Some pension managers have tried to combat this by firing expensive managers and allocating more money to low-cost passive strategies. Marc Levine, the former chairman of the Illinois Board of Investment, is known in the industry for firing hedge funds and other expensive active managers who were “destroying value” with their enormous fees. Levine said he still stands by the strategy that he embraced during his four years of running the Illinois Pension. Levine said he found soon after taking over that the state pension fund’s benchmarks for its hedge fund investments was a joke – it was an average of hedge fund performance. This prompted Levine to change it up and compare the actively managed hedge funds to index funds, and soon discovered that the hedge funds were extremely overpriced.
After offering viewers a handful of suggestions for passive funds that he would recommend for trying to track the broader US market.
Levine warned his audience that market timing rarely works, and if investors are saving for the long-term, they shouldn’t hesitate to invest now, before transitioning into a discussion of the endemic problems of state public-employee pensions funds.
Once you get these defined-benefit pensions rolling, Levine said, they’re “inherently unstable” and they end up hoovering up taxpayer money with their generous benefits.
“I think the federal government is going to have to do something about this because, basically, the potholes need to get fixed the traffic lights need to work. I think ultimately there will be some kind of grand bargain where they freeze benefits in exchange for federal money in some kind of grand bargain. Is that going to happen in the next couple of years, no, but in the next decade? I suspect it will.”
“Like a bailout?” asked MarketBrief’s Caroline Woods.
“Exactly,” Levine replied. “But I don’t worry the most about that because those are very rich benefits. Those beneficiaries are making more in retirement than they made while they worked.”
The real retirement crisis, Levine said, is the lack of retirement savings for all Americans (something that’s only going to get worse as time moves on).
The discussion of America’s pension crisis starts at around the 5-minute mark:
Survival – the pursuit of more time – is the most basic instinct. Procreation is a distant number 2. But 1a, making the most of your time, is survival instinct coupled with capitalism. Communism was intended as a more noble system — economic parity that avoids the inequality bound to arise from capitalism. Only the reds failed to recognize we won’t wait in line for fish for the benefit of our comrades. A cocktail of self-interest, cooperation, the assembly line, brand, and the processor has yielded more stakeholder value, as measured by GDP, in the last 50 years than in the previous 2,000.
Religion created a lot of value – it made people feel immortal. Time post death is an asset you’d trade shame for. But the ranks of the faithful are thinning. The opium of the masses no longer provides the same high. Wealthier, more educated societies have turned their focus to time on earth.
Any company that creates more than $10 billion in shareholder value does one of two things: extend time (more time, saving time) or enhance time.
Every firm that has aspirations of creating billions in shareholder value must construct a time machine and be clear on the type of benefit — savings or enhancement. The first trillionaire will build a time machine for the healthcare industry. The T-Man, or woman, won’t reduce costs (this is where the analysts get it wrong), but give us millions of years back, in the pursuit of health, at the same or lesser cost.
I’ve had a cough for the last month. My dad and sister freaked out, as I don’t get sick. They imagined the worst and demanded I get a chest x-ray. The doctor’s visit, two trips to Diagnostic Centers of America, and a consultation cost me 8 hours. An intelligent camera, Prime Health (whenever that arrives),and AI will give me 7 hours back. The best strategy for bringing healthcare costs down is to give time back. The real innovation in healthcare will do more than save money — it will save time.
Time Machines
The economic titans of the 20th century got you places faster (Ford, Boeing) or made your life more enjoyable (P&G, Prada). We’ve now gone gangster. Microsoft saves you years in efficiency (extend). LVMH allows you to enjoy the finest in life and increases your selection set of mates (enhance). Apple skimmed the foam off the top of the Microsoft beer, moving from tech to the luxury sector. Apple offered both faster transactions and an enhanced experience (for a 100% premium). iProducts just worked, made you feel better about yourself, and the global affluent willingly paid.
The sector that has created more value than any other over the last 10 years is the disruptors in media (Google, Facebook, and Netflix). These firms pulled a Robin Hood on the greatest thieves of time in post-WWII America — ad-supported media. Modern Family / ABC values your time at $4.67/hr. They get .70c for reminding you that you suffer from diabetes (9 min of ads). CBS gets a buck a month per viewer for urging us to buy awful beer or cars manufactured in South Korea.
Advertising is a tax the poor and technologically illiterate pay.
Ways to extend life:
Clear: I fly 2.5x/wk. I’ll pay Clear $5,370 over 30 years to not stand in line for 46 days.
Walmart Delivery Unlimited: At $98/year, that’s$2,940 over 30 years to get 120 days of your life back.
Netflix: At $156/yr, I’ll pay Netflix $4,680 over the next 30 years to avoid over a year’s worth of ads. If you could pay $4,680 to extend your life by a year, would you?
