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Authored by David Hay via Evergreen Gavekal blog,

“We’re paddling against the current in trying to sustain public faith in the Fed.”
–Federal Reserve Chairman JEROME (JAY) POWELL

“The FOMC (Federal Open Market Committee, the Fed’s key rate-setting entity) is in panic mode now, facing the Frankenstein monster balance sheet it has created. The FOMC has come to the realization that it cannot unwind it.”
–Jones Trading’s chief strategist MIKE O’ROURKE

“The Fed today is as much a prisoner of the market as the market today is a prisoner of the Fed.”
–Epsilon Theory’s BEN HUNT

“Big hat, no cattle”. “All sizzle, no steak”. “Talks a good game”. Those and other popular sound-bites are meant to refer to someone who is, to use another colloquialism, “all bark and no bite”. When it comes to most of the world’s central banks, all of those quips apply.

If you think I’m being excessively judgmental, consider recent developments: The European Central Bank (ECB) has been adamant about its desire to both begin raising interest rates and shrinking its bloated-like-a-Sumo-wrestler-on-steroids balance sheet.

Source: Financial Times, 2/19/2019

Adamant, that is, until recently. Thanks to weakening inflation and continuing anemic growth on the Continent, rate hikes are off the table. Soon-to-be-outgoing ECB emperor chief Mario Draghi is already making noises about restarting its quantitative easing (QE) program rather than reversing it as its American counterpart, the Fed, has done. This is despite the fact that the ECB’s balance sheet—or stash of European bonds bought with pseudo-euros—is an outrageous 40% of GDP versus “only” about 20% in the case of the Fed (GDP represents a country’s total economic output).

It’s true that Europe’s chronically flaccid economic pulse has faded one more time (European economic “liveliness” almost makes a corpse look animated). As a result, the number of negative-yielding bonds (the ultimate Alice In Wonderland financial condition where borrowers charge lenders to use the latter’s money) is once again swelling. The total value of these legalized investor extortion instruments is now $11 trillion, most of them from European issuers. This is up from the trough of $6 trillion last year when it seemed as though the ECB was serious about at least a feeble attempt at returning to normal monetary conditions (like where lenders get paid to extend credit).

Accordingly, it looks like the rumors of the demise of negative yields have been greatly exaggerated. Per the below, from the Wall Street Journal, almost a quarter of all global bonds outstanding produce, so to speak, negative interest rates.

Source: Wall Street Journal, 12/18/2018

In Japan, the land of the sinking yen and ever-rising debt, conditions have also flagged lately despite decades of zero interest rates and stupendous deficit spending. One of its most influential business conditions surveys recently noted: “Domestic economic weakness compounded with slowing global growth coincided with the lowest level of business confidence for over six years.”

As the no-nonsense financial commentator Danielle DiMartino Booth, former adviser to ex-Dallas Fed president Dick Fisher, recently wrote: “Not to beat a very dead horse but negative interest rates in Japan and Europe were supposed to have generated virtuous outcomes.” (Emphasis hers.) In other words, these radical policies, that were designed to stave off the ravages of the Great Recession and stimulate healthy economic growth, continue to fail to bring home the mail.

Then there’s America and its relatively new Fed chairman, Jerome Powell (Jerome sounds much more forceful than Jay, the handle he seems to prefer, doesn’t it?). Jerome came in with both guns blazing, raising rates and shrinking the Fed’s balance sheet, what we and others (like Danielle) have called a double-tightening. (As a reminder, increasing the Fed’s balance sheet was popularly known as quantitative easing or QE, which was where it essentially created $3.8 trillion of fake money to buy government debt. Other central banks, such as the ECB, the Bank of Japan, the Bank of England, and the Swiss National Bank also engaged in this monumental monetary fabrication.)

As recently as last fall, Mr. Powell “talked a good game” of ignoring market volatility (meaning sell-offs). He even hiked rates in mid-December despite a reeling stock market. He additionally seemed intent on continuing the double-tightening, also announcing in December that the balance sheet shrinkage—or quantitative tightening (QT)—was on “autopilot”. Based on the press conference he gave at the end of January, apparently that autopilot has already been switched off.

Many pundits have reacted to this about-face angrily and are accusing Jay (not Jerome) of caving into political pressure from the meddler- (and Tweeter-)-in-chief. Others have screamed that he has done exactly what he said he wouldn’t do by trying to sooth the stock market with dovish utterances once it was down about 20% from its September peak.

Conversely, the preternaturally bullish crowd on CNBC, especially Jim Cramer, have been delighted with Powell’s almost overnight conversion from hawk to dove. (On that topic, I was interested, but not surprised, to read that when the long-bearish John Hussman appeared on CNBC a few weeks ago, he was told to put a positive spin on his views. Talk about fake news! But to his credit, John didn’t dilute his message.)

Certainly, the stock market has loved the Jerome to Jay metamorphosis. From a selfish standpoint, Evergreen is in the pleased camp since it has been the bombed-out strata of what we’ve been calling the two-tier US stock market that has been in the vanguard of this powerful rally since the late December lows. In fact, energy in general and mid-stream energy assets (pipelines, et al) in particular, have been at the head of the charge, as we had hoped and anticipated, per our early January special message.

