the California senator attacked Biden’s record on civil rights. –The Hill

Meanwhile, we’ll be making more popcorn for the next debates, which will be held July 30 and 31 in Detroit. 

via ZeroHedge News https://ift.tt/2Ysptp3 Tyler Durden

Authored by Charles Hugh Smith via OfTwoMinds blog,

Will bitcoin appear on this chart of global reserve currencies in the future?

Could a non-state cryptocurrency like bitcoin become a global reserve currency? I first proposed the idea back in November 2013, long before bitcoin’s rise to $19,000, decline to $3,200, recent ascent to $13,000 and current retrace.

The idea is intriguing on a number of levels. In terms of retaining value though thick and thin, the ultimate reserve currency cannot be printed (and thus devalued) with abandon by a government. Gold and silver have served as the ultimate reserve currency, as precious metals can be traded for commodities and services, provide collateral for debt and serve as reliable stores of value.

While many observers believe gold is still the only reliable reserve currency (or if you prefer, the only reliable backing for government-issued paper money), it’s a worthy thought experiment to ask if a digital currency could also act as a reserve currency.

Since there is no real-world commodity backing the digital currency, its value must be based on scarcity and its ubiquity as money. The two ideas are self-reinforcing: there must be demand for the digital money to create scarcity, and the source of demand is the digital currency’s acceptance as money that can be used to buy commodities, goods, services and (the ultimate test) gold.

It follows that the first step in a non-state issued digital currency becoming a reserve currency is that it isn’t created in quantities that dwarf demand. If the digital currency is issued with abandon, it cannot be scarce enough to gain any value. If I own one quatloo (our hypothetical digital currency) and a trillion new quatloos are issued tomorrow, the value of my one quatloo will decline to near-zero.

The second step is its widespread acceptance globally as money, i.e. a store of value and something which can be traded for goods and services.

There is a bit of a built-in conflict in these two requirements. To be useful in the $60 trillion global economy, the quatloo must be issued in size: there must be enough of it around to grease transactions large and small in all sorts of markets. Using the U.S. dollar as a guide (since the USD is the primary reserve currency), we can estimate that a minimum of $1 trillion in quatloos would be needed to become a practical global currency.

To act as a reserve currency, another trillion or two would be needed, as nations would hold these quatloos as reserves. (Nations hold an estimated $7 trillion in USD reserves, about $3 trillion euros and $1 trillion or so in yen, pounds and other currencies.)

But issuing quatloos in these quantities would remove any scarcity value. Thus the issuer of the quatloo would have to carefully issue more quatloos only when demand justified the need for more monetary “grease” for the global economy.

If on the other hand skyrocketing demand/scarcity drove the value to the stratosphere, holders of the quatloo would rejoice, but this volatility would present its own set of risks for those seeking to use the quatloo as a reserve against currency volatility in the home-country currency. If a digital currency can leap ten-fold in a short time, then might it not drop with equal volatility?

Volatility is the enemy of reserves; the holder of reserves needs a liquid (meaning it can easily be sold or traded in size) currency that predictably retains its value. A volatile currency poses risks, as do currencies that cannot be traded in size without drastically influencing the market value of the currency.

These conditions pose a steep challenge for any cryptocurrency, but they are not insurmountable. Even as a niche currency, non-state issued digital currencies could play a role in the global economy, especially if government-issued fiat currencies destabilize/ devalue due to massive money creation by desperate central banks and state treasuries.

Is scarcity enough to back a non-state issued currency? Bitcoin offers a real-world experiment.

As for Facebook’s proposed Libra digital currency–it’s simply state-issued fiat currency in a corporate package. Libra will be backed by state-issued fiat currency, so it’s nothing but a corporate-controlled proxy for all the unbacked, prone-to-hyperinflation state currencies.

Will bitcoin appear on this chart of global reserve currencies in the future? How would Venezuela or Zimbabwe have fared had they invested some of their reserves in bitcoin in 2013, or even 2016? Much better than they did attempting to launch a state-controlled digital currency (Venezuela) or relying on the printing press.

*  *  *

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via ZeroHedge News https://ift.tt/2YkJQ7d Tyler Durden

A quick blurb from this morning’s Early Morning Reid (from DB’s Jim Reid), which confirms that the vast majority of investors expect deflation to pick up from here, and yields to drop further before (if) they rebound.

I’m at a big 2-day macro DB hosted conference at the moment with investors representing over 25 trillion of investable capital attending.