2013 Bombardier Challenger 300: Total costs over 10 years — depreciation, operating, and financing costs minus tax benefits = $10 million. (Not that I’ve dreamt of this … every day.) A two-bedroom that can skim the surface of the atmosphere at .83 the speed of sound would give me another 13 days a year at home with my family. So, if you had the money, would you, at the end of life, rather have $10 million or 4 more months with family? Keep in mind, that’s 2.5 dawg years. What Apple is to Android, the Challenger is to JetBlue, times a thousand. People who own jets all describe their bird the same way: Time Machine.
Movies and HBO saved some time, but were relatively expensive. And then came Google, Facebook, and Netflix. I’ll get a year back (time spent not watching ads) in exchange for $4,680 spent on Netflix. How to even think of doing research without Google? Would I have to go to a library and log on to Lexis/Nexis? It’s hard to imagine how much time and life Google has created.
The search firm has violated our privacy, divided us, and hamstrung the economy via monopoly abuse. Yet it’s still likely worth it. This doesn’t mean we should shrug our shoulders and not break up big tech. The combustion engine and fossil fuels have created enormous economic growth across the world, but we should still correct the subsequent global warming.
The biggest unlock in shareholder value in the last 5 years is Walmart’s click & collect and delivery. Walmart gave us 4 days a year back — grocery shopping takes an average of 69 min a week; you grocery shop 1.6 times per week, and the average commute for grocery shopping is 12.5 min each way. That makes the largest dollar-volume category (grocery, 750 billion) less time expensive. Since the introduction of click & collect and grocery delivery, Walmart has added over $100 billion in shareholder value.
RedBook
Facebook is now squarely in the red and a net negative for society. The social network held the promise of enhancing our time here, via connection, and has delivered on much of that. However, most time enhancement has been negated, as the social network is depressing our teens and endangering our most precious asset, girls. Teen suicide has skyrocketed — up 77% for older teen girls and up 151% for younger teens (research by colleague Jonathan Haidt).
There are many factors, but ground zero is the nuclear weapons we’ve put in girls’ hands to objectify them, perpetually undercut their self-esteem, and enable them to bully each other relationally, 24/7. Hospital admissions due to self-harm are up 50% for 15–19-year-old girls and up 200% for 10–14-year-old girls. At Facebook, a sociopath is wallpapered over by a 700-person corporate communications department and a $2 billion beard (Sheryl Sandberg).
The Dow, GDP, the Iowa polls. We are studying to the wrong tests. There is nothing more important for the future of the country, our society, and the planet than the health and wellbeing of girls. Think about this. The S&P is up 23% YTD, and the number of girls that decide to take their own life is up 151%. Three times more of them self-harm. The pursuit of money at the expense of girls’ wellbeing is the ultimate perversion of our society. We ignore injury to our daughters in exchange for the promise of economic growth.
Facebook is the incorporation of Jeffrey Epstein and Larry Nassar. Ok, that’s not fair. The social network is Jeffrey Epstein and Larry Nassar… times a million.
WTI Extends Gains After Bigger Than Expected Crude Draw
Oil prices managed a modest gain today, after Friday’s big plunge (and yesterday’s modest gains) thanks to investors hope that the upcoming OPEC+ meeting that could lead to deeper supply cuts by some of the world’s biggest crude producers.
“With the OPEC meetings coming up, there are expectations that not only will there be an extension of the existing cuts but also a further production cut,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston.
Crude also bounced above its 50-day moving average – and the dollar was weaker – which both helped technically but all eyes are once again on inventories tonight…
API
Crude -3.72mm (-1.5mm exp) – biggest draw since September
Cushing
Gasoline
Distillates
After 5 straight weeks of builds, API reports that crude inventories drew down more than expected in the last week (-3.72mm vs -1.5mm exp)…
Source: Bloomberg
WTI was hovering around $56.20 ahead of the data, and rose modestly on the API-reported bigger than expected draw
NOTE the chaotic spike as headlines that OPEC+ did not discuss deeper cuts hit.
After our daughter of fifteen years of age was moved to tears by the speech of Greta Thunberg at the UN the other day, she became angry with our generation “who had been doing nothing for thirty years.”
So, we decided to help her prevent what the girl on TV announced of “massive eradication and the disappearance of entire ecosystems.”
We are now committed to give our daughter a future again, by doing our part to help cool the planet four degrees.
From now on she will go to school on a bicycle, because driving her by car costs fuel, and fuel puts emissions into the atmosphere. Of course it will be winter soon and then she will want to go by bus, but cycling through the freezing builds resilience.
Of course, she is now asking for an electric bicycle, but we have shown her the devastation caused to the areas of the planet as a result of mining for the extraction of Lithium and other minerals used to make batteries for electric bicycles, so she will be pedaling, or walking.
Which will not harm her, or the planet. We used to cycle and walk to school too.
Since the girl on TV demanded “we need to get rid of our dependency on fossil fuels” and our daughter agreed with her, we have disconnected the heat vent in her room. The temperature is now dropping to twelve degrees in the evening, and will drop below freezing in the winter, we have promised to buy her an extra sweater, hat, tights, gloves and a blanket.
