This has been an impossible market to effectively trade as rhetoric between the White House, the Fed, and China, has reached a fevered pitch.
On Friday, several things happened which have at least temporarily significantly heightened market risk.
Jerome Powell disappointed the markets, and the White House, by sticking with their previous guidance concerning monetary policy actions. To wit:
We Will Act As Appropriate To Sustain The Expansion (Will cut rates if needed)
Says Events Since The July Fomc Have Been `Eventful’ (Trade War/Tariffs)
Carefully Watching Development For Impact On U.S. (China/US Trade)
Monetary Policy Has No Rulebook For International Trade
We’ve Seen Further Evidence Of A Global Slowdown (Germany in recession)
Fitting Trade Policy Into Risk-Management Framework Is a New Challenge
Fed Faces Heightened Risk of Difficult-to-Escape Periods of Near-Zero Rates (Neg. rates)
U.S. Economy Has Continued to Perform Well Overall (No rush to cut rates)
Sees Financial Stability Risks as Moderate, but Will Remain Vigilant
However, this commentary was not a surprise to us. We have suggested for several months the Fed should be slow to use what little ammo they currently have.
“With the markets pushing record highs, recent employment and regional manufacturing surveys showing improvement, and retail sales rebounding, it certainly suggests the Fed should remain patient on cutting rates for now at least until more data becomes available. Patience would also seem logical given the limited room to lower rates before returning to the ‘zero bound.’”
Not surprisingly, Chairman Powell’s comments did not sit well with President Trump who has frequently pressed the Fed to cut rates aggressively. Mr. Powell stopped short of promising any specific monetary-policy easing, saying instead the central bank would “act as appropriate.”
“After Powell’s closely watched speech in Jackson Hole, Trump tweeted, ‘As usual, the Fed did NOTHING!’
After China announced more import tariffs on U.S. goods early Friday, Trump said he would respond Friday afternoon. The president also asked ‘who is our bigger enemy,’ Powell or Chinese President Xi Jinping.” – MarketWatch
By the end of the day on Friday both the U.S. and China had hiked tariffs on one another.
“China said it would increase existing tariffs by 5% to 10% on more than 5,000 U.S. products, including soybeans, oil, and aircraft. A 25% duty on American-made cars would also be reinstituted. The value of these products is estimated by the Chinese Commerce Ministry to total around $75 billion.
Trump responded after financial markets closed by saying he would raise current U.S. tariffs. A 10% duty on $300 billion in Chinese goods will be raised to 15% in September while a 25% tariff on $250 billion in imports would be increased to 30% in October.” – MarketWatch
The Investing Conundrum
The problem with managing money is that markets are now trading on “tweets,” and “headlines,” more than fundamentals. This makes being either long, or short, particularly difficult.
With the volatility seen in just the past two weeks, it is too difficult to trade short positions without being ‘whipsawed’ out of the holdings.
Trading Rule:
When you are ‘unsure’ about the best course of action, the best course of action is to ‘do nothing.’”
This is where we are currently.
Over the past few months we have reiterated the importance of holding higher levels of cash, being long fixed income, and shifting risk exposures to more defensive positions. That strategy has continued to work well.
We have remained devoid of small-cap, mid-cap, international and emerging market equities since early 2018 due to the impact of tariffs on these areas.
For the same reasons we have also reduced or eliminated exposures to industrials, materials, and energy
With the trade war ramping up, there is little reason to take on additional risk at the current time as our holdings in bonds, precious metals, utilities, staples, and real estate continue to do the heavy lifting.
If you are being advised to hold all these asset classes for “diversification” reasons, you should be asking yourself, “why?”
Trade wars, and tariffs, are not friendly to these markets. With those “taxes” being ramped up by both parties, things will get worse, before they get better.
Risk management is critically important to long-term returns, and risk is becoming more elevated daily. So, if you are paying for a “buy and hold” portfolio, you may want to reconsider what you are paying for?
From a technical perspective, the market is back to oversold, so a bounce next week is possible, but as noted last week, this is “still a sellable rally.” However, if the market breaks the current consolidation to the downside, a test of the 200-dma will be critically important. Any failure at that support will bring the December lows back into focus.
As we have continued to note over the last few weeks, the ongoing deterioration of small and mid-capitalization companies continues to suggest the overall backdrop of the markets is not healthy.
We continue to remain cautious for the time being.
“The ‘ringing of the bell’ over the last decade has trained investors to rush into equity-related risk.”
With Powell disappointing traders, and Trump retaliating with additional tariffs, the initial response was to flee to “safety,” or rather should I say ” bonds.”
While retail investors continue to cling onto stocks hoping for a resurgence of the “bull market,” institutions are piling into bonds as the tidal wave of data continues to warn something is “broken.”
(You don’t have $17 Trillion in negative-yielding sovereign debt if there is economic and fiscal stability.)
Doug Kass reminded me on Thursday of a memorable lesson from “Wall Street.”
“Quick buck artists come and go with every bull market, but the steady players make it through the Bear Markets. Enjoy it while it lasts – ’cause it never does.’” – Lou Mannheim
The message that negative yields are sending coincides with weaker growth rates in:
Yes, the data is not negative which is why we aren’t in a recession…yet,(However, the data is subject to substantial negative revisions, and as we showed last week, the month before the last recession started all the data was positive as well.)
This is also the reason the Fed stopped hiking rates.
