A Washington DC Judge has denied President Trump’s efforts to halt a lawsuit brought by 201 Congressional Democrats who have sued to require that Trump seek approval from lawmakers before accepting financial benefits from foreign governments, according to Bloomberg.
US District Judge Emmet Sullivan (who is also presiding over former national security adviser Michael Flynn’s case) issued a pair of orders on Tuesday. The first order denied Trump’s request to halt the lawsuit in order to immediately appeal Sullivan’s previous refusals to dismiss the case.
The second order allows lawmakers to begin collecting financial evidence to support their case.
The legislators assert Trump’s receipt of benefits through his far-flung business holdings — including his luxury hotel just blocks from the White House — violates a U.S. constitutional provision barring American presidents from accepting so-called emoluments from foreign governments without the prior permission of Congress. The Democrats previously told the court they want to look at the president’s finances and revenue sources.
The president’s lawyers say money flows into his businesses legally. The judge has not yet made a final determination on that issue. –Bloomberg
Sullivan, who ruled that Trump’s lawyers did not meet their burden of showing that a mid-case appeal would speed up resolution of the case, noted that the Democratic lawmakers told him they could quickly gather evidence.
via ZeroHedge News https://ift.tt/2J5uTQ9 Tyler Durden
How much more can US equity valuations expand as interest rates continue to drop? An analysis of German/Japanese equities says “not at all”, even though sovereign rates there are negative. Further, S&P 500 valuation history from 2012 and 2016 (when 10-year Treasuries were below 2.0%) agrees; multiples were either lower (2012) or the same (2016) as now. Bottom line: we’re near the top of rate-driven P/E multiple revisions, and now it will be up to earnings/trade talks to propel markets higher.
It’s not just the S&P 500 hitting a new record last week: data from Bloomberg shows the dollar amount of global debt sporting negative yields broke to a new high as well. The data (link at the end of this section):
$13 trillion of global debt now has a negative yield, assuring a nominal loss for any buyers at current levels.
It’s not just German and Japanese sovereigns in the mix here. Austrian, French and Swedish 10-years hit new negative yield levels.
A quarter of that $13 trillion is in the corporate debt market.
On paper, this should be fantastic for global equity valuations and also help boost US stocks:
As yields decline, the discount rate used to value future corporate cash flows should drop as well.
The math here is simple enough. At a 7% discount rate, for example, $100/year of cash flow is worth $1,429 ($100/0.07). Drop the risk free rate by 1.0 percentage point and the same $100/year is worth $1,667 ($100/0.06). That’s a 17% increase in value ($238) even though cash flows are unchanged.
No coincidence, therefore, that the S&P 500 is +18% in 2019 as 10-year yields have dropped by 73 basis points from their January highs (2.78%) to now (2.06%)
The question now: “How much can negative yields help valuations from here?” We pulled a few case studies to answer that question.
Case Study #1: Japan, the country most associated with negative interest rates:
Current 10-year JGB yield: -0.17%
Current forward Price/Earnings ratio for the MSCI Japan Index: 12.6x
YTD/One year return for MSCI Japan in dollar terms: +7.4%, -7.5%
Verdict: Even at near-zero/negative rates, Japan has seen both lackluster equity returns over the last year and low valuations relative to US equities (S&P 500 trading for 16.8x).
Case Study #2: Germany, the epicenter of the current global trend to negative yields:
Current 10-year Bund yield: -0.28%
Current forward P/E ratio for the MSCI Germany Index: 12.3x
YTD/One year return for the MSCI German Index in dollar terms: +9.5%, -9.4%
Verdict: Same as Japan – even the recent move to negative rates has not put a fire under German equities (1-month returns -0.4%).
Case Study #3: the US in 2012 and 2016, when Treasuries saw their all-time lowest yields:
2012 average daily 10-year Treasury yield: 1.80%. S&P 500 total return in 2012: 15.9%. Average forward P/E ratio (per FactSet): 12.0x.
2016 average daily 10-year Treasury yield: 1.84% S&P 500 total return in 2016: 11.8%. Average forward P/E ratio: 16.5x.
Worth noting; S&P 500 earnings grew by 6.0% in 2012 but just 0.5% in 2016
Verdict: the 2 years with the lowest Treasury yields saw valuations either lower (12.0x) or the same (16.5x) as today. Rates in 2012 and 2016 were modestly lower than Friday’s 2.06% close. US stocks still worked, but largely because of hopes for cyclically improving earnings.
The bottom line: there are clearly diminishing returns from ever-lower long run interest rates when it comes to how they inform equity valuations. Current valuations for German/Japanese equities show that outright negative rates do not help; both trade at sizable discounts to US stocks even though Treasuries pay much larger coupons. And when Treasury yields dip below 2.0%, as they did in 2012 and 2016, valuations don’t get much higher than today.
Why don’t yields help in the way simple valuation math says they should? We’ll wrap up with 3 ideas on this point:
Negative rates are a sign that the transmission mechanism between monetary policy and the real economy is broken. Economic actors and market participants are therefore reluctant to spend and/or invest.
They also signal that deflationary pressures are building, potentially reducing consumption and therefore future earnings power.
