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Authored by Richard Breslow via Bloomberg,

If there was one message that resonated from the IMF meetings, it was that what we are doing isn’t working. Acknowledging that fact is every bit as important as the forecasts of dour prospects for global growth and the risks of excess leverage. You have to start somewhere. Or maybe we should think of it as, you have to stop at some point.

It’s an understandable human tendency for central bankers to worry that something bad might happen “on their watch.” But it has. Too many economies are merely limping along. And no amount of asset bubbles will halt that fact. Every time someone argues that providing less liquidity will cause pain, the counterargument has to be, not for savers and future generations. What we can tolerate now isn’t some radical reversal of policy. That probably would be too much of a shock. And, at this point counterproductive.

What we need is a time cure. A long period of letting things heal on their own. Emergencies can be dealt with as needed. Patience is indeed a virtue and further monetary policy activism is dangerous. This is true with or without the appropriate kind and level of fiscal spending. The world has collectively reached its reversal rate. It’s presumably too late for the Fed to reconsider its October rate cut plans. But it would be a policy error to tee up anything for December and beyond. I do like the blackout periods.

If central banks can bring themselves to be less intrusive, they will unavoidably have to deal with the fallout from some of the over-leverage they have encouraged. Undoubtedly, some borrowers and lenders will experience the pain. But that’s a different task than just throwing money at the entire system. Which merely exacerbates the problem.

Equity indexes are mostly up so far today. That’s nice. And if it’s actually based on trade optimism, all the better. But what actually could exude optimism is the fact that global bond yields are modestly higher across the board. We, obviously, don’t need a bond tantrum, but a gentle trend higher would be remarkably healthy. More and more policy makers are beginning to realize this fact. It’s certainly not something central banks, or political candidates, should try to resist. Yields, let alone negative ones, aren’t this low because of crisis conditions. They are a major cause of the problem.

The dollar is under pressure. The technical picture looks like this could potentially be a sustained move. Emerging markets like it. All that dollar denominated debt they’ve borrowed looks to be just a little bit less of a threat. Would that mean that they used this period to reduce their exposure to dollar liquidity issues? That’s probably asking too much. But it would be a prudent idea for them and their investors to keep checking on the status of the Fed’s currency swap lines.

Source: Bloomberg

Developed market central banks should resist the urge to push back on currencies. And when the FOMC meets, they would better serve the domestic and global economies by sorting out money-market stress issues than debating 25 basis points one way or the other.

We’ve dug a deep hole for the global economy. But doing more of the same isn’t the solution. And, frankly and emphatically, this isn’t the time or place to be pursuing trade and tariff fights. Even if you think they have some merit. Read the latest economic forecasts. We simply can’t afford it. As inexplicable as it is, we are unwilling to bring ourselves to do the right things. At least, we need to stop doing the wrong ones.

Boeing said on Sunday that it told U.S. regulators “multiple times” that it had expanded the role of its MCAS system and that the FAA had observed the system operating in flight tests before the 737 Max was certified for service, according to Bloomberg. 

The statement was posted online as a result of Friday’s bombshell, when instant messages between senior Boeing pilots came to light. The messages recount an experience that one pilot had during a simulator trial, where he noted that the MCAS software handling performance was “egregious”, according to Bloomberg. 

The MCAS system played a direct role in two fatal crashes that killed 346 people. 

Boeing said in its statement on Sunday: “We understand and regret the concern caused by the release of the instant messages. It is unfortunate that this document, which was provided early this year to government investigators, could not be released in a manner that would have allowed for meaningful explanation.”

It continued: “Boeing engaged in an extensive process with the FAA to determine pilot training requirements for the 737 MAX 8. This process was a complex, multiyear effort that involved a large number of individuals at both Boeing and the FAA. This effort itself was just a part of a much larger regulatory process for the design, development and certification of the 737 MAX 8.”

On Friday, the FAA spoke out against Boeing for not sharing the transcripts of the messages, even though the company had discovered them months earlier. The documents were turned over to the Justice Department in February, about a month before the second deadly crash. The company says it didn’t inform the FAA, because the regulator is “a subject of the same criminal investigation.”

