In this week’s pick of energy and commodity charts, Asian jet fuel suppliers feel the pinch from Hong Kong’s weak demand as protests in the city persist. Plus: Fujairah stocks and IMO 2020, global gas exporters meet in Equatorial Guinea, and more.
1. Hong Kong unrest causes jet fuel demand to nosedive
What’s happening? Prolonged political protest in Hong Kong appears likely to continue taking a heavy toll on the city’s oil consumption. Aviation fuel demand in particular has trended sharply lower in recent months, on faltering air passenger and cargo traffic volumes. Hong Kong has been gripped by social unrest since June, with protests prompting a major airport shutdown on August 12. Aircraft activity, freight and passenger figures all sharply fell in October as the demonstrations intensified, data from the Airport Authority of Hong Kong showed. Freight volumes fell 5.6% on year to 419,000 mt in October, for a seventh consecutive month of decline.
What’s next? Declines in Hong Kong’s jet fuel imports have raised alarm bells among Chinese and other regional aviation fuel suppliers, including South Korean refiners. Months-long protests could jeopardize the city’s role as a key aviation hub and stable jet fuel supply outlet. Refineries in China supplied 1.06 million mt or 2.78 million barrels/month of jet fuel to Hong Kong in the third quarter, down 7.1% on year. South Korean refiners supplied around 800,000 barrels/month of jet fuel to Hong Kong over the past few years, but managed to export only 1.24 million barrels over Q3, down 31.1% on year.
2. Iron ore price rebounds despite rising global supply
What’s happening: Iron ore prices are rebounding, reaching $87.80/mt for 62% Fe fines delivered to China late last week. The uptick comes despite an increase in global supply since production curbs following Vale’s January tailings dam burst, which provoked a five-year spike to over $120/mt in July. Iron ore is supported by the continuing growth trend in steel output in China, as well as seasonal factors. Analysts say a short-term rebound in the key steelmaking ingredient is not unusual before the Chinese winter mill production cuts for pollution control, which boost steelmaking margins, and ahead of the rainy season in Brazil, which typically disrupts shipments.
What’s next? Iron ore and steel derivatives markets in Asia point to continued strength in iron ore prices and are holding up sentiment. The Chinese state council’s relaxation in recent days of restrictions on infrastructure funding has improved prospects for future steel demand and reinforced confidence in the economy.“Steel demand from the property market remains strong, which helps to digest a lot of inventory,” a Chinese trader said. Weaker demand is nonetheless foreseen for high impurity products, and sources report a shift in preference towards higher grade cargoes, of 65% Fe and above, lump products and pellets, which can improve blast furnace productivity and help reduce carbon emissions as they require less coal to be used in the blast furnace mix.
3. Fujairah stocks of heavy residues soar ahead of IMO 2020
What’s happening? Stockpiles of bunker fuels and other heavy residues and distillates have climbed to a record in Fujairah, according to data released last Wednesday by the Fujairah Oil Inventory Zone, as shippers switched fuel types to meet new rules taking effect in January. Heavy distillates and residues rose 10% to 15.425 million barrels as of November 18, the highest level since data began to be compiled in January 2017.
What’s next? Demand is shifting from high-sulfur fuel to low-sulfur fuel as the International Marine Organization regulation looms. The price of 380 CST high-sulfur bunker fuel has been dropping as the IMO rule requires ships to lower their fuel sulfur content to no more than 0.5%, from 3.5% currently. S&P Global Platts is the official publisher of the oil products data. Fujairah has the Middle East’s largest commercial storage capacity for refined products.
4. Gas exporting countries meet as backlash against fuel grows
What’s happening? Heads of state from Gas Exporting Countries Forum (GECF) member countries are meeting in Equatorial Guinea to discuss the state of the global gas market this week. With global gas prices having been especially low in 2019, the GECF – whose members include gas heavyweights Russia, Qatar and Iran – will have much to ponder.
What’s next? Unlike its sister organization for the oil sector, OPEC, the GECF does not get involved in coordinated market action, instead focusing on promoting the use of gas. But with prices in the doldrums – due to an oversupplied global LNG market – and an increasing backlash against fossil fuels from environmental groups, the GECF’s members may also look at ways to preserve the role of gas in the global energy mix for decades to come.
5. EU benchmark power contract sinks to 15-month low
What’s happening? German year-ahead power prices have fallen to a 15-month low as EU carbon allowance prices devalued by 20% since July’s 10-year high. German power prices are still driven by coal generation costs despite a sharp decline in output this year as cheap gas generation displaced the least efficient hard coal units.
What’s next? Low gas prices are set to stretch deeper into 2020, keeping a lid on power as well as carbon prices. Slightly colder weather forecasts saw contracts rebound on November 22. With gas storage still almost full, only a cold winter or supply disruption could deplete storage sufficiently to prevent another bearish summer. Beyond that, nuclear and coal closures are set to tighten reserve margins, with Cal 2023 trading at a premium to Cal 20. Meanwhile carbon traders continue to eye Brexit ahead of the UK elections on December 12, and to anticipate the expiry in mid-December of Dec-19 options and forward contracts.
Just as we warned would happen, the tech giants are now moving aggressively to ban all speech that contradicts whatever “official” position is decided to be “the truth” by the corrupt establishment. This week, Facebook announced it would block all content on Facebook that questions the official dogma on vaccines, which falsely insists that vaccines have never harmed anyone (a hilarious lie), that vaccines contain only safe ingredients (a blatant deception) and that vaccines always work on everyone (another laughable lie).