But from a non-selfish vantage, I have serious misgivings about how even the most timid attempts at so-called monetary policy normalization (read: getting interest back up to a point where savers care about saving) caused things to fall apart. Also from a self-centered view, that’s a vindication. Whenever I was asked (and often even when I wasn’t) how long the Fed would tighten, my simple answer was: “until something breaks”. It’s fair to say that a lot of things broke—make that shattered–in the financial markets in last year’s fourth quarter and we now believe the Fed is done with actual rate increases. (The continuing balance sheet shrinkage, effectively representing further rate hikes, is a different story.)

As usual, stocks hogged all the press during last quarter’s crashette but I’d argue another development alarmed the Fed just as much…if not more. EVAs ad nauseum (no doubt nauseating many of our readers in the process) have conveyed the vital role of credit spreads. Also, ad nauseum, we’ve explained that these represent the gap between the government’s borrowing costs and those of Corporate America. We’ve also repeatedly noted that when those contract it’s very good news and when they widen, especially “bigly”, it’s head-for-the-hills time.

Source: Bloomberg, Evergreen Gavekal as of 2/12/2019

The above chart shows what’s been going on with spreads over the last five years. You can easily see that when they’ve been narrowing, or are stable, the stock market does just fine. However, when they zoom higher, red ink tends to flow down the canyons of Wall Street.

What was a bit different this time is that stocks seemed to lead credit spreads rather than the other way around, as is more common. To illustrate the typical sequence, witness what happened to spreads and stocks in 2007 to early 2009, as well as in 2011 and 2012.

Source: Bloomberg, Evergreen Gavekal as of 2/12/2019

But it is probably fair to say that the spike by spreads late last year elevated what was a mere correction into a near bear market for the S&P. Moreover, there was no “near” about it for most overseas stock markets, US small- and mid-cap stocks, and, frankly, most US issues save a few monster-cap names like Amazon, Netflix, Google, and Microsoft (i.e. the majority of the famous FANGM). Said differently, what was an already very painful dive of almost 20% by the S&P was far worse for a wide range of asset classes and individual stocks.

Thus, it’s likely that this darker backdrop was a key reason for the Jerome to Jay, monetary muscleman to monetary milquetoast, changeover – kind of like Superman reverse-morphing back to Clark Kent. As we noted at the end of December, it was becoming an out-and-out panic. Just as we saw at almost the exact same time of the year in 2008, those type of events can get out of hand very quickly. Once they’ve done so, it can be extremely challenging to convince terrified investors to get a grip.

If it sounds like I’m asking for some slack to be cut for old Jay (who’s actually just about my age, so, naturally, I don’t think he’s THAT old), I guess I am, emphasis on “guess”. The fact of the matter is I simply feel resigned to the ugly reality of current conditions. As I noted in the “What Price Prosperity” chapter, the reigning King of Bonds, Jeff Gundlach, summed it up best, in my view, when he said: “The Fed is damned if they do and damned if they don’t.” Ergo, they’re doomed if they keep tightening and they’re doomed if they stop.

Maybe you think doomed is too harsh a word, and perhaps it is. But I think what’s becoming increasingly clear is that the leading global economies are doomed destined to occupy a twilight zone of chronically deficient growth, rapidly rising debt levels, and a constant absence of interest rates. Frankly, I think the Jim Cramer’s of the world salivate over this scenario because they feel it means the US bull market isn’t dead after all. With the Fed on hold, it’s a greenlight for investors to go back into full risk-on mode, as they have most enthusiastically done this year. Or at least that’s how the current market narrative is shaping up.

To repeat, my personal portfolio and those of Evergreen clients are loving this revival of animal spirits. Even our most conservative strategy is off to a very fast start thus far in 2019. But down deep, and not really that deep, it seems to me the market is making a monstrous mistake. It’s not asking another one of those nagging questions—like what price (pseudo) prosperity?—such as, “What’s the ultimate end-game?”

With profuse apologies to all those who put their lives on the line in Iraq and Afghanistan, it feels to me like the financial equivalent of those quagmires. The US and its allies put enormous military force to work in both countries and, in fairly short order, were able to “win” both wars. But it seemed to me at the time, and it still does, that we never thought about an exit strategy. (It was illuminating in this regard to watch the PBS American Experience tribute to the life of George H. W. Bush. In it, several of his top advisers from the first Gulf War were interviewed and they recounted how much heat they took after it was over for not marching into Baghdad and deposing Saddam Hussein. Each of them pointed out they don’t hear those criticisms any longer after the world has had a chance to witness the near-impossibility of fully exiting either Iraq or Afghanistan.)

Basically, the US high command employed a massive military intervention. It had a brilliant plan to win the wars but, apparently, almost no plan to win the peace. Similarly, the planet’s central banks never seemed to have a sound strategy for withdrawing from their decade-long, multi-trillion experiment, one that has never been tried before—perhaps for good reason.

As noted earlier in this series, and we will see again at the end of this chapter, our forecast has long been that it will shock most people how little tolerance even the US has for higher interest rates. The market tumult of last quarter was one vivid illustration. But there’s more at work here and I think this is what the market is missing right now in its “O, Be Joyful” reaction to Jay Powell’s flip-flop. To quote Bill Clinton’s former top political strategist, James Carville: “It’s the economy, stupid.”

Lost in all the anxiety, followed by euphoria, over the Fed’s stance and the market’s response to same – not to mention the confusion of the government shutdown – is what is happening to economies both in the US and the rest of the world. Unquestionably, Germany is the lead sled-dog for the European economy and the industrial production numbers it’s been reporting in recent months have been shockingly weak, now down 4% year-over-year. Even German retail sales have recently done a cliff-dive. This is quite a letdown given the supposed health of the Deutschland consumer. Much less surprising is that Italy is sliding back into recession for what seems like the tenth time in the last ten years.