Last September, the Fed believed they needed to hike rates more aggressively as they believed the “neutral rate,”(code for economic growth) was considerably higher. We warned then several natural disasters were skewing the economic data, and that hiking rates was a mistake. By December, as rates reached 2%, and with the markets down 20%, the “neutral rate” had been achieved.
“This was a situation where we were getting back to what I would see as a neutral rate. In December 2018, we raised rates by 25 basis points. At that time, I was not supportive of that move because I thought that we didn’t need to do that. So, we’re just recalibrating back to where I thought we should have been, with a 25-basis-point cut.”
Since that is a lot of “Fed speak,” let me translate:
“Listen, as a member of the Fed, I can’t tell you the economy has weakened significantly, and the threat of a recession has risen markedly. If I did say that, the market would crash, consumer confidence would crash, and we would immediately be in a recession.
The reality is that we needed to get rates off of zero percent, and we were hoping to get rates closer to 4%, to give us some room to support the economy during the next recession.Unfortunately, we actually ‘over tightened’ which led to the market disruption last year. The rate cut in July was to be supportive of the economy short-term, but we need to hold as much ‘ammo’ as possible in reserve for when the recession hits.”
Here is a chart of the Effective Fed Funds Rate versus the Neutral Rate (Real GDP):
You should note a couple of things.
It wasn’t until the 1990’s that the “neutral rate” became a thing. However, one of the best indicators of an impending recession is when the 10-year rate is inverted to the Fed Funds rate, as it is now.
The indicator is even more timely when the curve is inverted combined with the Fed cutting rates, as they are now.
Could this time be different? Absolutely, there is always the possibility this time could be different. However, betting on possibilities versus probabilities tends not to work out well.
Why The Fed Won’t Go Negative
Since the Fed meeting in July when they cut rates by 0.25%, the Fed has been working diligently to lower expectations of further rates cuts. As noted, this is because the Fed understands the trap they have gotten themselves into.
With just a bit more than 2% between the current Fed funds rate and ZERO, the Fed understands what little bit of precious ammo they have to fend off the next recession.
They won’t go “negative” on rates.
Concerning the second point, my colleague Daniel LaCalle summed it up well:
“The paper ignores the collapse in net income margin and ROE and even dismisses ROTE (return on tangible equity) to try to defend the idea that banks earnings have not suffered from negative rates.
The worrying part is that these statements ignore the fact that one of the main reasons why banks’ bottom line has not fallen more is they have almost stopped making provisions on bad loans.“
His point is critically important.
Negative rates have irreparably damaged European banks, which only can be resolved through a massive debt revulsion.
The Fed is at least smart enough to understand this dynamic, which is why they are defending what room they have with the one rate they can directly control.
Wolf Richter also had some excellent points in this regard:
“Negative interest rates drive banks to chase yield to make some kind of profit. So they do things that are way too risky and come with inadequate returns. For example, to get some return, banks buy Collateralized Loan Obligations backed by corporate junk-rated leveraged loans. In other words, they load up on speculative financial risks. And as this drags on, banks get more precarious and unstable.
This is not a secret. The ECB and the Bank of Japan and even the Swiss National Bank have admitted that negative interest rates weaken banks. The ECB has even been talking about a strategy to ‘mitigate’ the destructive effects its policies have on the banks.
So that’s the issue with negative interest rates and banks. They crush banks.”
Don’t forget.
Why did the Fed launch Q.E., and cut rates to zero, to begin with?
To bail out the member banks of the Federal Reserve, or should I just say, “Wall Street.”
Interest rates are a function of economic growth. Globally, despite massive levels of QE, and low interest rates, economic growth is faltering, not strengthening.
The Fed does understand this.
Unfortunately, the Fed is still misdiagnosing what ails the economy, and monetary policy is unlikely to change the outcome in the U.S., just as it failed in Japan. The reason is simple. You can’t cure a debt problem with more debt. Therefore, monetary interventions, and government spending, does not create organic, sustainable, economic growth.
Simply pulling forward future consumption through monetary policy continues to leave an ever growing void in the future that must be filled. Eventually, the void will be too great to fill.
If rates ever do rise, it’s game over as borrowing costs surge, deficits balloon, housing falls, revenues weaken, and consumer demand wanes. It is the worst thing that can happen to an slow growing economy that is dependent of further debt expansion just to sustain current growth.
As Wolf noted, lower rates are not the solution, they are the problem.
“So far, the outcomes are already bad, and now, because the outcomes are already bad, they’re wanting to drive interest rates even lower to deal with the bad outcomes that these low interest rates have already caused.”
via ZeroHedge News https://ift.tt/2PabbsP Tyler Durden
With the ongoing dumpster fire that has been Tesla’s 2019 – including everything from J.B. Straubel leaving, Tesla stock falling nearly 30%, and now a new solar panel controversy – we’ve almost forgotten about some of the legacy legal liabilities that the boy wonder Elon Musk had created for himself over the last couple years.
One of those liabilities, Musk calling one of the Thai rescue cave divers a “pedo” – and then doubling and tripling down on the allegation – has now blossomed into what appears to be a full blown legal mess for Musk.
After a judge failed to dismiss Vern Unsworth’s defamation claims against Musk months ago, Unsworth’s lawyer, L. Lin Wood, has now appeared out of nowhere on Twitter, claiming that he had finally deposed Elon Musk and that the “truth about Musk” would soon be publicly revealed.
“The emperor has no clothes,” he taunted.