Looking just at today’s situation, negative sovereign debt yields push capital into riskier corporate debt at a time when this asset class may already be over-stretched. In the US, for example, total corporate debt is 48% of GDP, an all time record. This “crowding in” phenomenon makes the economy more fragile and threatens earnings stability in the next downturn.
The upshot from all this: history says don’t look for multiple expansion as global rates plumb fresh lows. Equity returns – in the US and elsewhere – will have to come from earnings growth now. All that puts extra pressure on the Trump/XI meeting at the G20 meeting later this week.
via ZeroHedge News https://ift.tt/2XsTW9b Tyler Durden
Russia’s defense technology sector is touting that Moscow’s newest S-500 ‘Prometheus’ air defense system is capable of reaching targets in space, according to the latest statements from the First Deputy General Director of the VKO Almaz-Antey, Sergei Druzin. The VKO Almaz-Antey, or “Air and Space Defense Corporation” is a Russian state-owned company and the country’s largest defense tech contractor.
Druzin told RIA Novosti this week that the S-500 can successfully take out “ballistic missiles of all types” and crucially that it’s missiles are capable of “working outside the atmosphere where aerodynamic control is impossible.”
Imagined S-500, Via Quora
This next generation of deadly Russian anti-air defense systems is expected to enter service (or at least prototype testing) by 2020, with the first group of officers set to begin training courses this year, which Russian media has previously described as forming “the backbone” of the country’s integrated air defense and missile defense shield.
Russian reports tout the S-500s range as capable of intercepting inbound projectiles at a distance of 600 kilometers. A prior TASS report said it could reach an altitude of 60km, which would put it in the Mesosphere of Earth’s atmosphere — though there’s long been debate over where ‘outer space’ technically begins.
The Russian internet news site Pravda.ru recently issued a report detailing the S-500s impressive sounding specs:
Russian state media began leaking early details of the next generation S-500 at the end of last year, at which point American defense officials began to muse over whether future Russian systems could soon take out US satellites.
It also constitutes a new threat to America’s stealth arsenal of jets including the F-22, F-35 and B-2 bomber, as The National Interest previously noted:
…while most of Russia’s defense industry suffered following the collapse of the Soviet Union, Moscow has continued to churn out quality air and missile defense systems. This is evident from systems like the S-400, S-300VM4 and S-350. Once deployed, the S-500 is expected to be networked with these existing systems to provide an integrated defense system. According to Majumdar, some U.S. defense officials worry that this system will be so capable that it might pose issues for stealthy warplanes like the F-22, F-35 and B-2.
Though we could see operational tests of the S-500 by 2020, it’s likely that only prototype versions would be delivered to the Russian military at that point; however, it’s as yet a secret as to just how far along production of the S-500 really is.
We wonder: given the current slow but steady advance in Sino-Russian relations, and given the growing list of countries seeking Russia’s current S-400 systems, is it only a matter of time before Beijing gets its hands on advanced S-500 missiles that could take out American stealth jets?
via ZeroHedge News https://ift.tt/2X7Roh3 Tyler Durden
Following Iran’s statement that diplomacy with the United States is “closed forever” after Washington sanctioned the Supreme Leader and other key officials, including on the foreign minister himself – making it practically hard to actually “do” diplomacy given sanctions also have the impact of restricting travel for the nation’s top diplomat – FM Javad Zarif slammed America’s track record with nukes.
“You were really worried about 150 people? How many people have you killed with a nuclear weapon? How many generations have you wiped out with these weapons?”Zarif said Tuesday in reference to Trump’s calculus that he refrained from ordering last Thursday night’s readied military strike against Iran when informed 150 people would die.
“It is us who, because of our religious views, will never pursue a nuclear weapon,” Zarif added.
Indeed it’s been long understood that since Iran’s Islamic revolution the Ayatollahs have been consistently against nuclear weapons on moral grounds, citing Koranic principles.
The US remains the only country in the world to have ever deployed nuclear weapons in a wartime situation, dropping two on Japan at the end of WWII.
Though scholars generally agree that the overwhelming destruction on Hiroshima and Nagasaki made counting impossible, conservative estimates tend to be at over 200,000 dead and wounded total wrought by the twin atom bombs dropped over those cities. And of course, the overwhelming majority of the Japanese dead and wounded were civilians.
Also on Tuesday Iran’s President Hassan Rouhani said the White House was “afflicted by mental retardation” amidst a war of words with the Trump administration. President Trump, for his part, said Iran could face “obliteration”.
He tweeted, “Iran’s very ignorant and insulting statement, put out today, only shows that they do not understand reality. Any attack by Iran on anything American will be met with great and overwhelming force.” The president then added, “In some areas, overwhelming will mean obliteration.”
The Administration intends to sanction Iranian FM Zarif later this week. Banning travel & sanctioning Iran’s top diplomat (regardless of what you think of him) is hardly a way to signal openness to diplomacy. Trump continues to box himself into war. https://t.co/AjGpbabstX
Further worrisome is that during an exchange with reporters on Tuesday, Trump said when asked about an “exit strategy” should hostilities with Iran break out, that:
“You’re not going to need an exit strategy. I don’t need exit strategies.”
