Tag: finance

Authored by Simon Black via SovereignMan.com,

Are you ready for this week’s absurdity? Here’s our Friday roll-up of the most ridiculous stories from around the world that are threats to your liberty, your finances, and your prosperity… and on occasion, poetic justice.

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Hillary Clinton’s Email Scandal Just Rose From the Dead

Ignorance of the law is no excuse for you or me.

But somehow when Hillary Clinton broke the law while Secretary of State, it was her intentions that mattered.

As everyone knows by now, Clinton stored confidential, top secret emails on a personal, unsecured email server while she was Secretary of State.

She got off the hook because she claimed that she didn’t intend to violate the law… she didn’t realize that what she was doing was totally illegal.

That’s why she’s not rotting in a prison cell, even though you or I would be turning big rocks into little rocks in a DayGlo Orange jumpsuit if we had committed an equivalent crime.

But a group called Judicial Watch wasn’t as quick to let it go.

Using Freedom of Information Act requests, they continued to uncover more and more details of the case and bringing it all to court. And as the judge in the case commented, “With each passing round of discovery, the Court is left with more questions than answers.”

Therefore a federal judge has permitted another round of discovery. This means Hillary Clinton will be forced to sit for an interview with government officials to answer “significant questions” about her violation of the law.

Click here to read the full story.

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Police in Scotland have a list of people who tell offensive jokes

Scottish Internet users better be careful of the jokes they tell online– you might end up on a government watchlist.

A Freedom of Information request revealed that 3,300 “non-crime hate incidents” have been logged in a police database.

Hundreds of people were added to the list last year for making offensive jokes or rude comments online.

Police say they track these individuals just in case their humor crosses the line into illegal territory.

For example, a couple years ago a Scottish YouTuber was arrested and convicted for teaching his pug a Nazi salute.

They guy may have been way too sophomoric… but when did it become a crime to be immature and offensive?

And now free speech is being monitored for signs of criminality.

Plus, with certain types of background checks, potential employers could see that these innocent people have been logged social media posts deemed to be offensive by the government.

Click here to read the full story.

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School forbade kids from saying no when asked to dance

I just love it when wokeness contradicts itself.

A middle school in Utah was gearing up to host its Valentine’s Day dance. And in an effort to make sure that all students felt “welcome, comfortable, safe, and included,” the school adopted a policy forcing the kids to dance with anyone who asked them.

And sure enough, when an 11-year old girl was asked to dance by a boy who creeped her out, the principal forced them to dance together.

This is pretty much the opposite of #MeToo.

And in their ridiculous effort to make sure that no student was upset or offended, they violated one of the most basic consent rules in our society.

This is the paradox of wokeness: it’s absolutely impossible to prevent people from feeling upset, offended, excluded, or rejected.

Click here to read the full story.

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Update: not illegal to remove cops’ GPS from your car

In December we talked about police who suspected a man of selling drugs.

They placed a GPS tracker on his car, but the man removed it. So the police got a warrant to search the man’s property for the “stolen” GPS.

While searching for the GPS, they found drugs.

Now the case against him for theft of the GPS has been dismissed along with the evidence of drug crimes.

The courts said it was all collected illegally, because the GPS was never stolen in the first place.

Click here to read the full story.

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Update: woman pleads guilty to being topless in her own home

We’ve been following the case of Tilli Buchanan who was charged with sex crimes for being topless in her own home.

She and her husband had removed their shirts after installing insulation. Because her step-children saw her barechested, Tilli was charged with “child sex abuse” under Utah criminal code 76-9-702.5(2)(a)(ii)(B) for exposing “the female breast below the top of the areola. . .”

That left her facing the possibility of having to register as a child sex offender.

Originally she tried to challenge the law itself under equal protection grounds, since it treated male and female nipples differently.

But when she lost that case, she opted to take a plea deal. The charges were downgraded so she won’t be considered a sex offender.

Tilli will pay $600 and the case will be dismissed in a year if she doesn’t commit any crimes.

It’s pretty pathetic that she was ever charged in the first place, and sad that this is what the justice system wastes resources on.

Click here to read the full story.

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And to continue learning how to ensure you thrive no matter what happens next in the world, I encourage you to download our free Perfect Plan B Guide.

At a crucial moment at which the historic US-Taliban peace deal appears hanging by a thread – if not already dead altogether – and as Pompeo is dubiously pledging to keep it alive and push forward, gunmen have carried out a massacre in Kabul which nearly killed top Afghan political leader, Abdullah Abdullah.

At a moment top national leaders were attending a Shia commemoration ceremony in the Afghan capital, gunmen unleashed a hail of bullets in a major coordinated attack, killing at least 27 people, according to a health ministry statement.

“Twenty-seven bodies and 29 wounded transported by … ambulance so far,” a health ministry spokesman told Reuters in the aftermath. The number of wounded was later updated to at least 55 injured in the attack.

Crucially, the country’s Chief Executive and presidential candidate Abdullah Abdullah escaped unharmed, as well as the chairman of the Afghan High Peace Council Karim Khalili — who was giving a speech at the very moment the attack started, said to include rockets fired toward the crowd.

Khalili is seen in video frantically leaving the stage mid-speech as gunfire rings out, fleeing for his life:

The video of attack when Mohammad Karim Khalili, was giving a speech. pic.twitter.com/EZglGlGiZg

— Tamana Ashna (@tamanaashna) March 6, 2020

“The attack started with a boom, apparently a rocket landed in the area, Abdullah and some other politicians … escaped the attack unhurt,” Abdullah’s spokesman, Fraidoon Kwazoon, told Reuters.