For the same reason we have decided that from now on she only takes a cold shower. She will wash her clothes by hand, with a wooden washboard, because the washing machine is simply a power consumer and since the dryer uses natural gas, she will hang her clothes on the clothes line to dry, just like my parents and grandparents used to do.
Speaking of clothes, the ones that she currently has are all synthetic, so made from petroleum. Therefore on Monday, we will bring all her designer clothing to the secondhand shop.
We have found an eco store where the only clothing they sell is made from undyed and unbleached linen and jute. Also can’t have clothes made on wool, because the emissions from farting sheep are supposedly causing bad weather.
It shouldn’t matter that it looks good on her, or that she is going to be laughed at, dressing in colorless, bland clothes and without a wireless bra, but that is the price she has to pay for the benefit of The Climate.
Cotton is out of the question, as it comes from distant lands and pesticides are used for it. Very bad for the environment.
We just saw on her Instagram that she’s pretty angry with us. This was not our intention.
From now on, at 7 p.m. we will turn off the WiFi and we will only switch it on again the next day after dinner for two hours. In this way we will save on electricity, so she is not bothered by electro-stress and will be totally isolated from the outside world. This way, she can concentrate solely on her homework. At eleven o’clock in the evening we will pull the breaker to shut the power off to her room, so she knows that dark is really dark. That will save a lot of CO2.
She will no longer be participating in winter sports to ski lodges and resorts, nor will she be going on anymore vacations with us, because our vacation destinations are practically inaccessible by bicycle.
Since our daughter fully agrees with the girl on TV that the CO2 emissions and footprints of her great-grandparents are to blame for ‘killing our planet’, what all this simply means, is that she also has to live like her great-grandparents and they never had a holiday, a car or even a bicycle.
We haven’t talked about the carbon footprint of food yet.
Zero CO2 footprint means no meat, no fish and no poultry, but also no meat substitutes that are based on soy (after all, that grows in farmers fields, that use machinery to harvest the beans, trucks to transport to the processing plants, where more energy is used, then trucked to the packaging/canning plants, and trucked once again to the stores) and also no imported food, because that has a negative ecological effect. And absolutely no chocolate from Africa, no coffee from South America and no tea from Asia.
Only homegrown potatoes, vegetables and fruit that have been grown in local cold soil, because greenhouses run on boilers, piped in CO2 and artificial light. Apparently, these things are also bad for The Climate. We will teach her how to grow her own food.
Bread is still possible, but butter, milk, cheese and yogurt, cottage cheese and cream come from cows and they emit CO2. No more margarine and no oils will be used for the frying pan, because that fat is palm oil from plantations in Borneo where rain forests first grew.
No ice cream in the summer. No soft drinks and no energy drinks, as the bubbles are CO2.
We will also ban all plastic, because it comes from chemical factories. Everything made of steel and aluminum must also be removed. Have you ever seen the amount of energy a blast furnace consumes or an aluminum smelter? All bad for the climate!
We will replace her memory foam pillow top mattress, with a jute bag filled with straw, with a horse hair pillow.
And finally, she will no longer be using makeup, soap, shampoo, cream, lotion, conditioner, toothpaste and medication. Facewashers will all be linen, that she can wash by hand, with her wooden washboard, just like her female ancestors did before climate change made her angry at us for destroying her future.
In this way we will help her to do her part to prevent mass extinction, water levels rising and the disappearance of entire ecosystems.
If she truly believes she wants to walk the talk of the girl on TV, she will gladly accept and happily embrace her new way of life.
Tariff-Tantrum Sparks Worst Start To December For S&P Since 2008
Trump’s trade-deal-related comments, combined with Pence and Ross confirmations that Dec 15th tariffs are still on the table unless a deal is struck imminently, sent the market’s expectations for a trade deal tumbling….
Source: Bloomberg
Sparking the worst start to December since 2008…
Source: Bloomberg
As US equities caught down to bond-land’s all-knowing levels…
Source: Bloomberg
Dow Transports are suffering most since the start of December (and Small Caps are relative outperformers, but still down hard)…
Source: Bloomberg
Trannies briefly broke below their 200DMA…
Notably, today’s bounce took the S&P futs back to VWAP (and tried to get back to the critical 3100 gamma level, after bouncing off the 3070/75 gamma-flip level)…
Source: Bloomberg
Cyclicals were monkeyhammered today…
Source: Bloomberg
European markets slid as Trump raises the threat of tariffs of EU exports…
Source: Bloomberg
VIX spiked to 17.99 intraday before fading back (and the short-end term structure inverted briefly intraday)…
Source: Bloomberg
Are stocks getting ready to catch down to credit?