Facebook is achieving this by labeling vaccine awareness information “misinformation” or “hoaxes.” At the top of the list is the assertion that vaccines are linked to autism — something that even the CDC’s own top whistleblower scientist reveals to be true, yet the vaccine industry claims it’s all a hoax (in order to cover of the crimes of medical violence against children that are being committed by the vaccine pushers).
Notably, tech giants are now banning vaccine truth information by labeling it “misinformation” in exactly the same way they ban conservative content by labeling it “hate speech.” They simply invent a false category to justify the ban, all while crushing the free speech of users (and ultimately leading to the vaccine maiming of millions of innocent children). Under this twisted system of speech policing, they can ban any content they don’t like by simply labeling it “false” or “hateful,” even if it’s true and important.
Don’t like infanticide and the killing of human infants after they are born? That’s “hate speech against women,” Facebook will soon declare. And you’ll be banned from talking about abortion.
The censorship trick: Limiting content to “authoritative information”
“Monika Bickert, Facebook’s vice president for global policy management, said the social media network would reduce the distribution of false data and provide users with authoritative information about vaccinations,” reports AFP, via Breitbart.
Of course, “authoritative information” means whatever propaganda the vaccine deep state is pushing at the moment. The vaccine industry is steeped in conflicts of interest and a long history of suppressing scientists and whistleblowers who attempt to warn the public about the toxic effects of vaccine ingredients such as Thimerosal (containing mercury), aluminum adjuvants, MSG, formaldehyde and other neurotoxins that are openly admitted by the CDC to be ingredients used in vaccines administered to children.
Manufacturers are virtually immune from product liability, so the incentive to develop safer products is much diminished. Manufacturers may even refuse to make available a product believed to be safer, such as monovalent measles vaccine in preference to MMR (measles-mumps-rubella). Consumer refusal is the only incentive to do better.
There are enormous conflicts of interest involving lucrative relationships with vaccine purveyors.
Research into possible vaccine adverse effects is being quashed, as is dissent by professionals.
Vaccines are neither 100% safe nor 100% effective. Nor are they the only available means to control the spread of disease.
Yet Facebook, under pressure from radical, deranged Democrat Adam Schiff, has now been bullied into banning conversations about vaccines in order to appease the vaccine industry and cover up its crimes.
This is only the beginning: Facebook will soon ban human opinions on cancer, GMOs, pesticides, fluoride, abortion and politics
The bigger picture in all this goes way beyond the issue of vaccines, of course. With this decision, Facebook is now signaling that it will ban all conversations or content that contradicts “official positions” on any topic. Those topics will very rapidly be expanded to include GMOs, cancer treatments, water fluoridation, politics, elections, abortions, pesticides and nutrition.
It’s no longer difficult to imagine Facebook banning all conversations about nutrition, citing the absurd FDA position that there is no such thing as a nutrient which can prevent, cure or treat any disease or health condition. That’s the actual “authoritative” FDA position, so by the same logic that Facebook has applied to the vaccine debate, they could simply ban all posts about vitamin D, vitamin D, resveratrol, astaxanthin or any other supplement.
Imagine being banned from Facebook for saying that vitamin C boosts your immune function. That’s exactly what’s coming.
Even worse, Facebook could declare that “authoritative sources” have concluded President Trump colluded with the Russians. Any human opinion that contradicted that “authoritative source” would be banned on Facebook.
“Authoritative” sources are often the most corrupt and misleading sources run by the globalist pharma establishment
The problem with Facebook relying on so-called “authoritative sources” for censorship is that such sources almost always represent the corrupt globalist, pro-pharma, pro-establishment point of view that’s steeped in fraud, deception and falsehoods. Vaccines, for example, are so dangerous that the U.S. government has now paid out nearly $4 billion in awards to families of vaccine-damaged children, yet any mention of those government statistics which are openly published by HHS (VAERS.HHS.gov) will be falsely labeled a “hoax” by Facebook, since the vaccine industry falsely insists that vaccines have never harmed anyone.
Thus, truth become a “hoax,” but lies become the “official truth.” Facebook becomes the Ministry of Truth (or more accurately, the Ministry of Lies), and all voices of truth and reason are silenced in the name of protecting corrupt, harmful industries that sacrifice children for profit.
Before long, Facebook won’t even allow any human opinions at all, and the “social media” site will be nothing but AI robots spewing official propaganda that meets the definition of “authoritative” information from the globalist establishment.
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Dem-Controlled School District Adopts SJW-Backed Busing Plan Despite Widespread Opposition
This is what happens when voters allow unaccountable Democrats to run wild with radical policies focused at building ‘equity’ and attacking ‘privilege’.
In deep-blue Howard County, Maryland, a local school board voted last week to impose a massive, 1970s-style busing and redistricting plan on the affluent suburban county, despite the fact that the plan is vehemently opposed by an overwhelming majority of residents.
According to the Daily Caller’s Luke Rosiak, after the first vote for the plan failed, members of the county school board retreated into their back room. When they came out, the one Democratic member who had voted “No” was visibly upset. When the board held another vote a few minutes later, she acquiesced.
Board member Kirsten Coombs voted “no” after board member Jennifer Mallo motioned to move a swath of children out of their schools to try to balance poverty rates. It failed 4-3, and people clapped. “I move that we go into recess to consider the impact of the failure of that last motion,” Mallo said.
Coombs appeared to be crying when they came out of the back room and said the board should vote again “because otherwise the entire plan falls apart.”