CNN describes that armed men began firing down on the crowd from a nearby high-rise building, and in the hours after security forces were described as still pursuing the attackers.

Abdullah Abdullah said after escaping: “I will not blame anybody for this because I don’t have a full picture from our security forces, but we need to know who is, or who were, behind it,” according to CNN.

Crucially, the Taliban denied any involvement in the attack, and it’s as yet unclear just who was behind it, though the same commemoration event of a prior Shia national unity figure has in past been subject of armed attack.

Authored by Charles Hugh Smith via OfTwoMinds blog,

The present disconnect between the science of Covid-19 and the status quo’s complacency is truly crazy-making, as we face a binary situation: either the science is correct and all the complacent are wrong, or the science is false and all the complacent are correct that the virus is no big deal and nothing to fret about.

Complacency is ubiquitous: readers on Facebook leave comments on my posts “this is silly.” Correspondents report that people don’t even cover their mouths when coughing, much less use a tissue. People keep repeating like a mantra that a bad flu season kills 35,000 in the U.S. alone, and so why worry about a couple thousand deaths globally?

Another common trope is “hepatitis kills far more people in the U.S., so why worry about the coronavirus?”

So let’s look at some data and consider what science can tell us about the potential consequences of the Covid-19 virus spreading as widely as conventional flu viruses.

The fallacy made by the complacent is that the number of cases will remain small (in the dozens or hundreds) and so the number of deaths will also remain small.

Since the evidence suggests the Covid-19 virus is more contagious than conventional flu viruses, a reasonable assumption is that it will eventually infect more people than a conventional flu, which according to the CDC infects up to 45 million Americans annually.

According to the CDC, viral hepatitis B caused 5,600 deaths in the U.S. in 2017, and hepatitis C caused 19,000 deaths, for a total of 24,600. That certainly exceeds reported deaths of Covid-19, but since the statistics presented by the Chinese government are unreliable, we have no idea how many people have the virus and how many have died.

According to the CDC, influenza and pneumonia together caused 55,000 deaths in the U.S. in 2017.

Given the scientific evidence that Covid-19 is highly contagious, let’s do a Pareto Distribution (80/20 rule) projection and estimate that 20% of the the U.S. population gets Covid-19. That’s 66 million people, roughly 50% higher than the 45 million who catch a flu virus in a “bad flu” season.

Data suggests between 2% and 3.4% of all Covid-19 cases end in death, but the deaths are concentrated in the 20% of cases that become severe, and in the vulnerable populations within the 20% severe cases that require hospitalization.

Using the lower CFR (case-fatality rate) rate, 2% of 66 million is 1.3 million, so if Covid-19 infects only 20% of the U.S. populace, current data suggests 1.3 million people will die. This is considerably more than 24,600,or 55,000. (Total annual deaths in the U.S. are around 2.8 million.)

But these mortality data are drawn from small numbers of patients who have had access to intensive care. Anecdotal evidence from places where the healthcare system has been overwhelmed (Wuhan) so intensive care is unavailable to the majority of severely ill patients suggest much higher death rates around 15%, with worst-case scenarios going as high as 80% mortality for untreated severe cases in vulnerable populations (elderly and chronically ill).

If 20% of all cases can be expected to be severe and require hospitalization/intensive care (20% of 66 million is 13 million people), then intensive care will quickly become unavailable due to the low number of intensive care beds in the U.S. (94,000). The total number of all hospital beds in the U.S. is around 931,000. (Recall that the majority of these beds are already in use, so the number available to those severely ill with Covid-19 is a fraction of the total.)

If 15% of untreated severely ill patients die, that is 13 million X 15% = 1.95 million.

So let’s cut all these numbers in half: let’s assume only 10% of the U.S. populace gets the Covid-19 virus (33 million), so only 6.6 million people become severely ill. If 15% of untreated severely ill patients eventually die, that’s 1 million deaths in the U.S. alone.

In other words, the death rate is only low if the number of severely ill patients remains very low. Once the number of patients needing hospitalization exceeds the number of ICU beds, the death rate leaps dramatically.

All this assumes there are not already more lethal variants in some human populations, and it also ignores the issue of re-infection: A tour guide in Japan tested positive for the coronavirus for a 2nd time, less than a month after recovering.

Authorities are well aware of the potential for the Covid-19 to spread rapidly and cause a great many deaths. But they’re also concerned about the consequences of an economic crash as people avoid public places (i.e. “social distancing”) as the most effective preventative measure to reduce the chances of contracting the virus.

The resulting layoffs and business closures will trigger financial and economic consequences that may not be recoverable if these trends self-reinforce (more layoffs cause consumption to decline, triggering more layoffs, etc.).

I wrote about this on February 11: China’s Fatal Dilemma.

If authorities downplay the Covid-19 pandemic and encourage people to continue flying, gathering in public, etc. in order to keep the economy humming, that will accelerate the spread of the virus.

When people awaken to the dangers of the pandemic (for example, when ICU beds are all filled and severely ill patients are being turned away), they will panic and pursue “social distancing” regardless of what officials say. When complacency gives way to panic (yes, it can happen here and yes, it can happen to you), the economy will crash.

In other words, the economy will crash either way: if authorities force “social distancing” to limit the spread of the virus or if they downplay the pandemic and let the virus spread to the point that people panic and “socially distance” themselves regardless of official entreaties to get out there and buy, buy, buy.