While there’s hope we’ve already averted that precipice, the administration seems to be increasingly boxing itself in given it’s still ratcheting up the pressure campaign against Tehran while expressing a desire to avoid war.
Iran at this point is not budging, potentially leading to a dangerous game of chicken and final showdown.
via ZeroHedge News https://ift.tt/2Yjw59a Tyler Durden
“The fact that financial markets responded in very similar ways… lends credence to the view that these actions had the expected effects on markets and are thereby providing significant support to job creation and the economy.”
– Ben Bernanke defends the idea that markets and the economy respond significantly to quantitative easing
“… it will be like watching paint dry, that this will just be something that runs quietly in the background.”
– Janet Yellen refutes the idea that markets and the economy respond significantly to quantitative tightening
It doesn’t take much calculation to see that the Fed’s position on quantitative tightening (QT) is blatantly inconsistent with its position on quantitative easing (QE). You only need to notice that the excerpts above, taken together, violate the following pair of postulates:
When A and B are opposites, the effects of A should be opposite to the effects of B.
QT is the opposite of QE.
So financial markets and the economy should respond significantly to both QE and QT—although in opposite directions—or they should respond to neither QE nor QT. To claim otherwise, as in the excerpts above as well as other similar communications, is like arguing that one of the two postulates is wrong in the context of the Fed’s bond portfolio. That seems unlikely, but not impossible. In particular, the first postulate falls short of being an absolute truth, reality sometimes being more complicated than we’d like it to be. Consider that Newtonian physics seemed absolute enough until Einstein came along.
But former Fed chairs Bernanke and Yellen aren’t relativity theorists and haven’t framed it like that. In public comments and speeches that I’m aware of, they haven’t acknowledged the postulates in the first place let alone explained why they reject the logic of opposite actions yielding opposite effects. In fact, they don’t have to acknowledge or explain, because major media outlets—those with invites to FOMC press conferences and “sources” close to the key decision makers—rarely challenge the Fed’s narrative. If you’re established in the mainstream, there’s no upside to investigating inconsistencies, only the downside of being seen as impolite while jeopardizing your coveted invites and sources.
Awkwardness Alert: Here Comes a Chart that Really Excites Me
So let’s agree that the Fed’s positions on QE and QT are incompatible, at least on the surface, and it’s only decorum and incentives that prevent, say, the Wall Street Journal from calling bullshit. Since I’m only stating the obvious, you agree so far, right? Yes? Good. Now let’s see what the data say. And by “data,” I mean the Fed’s own Z.1 report. Regular readers might recall that I used the Z.1 to test claims about QE, posing two questions that seemed reasonable to ask:
How rapidly do banks and broker–dealers (BDs) expand credit during QE periods (QE1, QE2 and QE3) compared to QE pauses (all other times)?
How does bank and BD credit expansion compare to the Fed’s credit expansion during the same periods?
Here are the answers in chart form:
Call it TMI, but the chart still excites me five years after I first produced it. (You can find the latest iteration here and then follow links to earlier versions.) Two of the most obvious questions yield the cleanest imaginable outcome—the private financial sector and the Fed almost perfectly offset each other! The Fed grabbed the credit-growth baton for QE laps and then passed it back for QE pauses, but whoever didn’t have it more or less stood still.
In other words, whereas the Fed expected to increase the amount of credit supplied to the nonfinancial sector, the Z.1 suggests it only substituted one source of credit for another. That’s not to say QE had no effects at all—it clearly jolted market psychology, and therefore, influenced market prices. But the Z.1 refutes the primary mechanism claimed by Bernanke, which required QE to increase total credit supply. The hypothetical chart that fits Bernanke’s expectations would have been less argyle and more Charlie Brown zigzag, with total credit creation rising to new highs during QE periods and then falling back during pauses.
All of which brings us from QE to QT. As of this month, the Z.1 shows four consecutive quarters of the Fed reducing its net lending, thanks to QT. So the argyle effect is necessarily over, because the Fed no longer alternates between only two options—QE and not-QE. The pattern has to change, but to what? Well, here’s the answer:
Not as clean this time, right?
On one hand, the private financial sector appears to have neutralized some portion of QT by increasing its net lending after the Fed’s lending began to shrink. On the other hand, the financial sector’s increased lending didn’t exactly offset the Fed’s decrease. The change in the first is about half the magnitude of the change in the second.
Three Possibilities
So what exactly does the new QE–QT pattern tell us? I’ll suggest three possibilities, ordered from my least likely to my most likely:
QT might have caused the total amount of credit supplied to the nonfinancial sector to fall, a result that would be intriguing largely because of what it would say about the central bank’s expectations. If the private financial sector fully offset QE’s credit creation but not QT’s credit contraction, which is the conclusion you might reach if relying on nothing but the chart, then Bernanke and Yellen got it completely backwards. You’ll never see that conclusion in the Wall Street Journal, for the reasons noted above, but it actually fits the data.
We might not have enough QT data to reach a firm conclusion just yet. In other words, we might find that the picture changes with a few more QT quarters, especially as the volatility of these figures is quite high. That’s why I waited for four quarters of data before publishing my chart, but four still might not be enough.