Across suburban America – and especially along the eastern seaboard – there are few local policy experiments as reviled as “busing”, as the Washington Post reminds us.
What’s more, the board received nearly 7,000 pieces of mail opposing the policy, and just 150 in support of it.
The police will dislodge thousands of children from their schools to try and balance out poverty rates in an attempt to equalize performance, drop-out rates and other metrics that measure ‘equality’. Tellingly, many residents in the communities that this plan is supposed to help also oppose it, since it could involve sending their children to schools far from home.
Adding insult to injury, after the vote passed, Jennifer Mallo, the board member who helped convince Coombs to change her vote, had the temerity to lecture her audience about the importance of equality, and neglected to mention the fact that nobody asked for this policy – and few support it, even among those the policy is purportedly designed to ‘help’. Mallo also lamented the open-government laws that allowed her audience to be present, and even complained about the low pay received by board members.
Unfortunately, this issue isn’t isolated to Howard County: A loose alliance of activist groups (many of the groups are backed by billionaire investor George Soros) are pushing “equity” plans that rely on what some economists have called “junk science”.
One country resident told the DC that she is questioning her allegiance to the Democratic Party because of the busing decision.
Marybeth Steil, a county resident and lawyer, told the DCNF, “I thought I was a Democrat before the August 22 release of the plan, but this totally alienated me. Lots of my neighbors have told me the same. They awoke a bear for sure.”
“The redistricting plan based on ‘equity’ came out of left field and is clearly an idea which came from outside the county. Even the board members who were very much ‘for’ the plan cited how the ‘country was watching’ — which just goes to show they were more interested in their own headlines than the lives of our county’s school children,” Steil said.
“I do think we are a warning to Montgomery County. Our Asian and Indian populations are all a buzz about it,” she said.
Fox News conducted an interview with the DC reporter who broke the story last night.
As the reporters pointed out, it appears this is yet another example of crusading white SJWs patronizing minorities and the indigent.
There is a laundry list of dangerous assets bubbles in the global financial markets today that have built up over a record long US economic expansion:
Highest ever global debt to GDP levels;
A passive investing and ETF craze that has led to historic lofty US equity valuations across a composite of fundamental measures tracked by Crescat;
Impossibly valued currency and credit markets in China at an extreme for any large country relative to the size of its economy;
China’s banking assets are valued at USD 41 trillion, including substantial hidden non-performing loans in our analysis, a major mismatch compared to its much smaller and stumbling 13.6 trillion GDP economy;
Record $17 trillion of negative yielding sovereign debt which may have just peaked in August 2019;
Private equity/VC excesses in opaque assets, highly leveraged companies, and frequently unprofitable businesses masquerading as new economy disruptors;
Record indebtedness of US public and private corporations combined relative to GDP;
Crowded “risk parity” positioning among large hedge funds and institutions who are long stocks paired with leveraged long bonds, a strategy that worked exceptionally well in a forty-year backtest as well as the last ten years that it has become popular, but it’s a strategy that would likely get decimated in a rising inflation paradigm;
Fashionable short volatility strategies which are yield enhancement strategies for an income starved world, but the extra yield is earned in exchange for accepting asymmetric downside risk;
High valuations and crowding into sectors traditionally viewed as defensive (including utilities, REITs, and consumer staples) with utilities being the most fundamentally questionable among them in our view; and
Tech bubble 2.0 with extraordinary valuations in SaaS, certain FANG+ stocks, many recent IPOs.
Catalysts
The unwinding of these imbalances is likely to be highly destructive to the investment portfolios of unprepared global savers today. Below, we list the confluence of macroeconomic timing signals, including social and geopolitical forces, now bearing down for an assault on overvalued financial assets. Most of these have been uncanny warning signs directly ahead of past bear markets and business cycle peaks.
In the US:
The Treasury yield curve recently exceeded the critical 70% inversion threshold that has preceded each of the last six recessions with no false signals;
The Conference Board’s consumer expectations survey has diverged strongly to the downside compared to its unsustainably high present situation index;
Job openings are declining while the lagging and contrarian unemployment rate is at cyclical lows;
Both the Atlanta and New York Fed’s real-time GDP trackers have been trending steadily down for almost two years and appear to be approaching recessionary levels;
Corporate earnings of the Russell 3000 already contracted on a year-over-year basis in the last reported quarter;
US share buybacks are now 30% lower than 2018;
Increased insider selling of stocks;
Declining CEO/CFO confidence surveys;
M&A transactions drying up;
ISM manufacturing PMI at recessionary levels;
Construction spending declining;
Bearish deteriorating stock market breadth while indices reach highs;
Implied volatility for stocks retesting low levels that preceded previous selloffs;
Smart money flow index diverging from the recent run-up in the S&P 500;
Leveraged loans stumbling;
Busted/delayed/cancelled IPOs;
Recent liquidity crisis that spiked interest rates in the overnight US Treasury rehypothecation market;
Inflation rate above the entire Treasury yield curve;
Core and median CPI at 10-year highs diverging from long-term inflation expectations at 40-year lows;
Capacity utilization now falling;
Commercial & industrial loans declining the most since the housing bust;
Auto loan spreads rising as delinquency rates rise;
Net exports of services now falling the most since the GFC and tech bust;
Increased election uncertainty and rising political polarization creates an unknown binary outcome for future tax policy which is now friendly for financial markets but could swing 180 degrees;
Trump impeachment proceedings might impair his credibility in maintaining a hyped-up economic narrative in face of deteriorating macro fundamentals; and
New bipartisan willingness to embrace fiscal stimulus and rising government deficits could change the inflation paradigm sooner rather than later and be detrimental to financial assets.