Forcing “social distancing” won’t stop the eventual spread of the virus, because as soon as restrictions are eased the virus will enter the newly open cities via asymptomatic carriers and a second wave of infections will spread. Forcing “social distancing” while thousands of airline flights and railway travel continue to spread asymptomatic carriers to every transportation node on the planet is not going to stop the spread of the virus.

The science suggests a significant percentage of the human populace will eventually get the Covid-19 virus. Estimates run from 40% to 70%; You’re Likely to Get the Coronavirus (The Atlantic).

Common sense suggests complacency is misplaced, and efforts should be made to minimize the risk of getting the virus until a reliable vaccine is available, which those with experience in the field suggest might be a year or 18 months away.

The science is telling us that the global economy will experience a depression as these realities sink in. Authorities pushing complacency as a short-term financial panacea are doing an enormous disservice to the people who entrusted them with power. The more effective strategy would be to prepare to deal with a global depression while limiting the spread of the virus by whatever means are available, which at present boils down to social distancing and increased hygiene.

Here is an example of status quo complacency in the U.S.: the person returns from Japan with symptoms of Covid-19, tests negative for conventional flu and other viruses, CDC refuses to test for Covid-19, no special protocols despite the obvious risk of Covid-19, staff tells the patient to go home by whatever transport he/she normally uses. My COVID-19 Story. Brooklyn. (via Maoxian)

So either the science is wrong and the complacent will be proven correct, or the science is correct and the complacent will be wrong.

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My recent books:

Audiobook edition now available:
Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World ($13)
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The Adventures of the Consulting Philosopher: The Disappearance of Drake $1.29 (Kindle), $8.95 (print); read the first chapters for free (PDF)

Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).

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The global equity market cap collapsed by a record $9tn – or two-thirds of China’s GDP – in 9 days, while global; sovereign 10-year bond yields crashed below 1.00% for the first time ever…

Source: Bloomberg

Even the veteran-ist of veteran traders were shocked by this week’s moves…

“Panic moved up a few notches from already extremely high levels,” said one trader today,

“I thought last Friday was the blow off top and then a few times this week before today but now its beyond belief,” he said, noting the rally in 30-yr to all- time lows.

The flip from Extreme-est Greed to Extreme-est Fear was unprecedented…

Or put another way…

But the real shock was from Federal Reserve Bank of St. Louis President James Bullard, who admitted central banks are losing their credibility rapidly: “Many central banks have consistently missed their stated inflation targets to the low side for many years… Critically, the central bank has to be able to actually deliver the required.” Which means…

“Credibility of central banks, instead of improving over time based on the achievement of stated goals, seems to be eroding instead.”

That’s quite an admission but 100% correct and this week’s carnage after an emergency 50bps rate-cut did nothing to calm fears is a perfect example…

And despite a huge resurgence in the Fed’s balance sheet, stocks were not playing along at all…

Source: Bloomberg

Today was quite a day across every asset class. We gathered some of the most shocking market move headlines of the day for some perspective:

• GLOBAL CONFIRMED CORONAVIRUS CASES SURPASS 100,000

• EUROPE DEBT RISK GAUGE EXTENDS RISE TO HIGHEST SINCE JUNE 2016

• GERMANY’S 10-YEAR BOND YIELD FALLS TO RECORD LOW

• GERMANY’S 30-YEAR BOND YIELDS FALL TO ALL-TIME LOW

• EUROPE SENIOR FINANCIAL DEBT-RISK JUMPS MOST SINCE 2018

• JPMORGAN EMBIG DIVERSIFIED SOVEREIGN SPREAD RISES ABOVE 400 BPS

• EMERGING-MARKET USD SOV.-BOND PREMIUM JUMPS MOST SINCE 2011

• U.S. TREASURY 5-YEAR YIELD FALLS BELOW 0.50%

• U.S. 30-YEAR YIELD FELL AS MUCH AS 30BP ON INTRADAY BASIS

• U.S. 30-YEAR YIELD SET FOR BIGGEST ONE-DAY DROP SINCE 2009

• U.S. CREDIT MARKET FEAR GAUGE SURGES MOST SINCE AT LEAST 2011

• VIX’S 3-WEEK CHANGE IS BIGGEST EVER – BIGGER THAN LEHMAN

• WTI CRUDE FUTURES DOWN 10.% – BIGGEST FALL SINCE 2014

For some context – the recent bond market collapse has never, ever happened before…

If you can tell from my tone, this troubles me, so I went back and looked into this, we have never had a 50% change in 10y yield levels in either direction over a 2-wk window. We have had larger rallies (yup in 4Q08) but nothing comes close to cutting rates in half this fast… https://t.co/tP2fJAdbvf pic.twitter.com/8308IzVmwW

— George Goncalves (@bondstrategist) March 6, 2020

And as The Fed cut rates, the 30Y Yield chased it down, along with the rest of the curve…

Source: Bloomberg

As Nomura’s Charlie McElligott details, panic moves in US Rates as Duration / Convexity goes “offer-less,” with 10Y yields hitting a fresh record low of 0.6932%, multiple “limit-UP” halts in UST Ultra bond futures and 30Y UST yields crashing down -22bps at the extremes (5s30s was flatter by -14bps at one point) in an investor climate that is fixated on “imminent global recession” via pandemic “lock-down”-NYT piece stating that over 2700 people have quarantined themselves in New York City, while new cases in S Korea frighteningly re-accelerate

This obviously has the look of a Rates “convexity-event” (forced hedging / buying at the highs from mortgage investors, insurance companies and those who are “short options”—i.e. all the Vol dealer desks selling low-strike receivers for the past few years, or the market makers short those 350k ED$ “Par Calls” for Jun expiry!)…

…but this is also a simple function of OIS markets now pricing-in a full ADDITIONAL 50bps rate cut on March 18th from the Fed already, as well as the obvious dynamic where “Rates are your everything hedge” from cross-asset investors (i.e. Equity L/S investors buying ED$ upside).