The messages were between Mark Forkner, who was Boeing’s Chief Technical Pilot for the 737 and another technical pilot, Patrik Gustavsson. The two pilots raised “multiple concerns” about the MCAS system, including not being given data by the company’s test pilots and pointing out “troubling behavior” during simulator tests. 

Forkner had earlier assured the FAA that the MCAS system was benign and didn’t need to be included in flight manuals. In 2016, the FAA had approved this request from the company. 

But in the messages, Forkner had said that the MCAS system was “running rampant” in the simulator. “Granted, I suck at flying, but even this was egregious,” Forkner, who is now a Southwest pilot, said. 

“So I basically lied to the regulators (unknowingly),” he continued. 

But then, two months later, Forkner emailed the FAA to remind them that the MCAS was not going to be included in flight manuals. 

Forkner’s lawyer said: “If you read the whole chat, it is obvious that there was no ‘lie,’. The simulator was not reading right and had to be fixed to fly like the real plane. Mark’s career — at Air Force, at FAA, and at Boeing — was about safety. And based on everything he knew, he absolutely thought this plane was safe.”

The timing of this incident couldn’t be worse for Boeing. The company was on the fringe of once again trying to rebuild trust from the public and the commercial return of its Max now isn’t likely until early 2020. The delays have cost Boeing $8.4 billion and the company’s CEO, Dennis Muilenburg, is at risk of losing his job. 

House Transportation and Infrastructure Committee Chairman Peter DeFazio called the messages a “smoking gun” and called for Muilenberg to resign. 

Bernstein analyst Douglas Harned said: “The text messages, as reported, appear to take issues to a next level, suggesting misleading statements from Boeing during the certification process. We need to learn more details before coming to a conclusion regarding what this news means in terms of any legal actions, implications for management, and impact on the timing for a Max return to service.”

Seth Seifman, an analyst with JPMorgan Chase & Co. said in a note Friday: “From a technical perspective, the revelation need not affect the timing but, in our view, there is a political/public relations aspect of returning the Max. Boeing, regulators, and carriers have to sell the technical and cultural changes credibly — and while the impact is difficult to quantify, the news is negative.”

Boeing sent the pilots’ messages to the Department of Transportation on Thursday evening, which was followed by a letter from the FAA demanding more information from Boeing’s CEO. 

FAA Administrator Steve Dickson said: “I understand that Boeing discovered the document in its files months ago. I expect your explanation immediately regarding the content of this document and Boeing’s delay in disclosing the document to its safety regulator.”

The FAA didn’t make any comments as to whether or not the revelation would set the timeline for the 737 Max back further. Meanwhile, regulators have required Boeing to perform a new safety analysis of the MCAS system and are requiring “multiple tests that weren’t done prior to the jet’s original certification in 2017.”

Boeing’s CEO then called Steve Dickson to respond to the concerns, according to the company, who admitted they are still at the behest of the FAA as it relates to returning the 737 Max back to commercial service.

“We’ll continue to follow the path to certification as currently outlined by the FAA,” the company said. 

However, despite the CEO’s efforts to rebuild confidence, Boeing shares tumbled on Monday, extending the previous session’s sharp drop after the planemaker received at least two analyst downgrades on increased risk related to the company’s best-selling 737 Max jet.

UBS wrote that the news “reinforces the perception of and heightens the potential of incomplete disclosure, which inherently puts more money/trust & time at stake.”

The firm cut its view to neutral from buy, and its price target to $375 from $470.

“We can no longer defend the shares in light of the latest discoveries, discoveries which significantly increase the risk profile for investors,” wrote Credit Suisse analyst Robert Spingarn, who called the news “indefensible.”

Credit Suisse cut its view on the stock to neutral from outperform and slashed its price target to $323 from $416. The news “may shatter the fragile trust between regulators and BA,” increasing political risk and potentially undermining public confidence in the aircraft, “which could have [long-term] demand implications.”

The damage to Boeing’s brand, it added, “could also metastasize to other BA products.”  