Total net lending might have declined over the last four quarters even without QT, such that any QT effects were negligible, notwithstanding my chart. Instead, debt-saturated borrowers might have decided to take a rest after nine years of expansion and independently of monetary policy. This view lines up nicely with the Fed’s loan officer survey, which shows weakening demand for most types of loans during the last four quarters. It’s also consistent with the idea that monetary policy makers neither manufacture nor extinguish creditworthy borrowers, who travel to loan and underwriting desks from all corners of the economy, just not from the front steps of the Eccles building as the Fed adjusts its bond holdings.
For what it’s worth, my last point above ties into what I believe to be one of the biggest flaws in the Fed’s make-up. That is, scholars like Bernanke and Yellen reason from theories that require people to respond slavishly and robotically to every adjustment in public policy, however odd, circular or obscure the adjustment might be. In Bernanke and Yellen’s world, it’s no exaggeration to say that central banks really do manufacture creditworthy borrowers, as if the term open market account describes a freakish assembly line, not a simple bond portfolio.
Bottom Line
You’ll form your own views on all of the above, but my advice is to filter the Fed’s narrative with a healthy skepticism, however deferentially the media chooses to endorse it. I’m not saying the narrative is always wrong, just that monetary policy is notoriously difficult to evaluate. But not impossible—the Fed’s data can help separate fact from fallacy. Dig into the Z.1, and you might find that the best reality-check is a single chart—call it the Burberry truth—modest in ambition but scintillating nonetheless.
via ZeroHedge News https://ift.tt/324ruKe Tyler Durden
Earlier today we noted that, as every last trace of the 2008 global financial crisis (and the 2007 credit bubble peak preceding it) is coming back with a vengeance thanks to a world that is drowning in liquidity as central banks begin the final lap in the race to terminal currency debasement, HELOC-based bonds are making a triumphal comeback.
And just to make sure that there are plenty of weapons of derivative-based mass destruction, JPM is also doing everything in its power to bring back the BFG of the financial crisis which allegedly was the catalyst that nearly brought down most Wall Street firms: the synthetic CDO.
According to IFRE’s Chris Whittall, the biggest US bank which is set to report another quarter of disappointing trading revenues, “is stepping up efforts to get more clients trading credit derivatives, including synthetic CDOs, through a platform that makes it easier for investors to take leveraged bets on corporate debt markets.”
According to the report, the gateway to spread these weapons of mass destruction to as many pathological gamblers as possible is JPM’s Credit Nexus platform which was launched earlier this year, and is designed to simplify the “cumbersome process investors usually face to trade derivatives, including credit-default swaps, CDS options and synthetic collateralised debt obligations, according to a client presentation obtained by IFR.”
In short, retail investors will soon be able to trade CDS and CDOs (both cash and synthetic). What can possibly go wrong…
Some more details from the report:
Rather than taking direct exposure to such instruments, users of the platform can instead buy certificates packaging together a range of credit derivatives as well as corporate bonds, FX forwards and interest-rate swaps. The presentation highlights how the certificates enable clients to lever up their investments several times over, while lessening much of the operational and market risks typically associated with trading derivatives.
“It’s a huge effort to negotiate ISDAs,” said one credit investor, referring to the International Swaps and Derivatives Association’s standard legal document governing derivatives trades. By contrast, the investor called JP Morgan’s platform “ISDA-lite”.
JP Morgan’s 22-page client presentation, which says it is for “professional and eligible” investors only and not retail, notes there are a number of “operational hurdles” to trade derivatives. Those include, the presentation says, having legal documentation in place as well as booking and monitoring the risk of trades.
Derivatives users must also comply with rules regulators introduced following the financial crisis to reduce risk in the US$544trn over-the-counter market, such as reporting trades and funnelling them through clearing houses.
The presentation says JP Morgan’s platform is “designed to streamline these requirements” by effectively removing them for clients, as certificates do not need to be cleared or reported. In short, JPM will onboard much if not all of the legal, financial and regulatory requirements, and let any Tom, Dick and Harry, allegedly institutional but in these days of home offices galore, certainly retail as well.
Ironically, JPM may be too late to get even more people “involved” in this diffusion of balance sheet risk to as great a population as possible. As IFRE notes, derivatives volumes are already surging in many of these products in recent months. This may be the result of the need for ever greater trading leverage at a time when government bond yields have tumbled across the world, narrowing the pool of high-yielding investments on offer for fund managers, while also forcing investors to magnify modest moves by applying layers of leverage.
And sure enough, trading volumes in synthetic CDOs linked to credit indexes were up 40% this year after topping US$200bn in 2018, according to IFRE. Trading in swaptions, or options on CDS indexes – until recently all but dead – now stands at US$20bn–$25bn a day, analysts say, which is higher than trading of US high-grade corporate bonds.
Banks including Citigroup and Goldman Sachs have been looking to take advantage of growing client interest in these products. That, for some bizarre reason includes the controversial, crisis-era synthetic CDO, which has been revamped to focus solely on whether corporate defaults will rise.
And this is where JPM comes in: it Credit Nexus platform allows investors to get exposure to synthetic CDOs linked to credit indexes. The bank’s client presentation suggests such investments are suitable for asset managers, hedge funds, insurance companies and pension funds to use as “hedging overlays” among other things.