There were a few shows of hands through day one to gauge the mood and a couple of the interesting takeaways from me was that about 90% expected 10yr US yields to go to 1.70% next versus 2.30%, and around a similar percentage expected the Euro construct to look similar in 10 years time than it does today (in terms of countries in it) – so relatively sanguine about Italy. On the second question I was one of the 10%! The conference was held in beautiful 30 degree London sunshine but that seems to have been near Arctic like conditions compared to what was the hottest June day on record in mainland Europe.

This should probably not come as a surprise because as the last BofA Fund Manager Survey found, a near-record, or 32%, of FMS investors expect short-term interest rates to fall over the next 12-months, and just 10% expect long-term interest rates to rise vs. 89% expecting higher short-term yields & 63% expecting higher long-term yields respectively as recently as Nov’18.

The reason: a record number of investors think the recession is imminent as an all time high 87% of investors say the global economy is late cycle.

Everyone knows what follows the “late cycle.”

via ZeroHedge News https://ift.tt/2Nm5oQ5 Tyler Durden

Authored by Wolf Richter via WolfStreet.com,

The average age of passenger cars and trucks on the road in the US ticked up again in 2019, to another record of 11.8 years, IHS Markit reported today.

When I entered the car business in 1985, the average age had just ticked up to 7.8 years, and the industry was fretting over it and thought the trend would have to reverse, and customers would soon come out of hiding and massively replace those old clunkers with new vehicles, and everyone would sell more and make more. But those industry hopes for a sustained reversal of the trend of the rising average age have been bitterly disappointed:

This rising average age is largely driven by vehicles lasting longer – an unintended consequence of relentless improvements in overall quality, forced upon automakers by finicky customers in an ultra-competitive market where automakers struggle to stay alive. To make it in the US, they have to constantly improve their products, and stragglers that can’t compete are left unceremoniously by the wayside. US consumers are brutal.

This unintended consequence of rising overall quality contributes to the dreadful industry problem: The US, despite constant population growth, is a horribly mature auto market.

In 1999, so 20 years ago, new vehicle sales reached a record of 16.9 million units. This record was broken in 2000, with 17.3 million units. Then sales tapered off. By 2007, they’d dropped to 16.1 million units. Then the Financial Crisis hit, GM and Chrysler went bankrupt, Ford almost did, and peak-to-trough, sales plunged 40% to 10.4 million units by 2009.

The recovery has been steep, and in 2015, finally the old record of the year 2000 was broken, but barely with 17.48 million units, and in 2016, the industry eked out another record of 17.55 million units. And that was it. Sales have fizzled since then. So far in 2019, the data indicates that sales are likely to fall below 17 million units, according to my own estimates, bringing the industry right back where it had been 20 years ago in 1999:

Yet, given the longer average age of the vehicles on the road across the entire fleet, even stagnating sales produce a rising number of vehicles in operation. So it’s not that Americans as a whole have fewer cars – far from it: They have more cars, and those cars are on average older.

The number of vehicles in operation (VIO) in 2019 rose by 5.9 million units from 2018, to a new record of 278.3 million vehicles, according to IHS Markit. In other words, during the 12-month period, about 17 million new vehicles were added to the national fleet; and about 11 million units were removed from the fleet, either by being sent to the salvage yard or by being exported to other countries.

What you see in the chart above is the future supply for the used vehicle market. Used vehicle sales will likely come in just under 40 million units this year – so about 2.3 times the sales volume of new vehicle sales.

The fact that the average age of the vehicles in operation is rising doesn’t mean that all people hang on to their cars longer. On the contrary.

Sure, we drive a car we bought new 12 years ago; it’s in great shape, looks good, the six-figure odometer reading is just a blip, and we’re going to hang on to it because there is no reason to get rid of it. We know other people on the same program. Millions of Americans do that.

But other people have two-year or three-year leases, and this is a booming business. More and more people lease. And when the lease ends, their old vehicle is returned to the leasing company, which owns the vehicle, and which then sells it at auction, where a dealer buys it and then sells it as a used vehicle to a retail customer. These vehicles are only two or three years old, and often in mint condition.

Then there is the huge fleet or rental cars of about 2.2 million vehicles that are turned over every couple of years or so to enter the used-vehicle market, much of it via auctions held around the country.

In addition, there are corporate and government fleets that get turned over at different intervals, and those units end up on the used vehicle market.