Authored by Sven Henrich via NorthmanTrader.com,

No new highs, no new lows, lots of chop and still no decisions on anything. New highs or not, trade deal or not, hard Brexit or not, the list goes on and on.

Bulls remain undeterred and confident that an ever more aggressive and interventionist Fed will bring the ship home to new highs, while economic and earnings data continue to show weakening as evidenced again this week by negative retail sales, negative industrial production and the New York Fed Nowcast dropping to 1.04% real GDP for Q4.

Yet markets again closed north of 143% market cap to GDP (Hitting the Wall) as another Opex week managed to crush the $VIX again while the Fed commenced its $60B per month treasury bills buying program.

So it remains a battle between artificial intervention and macro data signaling a rising recession risk:

Recession signal elements:
First yield curve inverts.
The yield curve steepens.
Industrial production slows & then turns negative.$SPX pic.twitter.com/PUwprKg871

— Sven Henrich (@NorthmanTrader) October 18, 2019

Yet despite all the intervention a potential new theme has emerged. Whereas in the period of January 2018 through July 2019 all new highs have been sold, since July 2019 markets keep making lower highs.

Bulls still need to prove their case as do bears. Hate to break it to everybody, but this market remains divergent with a potential double top in place but no breakdown either:

In today’s video update I’m discussing both macro and technicals to give a as realistic as possible overview of the current state of markets:

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To get notified of future videos feel free to subscribe to our YouTube Channel. For the latest public analysis please visit NorthmanTrader. To subscribe to our market products please visit Services.

So much for Deutsche Bank’s once legendary fixed income division being insulated from the unprecedented layoffs sweeping across the bank.

Months after unveiling that double-digit percent of its equity-linked employees will be let go as part of an ongoing restructuring that has left the largest German bank looking like a pale shadow of its former self, Bloomberg reports that Deutsche Bank is now also considering “substantial cuts” to the unit that trades interest-rate securities, a division that survived unscathed the mass layoffs announced as part of the lender’s sweeping revamp in July.

CEO Christian Sewing has concluded that it’s possible to cut enough of the associated technology costs to outweigh the loss in revenue, Bloomberg sources report, adding that the bank will likely cut a low double-digit percentage of jobs at the business.

“We are committed to a robust and broad-based rates platform, and are investing in areas of our rates business where we see opportunities to grow our client franchise,” DB spokesman Charlie Olivier told Bloomberg.

As a reminder, in early July we reported that the German megabank with trillions in derivative exposure unveiled a sweeping restructuring plan centered on pulling back from equities trading and cutting a fifth of the workforce. The lender said at the time that it wants to remain a “leading bank” in fixed-income trading, its traditional strength, but it soon became clear that adjustments were needed there, too.

Sure enough, the Frankfurt-based bank is currently putting the finishing touches on its review of the fixed-income division which has struggled with low profitability for some time, and findings could be presented at the bank’s investor day in December.

In rates trading, investors buy and sell products such as government bonds and derivatives to profit or protect themselves from macroeconomic developments that affect interest rates. It’s distinct from credit trading, where participants buy and sell debts and derivatives to wager on a company’s ability to repay loans.

As Bloomberg further adds, the rates business, which is headed by Kemal Askar, falls into many different geographic regions – including the U.S. – and includes a range of products – such as options or swaps: “Pulling out of any one of them only makes sense if the bank can eliminate associated costs of information technology.”

“We are a significant player in rates, but rates is an area where we need to refashion the business model to make it more profitable and do so against the resources that we have there,” Chief Financial Officer James von Moltke said last month.

And as DB admits that no sacred cows are left, we expect that once the bank fires thousands in “rates” employees, then credit – the final frontier – will be next, as the bank – having no other options – is forced to target the costs of its most expensive division. Alas, the best traders there will hardly wait for the hammer to fall, and we expect an exodus of DB fixed income traders and analysts to ensue, as the division that once made Deutsche Bank the most respected bank on Wall Street, is dismantled.