Spinning the globe roughly 180 degrees, China is experiencing what passes for a recession in that country. So far, it’s a growth version–if official numbers can be believed (and that’s a big leap of faith); if not, then you can remove the “growth” part of the description. Even so, China has been reporting the weakest economic data in 30 years. Naturally, stagnation in China ripples throughout the entire Asian region.

Even the “Lucky Country”, Australia, which has been fortunate enough not to have endured a recession in twenty-five years, looks like its luck is running out. Over that time, it has experienced one of the most outrageous housing bubbles ever recorded. Thus, its economy is at grave risk should housing prices decline precipitously. As Sydney-based Gerard Minack pointed out in his February 8th Down Under Daily, “The risk of an Australian recession is rising.” To back up his view, note a few of the charts he ran in that issue.

Source: Minack Advisors, 2/8/2019

Consequently, most of the planet’s leading economies look to be heading into contraction mode. Prior Bubble 3.0 EVAs have shown the Ned Davis Global Recession Watch chart and here’s an updated version.

Source: Ned Davis Research, 2/14/2019

Of course, what US investors care most about is our domestic economy. In that regard, it continues to amaze me how much focus there is on the labor market. In case you missed it, the latest jobs report released, on February 1st was a scorcher…at least on the surface. Some 300,000 jobs were created, reinforcing the view that the US has been able to decouple from the rest of the world’s slowdown/recession.

But, as often noted in these pages, the unemployment report is one of the most retro economic measures known to either woman or man. It only tells us about the past and precious little about the future. The closest thing the economic profession has to a media star these days is Gluskin Sheff’s David Rosenberg. David has done a 20,000 Leagues Under the Sea dive on the latest jobs report and he’s come up with a radically different take on the tale it tells.

First, he notes that the Household Survey (vs the official Payroll Survey) has historically been much better at identifying turning points in the jobs cycle. At the same time that the main report indicated strength, David noted that the Household Survey showed 250,000 jobs lost. He also points out there’s something very odd about recent studies of the prime working-age category of 25 to 54 years old. For the first time since April 2009 (i.e., the heart of the Great Recession), it has contracted for three months in a row. Meanwhile, the broader measure of jobs market, known as U-6, has risen from an unemployment rate of 7.4% to 8.1%, nearly as much as it did leading up to the total economic face-plant back in 2008.

The aforementioned Danielle DiMartino Booth is on the same scent on almost a daily basis through her Quill Intelligence service. (By the way, her Daily Feather is a steal at just $25 per month; you can sign up via this link.)

As far as I’m aware, Danielle is the only economic maven who tracks inversions in both the yield curve and the labor market. Most of us are familiar with the former (a yield curve inversion occurs when short-rates are higher than long rates, a condition that has already occurred in parts of the US treasury debt market) but the latter is more obscure. Per the following chart, she tracks “Jobs Hard to Get” minus “Fewer Jobs”.

Source: Quill Intelligence, 1/30/2019

The spread between those has provided a remarkably accurate warning in the past about a turn for the worse in both the labor market and the overall economy, as you can see above. The idea behind this is that when a bottom happens in “jobs hard to get” (i.e., they are easy to get), as happened last August, and then “fewer jobs” becomes a trend, a reversal from expansion to contraction is likely. In fact, over the last 50 years, recessions have been around the corner in six of the past seven times this has happened. As she points out, it’s also no coincidence that these two inversions happen in synch. An inverted yield curve is one of the most reliable advance warnings of an impending recession.

Still skeptical? Well, David Rosenberg, Danielle DiMartino Booth and the new King of Bonds, Jeff Gundlach (the erstwhile Bond King, Bill Gross, just hung up his Bloomberg) all further state that another highly reliable heads-up of an impending downturn is the difference between consumer views of current vs future conditions. The logic behind the theory is that when households feel fine about their present status but are becoming increasingly concerned about the future, an economic pivot point is also nigh at hand.

Source: Breakfast With Dave, 1/30/2019

The good news with this indicator is that it hasn’t for sure peaked out. The bad news is that it is looking perilously close to where it was at the conclusion of past expansions. Based on the below charts measuring consumer confidence, it does appear a turn for the worse is looming.

Source: Breakfast With Dave, 1/30/2019

As Danielle has summed it up recently: “Make no bones about it. ‘Recessionary’ best captures the last three months’ decline in the Conference Board’s Consumer Expectations index. The 27.8-point drop through January was the fourth largest on record. The other four declines comprise the top five which presaged past recessions.” (Emphasis hers)

Along similar lines, restaurant sales tend to be a reliable indicator of future consumer discretionary spending. They’ve now fallen in four of the last five months and are dropping at the steepest rate in 25 years. Maybe that’s why articles like this are popping up in the Wall Street Journal.

Source: Wall Street Journal, 1/25/2019

Housing also tends to lead the economy and the trend in home sales is another ominous development. In the Seattle area, home prices are sliding at rate nearly as fast as in 2009.

