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Authored by Jeffrey Snider via Alhambra Investment Partners,

Gold is the ultimate hedge, but it is far from perfect. Unlike, say, sovereign bonds there should be no expectation for a negatively correlated price. You can buy a UST or German bund even at negative yields and at least expect the price to rise when things are at their worst. Flight to safety or flight to liquidity.

You can’t with gold. One big reason is its seemingly opposing uses. I got a chance to sit down once again with Erik Townsend of MacroVoices to talk about gold, negative rates, and the lies (of omission) of Janet Yellen, but to further that discussion, particularly the gold parts of it, I’ll add more here.

While a UST will rise in value during a liquidity event partly or even mostly because of its status in repo, the opposite happens in the gold market. Though gold is a collateral of last resort, too, it isn’t as flexible and so it gets dumped whenever deployed that way. Very negative for its price.

So, it ends up in a tug-of-war between what I’ve called collateral gold (negative price) and fear gold (positive price). What ultimately might determine which one wins out is hard to predict, and it’s not a precise and straightforward mix at least inferring ahead of time.

As I wrote last December during the landmine:

Gold may be collateral of last resort but many still treat it as a hedge against everything going wrong – including central banks and their numerous big errors (forecasts). Therefore, even with renewed deflation and market liquidations tied right into collateral problems gold has been moving in that other direction – UP…

In other words, if there wasn’t this fear bid, gold would probably be down huge likely more than it was after April 18. That it’s not and is in fact at multi-month highs is a testament to the level of anxiety permeating global markets right now.

In 2008, for example, collateral gold was unleashed in the immediate aftermath of Bear Stearns – which makes sense given what Bear taught the marketplace about illiquid securities and the need for repo reserves. Gold was down sharply as collateral became very hard to source.

It gained a lot after Lehman because, well, fear. And then it promptly collapsed again when the repo market totally seized up in early and middle October once collateral became the most valuable commodity on the planet.

But then fear won out again late in October 2008 as it became (more) clear that the Global Financial Crisis was one of those historical events that changes things. Among the factors that would be changed was interest rates.

The cost of owning gold as a hedge is determined by the opportunity cost of not holding something else while you do. The metal pays no interest and if the market expects interest rates to rise or stay high, then it is a relatively more expensive and therefore unappealing hedge.

If, however, the market expects otherwise, that interest rates will fall, maybe even to less than zero, gold becomes a much more attractive prospect. Small wonder what happened for the final phase of the panic period where gold was concerned. As market expectations for interest rates (indicated by balance sheet constraints like swap spreads) fell sharply, gold took off even though stocks and other risky assets suffered a third wave of liquidations into early 2009.

Not only do lower rates reduce the opportunity costs for gold, they also signal the often-desperate instability which drives the demand for that kind of severe hedging in the first place. Fear gold and the expectation for, as well as the consequences of, lower rates go together.

All in all, gold performed a whole lot better than many other assets – if you were willing to sit through its severe ups and downs.

This is a different take on how gold is conventionally viewed – seen often as an inflation hedge exclusively. That’s not true, not entirely. It is an instability hedge which includes inflation as one form. As we saw in 2008 and 2009, it is also a deflationary hedge as nothing more than one other form of instability.

Why has gold had such a tremendously positive run in 2019 despite the lack of inflation? Fear gold is much less expensive to hold if the market also expects interest rates to tumble. And as interest rates do tumble, that merely reinforces the deflationary message as it relates to expected elevated instability and uncertainty. Higher demand and lower perceived cost equal much higher price.

The resulting pricing of fear gold simply reinforces perceptions which have already proliferated throughout bond markets around the world. It is corroborating the general sense of unease and maybe fear, along with the expectation that such instability will continue to lead bond markets to lower interest rates (and maybe that central banks will have no choice but ditch their yield curve denial and get with reality) which will make the gold hedge even less expensive as one.

There are those who still believe a rising gold price is indicative of only inflation. To this other view, what gold in 2019 might mean is a negative event which forces central banks into overdrive. In other words, supposedly, gold is rising in anticipation of the “money printing” that will be unleashed once central bankers are made to realize the seriousness of this situation; they’ll surely overdo it on the “accommodation.”