Source: Bloomberg
Treasury yields plunged today (biggest daily drop since mid-August)…
Source: Bloomberg
With 30Y Yields tumbling to their lowest since early October
Source: Bloomberg
And the yield curve flattened dramatically (most since early August)…
Source: Bloomberg
The Dollar dived again to its lowest in a month…
Source: Bloomberg
And offshore yuan suffered its biggest drop in 2 months to 7 week lows…
Source: Bloomberg
Cryptos dumped and pumped intraday but remain lower on the week…
Source: Bloomberg
Gold and Silver soared intraday and copper was clubbed like a baby seal…
Source: Bloomberg
WTI ended higher on OPEC production extension hopes…
Source: Bloomberg
Silver surged higher (best day in 2 months)…
And gold rallied back to a key resistance level (best day on over a month)…
Finally, this seemed appropriate…
Of course, one wonders if Trump’s delay comments might be a way to force The Fed back to its Dovish ways – and the market has added half a rate-cut to expectations in the last two days….
Source: Bloomberg
And the real QE4 continues to placate the repo markets – for now…
And don’t forget this is, by far, the longest bull market without a 20% correction in history…
Trump Hints At Use Of Military Force If North Korea Backtracks On Commitments
President Trump hinted on Tuesday that the United States may be forced to use military force against North Korea if Pyongyang doesn’t temper their rhetoric, according to Yonhap.
Trump revived the threat of military action as negotiations between Washington and Pyongyang have stalled over how to match the North’s denuclearization steps with U.S. concessions.
But the U.S. president also emphasized his close personal relationship with North Korean leader Kim Jong-un, saying he hopes Kim will abide by his commitment to dismantle his country’s nuclear weapons program. –Yonhap
After Trump said Kim Jong Un “likes sending rockets up, doesn’t he?” adding “That’s why I call him Rocket Man,” Trump told reporters at this week’s NATO gathering:
“Now we have the most powerful military we’ve ever had and we’re by far the most powerful country in the world,” adding “And, hopefully, we don’t have to use it, but if we do, we’ll use it. If we have to, we’ll do it.”
In 2017, Trump threatened to “totally destroy” the communist regime, before he and Kim conducted several summits aimed at salvaging the increasingly contentious relationship between the two nations.
Earlier Tuesday, North Korea’s Vice Foreign Minister Ri Thae-song urged the United States increase efforts to mend fences.
Since the collapse of Trump and Kim’s second summit in Vietnam in February, the North has warned that it will seek a “new way” if the U.S. fails to come up with an acceptable proposal by the year-end.
“The DPRK has done its utmost with maximum perseverance not to backtrack from the important steps it has taken on its own initiative,” Ri said, referring to North Korea by its official name, the Democratic People’s Republic of Korea. He was apparently alluding to the North’s suspension of nuclear and long-range missile tests since 2017.
“What is left to be done now is the U.S. option and it is entirely up to the U.S. what Christmas gift it will select to get,” Ri continued, in an apparent warning that unless the U.S. comes up with a new offer this month, Pyongyang could restart its nuclear weapons and long-range missile tests. –Yonhap
North Korea has conducted a series of short-range ballistic missile tests since May – with some experts suggesting they are covertly advancing their weapons technology while simultaneously pressuring the Trump administration to grant sanctions relief and security guarantees in exchange for partial denuclearization.
The most recent test involved a super-large multiple rocket launcher.
“My relationship with Kim Jong-un is really good, but that doesn’t mean he won’t abide by the agreement we signed,” said Trump. “You have to understand. You have to go and look at the first agreement that we signed. It said he will denuclearize. That’s what it said. I hope he lives up to the agreement, but we’re going to find out.“
“Lower For Ever”: One Bank Makes A Stunning Discovery – The Fed’s Rate Cuts Are Now Deflationary
For the past three decades, one of the most frequently asked questions in finance is ‘what has been behind the relentless bull market in treasuries’ (and collapsing interest rates), which have in turn helped push global stocks to never before seen highs amid a bull market that started in the early 1980s and has grown at what appears to be an exponential pace. The main reason for this confusion has been the majority’s strict adherence to the textbook view that the world is cyclical and mean reverting and, thus, declining yields now must surely mean rising yields later on.
Others, such as Rabobank’s Jan Lambregts in contrast, have believed that the forces which have been bearing down on yields are, in actual fact, structural in nature which has not only challenged the mean-reversion investment strategy but also thrown a spanner in the works in terms of cycle-based economic theory. And crucially, as Lambregts writes in his 2020 preview, policymakers’ attempts to provide a cyclical solution to what is a structural problem helps explain developments in the sociopolitical sphere in recent years.
To regular readers of Zero Hedge, and generally contrarians, it will come as no surprise that the structural forces Lambregts is referring to relate principally to our financialization thesis: this refers to a trend that has been evident for decades in Western economies (but arguably increasingly elsewhere in recent years) whereby corporations have increasingly favored investment in financial rather than fixed assets.
The first chart below stylizes this thesis by showing the holdings of financial and non-financial assets on the part of US non-financial corporations since the beginning of the 1950s. As can be seen, since the mid-1990s, US companies have clearly favoured financial investment vs. the “real” thing. 2010 is highlighted on this graphic as it is at this point that the crisis-induced correction in corporate financial asset holdings rapidly reverses. This is attributable to the onset of QE which only served to further encourage corporate investment in financial assets owing to the de facto government put implied by the central bank purchase program.