The Turkish lira has started to slide again…

.. as last week’s ceasefire between Turkey, northern Syria and its Kurdish inhabitants – which has just over 24 hours to go – now appears in jeopardy.

On Monday, Turkey gave Kurdish fighters until Tuesday night to leave a narrow strip of territory in northeastern Syria or face becoming targets, setting aside its demand for the militia to withdraw from a much larger “safe zone.”

“We have hours left,” Turkey’s Foreign Minister Mevlut Cavusoglu told a forum organized by state-run TRTWorld television in Istanbul on Monday. “If they don’t withdraw, our operation will start. This is our agreement with the U.S.”

As Bloomberg notes, citing a senior Turkish military official said, the Kurdish-led Syrian Democratic Forces must exit the 120-kilometer (75-mile) area between the Syrian border towns of Tal Abyad and Ras al-Ayn by 10 p.m. local time on Tuesday. While Turkey still wants the Kurds to withdraw from a swath of frontier territory more than 440 km long and 32 km deep, it recognizes that won’t happen before the expiry of a 120-hour truce negotiated by the U.S. last week, said the official who also ruled out any extension of the deadline for withdrawal from a 120-kilometer long frontier.

The clarification over the parameters of the truce on Monday followed threats by President Recep Tayyip Erdogan to restart the offensive if the militants do not pull back from the area.

Turkey’s immediate goal is to clear the 120-kilometer strip and so far 125 vehicles have left the area and that the effort to implement the deal was closely coordinated with the U.S., the official said, adding that Turkey plans to set up observation points, including combat units, in the area; he also said that control over the 120- kilometer strip would belong to the Turkish Air Force but that it would take time to fully make sure that the area is cleared from the militants.

Separately, Turkish president Erdogan is due to travel to Sochi on Tuesday for talks with Russian president Vladimir Putin that will likely dictate what happens next. With the departure of US forces, Russia has become the sole  major influencer in Syria since its military intervened to help win the civil war in favor of Bashar al-Assad’s regime.

As Bloomberg notes, Russia has been favoring direct contacts between Turkey and Syria based on a 1998 security accord, though there are no plans for such talks during Erdogan’s visit to Sochi on Tuesday, Russian Foreign Minister Sergei Lavrov tells reporters at news conference with Bulgarian counterpart Ekaterina Zaharieva.

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Meanwhile, as the US withdraws from northern Syria, the WSJ reports that civilians in Kurdish areas hurled rotten fruit and insults at a convoy of U.S. military vehicles that crossed from northern Syria into Iraq early Monday, marking “a dramatic drawdown to an American presence there to combat Islamic State.”

A Wall Street Journal reporter saw around a dozen armored vehicles on the road near Sheikhan in northern Iraq flying American flags. Stony-faced U.S. soldiers flashed victory signs for the camera. They appeared to be part of a larger convoy that passed through the town of Duhok about 37 miles from the Syrian border earlier Monday. A witness there heard onlookers in the predominantly Kurdish city curse the soldiers. One man called them “sons of bitches” and shouted at them to get out, he said.

The US withdrawal has been seen as a historic betrayal by the Kurds, who partnered with U.S. troops in Syria to fight Islamic State. The U.S. presence had served as a buffer against Turkey, which regards the Kurdish fighters as terrorists.

Fear not though: instead of withdrawing, it now appears that US troops are merely relocating to neighbor Iraq, where the US already has around 5,000 troops in Iraq, many of whom are based in the western province of Anbar.

U.S. Defense Secretary Mark Esper said late Saturday that all of the roughly 1,000 U.S. troops ordered to leave northeastern Syria would be redeployed to western Iraq and conduct operations against the Islamic State extremist group from there.

American troops are leaving Syria via helicopters, planes and ground convoys, a process that will be completed within weeks, Esper said. He didn’t say where precisely those troops would go.

Four large drug companies have reached a last-minute settlement with two Ohio counties to avoid trials blaming them for their part in fueling the ongoing opioid crisis, according to the Wall Street Journal. A fifth defendant, Walgreens Boots Alliance (WBA), has yet to agree to a deal.