But if that was so, why aren’t bond market inflation expectations also rising? TIPS and euro-denominated inflation-protected bonds would be trading that way and they aren’t. The bond market sees disinflation even though bond investors, meaning banks buying up balance sheet tools, are very well aware of what central banks are most likely going to be doing at some point.

That’s what eurodollar futures are also telling us; that the market is already pricing a serious probability of a return to ZIRP in the US which in all likelihood won’t be the only component; it will almost certainly include a restart of QE if not more. The ECB has already practically confirmed as much on its end.

The reason the bond market isn’t pricing in a resulting burst of inflation is because the banks buying the balance sheet tools in the bond market (and maybe gold, too) know from experience and practice central banks are incapable of creating inflation. That much has been fully established by the last twelve years. The fact that central bankers don’t know it yet further strengthens the case; they’ll try and simply repeat the same failures even if they go full BoJ QQE shock and awe.

For fear gold, it doesn’t matter. Gold demand is against instability, which takes many forms not just inflation. And since the rising dollar tends to also indicate the deflationary form, gold can, has, and does rise at certain times the dollar’s exchange value is also rising.

via ZeroHedge News https://ift.tt/2Zyq1gx Tyler Durden

Well, that was easy…

The last small leg higher, to entirely erase the losses from last Friday were sparked by Trump saying on Fox Radio that “China wants to make a deal… sort of has to make a deal” and was enough to trigger the algos…

But bonds ain’t buying it…

Source: Bloomberg

via ZeroHedge News https://ift.tt/2Hx6ZwR Tyler Durden

Authored by Michael Every via Rabobank,

Listen carefully. That is the sound of going rogue – and bond yields further through the floor.

Yesterday UK PM Boris Johnson announced he is going to prorogue–or close–Parliament, meaning that when MPs come back to sit next week they will only do so briefly, and will then not return until 14 October, when there will be a new Queen’s Speech to launch BoJo’s slate of legislation as the new PM. So far, so technical. Yet what this effectively means is that there will be a very narrow window next week, and then a slightly larger one in the final two weeks of October, for Parliament to act to prevent Hard Brexit on Halloween.

This is explosive and unprecedented stuff, politically. The British constitution is largely unwritten and so allows wiggle room, and the government insists they have checked the legality of all they are proposing; nonetheless, as the press and opposition note, it smells awful. This is clearly a case of Erskine May (the ‘parliamentary bible’ that looks and sounds like it belongs in a Harry Potter tale) turning into Erskine Maybe or Erskine Might.

Indeed, BoJo is being accused of a “coup”, a “constitutional outrage”, an “abomination”, and of being a “tinpot dictator”, though this being the UK, perhaps that should be “teapot”; but there is not just tea but a genuinely revolutionary atmosphere brewing. Bob Kerslake, former head of the civil service, is quoted in the Guardian as stating:

“We are reaching the point where the civil service must consider putting its stewardship of the country ahead of service to the government of the day.”

AGuardian op-ed advocates the current head of the civil service should follow the advice. Even the British royal family, already facing one scandal, risks getting sucked into this given some had expected the Queen might not accept the privy council’s advice to prorogue at all.

Of course, this all comes just after Bill Dudley publicly suggested the US Fed has a duty not to help ameliorate a Trump trade war via cutting rates and to instead hold fast to ensure he isn’t re-elected. As such, what we are seeing transcends Brexit, though I will return to it in a moment. Rather, this is the broad warning from my 2016 ‘Thin Ice’ report:

…the global neoliberal architecture collapsing, and perhaps taking some liberal-democratic architecture with it.

If you think that is hyperbole, consider this benchmark – how would we be reacting if the armed forces in any country were saying what Kerslake and Dudley just suggested?

This is not going to change for the better until we get a global new paradigm emerging – and that is a long way off. (Yes, Italy might cobble together a Europhile-PD/Europhobe-5 Star government, but how sustainable is that going to be, and will 5 Star’s party members support it?)