Worldwide:
Yield curve inversion with the US dollar as the world reserve currency versus an unprecedented 19 economies now with 30-year yields below USD Libor overnight rates;
Like the US, Hong Kong, Canada, and Japan all recently breached critical 70% inversion levels within their own yield curves;
Emerging market currencies have been falling despite recent easy Fed policies indicating that dollar liquidity globally is still tight amidst record dollar-denominated foreign debt;
Ongoing trade and cold war between the world’s two leading economies with diametrically opposed political systems, each with its own historically extreme financial imbalances;
China yuan recently broke the key 7 level and looks poised for an accelerated devaluation that would almost certainly take global investors by surprise;
Tariff increases that go into effect in December are a catalyst for an RMB shock if trade negotiations continue to stall which is our base case;
Accelerated yuan depreciation is the rhino in the room that would be a likely contagious global risk-off event feeding back to US, European, as well as other Asian and emerging markets as we have seen on multiple occasions already since 2015 with only minor devaluations;
There have already been material disruptions in the global manufacturing supply chain due to the trade war;
Frontloading of Chinese semiconductor inventory and CAPEX spending in 2019 amidst the threat of escalating US intellectual property purchase restrictions sets up earnings weakness ahead for this market leading but cyclically vulnerable industry;
The global manufacturing PMI has already dropped to recessionary levels;
Multiple political and economic crises have already been erupting in emerging and frontier markets;
Rising populism and nationalism more generally around the globe is causing disruption in world trade and financial markets; and
Last but not least, Brexit.
The two closest analogs to today’s excessive fundamental valuations for US stocks were the 2000 Tech Bubble and the culmination of the Roaring Twenties in 1929. Our work suggests that today’s valuations are even higher than those two periods. The nifty fifty stock mania of 1972 is another comparable period that featured excessive valuations in a popular group of large cap growth stocks that became widely regarded as “blue-chip” buy and hold positions. Institutions and retail investors were taught to cling to these stocks through thick and thin, throwing fundamental analysis and valuation principles out the window. The same idea is the prevalent passive investing dogma of today.
From today’s valuations, a mere cyclical mean reversion in stock market multiples implies a 50+% drawdown in prices. Yet, too many investors remain oblivious to these valuation risks. Many today have further been lulled into believing that central banks have their backs and will keep markets rising. Such bullish sentiment on the heels of recent Fed liquidity injections has emboldened a late cycle speculative push higher in the indices even as the market internals have been noticeably deteriorating. Never mind that the last two Fed easing cycles after tightening cycles coincided with and were confirmations of major bear markets and recessions underway rather than prevention of them.
A Perfect Predictor of Recessions, so Far
The recent distortions in the US Treasury yield curve are among the most relevant macro indicators supporting Crescat’s bearish thesis and positioning today. Our comprehensive calculation shows that across all 44 spreads of the yield curve, the percentage of them that are inverted spiked to 73% just three months ago in August. This is a critical timing signal as we show in the chart below, because in the five prior business cycle expansions that we studied, we found that when 70% or more of the yield curve first inverts, a recession soon follows. In all but one case, those recessions were accompanied bear market declines in stocks. Three of them were close to 50% collapses in the S&P 500 Index.
How to Profit from Yield Curve Inversions
From a portfolio management perspective, we have determined that buying gold and selling stocks is one of the most compelling macro investment ideas after inversions reach excessive levels. Since 1970, our analysis shows that when the yield curve first exceeds 70% inversions in a business cycle expansion, the gold-to-S&P 500 ratio performed exceptionally well on average in the following two years returning close to 90% while stocks lost almost 1/3 of their value on average. The only time buying this ratio didn’t work was during the S&L crisis. Yet, back then, equity valuations were quite the opposite from today. We think the 70%+ inversions that immediately preceded the 1973-4 inflationary recession and tech bust have the most comparable setups to today. Both of those times, the numerator and denominator of this ratio worked extremely well for the ensuing 2-year period resulting in an average gain in the gold-to-S&P 500 ratio of 147% excluding dividends! The intriguing fact here is that the commodities-to-equity ratio was near historic lows at the peak of those two stock bubbles (Nifty Fifty and Tech) as shown by the first chart in our letter above. Today’s macro set up looks remarkably similar, perhaps even more extreme. Gold is near record undervalued relative to the size of global monetary base and money supply. At the same time, equity valuations relative to their underlying fundamentals are arguably at their highest ever.
Negative Real Rates Across the Whole Treasury Curve – Uber Bullish for Gold
The entire Treasury curve now yields less than core CPI. It’s the second time in history we have seen this, the first being in early 2016. That time, the Fed had already hiked rates at the end of 2015 and was in quantitative tightening mode. This time, the Fed has cut interest rates three times in three months and has returned to quantitative easing at an alarming 45% annualized rate. With $15+ trillion worth of sovereign bonds with negative yields and central banks easing globally, we believe precious metals are in the early stages of a multi-year bull market.
Economy Weakening as Inflation Rising
When we look at the chain of events historically, it’s Fed tightening late in the business cycle that leads to yield curve inversions and then recessions. By the time the Fed starts easing, it’s a confirmation that the downturn is ripe to unfold. When such times have also coincided with stocks at record valuations, severe equity bear markets have ensued. Today, given the historic levels of debt and macro imbalances worldwide, the next decline could easily be among the worst in US history. Given all the warning signs, we think investors should prepare urgently if they have not already. In our view, a new wave of global fiat debasement policies is in its early stages and a shift in the inflation paradigm could be near. To get a glimpse of this in the US, note how the Atlanta Fed’s GDP nowcast has been declining in the face of rising consumer prices. This scenario could be extremely bullish for scarce and non-dilutable forms of haven assets such as precious metals.