Source: Breakfast With Dave, 1/31/2019

Besides the fact that almost nary a Wall Street strategist is talking about these realities—yet—all of the above economic factoids are unlikely to have escaped the Fed. This is notwithstanding the recent comment by Jay Powell that “the US economy is now in a good place.” Remember, the Fed has never predicted a single recession in its history. Maybe this is because it feels it must constantly put on a brave face to avoid creating a self-fulfilling situation. But behind closed doors, around its massive gleaming conference table, it’s probable the Fed-heads are looking at the same data I’ve shown.

Therefore, if stock investors are celebrating the Jerome-the-Hawk to Jay-the-Dove conversion, while ignoring the deteriorating economic backdrop, they are likely falling into a trap much as they did in late 2007 and early 2008. Back then, the stock market staged several robust rallies, as the Fed first paused and then eased, before the realization set in that a recession was bearing down on the world.

Putting that aside, let’s consider the plight of the planet’s largest investor cohort, the Baby Boomer generation. Beyond their exposure to another market meltdown like last quarter’s, what about their need for yield? If the world’s central bankers can’t exit from these emergency programs that have been in place for a decade now, when can retired, or soon-to-be retiring, investors expect to ever be able to earn an interest rate above inflation on their income portfolios?

As relayed by Mike O’Rourke in his January 30th edition of The Closing Print, here’s what then Fed chairman Ben Bernanke had to say to Congress back in April of 2009 about QE (quantitative easing, the expansion of the Fed’s balance sheet with pseudo money):

Question: “Do you think this extended balance sheet should be maintained permanently or do you think it should be a temporary fixture?”

Answer (Chairman Bernanke): “No. It’s a strictly temporary measure which is being used, given that the interest rates are down to zero…But clearly this is a temporary measure which is intended to provide support for the economy in this extraordinary period of crisis and when the economy is back on the road to recovery, we will no longer need to have those measures.”

As economist extraordinaire, Milton Friedman once wryly noted, “nothing is so permanent as a temporary government program”. He must be smiling down from his cluttered desk in the sky saying: “Told you so”.

What is truly extraordinary is that nearly 10 years and one of the longest expansions in history later, the Fed’s balance sheet is much larger today than it was in April of 2009. If you include all the other central banks’ balance sheets around the world, the effective amount of QE now dwarfs what it was during the worst of the Great Recession.
But the really pathetic part is that current events indicate there is no exit for the monetary mandarins. While the Fed is continuing to reverse its QE—what’s known as QT or quantitative tightening—it has also effectively admitted that its balance sheet will remain much larger than it envisioned as recently as December. Instead of pursing QT for three years, it now sounds like it will finish later this year—or sooner if the stock market craters yet again.

Source: Ned Davis Research, 1/29/2019

Returning to the less esoteric central bank tool of interest rates, the fact that so much market turmoil—notwithstanding this year’s relief rally–and what looks to be the onset of another global recession, money market yields are still at what used to be recession levels. In my mind, this is totally a function of how over-leveraged the planet has become, making it highly vulnerable to even mild rate-hiking campaigns.

Source: Breakfast With Dave, 2/6/2019

A couple of the important implications from all of the above are as follows:

1. The average bear market decline in recessions is 35%; thus, there is probably another down-leg up ahead for the S&P 500. (This does not preclude the possibility of a blow-off-top in the near-term; if so, it would likely serve to make the ultimate bear market that much more severe, however.)

2. Locking in today’s yields from riskless investments like treasuries and CDs is becoming increasingly urgent. (Per the below, there will come a time to be more aggressive on the yield lock-in front.)

Further, hopes of ever being able to earn something like 5% on reliable income investments are nil outside of equity-like securities such as mid-stream energy securities (pipeline-type MLPs) or on corporate bonds when credit spreads soar (as started to happen last year and may occur again soon). But there are risks with these investments as we saw vividly in the fourth quarter when both MLPs and corporate bonds took it on the chin, particularly the former. But if Boomers are going to earn a decent cash flow yield on their nest eggs, they are going to need to take some calculated risks. One of the best times to do so is after the Fed has cut rates repeatedly and the economy is clearly in recession. Obviously, we’ve got a long way to go before those criteria are met. In other words, the next great buying opportunity in corporate yield securities likely is a later-in-2019 event. (Past EVAs have generally given decently timely recommendations of when to capitalize on these episodes.)

Unfortunately, with the central banks looking increasingly caught in a trap of their own making, it’s likely we are facing a Japan-like scenario in much of the world. In case that doesn’t resonate with you, this means a multi-decade period of economic stagnation and interest rates gone missing. But it also doesn’t imply the end of the world. You may have noticed Japan is still a prosperous country. Yet, the other reality is that growth has become very hard to come by in what was once a nation that looked to be dominating every industry (and buying up what seemed like the most iconic US trophy properties).

This debt-drenched/low growth/puny interest rate world is certainly not what I want to see but to hope otherwise is to believe folks like Jay Powell have the chutzpah– and wherewithal–to reset interest rates well above the inflation rate. Frankly, even if they wanted to, I don’t think they can…at least not without triggering an excruciating bear market in stocks, real estate and junk bonds/highly leveraged loans (the latter two continue to be my top vote-getter for the next panic flash point). That, in turn, would almost certainly catalyze a wicked recession. Therefore, cue again, the Gundlach “damned if they do, damned if they don’t” assessment.

To close this chapter of Bubble 3.0, I’d like to quote Michael Lewitt, the unflinchingly candid author of The Credit Strategist. Mike sent this to me in an email at the end of last month and gave me his permission to share it with you: “The Fed is a total joke. It is clear they view their job as protecting the stock market. Powell is just another Yellen who was another Bernanke who was another Greenspan. They will destroy the world.”