None of this is to take a stance on what any particular executive or legislature is doing on any particular policy front. Rather, it is an analytical view of how bitterly, deeply divided many countries are between a status quo ante, with its neat technocratic rules and regulations, and a populist backlash from those who feel these no longer provide a path to what they used to have and still want. One can argue “executive vs. legislature” or “executive vs. gate-keepers”; yet when the executive speaks of the “will of the people” as its justification it gets very Hannah Arendt very fast. Equally, however, what if the legislature and gate-keepers really are refusing to recognise the need for wrenching populist change, no matter how painful short term? One can argue it left and right and back and forth – but ultimately we will need to see a winner. And that is what markets need to focus on: not who is ‘right’, but who wins and what that means.

So back to the practicalities of Brexit. Parliament has only a few options: sit in another location and call themselves Parliament regardless of the prorogue – is that legitimate or also a dangerous precedent?; pass a law which would cancel the proroguing, which ironically would have to be signed by the Queen who just signed off on the prorogue; call for judicial review of the proroguing, which is on shaky ground according to government lawyers; pass a law to repeal Article 50, which would trigger an inverse political crisis as large as what BoJo is doing; or call a vote of no confidence in BoJo…at which point figures close to him have stated he will wait the allotted 14 days and then dissolve Parliament for new elections…AFTER the Brexit deadline of 31 October. In short, this is all likely to come to a neo-Cromwellian head next week, and Hard Brexit odds are right up there with an election leading us back to the same Revoke vs Hard Brexit binary.

What was the market reaction to the UK heading into such deep, dark waters? GBP initially sold off and then recovered to hold around 1.22. Hardly an emerging market seeing meltdown; by contrast, look at what happened to the Argentinean Peso yesterday, which is currently around 58 when it started the year at below 38. Likewise, Gilt yields declined 2bp at the short end and 6bp at 10s and 5bp at 30s. That is hardly the reaction to a country about to implode and default. Then again, it is hardly a ringing endorsement of the economic outlook either…which, together with US 10s at 1.46% and German 10s at -0.72% explains why we are crashing through our self-made Thin Ice in the first place.

That and the fact that China continues to slow due to its vast self-made problems, according to the Bloomberg Economics gauge. On which final note, today’s CNY fixing was 7.0858, again slightly lower than the previous day, but again much stronger than where the fix was implied (7.1085) and where the market currently is at 7.1652. That’s another piece of neoliberal convention going rogue – the PBOC is saying something, markets are saying otherwise,…and nothing is happening to them as a result.

via ZeroHedge News https://ift.tt/345yCah Tyler Durden

Following MSNBC anchor Lawrence O’Donnell’s tweeted retraction of his ‘thinly-sourced’ lies that Russians had co-signed loans for President Trump, he took to his show last night to talk further about the fake news (but note the barely apologetic tone)…

 “I should not have said it on air or posted it on Twitter. I was wrong to do so. This afternoon attorneys for the president sent us a letter asserting the story is false. They demanded a retraction. Tonight we are retracting the story. We don’t know whether the information is inaccurate. But the fact is, we do know it wasn’t ready for broadcast, and for that I apologize.”

This lack of apology retraction appears to have ‘triggered’ President Trump who took to Twitter to remind his followers just how ‘normal’ this strategy of “loud/dramatic fake news headlines followed by quiet retraction/apology.”

The totally inaccurate reporting by Lawrence O’Donnell, for which he has been forced by NBC to apologize, is NO DIFFERENT than the horrible, corrupt and fraudulent Fake News that I (and many millions of GREAT supporters) have had to put up with for years. So bad for the USA!

— Donald J. Trump (@realDonaldTrump) August 29, 2019

Crazy Lawrence O’Donnell, who has been calling me wrong from even before I announced my run for the Presidency, even being previously forced by NBC to apologize, which he did while crying, for things he said about me & The Apprentice, was again forced to apologize, this time…..

— Donald J. Trump (@realDonaldTrump) August 29, 2019

….for the most ridiculous claim of all, that Russia, Russia, Russia, or Russian oligarchs, co-signed loan documents for me, a guarantee. Totally false, as is virtually everything else he, and much of the rest of the LameStream Media, has said about me for years. ALL APOLOGIZE!

— Donald J. Trump (@realDonaldTrump) August 29, 2019

We can’t blame him for the anger.

via ZeroHedge News https://ift.tt/34jycx4 Tyler Durden

As we detailed last night, Argentina’s embattled government will ask its creditors including the IMF for more time to pay off $101bn of debts, as the country struggles to avoid a ninth sovereign default.