In Vernon Unsworth case, I deposed Elon Musk all day on Thursday in LA. When Musk deposition transcript & video are eventually filed with the Court, truth about Musk will be publicly revealed. The emperor has no clothes.
Could this be just part of a sharp legal strategy to get Musk to settle? Or does Lin Wood have the proverbial goods on Musk in a way that the public doesn’t know about yet?
Regardless, we noted back in May that Musk would be heading to trial on October 22 as a result of calling Unsworth a “pedo“. A judge rejected Elon Musk’s defense that he wasn’t making a real accusation, partly because of a follow up e-mail that Musk wrote to BuzzFeed.
“A reasonable fact-finder could easily conclude that [Elon Musk’s] statements … implied assertions of objective fact,” wrote district judge Stephen V. Wilson. Unsworth is seeking more than $75,000 in damages, on top of a court order prohibiting Musk from making any further disparaging comments. Because court orders have worked so well for the SEC so far in censuring Musk.
We reported last September that Unsworth, the British cave diver who helped rescue 12 children in Thailand and who was hailed a hero by everybody in the world except Elon Musk – who instead decided to label him “pedo guy” and then later a “child rapist” – had sued Musk for libel, assault and slander.
Unsworth and his attorneys filed the suit in the US district court for the Central District of California, according to BuzzFeed. The Tesla CEO’s tweets and emails to BuzzFeed were submitted as exhibits in the lawsuit.
The suit alleges that Musk sought to destroy his reputation after Unsworth made outspoken comments about how he believed Musk’s solution for the cave rescue was “just a PR stunt”. The suit says Musk went after Unsworth’s reputation “by publishing false and heinous accusations of criminality against him to the public.”
The lawsuit provides a history of the rescue according to Unsworth. It paints him as a “highly respected caver” with four decades of experience, including a handful of rescues in the United Kingdom. And the suit also reportedly explains that Unsworth’s first visit to Thailand was in 2011, before exploring the caves for the first time in May 2012.
The suit says he spent six years going over the cave system and that he was “the first foreign rescuer” to arrive on the scene after calls for help. It also claims he was one of the last to leave, which directly contradicts Musk’s statement that he was banned from the site.
It states that he has never visited the area of Pattaya Beach, a destination in Thailand known for sex tourism. His lawyer stated:
“Musk falsely states that Mr.Unsworth had visited Pattaya Beach or lived in Thailand for 30 to 40 years and falsely stated that he lived in Chiang Rai with a 12-year-old bride. While the Cave System at issue contains a shelf and air pocket nicknamed ‘Pattaya Beach,’ which is near where the stranded Boys were located, Mr. Unsworth has never visited Pattaya Beach in Thailand.”
Unsworth’s British lawyer, Mark Stephens, told AP: “Twibels (Twitter libels) show that falsehoods by the rich and powerful can circulate round the globe to their 22.5 million followers and to the media before the truth can pull its boots on. The truth has now got its boots on and Elon Musk is being brought to account for repeatedly attacking and taunting the good name of an ordinary spelunker: Vernon Unsworth who answered the call and (with others) put his life on the line to help rescue the 13 trapped in the caves in Thailand.”
Previously, Musk had quadrupled down on his comments that Unsworth was indeed a pedophile based solely on the fact that Unsworth had not sued him yet. That argument is obviously off the table for Musk now.
We don’t know what goods this attorney has on Musk from this deposition, but we are hoping to all that is holy that, even in the case of a settlement (which we believe is likely), this deposition transcript and video eventually leak at some point.
And this could just be the start of a slew of depositions for Musk – PlainSite noted days ago that Tesla has now blown through 700 total lawsuits outstanding as of several days ago.
via ZeroHedge News https://ift.tt/2MDtW5G Tyler Durden
Last week, the United States Internal Revenue Service sent another round of letters to crypto traders called CP2000. These notices were sent to traders of some crypto exchanges due to inconsistencies found in their tax reports.
Using the information provided by third-party systems — such as crypto exchanges and payment systems — the IRS has been able to determine the amounts traders owe and included the amounts in dollars in the notices. Individuals who have received these notices are required to pay within 30 days, starting on the delivery date indicated in the letter.
If you think the exchange — on which you traded — provided your details to the bureau, you are probably right, but do not hold it against the exchanges. The regulation stipulates that all broker and barter exchange services are required by law to annually report trader activity on a 1099-B form, send it directly to the IRS and send a copy to the recipient.
In addition, transaction payment cards and third-party network transactions are also required to report on Form 1099-K, send it directly to the IRS and send a copy to the payee.
The IRS has not yet published specific guidelines for crypto exchanges. In fiat stocks, every broker must submit 1099-B to the IRS and send a copy to the trader. In crypto, the IRS still didn’t publish clarification whether exchanges should provide 1099-K or 1099-B.
Exchanges can benefit from the uncertain situation to provide 1099-K — like Coinbase Proand Gemini — but some do not provide any forms, such as Kraken and Bittrex. Meanwhile, the exchange must provide the users with the 1099-K copy by the end of every January, so they will be available to use it in their capital gains report. The users, at the same time, don’t submit the IRS their copy of 1099-K, as they only use this form to calculate and report on their capital gains or loss report.
Similarly, earlier this month, the United Kingdom’s tax, payments and customs authority, Her Majesty’s Revenue and Customs, has reportedly requested that digital currency exchanges provide it with information about traders’ names and transactions, aiming to identify cases of tax evasion.