So the rising average age doesn’t mean that Americans drive the same vehicle for a longer period of time – though they can, and many do – but that there is a strong market and demand for good older vehicles, and people buy them and drive them for a few more years.

But it is an issue for automakers. They could sell a lot more vehicles – and I mean a whole bunch more – if their vehicles on average reached the end of their life after eight years. But our finicky consumers don’t go for this program anymore. Quality is one of the factors that decides whether an automaker is going to make it or whether it will die.

What’s left for automakers to do to increase revenues in this environment of two decades of stagnating unit sales? A three-pronged industry strategy has emerged: Shift customers to more expensive vehicles, such as from cars to trucks and SUVs; load the vehicles with more goodies each year, such as driving-assist features; and jack up the prices pure and simple.

And automakers have been doing it across the board, which has the effect that for many Americans, new vehicles have become too expensive, and they stopped buying them, which puts further downward pressure on unit sales. But Wall Street, which keeps pushing automakers to go further and further upscale – because that’s where the money is – hasn’t figured this out yet.

Here are six charts on the used-vehicle market, plus my “Chart of Carmageddon” for new vehicles. Read... Used-Car Wholesale Prices Surge, Retail Volume Drops. New Cars Sink Deeper into Carmageddon

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Just over a week ago, by Morgan Stanley, we concluded that if the bank is right, “the world is now in a recession.” As a reminder, last Friday we reported that the Morgan Stanley Business Conditions Index just suffered its biggest one month drop in history.

Predictably, this was sufficient ammo for Morgan Stanley’s doom and gloom equity strategist Michael Wilson to launch on what may be his most bearish tirade so far this year, and as the strategist writes, “data points and analyst sentiment are falling and we think PMIs and earnings revisions are next.” That’s just the beginning:

Decelerations and disappointments are mounting:

• Cass Freight Index
• Retailer earnings
• Durable goods orders
• Capital spending
• PMIs
• May payrolls
• Semiconductor inventories
• Oil demand
• Restaurant performance indices…

and our own Morgan Stanley Business Conditions Index (MSBCI). Looking at the MSBCI in particular, the headline metric showed the biggest one-month drop in its history going back to 2002 and very close to its lowest absolute reading since December 2008.

This index has a tight relationship with ISM new orders and analyst earnings revisions breadth. Our analysis shows downside risk to ISM new orders (25% y/y), S&P earnings revisions breadth (6-13%) and the S&P 500 y/y (8%) if historical links hold.

While we showed the MS BCI last week, here it is again in the context of PMI Headline and New Orders. As Wilson warns, “be prepared for a sharp fall in PMIs” as the MSBCI suggests the Mfg PMI New Orders component will fall to 40 over the next few months, which would be down approximately 25% on a y/y basis. Another way of putting it – if Morgan Stanley’s indicator is right, the world is already in a recession.

But it’s not just Morgan Stanley’s proprietary indicator that confirms a global contraction has begun.

As The Market Ear points out today, there are two other signals which are pretty much fail safe coincident recessionary indicators:

1. The Fed has never cut 100bp within a year in an easing cycle outside a recession.
2. The Fed has never started an easing cycle with a 50bp cut outside a recession.

These are notable, because as the first chart below shows, 4 rate cuts over the next 12 months are now effectively priced in.

Meanwhile, a 50bps cut, which almost all now expect will be announced in July, is indeed a traditional recessionary indicator.

What is fascinating is that while the bond market clearly agrees, with the 10Y yield back to 2.00%, equities continues to float, and levitate, in a world of their own, confident that Fed rate cuts will be more than sufficient to offset the economic slowdown that a recession will usher in.

Meanwhile, speaking of “surprise” 50 bps rate cuts, and the massive dislocation between the bond and equity markets which has resulted in another record divergence in the market’s “alligator jaws”…

… here is an anecdote from the Global Macro Investor and founder or Real Vision, Raoul Pal, which shows why any trader who correctly times the convergence between stocks and bonds, may just be able to retire afterwards.

From Raoul Pal’s twitter account on “the story of the greatest macro trade I’ve ever seen.”

Back in 2000, the macro backdrop was very similar to now and the  forward looking data was suggesting a recession with the bond market was pricing in around 75bps of cuts but sell side analysts would hear none of it. They were sure the good times would continue to roll. But the macro guys, many of whom had been forced to close shop in 1999/2000, knew that the first recession in 10 years was imminent.