As corporations focused largely on growing their financial assets, the flip side was made apparent in the corporate behavior encapsulated in the next chart, which as ING notes, shows the collapse in net fixed investment demand as a share of GDP during the financial crisis and the fact that the subsequent recovery has only taken investment’s share of the economy back to the cyclical lows repeatedly forged through the post-WWII period. This, then, helps explain a conundrum economists have been struggling with in recent years which is why fixed investment demand is still so slow this many years after the crisis despite the historical and, in certain instances, record low cost of capital. Rabobank’s thesis argues that corporates have taken advantage of low borrowing costs but not to invest in organic growth but as a means of undertaking financial value engineering.
This view also provides a plausible means of addressing another post-crisis puzzle which is why productivity growth has remained so low (since 2010, US productivity has been growing at its slowest speed on average in the post-war era). This, as Rabobank further notes, should be no surprise given the clear bias of corporates to accumulate non-productive financial assets rather than undertake productive fixed investment. This, in turn, helps explain why estimates of US potential output have collapsed in the post-crisis period. The chart below highlights this development in showing the sharp decline in recent years of New York Fed’s estimate of the natural, or neutral, policy rate. This is the real policy rate level deemed suitable for meeting the Bank’s dual mandate of full employment and 2% inflation. Crucially, trend growth is a key assumption underpinning this assessment.
This “financialisation” thesis can also help explain the scarcity of developed world wage inflation despite historically low levels of unemployment. In large part, this is owing to the fact that higher wages in the absence of productivity growth implies lower margins. This is a development that has arguably been resisted by Anglo-Saxon companies as higher wages within this context would result in workers enjoying seniority in terms of access to profits vs. shareholders – the very opposite of the share-value maximisation corporate governance model that ING argues has been increasingly prevalent since the mid-90s.
The next chart shows the long-running crowding out of the US workforce in the form of labor’s share of (declining) national income from the 1960s onwards. The chronic nature of this trend reflects the fact that there are other structural forces at play which have been disadvantageous to developed world workers – specifically, globalization and robotization. Yet while these factors have long been widely acknowledged, Rabo’s focus is upon the less appreciated “-ation” – that of financialization.
The accelerated crowding out of labor at the turn of this millennium is also reflected in the explosion of US corporate profitability shown in the next chart. Taken together with charts 2 and 4, Rabobank argues that these three visualizations make it clear that these profits failed to make their way either to labor or to fixed investment while Chart 1 implies that financial value engineering was the ultimate destination. Taken together, Charts 4 & 5 reflect a post-crisis development that has been crucial from a social perspective.
To summarize, Rabobank’s core thesis is that recent decades have seen corporates (initially in the Developed world) increasingly avoid fixed investment in favor of that of a financial variety. Central banks have, ironically, accelerated this process by directly intervening in financial markets. The upshot of this has been a rapid appreciation of financial asset values but at the direct expense of real world activity (a cannibalization of fixed investment demand), a concomitant stymieing of productivity growth and, by extension, a crowding out of labor.
In other words, it is central banks themselves that are behind the global economy’s dismal – and ever slowing – growth rate.
Viewed in this way, financialization can be judged to be a zero-sum game whereby what is good news for those long financial assets is bad news for those long income. The divergence of the lines in Charts 4 and 5 thus reflects a yawinng inequality gap that has grown markedly in the post-crisis period. This, in turn, has resulted in a growing segment of developed world populations becoming disaffected as they fall further behind and are, as a result, increasingly looking for nonestablishment political solutions. This is not simply of sociological interest but also of keen strategic importance as it argues that populism itself is structural in nature – it is a struggle for a fairer slice of the pie.
Translation: those central bankers still stumped by what trigger event unleashed Brexit, Trump and a wave of populist anger across the entire world, should look in the mirror.
This push for redistribution underpinning the populist groundswell – and the 2020 Democratic primary – is taking the historically consistent from of pushing for redistribution from foreigners to domestics which, in resulting in the erection of real and metaphorical walls (tariffs, Brexit, the US-Mexico wall), is both creating cross-border frictions and weighing on confidence more broadly. As a result, the pie itself will grow more slowly and may ultimately begin to shrink only intensifying the struggle for a fairer slice.
The next chart shows that notable damage has already been done, with the contraction of global merchandise trade growth portending a notable deceleration in world output even if trade-related tensions do not further intensify.
According to Lambregts, “this structural view of the world is crucial given the fact that politics is currently driving the market and politics, by its very nature, is noisy.” The above framework also allows the investor to look through this noise as it highlights the fact that Brexit/trade wars/the broadening out of social unrest in apparently unconnected parts of the world are but symptoms of a broader problem of growing inequality. As a consequence, politically-motivated improvements in market sentiment are purely tactical retracements in an otherwise longer-run strategically bullish trend.