In the U.S., data gathered from these exchanges is collected by the IRS and compared to every trader’s 1099-K report. If the reports do not match the data provided by the exchanges, the IRS will send the CP2000 notice to traders. The notice includes the amount every trader is expected to pay within 30 calendar days.
What’s more, the notice generally includes interest accrued, which is calculated from the due date of the return to 30 days from the date on the notice. This Interest continues to mount until the amount is paid in full, or the IRS agrees to an alternate amount. It means that interest began on the due date — on the day that you were supposed to report this for the first time. If you should, for example, have included this capital gains on your 2017 report, the interest will start on April 2018 — the last day you should have reported this gain. And it’s calculated until the reply date on the CP2000 notice.
Those who received the CP2000 letter have two options:
If the amount proposed is correct:
Complete the response form, sign it and mail it to the IRS along with the tax payment.
If the amount proposed is incorrect:
Complete the response form and return it to the IRS along with a signed statement outlining why you are in disagreement with the amount listed. It is important to include any supporting documentation to your claims.
It is highly recommended to provide a supporting calculation that is comprehensive and includes all wallet activities and transactions carried out on all exchanges in order to have a complete and accurate report as required by the IRS.
You do not need to file an amended return Form 1040X, but if you choose to do so, you should write “CP2000” on top of it.
It is important to understand that 1099-K reports for individuals trading crypto can be inaccurate in some cases, and does not include the cost basis, which is crucial for crypto trading calculations.
1099-K only asks for the gross amount of the activity. In crypto reports, you need to know how much it costs you (how much you paid when you bought it) and not only how much you got when you exchanged it. You pay capital gains tax on the profit between the buy amount to the exchange (to fiat or another crypto) amount.
The price you pay for it is called “cost basis.” Without it you will not have an accurate report on crypto. 1099-K forms don’t ask this information, only 1099-b forms do.
Therefore, crypto activity must be fully calculated and compared to the previous tax filing before replying to the IRS notice.
via ZeroHedge News https://ift.tt/2MCoLTB Tyler Durden
Britain’s Prince Andrew – who was reportedly seen getting a foot massage from two young Russian girls at Jeffrey Epstein’s New York townhouse – has denied seeing or suspecting any sex crimes while hanging with his pedophile friend, according to Reuters.
Prince Andrew with then 17-year-old accuser Virginia Roberts Giuffre, who claims Epstein pimped her out to wealthy friends.
Andrew, the second son of Queen Elizabeth, issued a weekend statement saying he wanted to “clarify the facts” about his relationship with Epstein – who was found dead in a Manhattan jail cell earlier this month.
“At no stage during the limited time I spent with him did I see, witness or suspect any behavior of the sort that subsequently led to his arrest and conviction,” said Andrew.
We assume this includes the Lolita Express flight Andrew took with the former Miss Russia, Anna Malova (according to court records).
We also assume he saw nothing in 2010, when he was pictured at the door of Epstein’s Manhattan pedo palace.
The Mail said the picture had been taken in 2010 – two years after Epstein pleaded guilty to a Florida state felony prostitution charge and registered as a sex offender.
U.S. court papers have previously shown that Epstein had socialized with Andrew and other high-profile figures including U.S. President Donald Trump and former president Bill Clinton.
Andrew, 59, said it was a “mistake and error” to see Epstein in 2010 after he pleaded guilty to paying a teenage girl for sex.
He said that he first met Epstein in 1999, saw him once or twice a year and stayed in a number of his properties.
“His suicide has left many unanswered questions and I acknowledge and sympathize with everyone who has been affected and wants some form of closure,” said Andrew, whose title is the Duke of York.
“What I thought I knew of him was evidently not the real person, given what we now know.” –Reuters
In short, Andrew says it was a mistake to hang out with the convicted pedophile, and saw nothing while hanging out with the now-dead sex-offender.
Maybe he also saw nothing during his guest appearance on infamous UK pedophile Jimmy Savile’s show “Jim’ll Fix It,” when an eight-year-old girl asked to visit a warship.
via ZeroHedge News https://ift.tt/2Zdks81 Tyler Durden
Welcome to our weekend roll up, where we highlight the most interesting, absurd, and concerning stories we are following this week.
Can’t sue cop for breaking domestic violence victim’s bones
It all started when a boyfriend playfully tried to push his girlfriend into the pool.
Most people would see that as harmless horsing around. But one lady saw domestic violence. So she called the police.
Police came and arrested the boyfriend. His girlfriend, the alleged victim, became quite irritated, as you could imagine. She insisted that he had done nothing wrong, and they were just fooling around.
Then she walked away from police as they were talking to her. So one officer saw fit to run up behind this 5-foot tall woman and body slam her to the ground. He took her down with such force that he broke her collarbone, and she lost consciousness.
Amazingly enough, the police then arrested HER and charged her with disturbing the peace.
I’m not joking. The lady who broke her collar bone due to excessive police force is the one who apparently disturbed the peace.
Naturally this became a lawsuit. But last week, a federal court ruled that the police officer cannot be sued.
He gets “qualified immunity”, because, while he was slamming this petite bikini-clad woman to the ground and crushing her bones, he was performing his official duties as an agent of the government. Therefore he cannot be held personally liable for his actions.
Conscientious objector to taxes wins another round
Michael Bowman hasn’t paid taxes since 1999.
And when the government came after him for tax evasion, the whole matter went to court.