Source: Bloomberg

Today was also the biggest single-day jump in the Ultra Bond Future ever…which prompted fears of a major macro fund blowing up.

Source: Bloomberg

China is still massively outperforming US and Europe since the start of the Covid-19 crisis…

Source: Bloomberg

Today’s US equity market carnage sent all the majors into the red for the week, but the last 30 minutes saw the machines work ultra-hard to get the Dow, S&P, and Nasdaq green…

Was The PPT in the house again?

Somebody do something!

Another late-Friday panic-buy?

The Elon Musk Ramp? “The coronavirus panic is dumb”

So are we due for a bounce now?

Source: Bloomberg

US Banks have now crashed over 27% from their early Jan highs…

Source: Bloomberg

The biggest US banks have been bloodbath’d…

Source: Bloomberg

But, more worryingly, Global Systemically Important Banks stocks have crashed to their lowest since 2016…

Source: Bloomberg

While energy stocks were already getting clubbed like baby seals, the last two weeks have seen them collapse 22%…

Source: Bloomberg

MAGA Stocks have now lost over $750 billion in market cap (Note that the Q4 2018 collapse wiped just over $1 trillion)…

Source: Bloomberg

The week saw defensives dominate as cyclicals were hammered…

Source: Bloomberg

VIX topped 54 intraday for the first time since 2009…

This is the biggest 3-week surge in VIX… ever…

Source: Bloomberg

The VIX term structure is in massive backwardation…

Source: Bloomberg

The VIX Term structure hasn’t been this inverted since Lehman…

Source: Bloomberg

Europe’s VIX exploded this week, closing at its highest since the 2011 crisis…

Source: Bloomberg

Treasury ‘VIX’ surged today to its highest since 2011…

Source: Bloomberg

Credit markets were a bloodbath this week, with both HY and IG blowing out in US and EU…

Source: Bloomberg

And if you thought that credit’s biggest blowout ion a decade was notable, it’s nothing if it starts to catch up to its capital structure colleague on risk…

Source: Bloomberg

US Treasury yields collapse this week was nothing short of stunning with the entire curve down 40-50bps!!

Source: Bloomberg

10Y Yields crashed to a stunning 65bps overnight…

Source: Bloomberg

The 30Y Yield accelerated lower in the last hour, crashing below the Fed Funds Rate!

Source: Bloomberg

The yield curve flattened drastically,,,

Source: Bloomberg

Some perspective to where were just over a month ago…

Source: Bloomberg

The Dollar Index fell for the 2nd straight week (down 6 of the last 7 weeks)…

Source: Bloomberg

On a broad trade-weighted basis, the dollar has been gaining against the rest of its fist peers, but crashing relative to hard money…

Source: Bloomberg

Cryptos rallied on the week led by Bitcoin Cash…

Source: Bloomberg

Crude was obviously the week’s biggest commodity loser , copper went nowhere as PMs were bid…

Source: Bloomberg

WTI crashed over 10% today after the collapse of OPEC+ talks, its biggest drop since 2014…

Source: Bloomberg

Brent was worse, with its biggest drop since Jan 2009…

Source: Bloomberg

Oil ‘VIX’ has exploded higher…

Source: Bloomberg

This is the worst start to a year for crude since 1986…

Spot Gold soared up to $1690 – the highest since Jan 2013

Source: Bloomberg

Finally, there’s this…

That’s quite a serious out of stock at Costco…. pic.twitter.com/6kh2q5b8ch

— Matthew Boyle (@bizboyle) March 5, 2020

And here is the stunning punchline:  out of the five historical instances of this week’s pattern of trading (leaving out the present case for obvious reasons), Nomura finds that the only instance that was followed by a sustained market rally was that of April 1933, when the US abandoned the gold standard in the midst of the Great Depression.

And while it would be next to impossible to confiscate gold, a massive dollar devaluation against the yellow metal may be just what the Fed is planning next (as Harley Bassman suggested in 2016)

As Sven Henrich tweeted into the close:

“A world without central banks in control is a scary world indeed. People actually have to actively think about their investments.”

Trade, or hoard, accordingly!

The deeper stock markets plunge, the louder the calls for v-shaped recoveries, and the shriller the exclamations that “it’s just the flu, bro” suggesting the global panic is overdone.

But… with confirmed cases now topping 100,000 and the death count rising exponentially, there is a major difference between their fatality rates…

“Globally, about 3.4% of reported COVID-19 cases have died,” WHO Director-General Tedros Adhanom Ghebreyesus said during a press briefing at the agency’s headquarters in Geneva.  

In comparison, the seasonal flu generally kills far fewer than 1% of those infected, he said.

However, that hides the real risk of the “it’s just the flu” Covid-19 pandemic.

As the following chart shows – and should put to death (pun not intended) any belief this is just a rougher flu – the fatality rates for older people is extremely high…

Specifically, the fatality rate for South Koreans aged 65+ is 14.42% of the total population, and for Italians aged 65+ is 22.75% of the total population.