Which brings us to the punchline: why the sudden surge of interest – and trading – in derivatives and CDOs? The answer, as noted above, is simple: leverage (upon leverage, upon leverage).
In its presentation, JP Morgan devotes several pages to highlight and explain one of the main advantages of getting exposure to derivatives through the platform: leverage, and the same reason why back in 2005-2008 nobody traded cash bonds and everyone traded CDS.
Unlike when buying a bond, investors do not have to stump up all the cash needed to match the full size of their positions when trading a derivative. Instead, they only need to post a fraction of that total amount in margin. In this way, investors can make bigger bets on credit markets than they could ordinarily, leading to potentially outsized gains – or losses.
“This [certificate] is designed to replicate the economics of trading derivatives in an OTC format,” the presentation says. “Investors do not need to post [US$100m] of cash to trade [US$100m] of CDS.”
Of course, this is all great when the trade goes your way, the problem is when it doesn’t, and suddenly one – or usually thousands of investors – are called to post margin on their trades, either at the end of day trading, or – in a nightmare scenario – during the day. Such margin calls usually lead to, well, disaster as the trader holding the products rarely if ever has the required cash to post margin and a waterfall liquidation ensues, which in the case of 2008 did not end until the entire financial system had to be bailed out.
One final ironic twist is that not only is JPM giving its clients just the right weapons to blow up both themselves and the system once again, it is charging them for it, to wit: “JP Morgan charges running costs for its platform, which are higher for riskier products. There are also higher fees if the client chooses to use banks other than JP Morgan to execute the trades underlying the certificate.”
via ZeroHedge News https://ift.tt/2REbY2W Tyler Durden
Remember when it was pure tinfoil-hat conspiracy theory to accuse one or more banks would aggressively, compulsively and systematically manipulating the precious metals – i.e., gold and silver – market? We do – after all we made the claim over and over, while demonstrating clearly just how said manipulation was taking place, often in real time.
Well, it’s always good to be proven correct, even if it is years after the fact.
On Tuesday after the close, the CFTC announced that Merrill Lynch Commodities (MLCI), a global commodities trading business, agreed to pay $25 million to resolve the government’s investigation into a multi-year scheme by MLCI precious metals traders to mislead the market for precious metals futures contracts traded on the COMEX (Commodity Exchange Inc.). The announcement was made by Assistant Attorney General Brian A. Benczkowski of the Justice Department’s Criminal Division and Assistant Director in Charge William F. Sweeney Jr. of the FBI’s New York Field Office. In other words, if the Merrill Lynch Commodities group was an individual, he would have gotten ye olde perp walk.
As MLCI itself admitted, beginning in 2008 and continuing through 2014, precious metals traders employed by MLCI schemed to deceive other market participants by injecting materially false and misleading information into the precious metals futures market.
They did so in the now traditional market manipulation way – by placing fraudulent orders for precious metals futures contracts that, at the time the traders placed the orders, they intended to cancel before execution. In doing so, the traders intended to “spoof” or manipulate the market by creating the false impression of increased supply or demand and, in turn, to fraudulently induce other market participants to buy and to sell futures contracts at quantities, prices and times that they otherwise likely would not have done so. Over the relevant period, the traders placed thousands of fraudulent orders.
Of course, since we are talking about a bank, and since banks are in charge of not only the DOJ, and virtually every other branch of government, not to mention the Fed, nobody will go to jail and MLCI entered into a non-prosecution agreement and agreed to pay a combined – and measly – $25 million in criminal fines, restitution and forfeiture of trading profits.
Under the terms of the NPA, MLCI and its parent company, Bank of America, have agreed to cooperate with the government’s ongoing investigation of individuals and to report to the Department evidence or allegations of violations of the wire fraud statute, securities and commodities fraud statute, and anti-spoofing provision of the Commodity Exchange Act in BAC’s Global Markets’ Commodities Business, whose function is to conduct wholesale, principal trading and sales of commodities. Laughably, MLCI and BAC also agreed to enhance their existing compliance program and internal controls, where necessary and appropriate, to ensure they are designed to detect and deter, among other things, manipulative conduct in BAC’s Global Markets Commodities Business.
Translation: it will be much more difficult to catch them manipulating the market next time.
The Department reached this resolution based on a number of factors, including MLCI’s ongoing cooperation with the United States – which means the DOJ must have had the bank dead to rights with many traders potentially ending up in jail – and MLCI and BAC’s remedial efforts, including conducting training concerning appropriate market conduct and implementing improved transaction monitoring and communication surveillance systems and processes. Translation – no longer boasting about market manipulation on semi-public chatboards.
The Commodity Futures Trading Commission also announced a separate settlement with MLCI today in connection with related, parallel proceedings. Under the terms of the resolution with the CFTC, MLCI agreed to pay a civil monetary penalty of $11.5 million, along with other remedial and cooperation obligations in connection with any CFTC investigation pertaining to the underlying conduct.
As part of the investigation, the Department obtained an indictment against Edward Bases and John Pacilio, two former MLCI precious metals traders, in July 2018. Those charges remain pending in the U.S. District Court for the Northern District of Illinois.
This case was investigated by the FBI’s New York Field Office. Trial Attorneys Ankush Khardori and Avi Perry of the Criminal Division’s Fraud Section prosecuted the case. The CFTC also provided assistance in this matter.