As such, Rabo concludes that populism is here to stay and represents a chronic downside risk to global demand. It also
promises to intermittently trigger flights to quality which Rabobank believes opens the way for US term premia dropping to new record lows in the coming year – Rabo believes that 10Y TSY yields will drop to just 1.00% by the end of 2020.
So what do all of the above structural issues have to do with the current central bank response?
As Rabobank explained next, the Fed is effectively responding to the above structural problems with a cyclical tool – lower policy rates. At best, this cyclical/structural mismatch could be construed as seeing this response as ineffectual; at worst Lambregts warns that “it could actually prove to be self-defeating.” The latter refers to the fact that, in so far as an easier policy stance insulates risky assets (such as equities) from the fallout from elevated geopolitical concern, the Fed is actually be providing President Trump with a freer hand in terms of ratcheting tension with China yet higher, something we discussed in August.
In other words, the Fed is inadvertently enabling Trump in his crusade to protect the US from perceived unfair trading practices and, in so doing, is paradoxically – as we explained in our take of Bill Dudley’s shocking Bloomberg op-ed – increasing the geopolitical threats to growth and inflation. In this way, as Rabobank writes, one could argue that this time really is different in that Fed rate cuts could conceivably have a paradoxically disinflationary effect. One can also make this argument by observing the exponential propagation of zombie companies, kept alive only thanks to low interest rates, and whose very existence is a scramble to capture market share irrelevant of the cost, which of course is profoundly deflationary.
If true, the flattening of the US curve that has been seen heading into previous recessions (as shown in Chart 8 below) could be more intense this time round and the re-steepening heading into the next recession to be less pronounced.
This “this time is different” view has significant resonance with developments in the currency market, the Dutch bank adds. As the Fed embarked upon what it itself has branded a “mid-cycle adjustment”, the consensus very strongly favored a concomitant weakening of the dollar on the back of diminishing rate differentials. This view, as both we and now Rabo, noted missed three key points.
First, the Fed has been cutting rates owing to mounting downside risks to growth but growth has been slowing much faster outside of the US (which is dollar positive).
Second, geopolitical tension (potentially underpinned by Fed stimulus itself) has underpinned demand for safe assets (dollar positive).
Third, an escalation of the trade war lends itself to speculation over a narrowing US trade deficit which, in reducing the global supply of dollars, is a further positive for the greenback.
This is shown in Chart 9 above which shows the trade-weighted dollar from November 2016 (when Mr Trump became President Trump) to now. As shown, Trump’s accession to the White House triggered a long run decline in the dollar which was subsequently reversed with the onset of the trade war (appreciating by a little over 9% from March 2018). Meanwhile, as also shown above, short-dated US yields have collapsed in recent months as the escalating trade war triggered a policy turnaround by the Fed. The reason for plotting these two series side by side is to throw into relief the fact that, for those who have borrowed dollars outside of the US, any hoped for decline in the cost of servicing these obligations from lower rates when it comes to rolling them over is more than offset by the sizeable increase in repaying these debts from a local currency perspective.
Nowhere is this a more acute concern than for emerging markets, where dollar borrowing exploded in the wake of QE (and the accompanying lowering of dollar borrowing costs effected by the purchase program). Chart 10 above is based on BIS data which shows that dollar borrowing on the part of EM non-bank borrowers has jumped by 147% since the Fed first started buying USTs in March 2009. The added cost of rolling these debts over owing to the dollar’s resurgence represents a key threat to global growth and one the BIS has regularly highlighted.
Taking a closer look at EM debt, Chart 11 below shows world non-financial debt as a share of world GDP (the blue area) together with Chinese private non-financial debt also expressed as a share of world GDP. As can be seen, the rise in global indebtedness in the post-crisis period is accounted for entirely by increasing Chinese leverage. This is key as this explains our long-running thesis why China successfully became the global growth engine over the past decade. This is further demonstrated in Chart 12 which shows Rabobank’s estimates of the percentage point contribution to world growth on the part of developed countries and that on the part of China alone. Since the Global Financial Crisis, China has, on average, accounted for one half of the increase in global output. Finally, this also explains our long-running argument (refreshed most recently just two weeks ago in “Here’s The Simple Reason Why A Global Economic Recovery Is Not Coming” ) that absent a recovery – and fresh growth – in China, the world is doomed to recession if not worse.
So in addition to the higher cost of EM dollar borrowing, the rapid build-up of debt within the region also raises a clear question mark over the outlook for global demand. EM non-financial debt currently stands at 183% of EM GDP vs. 107% at the end of 2008. While it is hard to predict how far these liabilities could yet rise before a crisis is triggered, it is safe to suggest we are closer to the end than the beginning of this process. As a consequence, and in sharp contrast to 2008, it is hard to see who will step in to support demand as the current global slowdown unfolds. In the absence of Deus ex Machina (Deus ex Ma-China?), the current low level of long-dated yields in the developed world appears perfectly logical if not poised for an additional leg lower.