The world’s a resilient place, at least for those parts of it that protect free markets, including allowing investors to earn an acceptable return on their capital. But, these days, what’s acceptable in the minds of the central bankers seems to be shrinking with nearly every economic release.

Fascinatingly, though, the main topic for the next chapter of Bubble 3.0 may provide a way out, after all. It’s already beginning to garner significant media coverage with much more likely to follow. To many, it is the only viable exit strategy from this quagmire our dear central banks have created with their fealty to the faulty logic that punishing savers for years and years is a good thing. If you can’t wait a month or so to learn what I’m rambling about…well…sorry. There’s an old show biz saying that you should always leave your audience yearning for more. Just this once, I’m going to follow that advice.

via ZeroHedge News https://ift.tt/2EgY2oZ Tyler Durden

Iran’s President Hassan Rouhani has rejected the resignation of Foreign Minister Mohammad Javad Zarif, according to the country’s semi-official Fars news agency, after Zarif announced he’s stepped down via his official Instagram account late Monday. “The presidential office said the resignation had not been accepted,” a foreign ministry spokesman said. According to Iranian law the president must formally accept the resignation before it takes effect. 

Zarif wrote on Instagram as part of the shock announcement, “I sincerely apologize for the incapacity to continue serving and all the shortcomings during the service,” and added the words, “Be happy and upbeat.” Zarif was notably absent during official meetings related to Syrian President Bashar al-Assad’s rare visit to Iran on Monday. It was the first time since the war began in Syria that Assad traveled to Iran. 

Though Ayatollah Khamenie, IRGC Quds force General Suleimani, and President Rouhani all met with and were photographed with Assad as part of the “working visit,” Zarif  — considered the father of the nuclear deal (a deal the hardliners have always said is a trap) — was nowhere to be seen, fueling speculation as to why such an important figure would be missing to receive the close foreign ally. It was soon after news of Assad’s visit broke in international media that Zarif announced his resignation.

The foreign ministry’s Tuesday statement further said that speculation about the reasons for Zarif’s resignation beyond what was written on his Instagram page is incorrect, according to state media. 

Much of that speculation centers around the possibility that Zarif took the drastic action in response to hardliners, represented in the military and especially the IRGC, who may be wielding undo influence over decision-making at the expense of the foreign ministry’s authorized role.

The IRGC’s Qasem Soleimani, for example, appeared alongside Assad during Monday’s events as Zarif was absent. Soleimani is considered the key mover behind Iran’s militarily propping up the Syrian government throughout the war. 

Soleimani had made recent appearances on the Syrian battlefield, even at times appearing at frontline positions, where his presence has infuriated Sunni-led insurgents who oppose what they view as Shi’ite Iranian expansion in the region, as well as Israel, which fears Iranian expansion. Ayatollah Khamenei said during formal remarks greeting Assad on Monday that the Syrian-Iranian military alliance had dealt “a harsh blow” to US plans in the region, which involved empowering Gulf-aligned Sunni forces seeking to topple the Syrian state, and thus remove a key ally of both Tehran and Hezbollah. 

Spokesman: President Hassan Rouhani Has Not Accepted Foreign Minister Javad Zarif’s Resignation pic.twitter.com/97Sz3jAeg5

— Fars News Agency (@EnglishFars) February 26, 2019

The empowering of IRGC commanders in the context of the Syrian war, and the simultaneous failure of the 2015 nuclear (JCPOA), overseen on the Iranian side by FM Zarif, may have brought internal tensions to a head Monday, represented in Zarif’s sudden resignation. Tensions between the moderate camp (represented in Zarif) and the hardliners, which have the support of Khamenei, have long been boiling beneath the surface.

Writing of these tensions, Al Monitor’s Iran Pulse Editor Mohammad Ali Shabani wrote in the wake of Zarif’s resignation, via CNN: “Clearly there is dissatisfaction on Zarif’s part with the way things are going in terms of the authority he and his ministry are experiencing.” He added, “It’s not something that happened overnight. It’s been going on since day one.”

Currently, it appears Rouhani is reaching out to Zarif. The president said in a speech on Tuesday that Syria’s Assad had conveyed a personal thank you message to Zarif for his role as foreign minister, saying Iran’s “great success” in standing up to US sanctions was in part due to the foreign ministry’s efforts. 

“He’s been at the frontline of the battle against America,” Rouhani said of his top diplomat in the speech. 

 

 

 

 

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. دکتر حسن #روحانی رئیس جمهوری اسلامی #ایران استعفای دکتر محمد جواد #ظریف #وزیرامورخارجه #جمهوری_اسلامی_ایران را رد کرد #ظریف_بمان #ظریف_تنها_نیست #ظریف_ماندگار_شد

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“In the region we pulled off a great success and this great thing — this came on the back of efforts by all our forces. Part of that was on the shoulder of the foreign ministry, part of that was on the shoulder of the economy,” said Rouhani.

Interestingly the text announcing the Iranian presidency’s denial of Zarif’s resignation was also published on Instagram, via Rouhani’s official account accompanied by an image showing Rouhani and Zarif together and smiling. Additionally it included the hashtags “#Zarif_is_not_alone” and “#Zarif_is_staying” in Farsi. 

via ZeroHedge News https://ift.tt/2Nt4kpM Tyler Durden

It’s all fun and games until someone loses an eye…

Chinese markets saw some profit-taking from Monday’s exuberance, but not much…

 

European traders BTFD at the open but the FTSE remains lower on the week…

 

US equity cash markets all rebounded at 11ET but Small Caps gave up early and lagged the entire day…

NOTE: second day in a row of late-day weakness.