The details of the agreement with McKesson Corp. , Cardinal Health Inc., AmerisourceBergen Corp. and Teva Pharmaceutical Industries Ltd. will be announced later Monday morning. It is unclear whether trial will proceed against just WBA.

While the deal with the Ohio counties will avoid a federal jury trial with the two counties, it falls short of a more sweeping deal currently under negotiation to resolve thousands of opioid lawsuits across the country.

The cases of Ohio’s Cuyahoga and Summit counties had been selected to go to trial first from more than 2,300 opioid lawsuits brought in federal court by local municipalities, hospitals, Native American tribes and others that are consolidated before U.S. District Judge Dan Polster in Cleveland.

 

The lawsuits broadly allege the pharmaceutical industry pushed opioid painkillers for widespread use without adequately warning of the risks of addiction and allowed high volumes of pills to flood into communities.

The five companies were the last left for the trial after several other drugmakers settled with the two counties in recent weeks. –Wall Street Journal

The Ohio cases will likely serve as a benchmark for how the more comprehensive opioid litigation may be resolved, as virtually every state – and thousands of local governments, have sought to recover money from pharmaceutical companies involved in the manufacture, marketing and distribution of opioids.

Over 400,000 people in the US have died from overdoses of opioids – both legal and illegal, since 1999 according to the report.

The Ohio cases would have provided a rare insight into how drug distributors contributed to the crisis, as documents and witnesses would be under a public microscope. According to the Journal, the companies are middlemen who fulfill drug orders placed by hospitals, pharmacies and others.

An earlier opioid-crisis trial, in Oklahoma, had only drugmaker Johnson & Johnson as a defendant, limiting the scope of the narrative unspooled in court.

McKesson, Cardinal and AmerisourceBergen collectively controlled 95% of the U.S. drug distribution market in 2018, according to Drug Channels Institute, which provides research on the drug-supply chain. The three companies are among the largest in the U.S., all ranking in the top 25 of the Fortune 500.

The distributors have argued that their role is to ensure medicines prescribed by licensed doctors are delivered to patients who need them. They say they must balance their mission to deliver medicine against efforts to prevent and detect illegal diversion of those drugs.

Walgreens, widely known as a pharmacy, has been included in the trial for its role as a drug distributor to its own stores.

Israel-based Teva and its subsidiaries make generic opioid painkillers and two branded drugs used for cancer pain. The company has argued that it doesn’t market its generic opioids. –Wall Street Journal

According to some accounts, the comprehensive deal between the industry and a coalition of state attorneys could be worth as much as $48 billion – a number which has been rejected by lawyers for cities and counties. It includes $18 billion to be paid over 18 years by AmerisourceBergen, Cardinal and McKesson; $4 billion from Johnson & Johnson over a shorter time frame; and the donation of drugs from Teva and distribution services valued at as high as $28 billion according to the report.

With Trump eager to put last week’s turbulence in the readview mirror and start off the new week on a high note, he dispatched his best headline generator, economic advisor Larry Kudlow to Fox Business, to boost risk sentiment with a few strategically phrased quotes meant to bolster US-China trade talk optimism which as we noted earlier helped push risk sentiment higher overnight, and which is all the headline scanning algos were looking for:

• WHITE HOUSE ADVISER KUDLOW SAYS IF PHASE ONE CHINA TRADE TALKS GO WELL, DECEMBER TARIFFS COULD BE TAKEN OFF
• KUDLOW SAYS THINGS LOOK PRETTY GOOD AS U.S., CHINA TRADE TALKS CONTINUE KUDLOW SAYS THINGS LOOK PRETTY GOOD AS U.S., CHINA TRADE TALKS CONTINUE

Kudlow’s comments were all it took to spark a buying frenzy from the all too predictable algos, which quickly pushed the S&P above 3,000.

And so, with all due respect to William Cowan and his lengthy conspiracy theory article in Vantiy Fair, this is all it takes to send futures surging, and no, one doesn’t have to be an inside trader to expect that Trump (and Kudlow) will be doing this each and every day just to preserve the illusion that all is well.