At Crescat, precious metals are overwhelmingly our preferred hedge against fiat money printing and over-valued financial assets. It’s important to note that cryptocurrencies provide an additional outlet for investors to flee stocks and bonds as well as fiat currencies today and thereby to help make rising inflation in those currencies a self-fulfilling prophecy. Bitcoin is a bet on technology and cryptography as well as a vehicle to disrupt and even circumvent government control over money. Bitcoin is limited in supply like precious metals and in that sense could be a valuable call option on inflation. As the first mover, it has the network-effect advantage over other cryptocurrencies which are abundant and therefore unlike precious metals as an asset class. We believe a small position in bitcoin could provide diversification and hedging with significant upside, but we do not advocate for more than one or two percent of a portfolio at this time given its high risk. For those living under authoritarian governments with strict capital controls, it is important to note that cryptocurrencies provide a functional and disruptive means of escape which plays into our bearish view on the Chinese yuan.
In the wake of the 2008-9 crisis, central banks starved investors for yield in attempt to generate new borrowing and spending and thereby grow the economy. But in the absence of significant fiscal stimulus to go along with it, extraordinary monetary policy mainly served to generate extreme expansion in value of financial assets with only muted economic growth and real-world inflation to go along with it. Monetary stimulus alone thus increased the wealth disparity between the rich who disproportionately own stocks and bonds compared to the more generally debt-laden masses. It is thus no surprise that today we have a fertile breeding ground for rising populism and nationalism and their financial bubble bursting implications, including trade wars, and deglobalization.
Repo Liquidity Crisis a Wake-up Call to China Risks
When today’s plethora of macro imbalances begin to unwind, we fully expect that Fed intervention will again be necessary to attempt to ease the pain of collapsing asset prices. The rehypothecation (repo) liquidity crisis that we just experienced in September is a new kind of wake-up call. Like in 2008, a freeze up in the interbank credit markets is a sign that a large financial institution somewhere on the planet may be on the brink of collapse. The Fed indeed has already responded with emergency liquidity injections. We can only imagine that a large and wobbling Chinese bank needs US dollars and has been attempting to pledge Treasuries to borrow them. Perhaps other banks stepped away for fear that those Treasuries had already been pledged too many times over and nobody really knows who would get them if the music stopped. We are not saying that is what happened in September. We don’t know what exactly happened. The Fed has been carefully guarding the true story, but it has also continued in emergency QE mode for the last three months. What we are saying is that there is indeed substantial financial market risk today because of the truly insane imbalances that have built up inside the Chinese banking system. Based on our macro research, we believe the PBOC has already more than fully encumbered its foreign exchange reserves in its effort to keep its currency from collapsing to date. The recent surprise new money printing from the Fed is confirmation that there are indeed real problems beginning to surface in the global capital markets. The Fed’s role, to be clear, if China’s banking imbalances are indeed finally poised to unwind, is not to rescue Chinese banks, rather to rescue the US banks that are their counterparties.
So, while today’s US stock market has many parallels to 1929, 1972, and 2000 in terms of valuation and downside risk, it also has some to parallels to 2008 with the potential for banking liquidity crises in the interbank dollar funding markets. We are much less concerned about the risk of an actual collapse of the US banking system today because the Fed has proven its willingness and ability to swiftly step in there.
Ultimately, we believe combined fiscal and monetary stimulus will be applied in concert to combat the next market and economic downturn. We strongly believe that too many investors today are underestimating the future inflationary risk of this high likelihood. The problem is the recency bias of the post-GFC world where central bank easing failed to generate the inflation that was feared at that time. The reason it didn’t is that, outside of China, the accompanying fiscal expansion was absent. The chessboard looks much different today. The willingness to embrace new monetary and fiscal experiments today is high and they will come at a cost.
Such a political climate is particularly troublesome for stock and bond bulls today because rising inflation would almost certainly be a killer of today’s financial asset euphoria. If one is going to buy stocks at all in this environment, one area that looks extremely attractive with low valuations and improving fundamentals is gold and silver mining stocks. Many of these companies have low valuations, improving growth, and strong positive free cash flow already, after going through a bear market from 2011 to early 2016. After four years of base building, we believe they are poised to take off fundamentally and technically in a soon to be rising gold and silver price environment.
New Leak Shows Operating Manuals For ‘Re-education Camps’ For Chinese Muslims In Xinjiang Region
A series of classified Chinese government documents were leaked by a group of journalists describe the secret operations of detention camps in Xinjiang, reported Reuters.
Published by the International Consortium of Investigative Journalists (ICIJ) Sunday, the documents offer a rare look into the massive internment camp for Muslim-majority Uyghur in the troubled western region of China.
The 2017 documents reveal a list of guidelines “that effectively serves as a manual for operating the camps now holding hundreds of thousands of Muslim Uighurs and other minorities,” said ICIJ.
The leak shows intelligence briefings of “how Chinese police are guided by a massive data collection and analysis system that uses artificial intelligence to select entire categories of Xinjiang residents for detention,” said ICIJ.
The manual, called a “telegram,” is a six-page document that “instructs camp personnel on such matters as how to prevent escapes, how to maintain total secrecy about the camps’ existence, methods of forced indoctrination, how to control disease outbreaks, and when to let detainees see relatives or even use the toilet,” ICIJ adds.