Oh, and for anyone asking if they will get some of their money back for having been spoofed and manipulated by Bank of America, and countless other banks, into selling to buying positions that would have eventually made money, the answer is of course not.
The full non-prosecution agreement and attachments is below (pdf link)
via ZeroHedge News https://ift.tt/2xfb4k2 Tyler Durden
“And I heard as it were the noise of thunder. One of the four beasts saying come and see and I saw. And behold a white horse”.
Did the Fed just cop to something very important? Are they freaked about something I’m seeing in charts? If they’re seeing what I’m seeing they should be freaked out.
Let’s start with the former: A very oddly timed dialing back of expectations by Jay Powell and Mr. Bullard today. Markets had been feverishly pricing in a 50bp rate cut for July, but found Powell suddenly wavering, just a few days after $SPX made a new all time high. Cold feet or just clever jawboning? After all, hit the full dove button when markets are in trouble, as they were at the beginning of June, see dozens of Fed speeches and a dovish Fed meeting result in a 200 handle rally on $SPX to new all time highs, and then dial back expectations just a bit.
Hey, maybe things are not so bad, after all mission accomplished. Markets out of the woods and confidence back. If that’s the jawboning mission, well played.
There’s just a few problems with that theory.
One is the obvious I’ve been pointing to but which the Fed will never admit. Things are worse than last time and the Fed is just working with extreme limited ammunition. As I’ve said before, they need to be extremely judicious with rate cuts. So better to just jawbone, dangle the rate cuts, get the desired reaction, and then dial back expectations just a little and wrap it in “confidence” that things are actually much better.
How disingenuous. Things are always better after a 200 handle rally on the S&P 500, and they are always just a bit worse after a 200 handle drop. It’s called playing markets like day traders. Every speech is used to massage market expectations and participants jump to attention like lapdogs looking for a treat.
So Jay Powell may have admitted to something he best not want to admit to publicly: The Fed has limited ammunition and is worried. Worried that they use their limited ammunition too soon and worried not having enough when a recession begins in earnest. If this is so, then markets may end up disappointed quickly. After all July is just around the corner and unless a sudden China deal brings hope back in a major way then disappointment may be the theme of the summer.
Also coming soon: Earnings and they may be a lot less cheerful than new all time highs on $SPX last Friday indicated.
Speaking of these all time highs: Fake. Why?
Below their 200 day moving averages:
Transports, banks, small caps.
But by all means, keep celebrating last Friday’s all time high on $SPX and keep calling it a bull market.
I’ve been issuing warnings about internals and yield curves and banks. Indeed the banking sector is one of the 4 horsemen here that may foreshadow dark times to come.
Why? While $SPX made new all time highs $BKX is languishing below its 200MA:
It’s a horrifically weak chart and did not rally on those new $SPX highs.
Horsemen don’t travel alone.
Here are transports, also below their 200MA and showing a potential topping pattern that, if triggered, could target the December lows again:
Small caps are, pun intended, in a $RUT:
Also below their 200MA with their underlying volatility index still showing a bullish structure.
Now put these all together versus the almighty S&P and you get a rather stark picture:
None of these 3 key indices participated in the $SPX rally to new all time highs, couldn’t even make it close to their April highs. It’s pitiful, and these charts speak about the economy at large.
But worse for bulls and the Fed this specific weakness is, historically speaking rare and has foreshadowed significant additional weakness to come.
Via Sentimenttrader who’s been watching the same indices:
Within days of the S&P 500 hitting a new high, the following all collapsed to a relative low:
* Small caps
* Transports
* Banks
This has happened twice in 40 years, both leading to a 15% drop in the S&P w/in 2 months. pic.twitter.com/YEtEeuNdXv
A 15% drop from here or even from new highs would be a problem, a big problem as it would trigger all these larger topping patterns we’ve been discussing. Remember the technical target zone would be much lower.
Which brings us the the 4th horseman, junk ($JNK), all of this rallying is driven by high yield credit, it’s a huge distortion permeating the market landscape. And markets cannot rally without junk these days. In May Junk caught the sniffles and markets puked. Jay Powell has now served as a trigger for $JNK rallies several times since the December lows:
But not today. Markets wanted to hear confirmation of a 50bp rate cut in July. The lapdogs wanted a treat and didn’t get it and are now pouting.
But look, now $SPX has failed the 2940 zone for the 3rd time in a row and 4 horsemen are not happy.
If a 15% correction is to come, then a lot of chart patterns would be even more broken than they are now and major topping patterns may fully trigger.
What follows?
“And I heard a voice in the midst of the four beasts And I looked and behold, a pale horse And his name that sat on him was Death And Hell followed with him”.
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via ZeroHedge News https://ift.tt/2JjZWbh Tyler Durden
A “loose knit crew of rivals” are eager to help the government with its anti-trust probe of Alphabet, Inc., according to the Wall Street Journal. Competitors of Google are doing everything they can to try and help the Justice Department in their probe, including readying documents and data in anticipation of meetings with regulators.
Many of the competitors have argued that large technology platforms illegally abuse their market power. Some of them have found support in Europe, where regulators have fined Google for monopolistic practices three times already. Google has paid the fines, but is also challenging them in court.