 

The 11amET ramp seems to have been all buybacks…

 

As the early short-squeeze quickly ran out of ammo…

 

2,800 was once again the key for the S&P 500 and for the second day, it was unable to hold it…

 

Quad top strikes again…

 

VIX and stocks remain decoupled…

 

While stocks managed gains, bonds were also bid on the day…

 

While the belly of the curve remains inverted…

 

We note that the longer-end has now steepened to 12-month highs…

 

The dollar dumped back to pre-FOMC drop levels…

 

Is the dollar set for some downtime?

 

Cable surged to its highest since July…

 

Cryptos drifted lower on the day…

 

Despite the dollar weakness, commodities basically trod water today…

Gold in Yuan has been drifting lower recently…

 

Finally, there is this… US stocks test key highs once again as earnings expectations hit 7-month lows and US Macro plunges to its weakest since August 2017…

All thanks to the sudden resurgence in global money supply.

Let’s hope they can keep it up…

Oh and in case you loved the rebound in today’s Conference Board confidence data…

Nice headline, shame about the details. Vacation plans down to the lowest since Jun-18. Homebuying plans at a 7-mo low and the domino impact on big-ticket appliances fell to a 4-yr low. Auto spend intentions have declined for 4 straight months to the lowest level since last Jul.

— David Rosenberg (@EconguyRosie) February 26, 2019

via ZeroHedge News https://ift.tt/2Xr6J9d Tyler Durden

Authored by Daniel Lacalle,

If we look at the list of key macroeconomic data published in recent weeks, we can not use a better definition than “disappointing”.

The slowdown in the eurozone is evident and more pronounced than even the most pessimistic expected. Both industrial production, consumer confidence and indicators such as the trade surplus have deteriorated sharply. But there is growth. Despite the bad data, the Italian recession and the fact that the European Commission has had to revise down by more than 30% its own estimates from a month ago, Europe will likely grow in 2019.

China continues to slow down under the weight of its indebted and inefficient model, but it also grows.

The United States showed poor retail sales data, but both employment and gross capital formation show that the economy continues to expand. The emerging countries have worsened their prospects, but have navigated the monetary imbalances that deactivated the mirage of synchronized growth in 2018.

What does all this say? We have gone from a shock of euphoria in the first part of 2018 to a shock of pessimism in recent months and back to euphoria, yet macro indicators and corporate profits do not indicate a 2008 recession.

Why? If we remember 2007, the deterioration of the leading macroeconomic indicators was much more aggressive and, in addition, corporate profits showed weakness, poor sales, and margins that could presage what finally happened. It is not the case now. Corporate profits published this month are no party, but show widespread growth and, most importantly, expectations for a mildly decent 2019 and 2020.

Can this change and become a crisis? Yes, and that is why we must keep our attention focused on fundamentals, but the reality is that today we do not see macroeconomic or corporate indicators that indicate a crisis. Rather, the three “Ls” that we mentioned in 2017: low growth, low rates, low inflation.

What has led to this period of market euphoria if the macro data and profits are not spectacular?

(World Equity Index vs Economic Surprise)

(Money Supply vs Economic Surprise)

Simply a change of trend in global liquidity led by a U-turn in the process of normalization of central banks. In 2018 we saw the first drop in global liquidity in more than a decade, and that generated significant losses in financial markets. Since the end of December stock markets have rebounded strongly because the data, although poor, is not as bad as feared, and mainly because the Federal Reserve changed its tone on the number of rate hikes, the ECB announced that it would be much more accommodative and the Central Bank of China introduced the largest injection of liquidity in five years.

In fact, between December 26 and February 15 we have seen the largest injection of liquidity in the markets of the last two years, bringing the global money supply to record levels. Bloomberg published my comments in an article (“Follow The Money“) where I said that the global risk rally was driven by soaring money supply, while CNBC published my article reducing the optimistic expectations about the China-US trade agreement (here), which adds to the caution I recommended about the US economy in Forbes (here). Let’s forget the “synchronized growth” and look for opportunities where margins and earnings growth do not depend on abnormal expectations of inflation. Look for de-correlated returns in stocks and bonds of companies that have strengthened cash-flow generation, where margins are stable and growth undemanding. Yes, they may seem more expensive than other asset classes, but the biggest risk in this market is in the optically cheap sectors and assets, and in sovereign bonds. All this gives us strengths to continue analyzing where opportunities are located and in what assets and sectors we see value, in “returning to fundamentals”.

via ZeroHedge News https://ift.tt/2tC8QcD Tyler Durden

Submitted by Michael Every of RaboBank

As expected, Monday saw US President Trump help to make China great again – or at least the unloved Chinese stock markets. They saw their highest volume since the heady 1929-ish days of 2015 while soaring 5.6% (Shanghai) and 6% (Chinext), taking both into a technical bull market. So much winning! Of course, sentiment was also helped by the official message being sent out that ‘deleveraging has now achieved its goals’, and that the finance sector is very important to the economy. Deleveraging never even started. Sounds to me like the January flood of Chinese borrowing (worth 5% of GDP) might be more than a one off. It also sounds to me like China is going to try to blow another equity bubble to prop up demand. And that reminds me of an early episode of The Simpsons, one where Lisa has a crush on the bully Nelson, goes to his room and sees a poster saying “Nuke The Whales”, asks “You don’t really believe that, do you?”, and gets the response “I dunno. Gotta nuke somethin’.” Perhaps China is getting its trade-war retaliation in in advance? That might still be useful given Trump has said a signing summit for this deal might happen fairly soon or may not happen at all. So much detail!