The US State Department recently said nearly 2 million Muslim Uyghurs are being detained in camps in the western region of the country.
The manual also reveals the minimum detention time is about one year.
Reuters wasn’t able to confirm the authenticity of the leaked documents.
This is the second data dump of leaked documents on detention camps in Xinjiang in under two weeks.
403 pages of internal documents were leaked earlier this month to the New York Times that describe a clampdown in Xinjiang – a resource-rich territory located on the border of Pakistan, Afghanistan and Central Asia – where authorities have “corralled as many as a million ethnic Uighurs, Kazakhs, and others into internment camps and prisons over the past three years.”
Satellite images reviewed by The Wall Street Journal and a specialist in photo analysis show that camps have been growing. Construction work has been carried out on some within the past two weeks, including at one near the western city of Kashgar that has doubled in size since Journal reporters visited in November.
The full extent of the internment program was long obscured because many Uighurs feared speaking out. Now more are recounting experiences, including six former inmates interviewed by the Journal who described how they or other detainees had been bound to chairs and deprived of adequate food.
Top above shows a camp near Kashgar, China on April 17, 2017 according to the WSJ.
Below shows same camp on August 15, 2018, whichappears to have doubled in size. Image source: Wall Street Journal
The Uyghur American Association via Buzzfeed: “A satellite photo of a Chinese reeducation camp near Korla city in central Xinjiang. GPS coordinates were provided by a Uighur exile who had visited the camp.”
Satellite image of a re-education camp in Makit, Xinjiang (above). Source: Shawn Zhang via Medium.
The classified documents, leaked to Western media outlets, have sparked an international outcry over China’s human rights in the Xinjiang region. Led by the US and 30 other countries, they have labeled the detention centers a “horrific campaign of repression.”
Stelter and guest say Trump supporters need ‘deprogramming’
CNN’s resident lunatic Brian Stelter went above and beyond his regular whackery Sunday, wheeling out a ‘cult expert’ on his “Reliable Sources” show, who claimed that President Trump is a “destructive cult” leader, a la Jim Jones, and that he is using “mind control” to direct supporters.
Stelter introduced Steven Hassan, author of a book titled The Cult of Trump, claiming that many prominent figures (read ‘CNN talking heads’) have been suggesting recently that Trump’s America first movement is ‘cultish’.
Hassan claimed that Trump supporters are “not being encouraged to really explore and look at the details and arrive at their own conclusion.”
“Much of what they’re hearing is emotionally driven, loaded words, thought-stopping, and thought-terminating-type clichés.” he added, citing “fake news,” “build the wall,” “make America great again.”
Stelter then brought up mind control, asking “You say the President is using mind control, but how is that provable?”
“So, we can start with the pathological lying, which is characteristic of destructive cult leaders.” Hassan claimed, again without providing any evidence.
“Saying things in a very confident way that have nothing to do with facts or truthfulness. The blaming others and never taking responsibility for his own failures and faults. Shunning and kicking out anyone who raises questions or concerns about his own behavior. His use of fearmongering, immigration is a horrible thing.” the guest continued.
Stelter then chimed in with the stunning insight that “It is frightening to hear a cult expert say that you see all of these signs right now today in American politics.”
The pair then remarkably suggested that Trump supporters need to be ‘deprogrammed’ by breaking them out of their ‘bubbles’.
Could there be a better example of the pot calling the kettle black?
The real cult is happening at CNN, where for four years talking heads and presenters have completely obsessed themselves with opposing anything Trump says or does, as well as a plethora of things he doesn’t say or do.
63 million Americans are definitely not part of a mind controlled cult. However, a few thousand CNN viewers certainly seem to be.
As DB’s Jim Reid reminds us, “today is exactly one month until Christmas”, and as happens around this time of the year, it will be a truncated week due to the Thanksgiving holiday on Thursday that usually extends into a sleepy Friday for markets.
That said, the holiday shortened week still see some interesting US data with consumer confidence (Tuesday), preliminary Q3 real GDP, October durable goods orders, October personal income/spending, the November Chicago PMI and the Fed’s Beige Book (Wednesday). Ahead of the December FOMC blackout period at the end of the week, Fed Chair Powell speaks this evening in Rhode Island and centrist Governor Brainard speaks tomorrow in New York to discuss the Fed’s policy framework review.
As Reid notes, Powell’s recent Congressional testimonies didn’t reveal anything new so it’s unlikely we’ll learn much from Powell tonight but people will be listening nonetheless. There is also a chance that tomorrow Brainard discusses more about possible future yield curve control as an addition to the Fed’s policy toolkit.
For consumer confidence tomorrow, the reading has fallen for the last 3 consecutive months, but the consensus is looking for a slight uptick to 126.8 in November. For Wednesday, don’t expect any material revisions to the second print on Q3 real GDP (+1.9% preliminary vs. 1.9% advance), but the October durable goods data will provide an initial read on current-quarter capex spending if we can adjust for any impact from the GM strikes. A bounce back from these strikes should help the November Chicago PMI rebound (47 expected vs 43.2 last month) but there could be an additional boost from the recent stabilisation and slight bounce in the global manufacturing data over the last couple of months.
How far this small recovery in manufacturing goes may rest on the “phase one” trade deal so all eyes on new information on that topic this week. Over the weekend China issued new guidelines saying that it will raise penalties on violations of intellectual property rights in an attempt to address one of the sticking points in trade talks with the US. On Friday President Trump had said in an interview with Fox News that “This can’t be like an even deal, because we’re starting off on the floor and you’re already at the ceiling. So we have to have a much better deal,” before adding, we are “very close” to a trade pact.