Now, rival companies are stepping up their lobbying in the United States, where antitrust investigations have been divided among the Department of Justice and the Federal Trade Commission. Lawyers that specialize in antitrust law say that any probe could take years to complete. Google is preparing its case as well, while at the same time overhauling its lobbying effort in Washington, as we reported days ago.
Google has already successfully navigated regulator scrutiny of previous mergers in 2012 and 2013. It had persuaded the FTC in the past to not pursue a possible antitrust case by agreeing to change some business practices.
The competitors that have aligned themselves with regulators (and against Alphabet) include companies like TripAdvisor, Yelp and Oracle. Oracle has briefed European antitrust regulators about Google’s use of data to target ads and was a successful plaintiff against Google’s alleged anti-competitive behavior which led to a €4.3 billion fine last year.
Wall Street Journal parent corporation News Corp., along with other publishers, claim Google siphons ad revenue away from content creators. All of these companies obviously welcome further scrutiny into Google’s business practices. Additional companies have privately criticized Google, even though they haven’t made their critiques public.
Jason Kint, chief executive of Digital Content Next said: “There is a lot more concern that you hear behind closed doors.”
Private testimony was paramount in the Federal Trade Commission’s previous probe of Google, where companies like Microsoft provided regulators information on their business practices. And last month a veteran of the online advertising industry told the Senate Judiciary committee that they should consider breaking up technology giants.
Brian O’Kelley, former chief executive of AppNexus said:
“We need to assume that internet giants, like any other big companies, will use their assets to maximize profit and strategic value. Either break up the internet giants or force them to treat their component parts at arm’s-length.”
In addition to the information gathered by US companies, regulators can gather evidence from overseas. During the FTC’s 2012 probe, both US and European investigators shared documents and updated each other during regular phone calls. EU antitrust officials say they’re willing to cooperate again with the US once it opens its probe. Regulatory agencies often need a company’s permission before sharing information with another regulator, but companies don’t usually object to it, so as not to antagonize the regulators.
And anti-trust probes are often more straightforward and direct in the EU versus the United States because the European commission has the power to launch an investigation and to decide on the fines and remedies by itself. The company then has the option of appealing in court, but the reputational damage is done and the appeal can take years. In the US, however, the Justice Department would have to bring the lawsuit in a federal district court.
Thomas Vinje, a partner at Clifford Chance said: “In that sense it is more difficult. Unless you move quickly and impose serious and effective remedies, it’s a waste of time.”
via ZeroHedge News https://ift.tt/2WZW03X Tyler Durden
“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.”
–SAM EWING, former Major League Baseball player
Introduction
Inflation is a fickle measure influenced by several economic variables. Over the last 100 years, the rate of price inflation in the United States has swung wildly, from upwards of 20% in the early 1920, to -17% a few years following, to a steadier rate in the low single-digits over the last 35 years.
Today, most economists favor a low and steady rate of inflation with a benchmark of around 2%. Central banks have a key role in controlling this rate through the setting of interest rates and banking reserve requirements.
While inflation in the United States hasn’t accelerated to alarming levels since the late-1970s, as this week’s newsletter points out, the changing demographic picture could create a domestic and international wave of increased consumption, thus leading to higher rates of inflation.
The irony in this possibility is that retiring baby boomers, who are the demographic with the most influence over this trajectory, are the same demographic that would be most impacted by a sharp rise. The reason being is that if inflation rises, the purchasing power of cash would diminish, and a lifetime of hard-earned money could last shorter than originally planned. This, mixed with longer projected life-expectancies, would be a recipe for trouble. But more on that from Evergreen Gavekal’s partner Louis-Vincent Gave below.
As you will read, he makes a not-so-popular claim: that this administration’s crusade to bring manufacturing industries back to the US by slapping tariffs on goods imported could very well be positive for US growth, living standards, and market outperformance.
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THE CASE OF THE MISSING INFLATION: THE CHANGING DEMOGRAPHIC PICTURE
By Louis-Vincent Gave
Imagine a society where everyone is a consumer and no one saves. In such a society, the competition to buy goods and services would be fierce, and prices would likely rise. Now imagine a society in which everyone saves a substantial portion of his or her income, and therefore “under-consumes”. In such a society, capital would be abundant (and so cheap), ensuring high (even excess?) levels of production, and a constant downward pressure on prices.
This is not just a theoretical exercise. The demography of most Western and Asian countries is set to change dramatically over the coming years. Take the US as an example. Every year from now on, some 3mn people will turn 70 years old. And while Charles would argue that 70 is the new 40, the reality is that at around that age, the direct contribution of most people to society shifts. From their 30s to their 60s, people are capital providers. Past 70, they become heavy capital consumers.
As the chart above illustrates, most people:
are net consumers between the ages of 0 and 34 years old;
are net savers between the ages of 35 and 64 years old;
are net consumers again past 65 years old;
and when they pass 70 years old, their consumption of capital really goes into over-drive.
So, if we accept that in most countries most of the saving is done by people aged 35-64 years, we can come up with a “capital providers ratio”. This is a weighted coefficient of the numbers of people in the savers’ cohorts relative to the total population. For the world (or at least for the top 85 countries by GDP, which account for almost all global saving), the capital providers ratio looks something like this.