On January 3rd 2001, with the US economy still growing at 1.4%, the Fed surprised with a 50bps cut when many people hadn’t even returned back to work from the  holidays.  But one ex-GS prop trader, now at one of the worlds most famous hedge funds, drove to his half empty office and went limit long December 2001 Eurodollar interest rate futures. His bet was that after a massive equity bull market, a tech bubble, Y2K inventory unwind and over confidence, the economy was likely to be very fragile and the Fed were going to have to massively cut rates.

You see it’s not rocket science. The Fed generally don’t cut once. And Greenspan LOVED low rates. So, though the markets were pricing in 75bps, this trader thought it was massively mispriced. After putting on the maximum position he could, he left the office and flew to his house in Mallorca to continue his vacation and stop himself trading.

His entire bet was one trade only.  Nothing else but the Dec 2001 Eurodollar futures. On Jan 31st the Fed cut again, another 50bps. This was a huge shock and the market quickly realised that the Fed were well behind the curve and the full downside of the extended business cycle lay ahead. The hero of our story was now up, what is technically known as a “shit ton” of money. He did nothing, just hung out at his house in Mallorca, where no brokers or other traders could talk him out of his massive conviction.

The Fed continued to cut and the economy began to tank as rates were in free fall. By June he was a few hundred basis points on side and with the stunning leverage offered by Eurodollars, his positions was ENORMOUS and he was now up “large” (technically more than a shit ton).  But over-positioning, & government and Fed jawboning caused a rather large correction (around 70bps if my memory serves me correctly). His boss, one of the most famous risk takers in history, flew to London and asked the trader to join him at office to talk about his trade. They met at their offices outside London and big boss explained that the trade had been amazing but he’d given a lot back therefore did he want to take profit or not. The trader, without blinking, said, I’d like to double up!

Big boss could tell the trader was in the groove, and increased his limits, in one of the best risk management calls I’ve ever seen. Our hero doubled his position flew back to Mallorca. So, by June, he had only traded twice; once to enter the trade and once to double it.

In November, the trader flew back to London, closed his position for an absolutely enormous profit and basically retired from the payout. Now, that is how to trade macro. When a set up is so perfect and so clear, you get one shot at the prize – The fabled “Career” trade. Another example would be Richard Rainwater’s enormous long trade in oil in 1999 from the $11 low. The perfect set up. The billion dollar trade. Soros had it in Sterling and PTJ in 1987 and 1990 (Japan).

What was so good about the Eurodollar trade is the trader understood that the Fed couldn’t cut once, or too little, or a bigger panic would ensue (I.e the Fed’s put isn’t it enough). Also, unlike equities or commodities, Eurodollars are relatively predictable if you know where rates are likely to head, as they are anchored to Fed funds, in essence ( unlike bonds too, I guess). Thus, it perfectly expressed the view.

I strongly believe we have the near exact same set up now, with the added kicker that if the dollar goes up, there is a gigantic tailwind to the trade, making it an extremely skewed risk reward. Maybe one of the best I’ve ever seen. This set up has been in place for 9 months now and is why I’m very long Eurodollar interest rate futures. Options were ultra cheap and the dollar hasn’t yet made its move. Vol is too low compared to the potential upside in these as we head to negative rates, if the dollar squeezes higher. This makes an asymmetric trade crazily asymmetric.

What’s even better is that at the start of Q4 2018, the market was record short Eurodollars, skewing it even further in its asymmetry.   But, all the action so far has preceded the first Fed cut. When the cuts start the odds are that they will be bigger and faster than expected and the real juice on the trade is still to be had, just like in 2001 because rates will go  negative and then they will force the long end down to zero. Maybe the greatest trade in the world is still to be made. This is why I love macro. Also, remember, before you @ me, time horizon matters. Mine is long as that where I think my edge is.

So for all those who – like Pal – believe that the tag team of Powell and Trump will send rates negative to deflect the now inevitable recession, unleashing the infamous Albert Edwards “ice age”, the “trade of a lifetime” is not to short stocks, which may just as easily keep rising if the Fed has decided to debase the dollar (see Weimar, Zimbabwe, Venezuela), but to simply go long ED futs and just wait for that retirement check to be cashed… or perhaps not cashed as at that time any cash deposits will likely result in an interest payment to the bank.

via ZeroHedge News https://ift.tt/2Nlk55Z Tyler Durden

Via AdventuresInCapitalism.com,

Longtime readers of this site know that I try to avoid making big stock market calls as I feel that I have no edge there. An overvalued market perched on shaky fundamentals can always become more overvalued. Besides, opinions are worth what you pay for them—which incidentally is free around here. I’d rather focus my energy on esoteric pockets of the world that are under-analyzed and likely to offer analytical edge to those who are willing to peel away at the onion. That said, recent data seems to imply that the US economy is slowing and the pace of decline is accelerating rapidly.