In light of the gloomy structural framework detailed above, it will come as little surprise that Rabobank’s outlook for rates is not so much “lower for longer as lower forever.” Charts 13 and 14 below show the bank’s forecasts for US policy rates and yields through to the end of next year. The bank’s Fed watcher, Philip Marey, who has been spot on in his Fed calls in the past two years, expects the Fed to be forced into cutting policy rates once again in April 2020 as a slowdown becomes more pronounced. With this deceleration of activity seen triggering a recession in the second half of next year, Rabo’s base case is for the Fed to cut rates at each subsequent meeting taking the lower end of the fed Funds target range to zero by the end of the year (a development that will naturally prompt discussion of another wave of, self-defeating, QE in addition to the NOT QE we have right now).
Finally, in terms of specific asset price targets, Rabo expects 10y yields to hit a new record low in H2 2020 with 1.0% currently viewed as the resting point at the end of the year, and strikingly, the bank states that it views the risks to this forecast “to be titled to the downside”!
Perhaps 2020 is the year when NIRP finally comes to the US? And while purely anecdotal, this view was endorsed by the 15 accounts that Rabo’s rates strategists visited on the US East Coast in October. The question they received most regularly from these investors was not whether USTs offered value (the clear consensus was that they most certainly do) but rather “what the likelihood was of US yields ultimately ending in negative territory. “
Whereas SocGen’s Albert Edwards is mostly concerned with global macro phase transitions, and specifically when the current global economy will transform into a terminal deflationary singularity, one which Edwards calls the “Ice Age”, his just as bearish SocGen colleague Andrew Lapthorne has been more preoccupied with the micro in recent years, and this morning the strategist believes he has uncovered the “most depressing chart ever” (especially for active managers).
The chart, shown below, measures how many of the world’s 16,000 stocks have beaten the S&P 500 over one and two years. What it finds is that over the last couple of years, nearly 80% of stocks have failed to beat the broader index, making a mockery of the concept of “alpha” creation, and paying someone 2 and 20 to find value beyond the broader market. On the other hand, with activist central banks actively targeting broad market indexes for the past decade, and especially any time there is even a modest swoon, or whenever they fill like boosting investor (and consumer) confidence with a little NOT QE here and not so little NOT QE there, it should not come as a surprise that it is now virtually impossible to outperform the overall market.
Below we present the highlights from Lapthorne’s note, which start of by noting that “if the world is heading into a slowdown, global equity markets don’t seem to be that bothered.”
MSCI World rose 2.7% in November, which leaves it up 21.7% in 2019. Of course, 2019 performance figures are helped by the starting point, which coincided with the turn of the year and a handbrake turn from the Fed. Picking a less generous starting point, say end-January 2018, and global equities have returned 8.6% versus 10% for 10-year global government bonds. On a total return or a risk-adjusted return basis you were better off owning bonds. Though really, and as ever, the best asset to own was simply the S&P 500.
Lapthorne then reminds us of Warren Buffett’s famous recommendation, which urged retail investors to buy the S&P 500, as stockpickers regularly failed to beat it.
“He’s not wrong. The strong performance of the S&P 500 leaves everything in its wake. This is lauded as a success and an abject failure of active fund management. But, the S&P 500 is less a measurement of corporate success and increasingly an ingredient of ever more complex financial products.”
Which brings us to the punchline: “Once in a while we create a chart that is truly depressing.”
The chart below measures the percentage of global developed and emerging market stocks that have beaten the S&P 500 on a total return USD basis over one and two years. This is a very big universe of 16,000 stocks and over the last couple of years 78% of stocks (so over 12,400 stocks) have failed to beat the S&P 500. Over the last year things have got a little better with only 66% of stocks underperforming. This high-profile index provides such a tough performance benchmark that increasing it convinces investors that just buying the S&P 500 will do.
As the Socgen strategist concludes, “this is a big shame” and explains why:
Not because I want to bang the drum for active management (admittedly a big part of our client basis), but if the measurement of company success is outperforming the 500 largest-cap US businesses supported by the US Federal Reserve, debt-funded share buybacks, and increasingly sophisticated financial products, then you can understand why less business are going public and private equity is booming. I find this depressing.”
So to all those who financial professionals who still foolishly support and cheer for the Fed, even though it is the Fed itself that is making all financial professionals obsolete in a world in which any dumb robot can just buy and hold the S&P for 0 and 0 as opposed to 2 and 20, we wonder just what else you need to see or experience before you too realize that central planning ends in tears for everyone involved. The only question is when.
House Democrats Mull Pivot Back To Russiagate To Pad Weak Case For Impeachment
As House Democrats cobble together a ‘less than compelling’ case for impeachment based on President Trump’s request that Ukraine investigate Joe Biden and his son for Obama-era dealings with the appearance of obvious corruption, some members of the House Judiciary Committee and ‘other more liberal-minded lawmakers and congressional aides’ are looking back to Russiagate and other accusations for new material to include in articles of impeachment, according to the Washington Post.