From the 1960s to the early 1980s, as the world went through the tail-end of the baby boom and the first boomers went to college and then joined the work force, there weren’t enough savings to go around. The global capital providers ratio kept on deteriorating (the ratio on the chart above is inverted). The competition for goods and services was fierce, and the world experienced a parallel rise in inflation and rise in the cost of capital.
By the early 1980s, however, the global capital providers ratio started to improve as the baby boomers hit their mid-30s in ever greater numbers. Contributions into pensions funds, 401(k) and savings accounts duly shot up. In the following years, the world as a whole “over-saved” and “under-consumed”. Inflation duly collapsed, along with interest rates.
Unfortunately, the world is now entering a new “dis-saving” phase, as the baby boomers start to live off their past contributions into 401(k), pension plans and the like. History suggests this phase is likely to be inflationary.
Of course, not every country shares the same demographic profile. Across emerging markets, a number of countries will continue to see improving capital providers ratios. But will China’s, India’s or Brazil’s excess capital flow to the US to fund excess consumption there? Or will it stay at home?
The counter example to this theory, of course, is Japan, where the capital providers ratio topped out in 2010 and where inflation has yet to make a significant mark. However, it is interesting to note that Japanese inflation bottomed out in 2010, just as the capital providers ratio topped out.
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MONOPSONIES, PROTECTIONISM AND ROIC
By Charles Gave
It is extremely unfashionable to say so, but Donald Trump’s campaign to bring manufacturing industries back to the US by slapping tariffs on goods imports may not be quite the act of economic illiteracy most professional practitioners of the dismal science would have you believe. On the contrary, it could well be positive for US growth, living standards, and market outperformance.
I realize this is a contentious statement, so please allow me to explain. Back in the very early days of Gavekal, we did a lot of research on a new form of corporation we dubbed the “platform company”. The idea was simple: every business has to do three things: design its product, build its product, and sell its product. These days, value is created by design or marketing. So, with the simultaneous emergence of the internet and globalization, it made sense for a bunch of US companies to get out of the low margin, capital intensive production business, contracting it out to China, and to concentrate on research and development and marketing.
In a world of perfect competition, this would not have been a problem. Except our world is far from perfect, and over the last 20 or so years these platform companies and their global supply chains have in effect become labor monopsonies; that is, they are the only marginal buyer of labor.
This means we are no longer in a Ricardian world of comparative advantage. Instead, we are in the sort of world described by the Cambridge economist Joan Robinson as long ago as 1933. Robinson showed that the emergence of labor monopsonies would lead to an unsatisfactory equilibrium, where most of the value-added went to capital, and only the crumbs to labor.
In a competitive labor market, each company has an incentive to bid up the wage it pays its workers in order to recruit and retain staff. This bidding war pushes up wages to the point at which the marginal cost of hiring new employees equals the marginal revenue a company can expect to generate by expanding its workforce.
In contrast, in a monopsonistic labor market, the sole employer has an incentive to cut costs by paying lower wages. The reduced pay pushes some workers out of the labor force, meaning the company earns less revenue. But fatter margins achieved by cutting costs more than compensate for its reduced revenue, pushing up profits, even though overall economic growth is slower.
This is the Robinsonian world we are in today. In almost every sector, the biggest three or four companies occupy a position of overwhelming dominance—much as in the time of Theodore Roosevelt, when he went after the US “trusts”.
Now, this situation is entirely at odds with the tenets of the law of comparative advantage, which is the intellectual basis for free trade. We all accept free trade as a “Good Thing”, because it is supposed to allocate labor and capital in the most efficient way possible. But if labor monopsonies start to arise on a global basis, then free trade will no longer guarantee an economic optimum—quite the reverse.
If I am right about all this, it is likely that the only way to restore a favorable economic situation at the national level is to tax away the excess returns that the monopsonies earn from their dominant positions. And the best way to do this is probably to tell them: “You can remain a platform company, but only if the production you contract out is contracted out at home.”
In short, companies that want to sell their products in the US will have to make their products in the US. And as they bring their supply chains back onshore, they will have to compete with other companies for labor. And because competition in the US labor market is so intense, such re-onshoring will help to restore the long-lost conditions of optimum economic growth, or at least something a lot closer to them (and eventually something similar could happen in Europe and China).
But bringing US supply chains back onshore will leave the rest of the world with huge productive overcapacity. Returns on invested capital outside the US will collapse, while ROIC in the US will go up. Since financial markets are in the business of measuring ROICs around the world in real-time, we should expect the stock market in the US to outperform stock markets in the rest of the world. Sure enough, this is what we have seen since Trump introduced his first tariffs against China, on solar panels, on January 22, 2018, just four days before world markets hit their peak—a peak that non-US markets have yet to recover.
The conclusion is simple. The days of globalized platform companies are numbered. Supply chains are going to localize. Or more likely they will regionalize, with goods produced locally in three zones – North America, Europe and Asia – while shipping goods from one zone to another will become a great deal more difficult and expensive.
via ZeroHedge News https://ift.tt/2FAQ7Vg Tyler Durden