In April 2018, though, courts dismissed tax evasion charges because Michael openly refused to pay the taxes. He wasn’t lying or engaging in fraud– he openly and conscientiously objected to paying.
As a conscientious objector, Michael opposes the fact that his tax dollars fund programs that go against his religious beliefs.
The court recognized this claim and dismissed the charge.
But Bowman was also charged with failure to file tax returns… which is another crime.
And that case has recently resulted in a mistrial; the hung jury could not come to an agreement on whether Bowman held a good faith belief that he was not breaking the law.
This is a victory for Michael… though the government could still decide to re-try the case.
Social media giants will ban anyone for “hate speech” these days.
That could be for anything as simple as expressing an unpopular opinion, or sharing a politically incorrect meme.
But when it comes to spreading Chinese propaganda, Twitter and Facebook are happy to oblige. For a price.
A Chinese state-owned media source, Xinhua News, has been buying ads on Twitter and Facebook, to show in Hong Kong and overseas.
The ads claim that most Hong Kong residents want the protests to end, and support the Chinese government. This, of course, is according to the Chinese government.
One advertisement stated that “All walks of life in Hong Kong called for a brake to be put on the blatant violence, and order to be restored.”
Another claimed Hong Kong citizens were calling China their motherland.
All were misinformation, aimed at countering the true scope and purpose of the Hong Kong protests against Chinese control over Hong Kong.
Only after public backlash, Twitter and Facebook removed a number of accounts placing the ads. Twitter said they will not accept advertising from state-controlled media.
Government gave her son a sex change without her consent
At age 17, the government considers you so irresponsible that you cannot buy cigarettes, drink alcohol, or consent to marriage.
Even if you want to join the military at 17, you still need a parent’s permission.
But a county in Minnesota decided a 17-year-old was capable of making the life altering, irreversible decision to get a sex change.
The school district, county, and state agencies, without any legal process, decided the minor was emancipated from his mom. That means he is in charge of his own legal decisions.
This usually requires a court order. But in this case, school and medical officials decided this on their own. They didn’t even inform his mother before giving him drugs and elective medical treatments.
So far, this mom has lost every suit she has filed. Courts say her parental rights were not substantially abridged.
Now she’s asking the Supreme Court to take up the case.
India’s $42 billion shadow-banking system has been cracking since the country’s largest infrastructure lenders halted debt repayments in 2018.
Confidence in these banks has since tumbled, with the latest fears resurfacing in June when a primary mortgage lender delayed bond interest payments, indicting credit markets are freezing across the country.
The situation has led to a rapid rise in borrowing costs, forcing non-bank financial companies (NBFC) to tighten lending practices. This has stressed out Indian consumers, who are desperate for loans, now willing to pledge and or even sell their gold for lines of credit.
Reuters interviewed Indian farmer Babasaheb Mandlik, who was refused a farm loan from a major state-run lender; he was forced to pawn his wife’s gold jewelry as collateral so that he could use the funds to manage his 8-acre cotton farm in western India.
“Pawning the jewelry was a difficult decision as my wife likes to wear it at festivals and weddings,” 50-year-old Mandlik told Reuters.
“I convinced her that we didn’t have any other option.”
Mandlik isn’t the only one. Pawning or selling gold for bank loans has been an increasing trend amid a severe credit crunch and an economic slowdown that began last summer.
Several lenders told Reuters that demand for loans collateralized by gold is unprecedented at the moment, it’s the only way banks in some parts of the country will give out money to people.
The credit crunch, which has prompted some lenders to impose restrictions as risks and borrowing costs rise, has been accelerated by record gold prices.
Domestic gold prices have jumped by 25% this calendar year, hitting a record high of 38,765 rupees ($543) per 10 grams earlier this month.
“As a lot of NBFCs have become cautious of giving unsecured or even secured loans, we are seeing more customers opting for gold loans instead,” said Sumit Bali, chief executive officer of IIFL Finance.
“One can obtain a gold loan and walk out of the branch in just thirty minutes.”
IIFL’s gold loan portfolio stood at 65.83 billion rupees ($922 million) at the end 2Q19, up 46% YoY.
Most of the pawning or selling gold for loans are from farmers and small business owners.
Muthoot Finance, a top shadow bank in the country, said its gold loans rose 6.6% between April 1 and July 24 this year to 358 billion rupees ($5,006,117,702).
“Pledging gold is becoming more lucrative with rising prices. We have seen healthy demand for gold loans in the last few months,” said George Muthoot, director at Muthoot Fincorp, which has 2.98 million customers.
Ashutosh Khajuria, the chief financial officer of Federal Bank Ltd., a private lender located in South India, said it’s gold loan portfolio jumped to record levels of around 80 billion rupees ($1,118,685,520.00) and is expected to expand as the Indian credit crisis and economic slowdown gains momentum into 2020.
via ZeroHedge News https://ift.tt/2Nv7Xxt Tyler Durden
No-Bond World And The Risk Of A Daily Liquidity Crisis
Rates hit new lows this month. Symbolically, the 50-year swap rate in Europe dived into negative territory. Bonds as an asset class are in extinction, a major shift in modern finance as we know it, inadvertently turning ‘balanced portfolios’ into ‘long-equity portfolios’. The ‘nocebo effect’ of enduring negative interest rates is such that negative rates are deflationary, hence self-defeating. Meanwhile, they have potent unintended consequences for systemic risk, which spreads around, leading the market into an historical trap. A ‘Daily Liquidity Crisis’ may result. All the while as markets get off the sugar rush of Trump rate cuts, and Europe has his banking sector at risk of implosion.