World “authorities” admit they don’t know much about this virus, yet are hopeful it can be contained. Dr. Mike Ryan, executive director of WHO’s health emergencies program, said Monday that the coronavirus isn’t transmitting the same exact way as the flu and health officials have been given a “glimmer, a chink of light” that the virus could be contained.

“Here we have a disease for which we have no vaccine, no treatment, we don’t fully understand transmission, we don’t fully understand case mortality, but what we have been genuinely heartened by is that unlike influenza, where countries have fought back, where they’ve put in place strong measures, we’ve remarkably seen that the virus is suppressed,” Ryan said, according to CNBC. 

In other words: “no, it’s not ‘just like the flu, bro!”

Additionally, as Lawrence Solomon notes, you shouldn’t believe everything you read about flu deaths…

The CDC unabashedly decided to create a mass market for the flu vaccine by enlisting the media into panicking the public. An obedient and unquestioning media obliged by hyping the numbers, and 10 years later it is obliging still.

The CDC’s decision to play up flu deaths dates back a decade, when it realized the public wasn’t following its advice on the flu vaccine. During the 2003 flu season “the manufacturers were telling us that they weren’t receiving a lot of orders for vaccine,” Dr. Glen Nowak, associate director for communications at CDC’s National Immunization Program, told National Public Radio.

“It really did look like we needed to do something to encourage people to get a flu shot.”

The CDC’s response was its “Seven-Step ‘Recipe‘ for Generating Interest in, and Demand for, Flu (or any other) Vaccination,” a slide show Nowak presented at the 2004 National Influenza Vaccine Summit.

Here is the “Recipe that fosters influenza vaccine interest and demand,” in the truncated language that appears on his slides:

“Medical experts and public health authorities [should] publicly (e.g. via media) state concern and alarm (and predict dire outcomes) – and urge influenza vaccination.” This recipe, his slide show indicated, would result in “Significant media interest and attention … in terms that motivate behavior (e.g. as ‘very severe,’ ‘more severe than last or past years,’ ‘deadly’).”

Other emotive recommendations included fostering “the perception that many people are susceptible to a bad case of influenza” and “Visible/tangible examples of the seriousness of the illness (e.g., pictures of children, families of those affected coming forward) and people getting vaccinated (the first to motivate, the latter to reinforce).”

The CDC unabashedly decided to create a mass market for the flu vaccine by enlisting the media into panicking the public. An obedient and unquestioning media obliged by hyping the numbers, and 10 years later it is obliging still.

 

It’s official: the black bat that sparked the coronavirus (it didn’t, the coronavirus was actually created in the Wuhan Institute of Virology as a gain-of-function experiment that was leaked into the broader population, but let’s play with the narrative for now), is now a black swan.

Shortly after we were discussing the market’s black swan-dive, Bloomberg appropriately writes that a black swan fund that hit it out of the ballpark during the global financial crisis (which also “nobody could possibly predict” also) just notched its best month since then.

36 South Capital Advisors skyrocketed to fame after posting huge returns in 2008. Now it’s gained big from the February mayhem, after spending years patiently waiting for the next cataclysm, Bloomberg notes adding that according to preliminary Eurekahedge data, tail funds gained a modest average of around 5%. Richard “Jerry” Haworth of 36 South says his return “was more than five times that.” And with markets still turmoiling on Friday, there could be more gains in store for these types of options-based strategies that benefit from volatility breakouts.

“February was our best month since 2008 and we believe the strongest performance is likely ahead of us,” London-based Haworth told Bloomberg, without giving a specific figure.

With a majority of hedge funds once again massively underperforming, and the HFR equity long/short index cratering, and back to year ago levels…

… early data suggests tail-risk managers had their best month overall since August 2015, according to Eurekahedge data, which was enough to push them toward the top of the fund-performance tables “in what is so far turning out to be a mixed, albeit relatively palatable, month for hedge funds,” said Mohammad Hassan, analyst at the research and indexing firm.

Other winning strategies include precious metals-focused funds, short-term systematic CTAs and short-biased managers, according to Hassan. In the latter category, the world’s biggest bears – such as Russell Clark and Crispin Odey – gained big, although it remains to be seen if the month’s stellar returns will be enough to offset years of underperformance.

The tally is even more questionable on a full-year basis, which shows tail funds are up so far in 2020 only after 8 straight years of losses.

Indeed, as Bloomberg notes, “the jury’s out on whether these players are a good overall value for what they deliver. Tail funds, which manage $4.6 billion according to Eurekahedge, can charge stiff fees and deliver years of lackluster returns as investors await the big one. Whether there are cheaper or more effective ways to hedge – like bonds or gold – is up for debate.”

To be sure, a far simpler strategy of merely buying long-term Treasuries in the form of the TLT 20+ Year Treasury Bond ETF, delivered a 6.6% total return last month. Better yet, one can buy the TLT without spending 2 and 20 (or more) for management fees (of course, being long Treasurys goes against the Wall Street canon of “buy stocks” but then again Wall Street hasn’t been right about anything for a long, long time).

On the other hand, “fat tail”-focused funds and other long-volatility strategies use techniques for reducing the eye-watering costs of holding hedges over extended periods, such as relative-value derivatives trades. One reason for the relatively modest performance reflected in the Eurekahedge data may be that under a common definition – an event more than three standard deviations from the norm – last week’s market moves didn’t necessarily qualify as a tail, according to Bloomberg, although as Nomura showed overnight, the three consecutive 3-sigma moves we saw in equity stocks have happened just six time since 1900.

Therefore, anyone who successfully caught the move and traded it, has certainly made a killing.