Courtesy of Deutsche Bank, here is a full calendar for the week ahead:
Monday
Data: Germany November Ifo business climate, Canada September wholesale trade sales, US Chicago Fed October national activity index, Dallas Fed November manufacturing activity
Central Banks: ECB’s Villeroy, Holzmann, Lane speak, Bank of Israel policy decision
Tuesday
Data: Germany GfK consumer confidence, US October retail inventories, preliminary October wholesale inventories, September FHFA house price index, November Richmond Fed manufacturing survey, October new home sales, November Conference Board consumer confidence
Central Banks: Fed’s Powell (00:00 UK time), Brainard, ECB’s Coeure, Wunsch speak
Wednesday
Data: China October industrial profits, France November consumer confidence, Italy November consumer confidence index, manufacturing confidence, economic sentiment, US weekly MBA mortgage applications, US second estimate Q3 GDP, personal consumption, GDP price index, core PCE, preliminary October durable goods orders, weekly initial jobless claims, November MNI Chicago PMI, October personal income, personal spending, pending home sales, Japan October retail sales
Central Banks: Federal Reserve releases Beige Book, BoJ’s Sakurai and ECB’s Lane speak
Thursday
Data: Euro Area October M3 money supply, Italy October PPI, Euro Area November economic confidence, business climate indicator, industrial confidence, services confidence, final November consumer confidence, Germany preliminary November CPI, South Korea October industrial production, Japan October jobless rate, Japan November Tokyo CPI, preliminary October industrial production
Central Banks: Mexican central bank releases monetary policy minutes, ECB’s Villeroy speaks
Other: Thanksgiving holiday in US
Friday
Data: UK November GfK consumer confidence, Japan September vehicle production, October housing starts, construction orders, November consumer confidence index, France October PPI, consumer spending, preliminary November CPI, final Q3 GDP, Germany November unemployment change, Italy preliminary October unemployment rate, UK October mortgage approvals, M4 money supply, Italy preliminary November CPI, final Q3 GDP, Euro Area October unemployment rate, preliminary November CPI, Core CPI, Canada September GDP
Central Banks: Bank of Korea policy decision, ECB’s Villeroy speaks
Finally, looking at just the US, Goldman writes that the key economic data releases this week are the second vintage of Q3 GDP on Tuesday, and the durable goods report and core PCE report on Wednesday. Fed Chair Powell speaks on Monday, and Fed Governor Brainard speaks on Tuesday.
Monday, November 25
10:30 AM Dallas Fed manufacturing index, November (consensus -2.9, last -5.1)
7:00 PM Fed Chair Powell (FOMC voter) speaks; Fed Chair Jerome Powell will speak at the Greater Providence Chamber of Commerce annual dinner in Providence, Rhode Island. Prepared text is expected.
Tuesday, November 26
08:30 AM Advance goods trade balance, October (GS -$70.0bn, consensus -$71.0bn, last -$70.5bn); We estimate that the goods trade deficit declined to $70.0bn in October reflecting an increase in outbound container traffic. Goods imports declined in September, following the implementation of tranche 4A tariffs on imports from China, limiting the scope for a rebound in October.
08:30 AM Wholesale inventories, October preliminary (last -0.4%); Retail inventories, October (last +0.2%)
09:00 AM FHFA house price index, September (consensus +0.5%, last +0.2%)
09:00 AM S&P/Case-Shiller 20-city home price index, September (GS +0.5%, consensus +0.2%, last -0.2%); We estimate the S&P/Case-Shiller 20-city home price index rose by 0.5% in September, following a 0.2% decline in August. Seasonal adjustment issues are likely to boost the series for September.
10:00 AM Richmond Fed manufacturing index, November (consensus +6, last +8)
10:00 AM New home sales, October (GS +0.5%, consensus +1.0%, last -0.7%); We estimate that new home sales rose by 0.5% in October, partly reflecting mean reversion after a weak reading in the previous month.
10:00 AM Conference Board consumer confidence, November (GS 126.5, consensus 127.0, last 125.9); We estimate that the Conference Board consumer confidence index edged up by 0.6pt to 126.5 in November, partially reflecting higher equity prices.
1:00 PM Fed Governor Brainard (FOMC voter) speaks; Fed Governor Lael Brainard will discuss the Fed’s policy framework review at the New York Association for Business Economics. Prepared text and audience Q&A are expected.
Wednesday, November 27
08:30 AM GDP (second), Q3 (GS +2.1%, consensus +1.9%, last +1.9%); Personal consumption, Q3 (GS +3.0%, consensus +2.8%, last +2.9%); We expect a two-tenths upward revision in the second estimate of Q3 GDP to +2.1%, mainly reflecting a boost from expected consumption and inventory revisions, but a downward expected revision to residential investment.
08:30 AM Durable goods orders, October preliminary (GS -2.0%, consensus -0.7%, last -1.2%); Durable goods orders ex-transportation, October preliminary (GS -0.5%, consensus +0.2%, last -0.4%); Core capital goods orders, October preliminary (GS -0.3%, consensus flat, last -0.6%); Core capital goods shipments, October preliminary (GS -0.3%, consensus flat, last +0.7%): We expect durable goods orders to decrease 2.0% in the preliminary October report, largely reflecting a decline in commercial aircraft orders. A further drag from September tariffs and weakness in industrial freight volumes suggest a potential drag on core capital goods orders and shipments, which we expect to decline by 0.3% each.