I find most US Government statistics to be on par with Tesla’s (TSLAQ – USA) financial statements (ie. mostly made up). Fortunately, there are other places to seek out reliable data. I like to look at railcar loadings and trucking volumes. You don’t have much of a modern economy without stuff moving around. I like to look at automobile purchases and new housing starts as the upstream supply chain is simply massive in these industries. I analyze credit statistics and delinquency data. All across the various data points, we see a slowdown. Will it accelerate? I don’t know, but we are ten years into this economic cycle—in other words, we’re sort of due for a recession. The bigger question is what will the Fed do? I suspect they will massively over-stimulate and make the situation worse. What will the market do as this all unfolds? Who the hell knows?

One part of me says that the stock market should decline as the economy slows. At the same time, history says that when governments print money, stock markets tend to explode higher. What if we are in a subdued version of a Weimar, Venezuela or Zimbabwe scenario where the stock market races ahead despite the economic situation? In many ways, guessing more than a few steps ahead is simply too hard. Besides, I want to buy good businesses at outstanding prices—not try and guess what the overall market will do. I simply have no edge there.

When the economy slows, the ego trade is always to short the market—either a collection of businesses or a broad-based index. I myself am occasionally guilty of the latter—until I ask myself what the hell I am doing? What if we go the Weimar route here? The losses are infinite!! I can buy longer dated index puts, but I don’t feel I have any special edge in guessing the timing of a market decline—even if implied volatility is rather affordable currently. So, what am I looking at for my book? I’m looking at “long-shorts.”

The rules of the jungle say that the most you can make on a short is 100%. The real money is made by being long. I always want to be long. In this case, I’m looking at businesses that do well when the overall economy isn’t well. For lack of a better term, I’m going to call these positions “long-shorts.” I’m the owner of a business that goes up exponentially if something bad happens.

What does a “long-short” look like?

One of my largest positions is a company named Altisource Portfolio Solutions (ASPS – USA). Its primary business is handling residential mortgage defaults. As you can imagine, that’s been a lonely place to be over the past few years and the share price reflects this fact. Meanwhile, the shares are quite cheap—even if there is no increase in their business. If housing defaults pick up, this has multi-bagger potential (more to come in a future article).

I also own natural gas producers. Thus far, I’ve been early, but I don’t think I’m wrong. An increasingly disproportionate share of natural gas comes from byproduct shale oil production along with unprofitable dry gas production. As credit shuts off to money losing producers, supply will decline at a time when demand is rapidly increasing—even if the US economy slows a bit. How will they fund new drilling during a credit crisis? With rapid decline curves; could gas go to some surprisingly high number? Those who survive the current low pricing regime could be huge winners.

I’m focusing on industries like shipping where a global recession should lead to a reduction in new vessel deliveries at a time when IMO 2020 should lead to an increase in vessel scrapping.

I’m looking at sectors like for-profit education that benefit from an increase in unemployed people seeking to upgrade their education.

I’m trying to think outside the box. Basically, I want my businesses to benefit from a slowdown or at least benefit from someone else’s credit getting cut. After a lot of expensive lessons over the years, I only invest in businesses without the near-term need for external financing. By definition, my businesses have better balance sheets than the rest of the sector.

I suspect we are entering a rough patch for the global economy. You cannot undo three decades of global supply-chain development and not expect a slow-down. Businesses can deal with almost any political situation—except uncertainty. I suspect that as the world pivots towards a cycle of nationalist strongmen, cross-border investment decisions will slow. With it, global growth will slow. Slowing growth perched atop historic debt levels could lead to surprising outcomes.