Hernán Lacunza, the finance minister, late on Wednesday, said confidently

“The government is aiming to clear the outlook for the financial programme in the short, medium and long-term horizon,”

“This is due to short-term liquidity stresses and not due to problems with the solvency of the debt.”

But the currency markets suggest investors are selling first and asking questions later…

Source: Bloomberg

And JPMorgan agrees, warning that pressure on Argentina’s international reserves may linger amid foreign-exchange deposits withdrawals and dollarization of peso deposits despite the government’s plans to extend debt maturities.

“A political gesture of the main opposition candidate and favorite to win the elections is a necessary condition to break the prevailing vicious cycle that has taken a toll on reserves,” analysts Diego Pereira and Lucila Barbeito write in a note.

By announcing the debt re-profiling late Wednesday, government aims to address short-term liquidity problems with the clear intention of safeguarding reserves, they write.

JPMorgan says the reaction of local law debt holders “is not clear,” particularly if the Congress addresses the local debt re-profiling bill only after the October election.

However, for now, judging by the collapse in the peso, traders are taking the “Fool me once, shame on you, Fool me a ninth time, shame on me!” road…

via ZeroHedge News https://ift.tt/2L5jaDe Tyler Durden

Authored by James Bianco via BiancoResearch.com,

Summary

For the first time ever, the fed funds rate is the highest rate in the developed world. The Fed has some explaining to do.

Comment

This morning the yield of 30-year Italian bonds fell below the fed funds rate. This means the Fed is now in charge of the single highest interest rate in the developed world.

The next chart shows 3-month rates for developed countries back to the 1950s. For the first time in over 50 years, the U.S. 3-month rate (a proxy for the policy rate) is the highest in the developed world.

Restated, this is the first time in modern history that the federal funds rates is the highest short-term rate in the developed world.

U.S. long rates are at a similarly extreme level relative to other developed nations. The next chart shows 62 years of data and, for the first time, U.S. long-rates are the highest in the developed world (this trend began in 2018).

The market has made its opinion known about this situation via the yield curve.

The 3m/10y curve continues to sink further into inversion, approaching its most extreme level in 19 years.

While the yield curve is screaming for a 50 basis point cut, the market is not yet pricing in such a move. As the chart below shows, the probability of a 50 basis point cut is between 5% and 16%.

So why is in the fed funds market not pricing in as aggressive a stance as the yield curve?

As we noted yesterday:

Fed fund futures (and OIS) are not pricing in a 50bps cut because Powell and Fed officials are hinting they are not willing to cut 50. The inverted curve says this is a mistake.

So what gets the market to price in a 50 basis point cut? As we also pointed out yesterday:

Currently, the S&P 500 is trading around 2890. Given a drop to 2822 pushed the implied odds of a 50 bps cut to 36%, it is looking like a trade under 2800 (about an 8% correction from the all-time high) would push fed funds futures to price in a 50% chance of a 50 bps cut.

The next chart illustrates how the odds of a 50 basis point cut (as measured by the October fed funds futures in orange) closely follow the stock market (blue).

Conclusion

When the Fed meets on September 18, officials should ask themselves the following:

The federal funds rate, the rate we administer, is now the single highest interest rate in the developed world. Market measures, like the yield curve, are saying this is wrong.

Are we sure we have the correct policy? What set of economic indicators suggest this is the first time in 60 years that the U.S. should stand alone with the highest rate in the world, led by our administered rate as the highest point of all?

We have argued that an inverted curve damages the economy. Accumulate enough damage and the economy sinks into recession. So, the curve does not predict a recession, it causes it. What is not known is how much damage the economy can withstand.

If the Fed does not get aggressive and cut rates, we are going to find out how much the economy can withstand. And until they do cut aggressively, long-term rates will continue to sink and the inversion will get deeper.

via ZeroHedge News https://ift.tt/2UfmW07 Tyler Durden

There were no surprises in today’s first revision of Q2 GDP, which the BEA reported moments ago printed at 2.0% (2.040% to be precise), just as expected, and down modestly from the 2.1% (2.060%) initial estimate; the number was also down from the 3.1% annualized GDP growth in Q1.