“Tails tend to be more extreme in the distribution,” said Wayne Himelsein, president of hedge fund Logica Capital in Los Angeles. “Black Friday of ’87. The global financial crisis in ’08. Most tail risk managers will start kicking in at down 15%, 20%, 25%.”

The jury is still out on when the current multiple-sigme market move will end, and just how the Fed – which even Bullard now admit is losing credibility – will step in to restore calm to a market which for the past decade has grown habituated to central bank intervention during any time of market turmoil. Until we wait, those fat-tail funds suddenly look quite attractive.

Authored by MN Gordon bia EconomicPrism.com,

Major U.S. stock market indexes yo-yoed about all week.  On Monday, panic selling from last week turned to panic buying.  Decades of Fed intervention have conditioned stock market investors to step in front of semi-trucks to scoop up nickels.

The Dow Jones Industrial Average (DJIA) jumped 1,290 points.  This marked its biggest-ever single day gain in terms of points.  Can the economic destruction wrought by coronavirus containment really be overcome with what former New York Fed President, Benjamin Strong, once called stock market “coup de whiskey?”  We doubt it.

But we are fairly confident Fed stimulus will have the offensive consequence of widening the gap between sky high asset prices and weak economic fundamentals.  Fed Chairman Powell certainly understands this.  Nonetheless, on Tuesday, he went forward with the dirty deed.

After an early morning teleconference with various G7 poohbahs, Powell cut the federal funds rate by 50 basis points.  This took the Fed’s target range to between 1 and 1.25 percent.  As far as we can tell, Powell’s dirty deed achieved the exact opposite of its intent.

U.S. stock market indexes didn’t go up.  Rather, they went down.  In fact, they went down a lot.  The DJIA, for example, gave back 785 points.  Here’s why…

The Fed’s rate cut was an act of fear.  Investors smelled it out and circled like a pack of wild hyenas.  Powell may be able to expand the supply of money and credit.  But he can’t make up for the economic destruction of a global economy that’s grinding to a halt to stem the spread of coronavirus.  Cutting rates 50 basis points won’t cut it.

“This Sucker’s Going Down”

Bull markets, like myths and legends, die hard in America.  By Wednesday, the bulls were back at it…bidding up share prices like 17th century tulip bulbs.  The DJIA, baited by promises for fiscal stimulus, jumped 1,173 points – back above 27,000.

Could it be that the bull market is not dead after all?  Is Dow 30,000 back on the table?

Not quite.  On Thursday, investors lost their nerve.  The DJIA puked back 969 points.

The fact is, these wild market gyrations are not indicative of a healthy market.  Rather, they’re representative of a grisly, ghastly, and grim market.  One that by all rational accounts should be deflating, but for desperate Fed attempts to inflate it.

Remember, Fed Chair Powell is first beholden to the reserve systems member banks.  After that, and when it aligns with the Fed’s main objective of perpetual credit creation, Powell will oblige the haranguing of President Trump.

But the real news.  The news stock market investors would be wise to heed.  The yield on the 10-Year Treasury Note slipped below 1 percent for the first time ever. 

Treasury investors, no doubt, can read the writing scribbled on the wall by George Dubya in late 2008: “This sucker’s going down.”

Destruction By Definition

Coronavirus – and the fear of coronavirus – is spreading around the globe.  This week, in fact, it attacked our own hamlet.  The authorities, in the form of the Los Angeles County Department of Public Health, declared a local health emergency on Wednesday.

Then, in the form of a preemptive measure, our immediate government, City of Long Beach, declared a local health emergency.  This declaration, in all seriousness, was made prior to a single confirmed coronavirus case within the city.

But everyone knows there are already hidden carriers roaming about from Pine Street to the outer tip of Belmont Veterans Memorial Pier.  Better to be poised than passive.

Regardless, the economic damage has already been done.  From our perch overlooking San Pedro Bay, the main port of entry for Chinese made goods into the USA, facets of the mounting economic catastrophe come into focus.  These elements, even for the most untrained of eyes – and ears – are impossible to miss.  Namely, foghorns are less frequent.  Zero Hedge delivers the grim particulars:

“The Port of Long Beach, the second-largest containerized port in the US, has had two top officials warn in the last several weeks of chilling effects of supply chain disruptions from China. 

“Last week, the Deputy Executive Director of Administration and Operations for the Port of Long Beach Noel Hacegaba warned China’s economic paralysis led to the increase of blank sails between China and the US.  He said port activity plunged in January and February, with expected weakness to continue through March.

“Hacegaba said the slowdown at Long Beach is starting to hit the local economy around the port.  He said it could only be a matter of time before it triggers a broader slowdown in the region, and even maybe in the overall US economy.”

What we have here, folks, is destruction by definition.  

Supply chain disruptions breed consumer good disruptions, which breed declining sales, which breed disappearing cash flow, which breed layoffs, which breed less Ford F-150 sales, which breed shrinking tax receipts, which breed unserviceable public and private debt, which breed mass bankruptcies, which breed game over.

Yep, whether coronavirus spreads out across the LA Basin en masse or not, this sucker’s going down…and it will take the stock market down with it.  In the meantime, you can lock in a 30 year fixed rate mortgage refi for under 3.5 percent.  Yee-Haw!

With stocks tumbling, the VIX has, predictably, soared, briefly tipping above 50 intraday on Friday and last trading above 46, surpassing the levels hit during the Volmageddon in Feb 2018 and the highest level since the US credit rating downgrade in August 2011.