08:30 AM Initial jobless claims, week ended November 23 (GS 225k, consensus 220k, last 227k); Continuing jobless claims, week ended November 16 (consensus 1,690k, last 1,695k): We estimate jobless claims declined by 2k to 225k in the week ended November 23, following an unchanged reading in the prior week.
09:45 AM Chicago PMI, November (GS 47.7, consensus 47.0, last 43.2); We estimate that the Chicago PMI rose by 3.5pt to 47.7 in November – following a 3.9pt decline in October – partly reflecting a boost from rebounding domestic new export orders and an end to the GM auto strike.
08:30 AM Personal income, October (GS +0.4%, consensus +0.3%, last +0.3%); Personal spending, October (GS +0.3%, consensus +0.3%, last +0.2%); PCE price index, October (GS +0.23%, consensus +0.3%, last -0.01%); Core PCE price index, October (GS +0.13%, consensus +0.2%, last +0.05%); PCE price index (yoy), October (GS +1.37%, consensus +1.4%, last +1.33%); Core PCE price index (yoy), October (GS +1.66%, consensus +1.7%, last +1.67%): Based on details in the PPI, CPI, and import price reports, we forecast that the core PCE price index rose 0.13% month-over-month in October, or 1.66% from a year ago. Additionally, we expect that the headline PCE price index increased 0.23% in October, or 1.37% from a year earlier. We expect a 0.4% increase in personal income in October and a 0.3% increase in personal spending.
10:00 AM Pending home sales, October (GS -0.5%, consensus flat, last +1.5%); We estimate that pending home sales declined 0.5% in October based on regional home sales data, following a 1.5% rise in September. We have found pending home sales to be a useful leading indicator of existing home sales with a one-to-two-month lag.
02:00 PM Beige Book, December FOMC meeting period: The Fed’s Beige Book is a summary of regional economic anecdotes from the 12 Federal Reserve districts. In the December Beige Book, we look for anecdotes related to growth, labor markets, wages, price inflation, and the economic impacts of trade policy and slowing global growth.
Thursday, November 28
Thanksgiving holiday. NYSE closed. SIFMA recommends bond markets also close.
Friday, November 29
NYSE will close early at 1:00 PM. SIFMA recommends an early 2:00 PM close to bond markets.
Fed’s 42-Day Repo 2x Oversubscribed In Scramble For Year End Liquidity
Traders were keenly looking ahead to the result from today’s 42-day repo as this was the Fed’s first liquidity-injection providing dealers with funding to carry them over into next year, as the operation was the first to mature in 2020 or January 6 to be precise. And, as many had feared, year-end liquidity fears remain front and center as the $25 billion operation proved to be roughly half the required size to satisfy all liquidity demands.
Dealers submitted $49.05BN in bids for the 42-day op ($33.55BN in Treasurys, $5BN in Agency, $10.5BN in MBS paper), resulting in a nearly 2x oversubscription of the $25BN in available repo.
While this was only the first operation providing liquidity into the new year, there are two more operations that will allow Dealers to lock in funding into 2020.
It remains a major question for funding markets why, even with QE4 in place and now daily overnight and short-term repo operations in place, banks continue to fret about year-end liquidity, where some fear a similar explosion in overnight repo rates as was observed on Dec 31, 2018 when General Collateral exploded amid a widespread liquidity shortage. Indeed, as Bloomberg puts it, “even with the Fed’s commitment to continue providing liquidity to the financial system around year-end, the market is still showing concerns. This is due to banks’ year-end balance-sheet constraints related to capital surcharges and other regulatory requirements.”
As are reminder, while most US bank have a GSIB surcharge of around 2%-3%, JPMorgan remains an outlier – and is perceived as the “riskiest” bank – with its 4.0% surcharge. It’s also the reason why the bank has been quietly pulling liquidity away from funding markets ahead of quarter-end periods.
For those curious how the Fed calculates the GSIB surcharge, Bank of America provided the following handy schematic:
Last week, when commenting on what it expects for year end liquidity pressures, BofA said that funding markets are currently very stable but the bank sees risks of repo pressure into year-end, as the Fed faces two funding issues into Y/E:
a low level of reserves requiring ongoing large Fed repo injections
dealer repo intermediation constraints stemming from the GSIB surcharge.
The way these issues are linked is through the Fed’s short-term repos; Fed repos pressure dealer balance sheets larger while GSIB constraints encourage dealers to shrink the overall size of their market making activities.
Separately, and in keeping with the recent tradition, the Fed also completed an overnight repo operation, which however showed less funding demand, as “only” $68.5 billion in securities were pledged in exchange for overnight liquidity with the Fed, well below the limit of $120 billion. Yet another troubling observation: while many have expected the total notional on overnight repos to decline over time, the daily use of the overnight repo has stabilized in the $60-$80 billion range and has failed to decline over the past month.
Fed’s “National Activity Index” Plunges To 2-Year Low
Just when you thought it was safe to declare the “trough” is in for economic weakness, The Chicago Fed’s National Activity Index, which draws on 85 economic indicators, was minus 0.71 in October versus minus 0.45 in September.
27 of the 85 monthly individual indicators made positive contributions
58 of the 85 monthly individual indicators made negative contributions
Source: Bloomberg
And the recent rout of weakness has pushed the index to its weakest since October 2017…
A trade deal better hit soon (as if it’s not priced in) because The Fed claims its on hold into this renewed weakness.