Indeed, I would argue that “gotta nuke somethin’”, in its gloriously atavistic imbecility, is actually the financial-market zeitgeist of our age. What else have our central-banks been doing for years and years? Certainly not using their considerable ammunition to help in any way if one takes a long-term view. I say that as Rabo are already predicting a US recession in 2020, which will drag many down with it, and as the OECD now warns that swollen corporate debt piles, which central banks have so encouraged, is of ever lower quality and potentially more dangerous than it was back in 2008. 54% of investment grade bonds are now BBB-rated, up from 30% in 2008. The OECD argues “In the case of a downturn, highly leveraged companies would face difficulties in servicing their debt, which in turn, through higher default rates, may amplify the effects…Any developments in these areas will come at a time when non-financial companies in the next three years will have to pay back or refinance about USD4 trillion worth of corporate bonds. This is close to the total balance sheet of the US Federal Reserve.”

Guess what guys? China is right ahead of you on that curve – which is why it is trying to find another whale to nuke ASAP: things are looking truly ugly given many firms can’t even pay the interest on their debt, let alone the principle. And guess what else? That OECD and China warning sounds like an admission of the Minsky debt dynamic that you might have thought all central banks would have to have learned the lessons of post-GFC. Apparently not, however – because they think they already know everything.

As former Fed Chair Yellen mocked yesterday, Trump doesn’t understand what the Fed’s dual mandates of price stability and stable employment are. That might well be true. But was it the Fed or Trump who publicly called out how dangerous continuous Fed rate hikes are in a debt-laden, Minsky-teetering financial system where the yield curve is still inverted 9bps on 1s-5s even after a pause? I think Yellen will find it was Trump who was right and the Fed who was forced into a humiliating and frankly incongruous policy U-turn. So much expertise! Trump also made a similar intervention over oil prices overnight, and once again they dipped, though are opening up strongly this morning in Asia.

“So much expertise!” is also a nice segway to the UK, where the latest headlines are that Labour might back a second referendum. Let’s just nuke a few recent talking points there:

1. The Independent Group (TIG) of 11 MPs can only do one of three things: prop up the May government, which it won’t do as it is so anti-Brexit; support a hypothetical Corbyn-led constellation, which it won’t do given 8 of the 11 members quit Labour because of him; or allow the May government to collapse and we get a general election and TIG lose their seats. So no game-changer.
2. Labour backing a second referendum means nothing. There is no Parliamentary majority for a second referendum because many Labour MPs won’t back it, and the only amendment in Labour’s hand is backing May’s Withdrawal Agreement –the one her own party won’t because of the Irish border issue– on the proviso it is then put to the people in a final vote!
3. Delaying Brexit for a few months, which the EU is not united on, just kicks the can down the road. Indeed, one could argue that by delaying to May, for example, the odds of Hard Brexit rise further as at that point any further delay would mean the UK would have to stay in without any EU Parliamentary representation – which clearly cannot work. Nonetheless, GBP is at a four week high as someone/something reads the word “Delay” in a headline and thinks it augers well. Personally, I think the most pertinent headline on Brexit I have seen is: “Stop flushing Yorkshire puddings down the toilet, water company pleads”. We have now changed our house call away from a BOE rate hike in May on that basis (Brexit, not Yorkshire puddings) as Stefan Koopman explains here.

So more easy policy in the UK; ultra-easy policy in China; promises of more easing in Japan; an ECB U-turn to come(?); and the Fed on hold and stopping QT soon at least. And that’s with bullish markets and reasonable global growth – just wait until things head south: if all you have is a nuke, everything looks like a whale.

via ZeroHedge News https://ift.tt/2H4z3bN Tyler Durden

Authored by Jeffrey Snider via Alhambra Investment Partners,

St. Louis Fed President James Bullard was in New York last week, making a presentation to the US Monetary Policy Forum. A well-known dove, speaking to CNBC while attending the conference, as a current voting member of the FOMC Bullard announced his dissenting view to the last “rate hike.” He was not eligible to vote in December, rotating into this situation at the beginning of this year just in time for this new dovish tilt.

I thought at the December meeting, myself I thought it was a step too far. I argued against that move. We did get a bad reaction in financial markets. I think the market started to think we were too hawkish, might cause a recession.

That’s the thing with these doves, they never explain this huge contradiction. Monetary policy is the center of the universe for these people, the central bank could not be more central. To them, it explains everything even though it can’t.

Since rate cuts and QE were so powerful, how in the world can anyone be so dovish after all this time and so much of it? The world wouldn’t seem to need more of it if it worked at all like it has been advertised. Not only that, if it is so effective how can just 250 bps of “rate hikes” (spread out over three years!) be sufficient to bring about very real fears over a recession?

For Bullard, that is the main issue currently; the rate hikes, not QT. Though everyone is talking about balance sheet normalization, for the St. Louis branch this is a minor bit of fine tuning. The subject of his presentation in New York was how QT isn’t really QT.