Just as dramatic is the accelerating VIX term structure inversion, which has pushed the curve to the steepest backwardation since the financial crisis…

… as spot has exploded higher even as the move in futures has been far more normal.

But while we have extensively discussed the ongoing equity crash where realized vol has soared, and has been a direct factor in the surge in implied volatility, there is another, potentially far more dire impact that the soaring VIX will have on the cross-asset universe, one that could potentially unleash a historic crash driven by the one pillar that has so far supported the US economy and stock market: credit.

What sparked our concern was the latest note from SocGen’s Albert Edwards, who laments the ongoing collapse in yields, which he had fully predicted in the past as part of his Ice-Age thesis (at least until MMT steps in and blows yields up into the stratosphere as the monetary endgame begins) and is familiar to anyone who has followed Edwards’ writings over the years. We won’t spend much time on this part of his note, suffice to point out that the unprecedented plunge in yields may be just the beginning now that the Japanification of the US has begun in earnest, and that we are nearing that tipping point for yields beyond which further downside becomes a negative for risk assets as it no longer stimulates equity buying in contravention to the Fed Model, or as Edwards puts it, “If Japan remains the template, much more downside lies ahead for the US .”

One final point on where Edwards see stocks headed to if he indeed right, and further yield declines turn negative for risk:

The lesson from the recent landmark move in the 30y US T-Bond yield below the equity dividend yield is simple. If we are right and US 30y yield falls below zero, US PEs will contract from their lofty 19x forward earnings peak seen recently, especially in a likely recession. Try 8x instead at the bottom of the next recession and see where that takes us!

Shifting attention from stocks to credit, this is where things more interesting.

Addressing the massive credit bubble that was built up over the past decade on the back of record cheap debt, and where trillions in BBB-rated issuance was used to repurchase stock pushing stocks to mindblowing levels even as most investors pulled money from the market for the past several years, Edwards reminds us that “almost every major supranational economic organisation, including the OECD, IMF and BIS, has warned that the huge build-up of US corporate debt is the Achilles Heel of the US economy – the new credit bubble to replace the mortgage-backed securities bubble of the 2000s. This Zero Hedge article for example, highlights a recent IMF report that some 20% of US companies are vulnerable to default or bankruptcy in the next recession – link. The surprise to many, such as myself, has been the complacency of the corporate bond market in the face of the sky high corporate debt ratios (see chart below).”

Edwards then highlights a theory proposed by his SocGen colleague, Andrew Lapthorne, explaining the complacency in the corporate bond market despite companies loading their balance sheets up to the eyeballs with debt, one which brings us to the punchline of why the surge in VIX may soon result in a shockwave that topples the record US credit bubble. “He notes the equivalence of corporate bond spreads and measures of equity volatility (see chart below). This is not just a spurious correlation in the sense that recessions could cause both series to surge independently. Andrew believes there is a direct causal relationship from low levels of equity vol directly to tight corporate bond spreads.“

In other words, SocGen’s theory is that the ultra low VIX of the past few years was the necessary and sufficient condition permitting record low yields:

Andrew says that credit models such as Merton’s ‘distance to default’ and Moody’s KMV models suck in equity volatility and spit out the appropriate credit spreads (see this BoE analysis – link). It is low equity vol encouraged by continual Fed interventions and the market’s belief in the continued Fed Put that has sustained low corporate bond spreads, depressed defaults and allowed companies to borrow excessively.

Of course, until just two weeks ago, the equity market had remained at or close to all-time highs despite accelerating weakness in the economy, as Edwards shows in the chart below.

And echoing an argument we have made repeatedly in the past, to the extent that the Fed’s recent monetary largesse (or “Not-QE” as most people know it) has kept an over-valued equity market at or close to record highs, Edwards claims that it is the Fed that directly and explicitly suppressed equity market volatility.

To the uninitiated, measures of equity market volatility tend to be low while a market is rising, but spike up sharply when the market declines. As the saying goes “the market rises on foot, but descends in the elevator”.

The relationship between high stock prices and low yields (for whatever reason) has been a reflexive one adding further complexity to the causal link: in any case, to the extent that a buoyant equity market has suppressed corporate bond spreads, despite balance sheets groaning with debt, companies have been able to access funds they would never have been allowed to do in more normal times, the SocGen strategist points out, or as he puts it “Low vol and low interest rates misallocate resources.” That is why, as the next chart shows, there is a direct causal relationship between rising equity vol  and defaults. The markets can break a company even if it is in a position to maintain its coupon payments.

The chart above is among the reasons why we, along with many commentators, highlight that the investment grade universe of corporate bonds is now majority populated by the lowest BBB grade bonds. It is also why Edwards shows in his work that the Russell 2000 group of smaller companies has the highest levels of leverage of all the US quoted sectors: “that is why we highlight the huge retail flows of funds into corporate bond vehicles. That is why we highlight the imbalance  between the tradability of corporate bond investment vehicles and their underlying assets.”

In short: by suppressing VIX, the Fed’s visible hand has created a credit bubble.  And now the VIX has exploded to levels seen just once in the past decade.

What happens next? Here, Edwards’ imagination about the coming devstation is – as usual – without parallel:

Just wait until the first corporate bond fund is forced to “gate” their fund as redemptions soar. You will then hear a loud sucking sound coming out of the whole corporate bond mutual fund and ETF complex. This is a surely a flow of funds disaster waiting to happen.