History Being Made
It must be a great thing to witness history being made during the span of your career, to find yourself in a market where so much happens for the first time in the history of finance, and close to everything else is at an extreme over the past decade. Nothing much is left around us which is trading regularly, or around historical averages.
In no particular order: the whole of the US interest rate curve dropped below 2% in mid-August, for the first time in history. The whole of the German interest rate curve dropped below zero. The Swiss, Swedish, Japanese curves are also negative for their entirety or whereabouts. The 10yr Swiss government bond yields a mind-blowing -1.2%, a sure bet to make no less than 12% in capital losses by maturity. Peripheral Europe joined in: the 10yr Portugal government bond is close to 0% yield now, about to dive in negative land too.
Across Europe, the EUR 50yr swap rate dipped below zero for the first time ever this month.
Approx 20 junk bonds in Europe trade today at negative yields, including Altice, Nokia, Arena.
Mortgage bonds are trading negative in Denmark (10yr maturities) and Germany (5yr maturities). For the first time ever, the third largest bank in Denmark offered mortgages at -0.5%. For the first time in its history, UBS will charge the super-rich for cash deposits. For the first time in humankind, a supposedly dull invested in a AA-rated Government bond returned 80% in 8 months in price appreciation, 100% in ca. 2 years: the Austria 100yr 2.1% coupon bond, now yielding a generous +0.70%, for a prime government bond that raced faster than a penny stock at the IPO. And then, of course, for the first time in history, over ca. $16.4 trillions worth of bonds globally are trading at negative yields, approx. a third of all govies globally. We thought we had seen the bottom in yields in 2016, having recorded the lowest yields in 5,000 years, only for the record to be broken again in 2019!
In equity-land too, outliers abound. Argentina’s MerVal Index dropped 37.9% in one day on August 13th, the largest daily collapse on record, a 15-sigma event, the odds of which are truly infinitesimal; meanwhile, their bonds recorded a 4-sigma event. European banks made new historical lows, exceeding the post-Lehman mayhem; and even flirting with the lows of the mid-80s, some 35 years ago. With less than Eur 20bn, today you can buy the two largest German banks, Deutsche Bank and Commerzbank. The total market cap of the 26 largest banks in Europe is below Facebook’s. And is set to continue shrinking, as rates move lower across maturities.
In currency-land, absent dramatic action from the FED, the US Dollar seems about to break decade-long resistance lines against the world, both developed and developing. The Asian Dollar Index (ADXY) for example, measuring Dollar strength against select Asian currencies, is flirting with a long-running support, and threatens to break with vengeance. Its main constituent (for 41.2%) is the Chinese Renminbi, that crossed 7 against the Dollar for the first time in a decade, as trade tensions flare up and is used as a negotiation tool.
For the future, breaking Guinness records feeds onto more record breakings. As investors in the Austria long-bond doubled up capital in 2 years (that is, before leverage), and investors in 10yr Bund are up 12% year-to-date (before leverage), you may expect the fast gains to attract new speculative demand, and rates to go even lower. If 10yr Swiss is already at negative 1.20% yield, why shouldn’t Bunds be there? With PMI in Germany showcasing an astonishing free fall back to 2012 EU-crisis levels, a handy narrative is there to justify that that’s where they belong, in deep antimatter territory. New lows are baked in the cake.
Negative Rates Are No Natural Law
Deeply negative interest rates are the biggest elephant in the room, evidently. But instead of raising eyebrows and make heads explode, they now seem broadly accepted by market participants and policymakers, having become a sort of natural law in modern-day finance. Forgetting that rates are already negative, the ECB contemplates new cuts; the IMF agrees. By habituation, we got so used to them that they became part of the furniture, boring and dismissed as a sort of déjà vu’. They must be accepted by the world of finance as a fact of life, and all better adapt to them at the margin.
In contrast, lasting negative rates should be seen for what they are, the magic and poisonous blood-red wishing apple, sending Snow White into deep sleep. Markets become ‘Fake Markets’, where valuations are nobody’s problem, and the structure of the market itself morphs in response, to become undiversified, passive, price- and risk-insensitive, abnormally sluggish, half asleep. In induced lethargy.
As investors’ minds hibernate, the market discourse dropped to new lows alongside interest rates, and is nowadays incessantly obsessing on secondary-order elements: the shape of the curve, trade tensions, the independence of the FED, indications from sector rotations, the VIX. For instance, the curve. The US curve has turned negative this month, for the first time in a decade, which has historically correlated well to upcoming recession and steep market declines. Yet, rates have never been this negative before globally, so how can the comparison be equally informative today? If rates are negative, for long enough, all around the globe, shouldn’t curves get flat or negative, eventually, naturally? As we long argued in previous write-ups, negative rates are deflationary and work as a magnet. Rates have been negative despite fluctuations in inflation and growth rates over several years now, which signalled to market participants that price discovery is impaired and perhaps bonds as a financial instrument are dying. It is hard to overstate the historical juncture we are at.
Nowadays, victims of a magic spell, most market participants think it is OK for a bond to yield negatively. In behavioural finance, the spell can be broken down in the ‘ostrich effect’ and the ‘anchor bias’: the mental hack that allows us to ignore the bigger picture and focus on a single element that worked well for us in the recent past, thus sticking the head in the sand to protect against warning signals.