The Q2 increase in real GDP reflected an even greater increase in consumer spending and government spending, while inventory investment, exports, housing investment, and business investment decreased. Imports, which are a subtraction in the calculation of GDP, increased. The increase in consumer spending reflected increases in both goods and services that were widespread across major categories. The increase in government spending reflected increases in both federal and state and local government spending.

The decrease in inventory investment reflected decreases in manufacturing, retail trade, and wholesale trade industries. Goods led the decrease in exports.

Curiously, even as overall GDP growth eased somewhat, personal consumption jumped, rising from 4.3% in the first estimate to 4.7% currently: this was the highest PCE in almost five years, since Q4 2014, and up shaprly from just 1.1% in Q1:

As detailed by he BEA, the revision to GDP growth reflected downward revisions to state and local government spending, exports, inventory investment, and housing investment. These revisions were partly offset by an upward revision to consumer spending. Broken down by item, the Q2 GDP of 2.04% looked as follows:

• Personal Consumption: 3.10%, up from 2.85% in the first estimate
• Fixed Investment: -0.20%, down from -0.14%
• Change in Private Inventories: -0.91%, down from -0.86%
• Net Exports: -0.72%, down from -0.64%
• Government consumption: 0.77%, down from 0.88%

Inflation remained stable, with the GDP price index rising 2.4% in 2Q, in line with expectations, after rising only 1.1% prior quarter; there was some weakness in core PCE, which rose rose 1.7% in 2Q, missing expectations of a 1.8% increase, after rising 1.1% prior quarter.

Finally, the BEA also reported that in Q2, profits increased 5.3 percent at a quarterly rate in the second quarter after decreasing 3.8 percent in the first quarter. Specifically:

• Profits of domestic non-financial corporations increased 4.0 percent after decreasing 9.0 percent.
• Profits of domestic financial corporations increased 1.0 percent after increasing 5.8 percent.
• Profits from the rest of the world increased 11.7 percent after increasing 1.5 percent.

via ZeroHedge News https://ift.tt/2Le6064 Tyler Durden

The endless back-and-forth of provocations between the US and China in the South China Sea continued apace on Thursday as Bejing condemned the latest US “freedom of navigation” operation near a set of disputed reefs in the South China Sea, according to the SCMP.

On Wednesday, the guided missile destroyer USS Wayne E. Meyer sailed within 12 nautical miles of Fiery Cross and Mischief reefs, the two biggest artificial islands – or, as Steve Bannon calls them, ‘stationary aircraft carriers’ – in the disputed Spratlys.

According to the SCMP, it was the first time an American warship had challenged two Chinese military outposts at once in a “freedom of navigation” operation. On Thursday, Senior Colonel Li Huamin, spokesman of the People’s Liberation Army’s Southern Theater Command, accused Washington of “acting as a hegemony in ignorance of the international laws and rules” and urged itto stop its “provocative actions” to avoid an “unpredictable incident.”

Suggesting that the mission almost resulted in a confrontation, Li said the PLA Navy and Air Force monitored and warned the destroyer, ultimately driving it out of Chinese territory.

Meanwhile, Reann Mommsen, a spokeswoman for US 7th Fleet, said US forces operated in the Indo-Pacific region on a daily basis, including in the South China Sea, and that these operations were simply to make sure the US can still operate in accordance with international law.

“All operations are designed in accordance with international law and demonstrate that the United States will fly, sail and operate whatever international law allows,” she said.

Beijing claims most of the South China Sea, an area rich in resources and through which trillions of dollars in trade passes each year. Despite international court rulings contradicting this claim, Beijing has occupied the Paracel Islands, built up the Spratlys, and assigned significant military forces to them.

The US Navy has sent ships into waters around the Chinese-controlled islands and reefs on an almost monthly basis since the end of last year “to challenge excessive maritime claims.”

“Our troops will [take] all necessary measures to resolutely defend national sovereignty and security and firmly safeguard the peace and stability in the South China Sea,” Li said.

This has greatly angered Beijing, and contributed to the worsening tensions between the world’s two largest economies. Beijing has regularly threatened military retaliation, and on at least one occasion nearly provoked a confrontation between US and Chinese ships.

via ZeroHedge News https://ift.tt/2zvDJm2 Tyler Durden