He is right: the growing liquidity mismatch among investment funds, and the creeping “gates” among funds holding on to illiquid paper, is precisely the reason why last July we wrote that there is a “New, Ticking Time Bomb In The Market.“

Back to Edwards who continues his apocalyptic tour de force, warning that “this time around things are much, much worse than 2008, particularly as the whole economy effectively cantilevers off multiple financial market bubbles. For when the equity market begins its long descent in the elevator and Vix begins to spike upwards, as it has begun to do in recent days (see chart below), we would expect corporate bond spreads to eventually explode higher.”

Said otherwise, “companies that are already likely struggling with the profit-crushing effects of the coronavirus will see a cascade of defaults and bankruptcies and the economy will be plunged into deep deflationary recession. The coronavirus will be blamed, but it is the tottering pyramid of financial cards built on sand, constructed by the Fed, that is to blame. It’s the Fed’s fault.“

We couldn’t agree more.

* * *

And just in case anyone skipped right to the conclusion, here it is in one sentence and one chart: unless the Fed manages to hammer the VIX as it always has in the past decade, and puts the “coronapanic” genie back in its bottle, the credit bubble – the biggest ever – is about to burst and wipe out the US – and global – economy in the process.

The much anticipated iPhone 5G – and the next obvious cash cow for smartphone technology company Apple in its long line of smartphone cash cows – may be put on hold due to spillover effects from the coronavirus.

Bank of America put out a note on Friday morning, citing a conversation with an expert on the company’s supply chain, that said the product launch may wind up being pushed back. 

The expert said that  “the iPhone 5G launch in the fall could see a month of delay.” He also warned that the launch of the iPhone SE2 would be delayed by “a few months” due to supply issues and weaker demand as a result of coronavirus. 

Wamsi Mohan, analyst for Bank of America, warned timing for these upcoming models would “depend on how production ramps back up in April and May.”

Estimates were that Apple was set to launch the 5G phone this year, with the 2019 iPhone 11, iPhone 11 Pro, and iPhone 11 Pro Max continuing to use LTE. Now, it’s looking as though 5G may even wind up being a 2021 event. 

We estimate that if the coronavirus outbreak takes a turn for the worse, the delay could be longer than Bank of America estimates. 

For Apple, the shock could be profound. The iPhone is the company’s staple product and core driver of sales and margin. Due to Apple’s inclusion in many indexes, a resultant headwind for the company’s stock as a result of the delay could also serve to just add to the downward pressure the market is already facing as a result of the coronavirus outbreak. 

Three weeks ago, former Fed Chair Janet Yellen incepted the idea that during the next crisis, the Fed should consider expanding the range of assets it would purchase, most notably buying stocks. Our comment to this was that “thanks to Janet Yellen, we now we know that before the current fiat regime of central banks finally ends and before stocks go limits up as the revolution starts, the Fed will order a POMO of, well, everything in one final, last ditch effort to keep social stability by creating the impression that stocks are stable and rising even as society implodes.”

Well, thanks to experiments conducted in a Chinese P-4 biolab, the next crisis appears to have arrived in the form of the coronavirus pandemic, and the idea of the Fed buying stocks is now on the agenda, case in point Boston President Eric Rosengren, who echoed Yellen, and said the Fed should be allowed to buy a broader range of assets – either by change of mandate or through a facility that allows it to buy stocks – if it lacks sufficient ammunition to fight off a recession with interest-rate cuts and bond purchases. In such a scenario, the US Treasury should indemnify the Fed against losses, Rosengren said in the text of remarks scheduled for delivery Friday in New York.

In a situation where both short-term interest rates and 10-year Treasury rates approach the zero lower bound, allowing the Federal Reserve to purchase a broader range of assets could be important.

Excerpt: “In such a case, as Marvin highlighted in his 1999 article, we should allow the central bank to purchase a broader range of securities or assets. Such a policy, however, would require a change in the Federal Reserve Act. … Alternatively, the Federal Reserve could consider a facility that could buy a broader set of assets, provided the Treasury agreed to provide indemnification.

Rosengren also warned the Fed would face greater challenge than in 2008 crisis when Fed’s benchmark rate was cut to nearly zero, because yields on longer-run Treasuries have fallen below 1%.

“Such a situation would raise challenges policy makers did not face even during the Great Recession,” he says at conference hosted by the Shadow Open Market Committee.

That said, Rosengren rejected the option of pushing the federal funds rate below zero in a recession, because somehow buying stocks rather than going NIRP makes more sense. Negative rates would harm banks and may make an economic recovery more difficult, he says

Goodfriend suggested that negative interest rates might be an effective policy tool in some situations – but Rosengren remains skeptical, saying the experience in Europe and Japan shows the adverse side effects are likely quite large.

Excerpt: “In my view, negative interest rates poorly position an economy to recover from a downturn. … I view the recent experience of countries with negative rates as evidence that such a policy would not be particularly successful in stimulating economic activity. … [Also,] we need banks to be healthy enough to provide credit and liquidity in challenging economic times.

Rosengren also pointed out something we had pounded the table on in the past, namely that dovish central bank policy is now deflationary, highlighting that in countries that employed negative rates since 2008, the impact on retirement savings and pension funds has incentivized more savings and less spending.

Rosengren said fiscal policy is the “obvious alternative to monetary policy in a downturn” although “somewhat surprisingly, there seems to be little movement toward making automatic stabilizers more prominent, or preparing to invest significantly more in the sorts of public investment projects that yield positive returns.”

In other words, in the absence of a multi-trillion fiscal package, we now know what the Fed’s next step will be: BTFD.