However, there is a simple difference between a coupon-bearing bond and a negative-yielding bond. The difference is that one is a bond, while the other one is not. It is something not seen before in financial history, at this order of magnitude and duration at least, something that needs a new name but surely is no longer a bond. Perhaps, an anti-bond, or a fake-bond, or fake-cash; but surely not a bond. Traditionally, a bond instrument differentiates from an equity instrument in having a capped upside, a recurrent income called the yield, stability and security over cash flows. Negative yielding assets (or shall we say liabilities) have a sure downside, as they guarantee a loss of capital, except it is not capped as it could always be larger upon a credit event.
Much of the literacy and the modelling in finance, over history, assumes rates to be floored at zero. None of the founding fathers of economics and finance had to deal with this shape and form of ‘market economy’. It follows that we cannot reach out easily and comfortably to the work of Keynes, Smith, Cantillon, Galbraith, Friedman, nor to the pricing tools of Cox, Ingersoll, Ross, Black, Scholes, Hull, etc.. for guidance. What’s the value in modelling the term structure of interest rates today? Similarly, portfolio management tools like Capital Asset Pricing Model (CAPM), Modern Portfolio Theory (MPT), Value At Risk (VAR), Risk Parity are all ill-equipped to handle a world of lasting negative interest rates.
That leaves us, nowadays, in the middle of the ocean during a storm with no compass to help navigation.
Not even the visionary economist and monetary reformer John Law, founder of the first Central Bank in France in 1716, could ever have imagined the alchemy of finance of negative rates. A bold gambler by background, he saved the country from bankruptcy by introducing ‘paper money’ and banknotes. Well before Keynes and modern economics, he believed that the intrepid expansion of unbacked printed money in circulation could spearhead the economy back into life and create the inflation needed to pay offs debt. Yet, he too worked under the constraint that savers had to be paid something to lend to bankrupt borrowers. Today’s central bankers are bolder risk takers than their godfather John Law, it seems, willing to take more chances than the revolutionary gambler. For the records, John Law’s monetary experiment peaked in the historical Mississippi Bubble.
In such unchartered territory as the one we live within, where financial laws are lab tested on a grand scale and the traditional economics of saving and borrowing are flipped on their heads, the belief that the shape of the curve of interest rates, or the gold/Treasury ratio, or credit/equity correlations, or generic trend-lines, or the VIX/VXX, or Hindenburg Omen .. will help us assess the probability of what’s to come probably sits in between wishful thinking and a fairy tale. New tools are needed, to understand the secular, critical transition we are in. In our efforts over recent years, we devoted our attention to Complexity Theory, to try and add some value to the discourse. To a bare minimum, such theory bothers about non-linear connections, runaway effects, positive feedback loops, far-from-equilibrium dynamics, all so visible in today’s environment. It may well be a wrong or insufficient venture, but surely the interest rate curve is less informative. You can’t fight modern warfare with arrows and catapults.
Happy Ending
By the way, if negative rates are indeed the red apple of the fairy tale of Snow White, we should all fasten seat belts. In the original story by the Grimm brothers, differently than in the Disney movie and others, Snow White was not cured by being kissed; the Prince was amazed at her beauty and had her carried in the glass coffin to his castle; while on route to his kingdom, she was knocked, the coffin shook open and Snow White vomited up the apple. So, it was not a romantic kiss of love to save her, as most believe, but rather a road accident. It was a good crash, that awakened our heroine. Informative.
Bonds: To Be Or Not To Be
No-Bond world. Bonds as an asset class are in an existential crisis. But, if bonds are not bonds, it also means that a lot of ‘balanced portfolios’ out there – incidentally representing the bulk of asset allocation globally – are no longer ‘balanced portfolios’, but rather ‘long-only equity portfolios’, with some ‘cash’ to the side. Except the ‘cash’ is fake-cash, insofar as it can lose money too, and is likely to do so at some point down the road upon resurgence of inflation, default risk or confidence crisis. This is one big unintended consequence of negative rates for global asset allocation and the institutionalized Asset Management industry as we know it. Reluctantly when not unawarely, a lot of institutional investors the world over, mandated with low volatility safe allocation targets and typically expressing it through mostly fixed-income portfolios, find themselves instead to be ‘long only equity’ managers, de facto.
To an extreme, if bonds are retiring as an asset class, we are looking at a totally different market economy than the one we have been accustomed to, a new monetary paradigm, a major historical shift. Which then, again, also means that discussing the shape of the curve, or the FED, or trade wars is petty talking. A bit like having the Incredible Hulk entering the room and joining the meeting, and spending all the time discussing his hair style.
Deep and persisting negative rates are not a surprise after all. In our 2016 piece titled ‘‘The Market Economy in 2020: a visualization exercise. The Emergence of a New Monetary Orthodoxy’’ (link), we discussed how the market may have looked like this time next year, and negative rates ranked top of the list, in recognition of the historical transition we are witnessing in years such as these.
Still, to think that they do not have negative systemic consequences is a costly miscalculation. We think they do, and no need to wait because the process is already unfolding. The longer it goes the more brutal the pull-back, and the more Biblical-type the day of acknowledgement will be.