Members of the House Judiciary Committee and other more liberal-minded lawmakers and congressional aides have been privately discussing the possibility of drafting articles that include obstruction of justice or other “high crimes” they believe are clearly outlined in special counsel Robert S. Mueller III’s report — or allegations that Trump has used his office to benefit his bottom line. –Washington Post
That said, moderate Democrats wary of impeachment blowback in their GOP-heavy districts have pushed back against the idea, according to the report. In addition, Democratic leaders seeking to keep the impeachment case focused on Ukraine have resisted expanding the case against Trump as well.
The debate is expected to play out in leadership and caucus meetings this week, as the House Intelligence Committee prepares to hand the impeachment inquiry to the House Judiciary Committee. The Intelligence Committee is scheduled to vote Tuesday night on its final report on Ukraine, allowing Judiciary to then work on writing articles of impeachment based on that document.
But the Judiciary Committee also has asked other investigative panels to send any findings of Trump-related misdeeds that they believe are impeachable. And many of the committee members are hoping articles will refer to and cite their own months-long investigation into the Mueller report, which described 10 possible instances of obstruction by the president.
“One crime of these sorts is enough, but when you have a pattern, it is even stronger,” said Rep. Pramila Jaypal (D-WA), a member of the House Judiciary Committee and co-chairman of the Congressional Progressive Caucus – who added that there’s a strong case for citing the Mueller report in impeachment articles.
“If you show that this is not only real in what’s happening with Ukraine, but it’s the exact same pattern that Mueller documented . . . to me, that just strengthens the case,” she insisted.
Trump is accused of holding up nearly $400 million in military aid to Ukraine while simultaneously requesting that newly elected president, Volodomyr Zelensky, investigate the Bidens as well as other matters related to the 2016 US election. Zelensky, who didn’t know the aid was paused at the time, has insisted there was no quid pro quo, while several anti-Trump ambassadors who testified in front of Schiff’s committee could not establish that the aid hinged on Trump’s request. Instead, they assumed it did.
Perhaps this is about more than just having a weak hand on the Ukraine claims. Assuming the House votes to impeach, the GOP-controlled Senate will then hold a trial. If Democrats expand the scope of the impeachment, Senate Republicans would be forced to consider all claims levied at Trump – effectively reducing the spotlight on Ukraine by overwhelming the proceedings.
Whatever the case, even if the Trump-Ukraine claims are forced to share space with Russiagate and emoulments arguments for impeachment, Senate Republicans can still subpoena Joe and Hunter Biden to testify about Burisma, as well as House Intelligence Committee Chair Adam Schiff (D-CA), whose staff communicated with the CIA officer whose whistleblower complaint is at the heart of the impeachment.
Earlier this week, House Republicans issued a “prebuttal” of the upcoming House Intelligence Committee report expected to outline claims that Trump abused his power.
In a 123-page document, GOP investigators assert that Democrats failed to make the case that Trump committed impeachable high crimes and misdemeanors by withholding military aid and a highly sought-after White House meeting to compel Ukraine to launch investigations into his political rivals. Nor, the Republicans say, do Democrats have a basis for impeachment in Trump’s decision to spurn House document requests and witness subpoenas pertaining to Trump’s Ukraine dealings.
Instead, the GOP document contends, the impeachment effort is “an orchestrated campaign to upend our political system” — one “based on the accusations and assumptions of unelected bureaucrats who disagreed with President Trump’s policy initiatives and processes.”
According to the GOP report, “The evidence presented does not prove any of these Democrat allegations, and none of the Democrats’ witnesses testified to having evidence of bribery, extortion, or any high crime or misdemeanor.”
According to a press release on Dec. 3, the currency is part of a broader initiative to grow the local fintech sector and will be presented during the BVI Digital Economy symposium.
The coin will be a stablecoin pegged 1:1 to the U.S. dollar — which the BVI have used since 1959 — and its use is expected to reduce transactional fees, increase transaction speed and be accessible to outsiders such as tourists.
LifeLabs is also developing Rapid Cash Response, a fund meant to provide aid in case of a national emergency. The local government already announced this initiative in April. BVI Premier Andrew Fahie said:
“The importance of blockchain technology and the significant benefits it offers the BVI, are paramount to the Territory. We welcome this innovation with open arms. Our partner, LIFElabs, has demonstrated with their proven track record that their ideology is not just mere words, and we look forward to continuing our partnership with them on the rollout of BVI~LIFE, our digital currency.”
The Life token will serve as gas
LifeLabs community manager Anwar Ali claimed that the transaction fees of the BVI~LIFE stablecoin will be paid in the firm’s Life tokens. According to cryptocurrency data website Coin360, the Life token’s price increased by nearly 31% over the last 24 hours, reaching $0.000083.
While the BVI may be considering a dollar-pegged stablecoin, the Marshall Islands are developing a token in an effort to move away from the United States’ fiat currency. Earlier this year, officials announced that the Pacific island nation would develop a digital Sovereign that would be easily transmittable over the many islands that make up the country.