I have a whole lot of cash to deploy into a slowdown. Experience tells me that in a broad-market decline, all positions get hit and “long-shorts” only start to outperform as the immediate crisis begins to subside. If we crash upwards like Venezuela (the Fed is indeed talking about cutting interest rates at all-time market highs), my companies should still out-perform. I don’t know which way it breaks because the Fed is so unpredictable. I have to be ready for anything. Most likely, we break a bit to the downside, the Fed panics and we crash upwards. This isn’t a prediction but that’s been the pattern for the past few market declines. Meanwhile, each round of Fed stimulus seems to produce less real economic growth—just more bubble creation. Following this pattern, maybe the Fed won’t be able to re-start things as easily this time around?

I realize this article is more of a mental ramble than what I normally write. This is because the situation is unusually fluid. Central banks don’t normally stimulate at all time highs after a decade-long bull market. Global economic blocs don’t suddenly cut off other blocs. Economic statistics don’t normally collapse as rapidly as they currently are. It’s hard to say what happens next. Technological disruption and overseas asset impairments aren’t usually bullish developments.

For the past few years, I’ve been under-invested and somewhat tactical in the special situations I’ve gotten involved in. I have been unusually bearish and it has cost me some upside. Now, I’m actually looking to profit from this bearishness—the time has come to slip into “long-shorts.” Shorting the market is the risky man’s route as anything can happen. I want to think outside the box—there are untold ways to be invested in “long-shorts” that dramatically outperform because of what happens in our crazy world. The opportunities are only limited by your own vision of the future. There are a lot of ways to have multi-bagger upside potential right now—shorting ain’t it. As the news gets worse, don’t get suckered into shorting. It’s too risky with the Fed out there threatening to stimulate. Instead, seek out the “long-shorts.”

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

California gun owners have been rushing to buy bullets before a new background check law goes into effect statewide on Monday, the first of its kind in the nation.

“In the last two weeks I’ve been up about 300 percent,” one Sacramento ammunition store owner told Fox News, adding that people have been “bulking up because of these stupid new laws.” 

Enacted in 2016, Proposition 63 and SB 1235 require one of two types of background check when buying any type of ammunition for a firearm; a $1 “Standard Ammunition Eligibility Check” for anyone who has legally purchased a handgun in the state since 1990 (and whose CA Driver’s License or ID matches the address used at the time) which takes 2-3 minutes, or a more invasive $19 “Basic Ammunition Eligibility Check” that will take up to 10 days to complete.

Those with a valid “Certificate of Eligibility” (COE) issued by the DOJ will require a $1 fee. 

The instant background checks will reference information on file at the DOJ’s Automated Firearms System that automatically goes on file when a California resident buys a gun. 

A detailed overview of the law can be found here (via the California Rifle & Pistol Association / Michel & Associates). 

“Locking a door doesn’t stop a thief from breaking in, so putting another restriction on ammunition it’s not going to stop a crazy person or person with mental illness from getting ammunition or a firearm,” one LA-area gun store owner told Fox 11. 

There are currently 10 bills in pending in the State Legislature which would expand on the law – one of which would allow people to petition a court to disarm a resident deemed to be “at risk,” while another would extend restraining orders related to gun violence from one year to five years. 

A lawsuit has been filed against the state by opponents of the new laws, saying it violates their 2nd amendment rights. 

via ZeroHedge News https://ift.tt/2Xf6zVL Tyler Durden

Authored by Mike Shedlock via MishTalk,

China’s currency reserves ought to be increasing given its persistent trade surplus.

They aren’t… due to capital flight.

“China’s travel-account deficit began to increase sharply in 2014. = 80% of deficit in service trade” It is calc frm forex trade at banks in China, payments by credit cards and smartphones, ATMs by tourists going overseas and students studying abroad.”https://t.co/RvSRXadcqT pic.twitter.com/4LJShOEm3g

— Adam Tooze (@adam_tooze) June 23, 2019

Question of the Day?

While China’s surplus grew by $2 trillion from 2009 to 2018, its external assets rose by only $740 billion in the same period. What explains the $1.2 trillion difference? “Net errors & omissions” and disguised capital flight? One for @Brad_Setserhttps://t.co/RvSRXadcqT pic.twitter.com/imBDdPiBj6

— Adam Tooze (@adam_tooze) June 23, 2019

Brad Setser Explains

this is a relatively straightforward BoP question —

a) there is a bit of capital flight embedded in the current account (the overstated tourism balance)
b) errors and omissions (hot money, flight capital has been roughly equal to the surplus in the basic balance since 14)

1/x https://t.co/EFDqgoIQ9i

— Brad Setser (@Brad_Setser) June 23, 2019

This is a relatively straightforward BoP question —

a) there is a bit of capital flight embedded in the current account (the overstated tourism balance)

b) errors and omissions (hot money, flight capital has been roughly equal to the surplus in the basic balance since 14)

I have written about this in the past, but in the context of explaining why the equilibrium level of intervention by China has fallen (e.g. reserve growth no longer tracks the current account surplus)

In the preceding chart I subtracted errors from the basic balance, and compared it to my measure of the buildup of official assets — the difference is recorded private capital flows (in and out) — e.g. there was a modest net private inflow in 18.