Bullard: With the policy rate near zero, the effects of QE may have been substantial due to signaling effects. Now, with the policy rate well above zero, any signaling effects from balance sheet changes have dissipated https://t.co/0aXyGtq46C pic.twitter.com/FTZzc69CfB

— St. Louis Fed (@stlouisfed) February 22, 2019

The funny thing is, Bullard comes awfully close to acknowledging the truth about monetary policy. It isn’t money printing; it isn’t even money. He makes the argument that QE’s powerful effects were instead accomplished via expectations. I could not agree more. Or, as former Dallas Fed President Richard Fisher admitted in early 2013, a monetary head fake.

This is how, according to James Bullard, QE can be massively effective while QT is, essentially, nothing more than accounting.

How, then, does 250 bps work out to recession fear? For policymakers, it is an extension of secular stagnation. They don’t call it that, of course, rather it is clothed in the CYA of R* discussions. Where once a policy rate could get up to 600 bps or better, in today’s economy 250 bps where R* is atypically low becomes tight by virtue of reasons never specified.

Something something productivity.

In other words, several suspected factors are holding back the real economy so that whatever today’s smaller input from the Fed can potentially hold much larger negative consequence for the real economy; except, obviously, QT which seems big but apparently, for Bullard, is small. It doesn’t really add up.

A separate and unrelated study published earlier this month by Ernest Liu, Atif R. Mian (of Princeton), and Amir Sufi (University of Chicago) attempts at least an explanation for R*. An exhaustive statistical exercise (as per usual), the authors look for this persistently weak economy in low interest rates themselves.

Traditionally, a lower interest rate is viewed as expansionary for the production side of the economy. Consider a typical firm making an investment decision. A decline in the interest rate, all else equal, increases the net present value of future cash flows leading the firm to increase immediate investment. This mechanism explains why the production-side relationship between economic growth and interest rates is typically negative in endogenous growth models.

That’s not how it has worked out, though. Over the last decade, interest rates seem like a trap – as James Bullard now alleges. The economy is so awesome because of powerful monetary stimulus but can’t tolerate even the smallest, more carefully laid out “rate hike” regime. Call it R* if you want, but something is missing.

Liu, Mian, and Sufi contend that the curve representing the production-side relationship between interest rates and economic growth is an inverted U-shape (Laffer curve-like). Interest rate policy, in their view, has a sweet spot; if rates drop below it, then the circumstance does more harm than good.

The reason they cite is increasingly monopolistic behavior across industries:

This paper introduces the possibility of low interest rates as the common global “factor” that drives the slowdown in productivity growth. The mechanism that the theory postulates delivers a number of important predictions that are supported by empirical evidence. A reduction in long term interest rates increases market concentration and market power in the model. A fall in the interest rate also makes industry leadership and monopoly power more persistent.

In other words, Milton Friedman was right about low rates. The paper’s authors don’t say it, nor would I expect them to have even thought about it. Still, what they find in their conclusions is every bit consistent with liquidity preferences due to a tight money constraint. The interest rate fallacy.

When money is tight in the real economy, as low interest rates propose, then those who find themselves in the enviable position of possessing effective money choose the safest, most liquid investments (Keynes called these liquidity preferences). When money is loose, they do the opposite foregoing safety for risk and opportunity.

In corporate markets, which one is which? Quite clearly, market leaders as Liu, Mian, and Sufi identify receive the best financial terms with an unending stream of credit at the expense of their smaller, less established therefore more risky competitors who struggle, relatively speaking, to secure financing. Competition is lessened thereby reducing the incentive for those leaders to invest productively; they fall back instead on harmful monopolistic behavior.

There isn’t enough money to be redistributed more equally.

The paper doesn’t mention them, but I would put stock repurchases right at the top of this list. Noting this clear correlation, it does note how, “The fall in long term rates has been associated with a rise in industry concentration, higher markups and corporate profit share, and a decline in business dynamism.”

Rather than try to explain a few of the facts in piecemeal fashion, as Bullard attempts, we can instead explain all the facts at once by stepping outside the orthodox box and into the monetary head fake. Tight money is disruptive to the economy supply side, for obvious reasons as well as these other channels. It is itself a trap, meaning that low rates become self-reinforcing in behavior as well as occurrence; especially since policymakers are under the delusion that QE for whatever reasons was powerful stimulus.

They welcome them as successful policy and therefore are not prepared for the negative consequences; some of which Liu, Mian, and Sufi detail.

The interest rate fallacy explains why neither QT nor 250 bps of “rate hikes” have much to do with recurring problems of recession-like periods. Focusing on monetary policy instead of the interest rate fallacy is itself an enormous fallacy. Therefore, policymakers can’t make heads nor tails from the situation. It shows, one day absolutely sure about an inflationary economic breakout and the next trying to figure how bank reserves (which didn’t matter to anyone before 2008) or 250 bps of federal funds (a market nobody uses and a rate for it that practically nobody pays attention to in operative practice) spoiled the party.

These are nothing more than attempts to reverse engineer how to get from their persistent assumptions about what they do to the equally persisting awful economic circumstances surrounding them. QE was awesome, but yet it doesn’t seem to have worked out that way. Not only is there no money in monetary policy, central bankers have no idea what interest rates mean. The first two presumed functions for every central bank are money and interest rates. 

via ZeroHedge News https://ift.tt/2Xr8ovf Tyler Durden