Here is another way of cutting the data.  Cumulative reserve growth v the cumulative basic balance (CA surplus plus net FDI).  There is a bit of a gap, e.g. there has been some leakage.   But China also has ~ $1 trillion more in state assets than shows up in reserves.

Bottom line as far as I am concerned — China’s state (between the PBOC, SAFE and the big state banks) has ~ $5 trillion in assets (over $3 trillion as SAFE/ CIC, almost $2 trillion in bank assets), just under $1 trillion in liabilities

Chinese residents have a growing (but unrecorded) offshore asset position from the “flight capital” of the last five years (easily $1 trillion) — and as is well known FDI inside China tops Chinese FDI abroad.

Bottom line: there is capital flight, but it is covered out of the goods surplus– and the net foreign asset position of the Chinese state remains massive even if it isn’t growing as fast as before. I personally would not spin this as something all that alarming.

There is plenty to worry about in China: notably the domestic financial system’s fragilities and the ongoing inability of China to sustain its growth without rapid growth of credit and investment.   But I don’t really see a case for worrying about the BoP.

Full tweet thread here…

1.2 Trillion Disappears

Asian Review reports Quiet Capital Flight Dents China’s Sway as $1.2 Trillion ‘Disappears’

The IMF says China had $2.1 trillion in external net assets as of 2018 — the third-largest total after Japan’s $3.1 trillion and Germany’s $2.3 trillion, but well below its current-account surplus.

Normally, a current-account surplus moves in tandem with an increase or decrease in external net assets. But while China’s surplus grew by $2 trillion from 2009 to 2018, its external assets rose by only $740 billion in the same period.

The IMF says China had $2.1 trillion in external net assets as of 2018 — the third-largest total after Japan’s $3.1 trillion and Germany’s $2.3 trillion, but well below its current-account surplus.

Yu Yongding, an economist and former member of the People’s Bank of China monetary policy committee, offered a theory. If a Chinese company exports products worth $1 million to the U.S., it logs the amount as sales in trade with the U.S., according to Yu. But sometimes, only $500,000 ends up in the company’s bank account in China, while the other half remains abroad.

Yu said the accumulation of such money explains a portion of the $1.2 trillion. In China’s official statistics, a category called “net errors and omissions” covers such hazy transactions. For the 2009-2018 period, China recorded minus $1.1 trillion in this segment — suspiciously close to $1.2 trillion.

Net Errors and Omissions

Let’s label that correctly: Capital flight.

IMF Forecast

Trump Placated?

The IMF believes China’s net current account surplus will turn negative in 2022.

Setser does not see that yet and it’s easy to dismiss the IMF because the IMF is wrong far more often than right.

Yet, assume the IMF is correct. Does this placate Trump?

Not quite. It is highly likely that China’s surplus with the US simply moves elsewhere.

I discussed that idea two days ago in “Made in China” Soon to be Replaced by “Made in Taiwan”

Tariffs Won’t Work

In response, a friend of mine summed up things nicely: “The world has just changed too radically for tariffs to work like Trump expects. It’s like trying to fight World War III with muzzle loaded guns.“

If Trump puts tariffs on the entire world, few manufacturing jobs will return because everything is so automated. The only “success” Trump will see is turning the US into the highest cost producer.

Our Currency But Your Problem

This all goes back to Nixon who closed the gold window on August 15, 1971, ending redemption of dollars for gold. Nixon’s treasury secretary then famously stated “The dollar is our currency but your problem.”

Following Nixon’s “temporary” move, fiscal deficits exploded globally and the US bore the brunt of trade deficits.

Trade imbalances are now Trump’s pet peeve. But Tariffs cannot possibly fix the problem.

Trump is fighting a 1968 Vietnam-style “guns and butter war” (wanting both) with tools that cannot possibly work.

via ZeroHedge News https://ift.tt/2RHFi8C Tyler Durden