Source: Fasanara Capital | SCENARIOS, 7th June 2016
The Market Economy in 2020: a visualization exercise. The Emergence of a New Monetary Orthodoxy (link)
‘’It is not the first time in history that we go through an existential crisis of global capitalism. In the 20’s, structural deflation led to Keynes revolution in economics. In the 70’s, chronic inflation led to Milton Friedman counter-revolution, and governments like Thatcher or Reagan. Market-based economies survived both. Today, a new form of global capitalism might have to be worked out, after we decipher how we could still be entangled in deflation despite what we learned from past experiences. We thought we knew it all and we do not. The disruption from technology, working wonders at accelerating returns, is happening so fast that it is tough to come to terms with it and fully grasp its many implications. For what is worth, also the industrial revolution took years to equate to growing productivity and wealth, while it went through its implementation phase. Industrial and aggregate productivity growth slowed down markedly in the years 1890 to 1913, as we moved towards the second industrial revolution (‘electric dynamos were to be seen everywhere but in the productivity statistics’: the modern productivity paradox, the case of the dynamo. Also interesting in this respect the ‘regime transition thesis’ of Freeman/Perez).’’ .. ‘’A new evolutionary phase of combining QE, deficit spending, and ‘helicopter money’ – the nuclear fusion of monetary and fiscal policies – might well be the next stop for policymakers, as they move from price setting to direct resource allocation, in certain markets more than others, in certain places sooner than in others, but the road to that next stage is certain to be bumpy. Policy mistakes and market accidents are legitimate along the way.’’
The Ugly Face Of Enduring Negative Rates: System Stability
The centrally-induced gravitational forces of endless negative yields across vast swathes of the bond universe are winning over market forces. The transformation of the market economy is progressing and central planners are winning, eating out market pricing mechanisms all across.
But there is a flip side, and frightful unintended consequences.
First, the ‘nocebo effect’ of negative interest rates. In medicine, the nocebo effect is opposite to a ‘placebo effect’, insomuch that it depicts the phenomenon in which inert substances or mere suggestions of substances actually bring about negative effects in a patient. As a market participant, if I know that lending does not yield much, but may entail untraditional levels of risks, I do not lend. I wait and see what happens first. As a borrower, if I feel the economy is so desperate as to be in need of endless non-sensical negative rates, I do not borrow. What are the prospects in an economy in need of dramatic measures. Having flipped completely upside down the lending and borrowing scheme, by messing around with the price of money, creates a market economy that leaves economic agents wandering and waiting on the side-lines. They go to sleep, like Snow White after biting the red apple.
In that, enduring negative rates are deflationary. Thus, in a vicious cycle, defeating the purpose for which they are introduced.
But it is not only a phenomenon of inert substances influencing agents in the economy. It gets quite mechanical. First, as a Central Banker, if I see my fellow bankers indulging in negative rates I may be compelled to follow suit, to not lose in competitive devaluations and currency wars. This is especially the case at those times when geopolitical risks are on the rise.
Then, the involuntary effect on the market structure. The Negative Interest Rate Policy, when combined with Quantitative Easing, has all sorts of amplifying feedback loops with the private investment community. It created today’s undiversified modern financial markets: a homogeneous, over-concentrated, systemically unstable investment community. A number of investment strategies that are diverse only in the labelling/marketing, but do the same job. Two factors explain it all: long Beta/ Carry (or what’s left of Carry at zero rates) and short Volatility. It can be called Risk Parity, Risk Premia, trend-chasing momentum or CTA, low vol ETF or long-short Equity, but is indeed limited to the jolt of those two factors for the most part. This follows logic. If those two factors are all that works, those two factors must disseminate across, percolating down the veins of the financial system like an addictive drug. And so it happened that on repeated use, after use, after use.
The first serious bear market may prove it, and expose the un-diversification of the market community for what it is. Until then, in the absence of feedback mechanisms to realign exposure, the problem cannot but compound further. The longer it compounds for, the more violent the adjustment down the road: a law of mathematics that negative rates cannot replace.
Additionally, zero and negative rates have accelerated the rise of passive strategies and ETFs. As an equity investor, looking at an environment of negative rates globally and knowing something is wrong, I should step to the side, prudently. This should curb equity excesses, and meanwhile keep the S&P below 2000. But such informed investor is no longer there: it is a renowned fact that between 70% and 90% flows daily (depending on the source being BAML, MS or Vanguard) on the S&P are passive. Passive vehicles have no need to overanalyse assets before buying. The long list of pricing anomalies across ETFs proves it rather conclusively.
Meanwhile in the real economy, again mechanically, if insanity prevails and as a junk borrower I can raise cash at negative rates, of course I will, to leverage up and buy back my stock, thus boosting the equity price to unnatural levels. Today’s, Nokia, Altice and many others can decide to do so, in simple math. Soon enough, we are likely to see attempts at raising ultra long-dated junk bonds for a bunch of basis points in annual coupons in return: a bulky yield pick up.
Because of mechanical effects and nocebo effects, the original sin of negative rates and heavy market manipulation led to the ‘fake markets’ we line in today, insensitive to fundamentals, dominated by passive vehicles, fraught with systemic risk.
Systemic Risks: The Upcoming ‘Daily Liquidity Crisis’
Equities, especially US equities but also European, are in a state of illusory stability, while clouds gathers at the horizon in the months ahead.Underpinning equity strength are 16.4trn of negative yielding non-bonds. Markets today are propped up by the wrong expectations of further stimulus and a peaceful resolution to the trade spat. Both are likely going to be proven ill assumptions, ultimately. Meanwhile, liquidity in the market is ephemeral across bonds and equities and ready to evaporate: a liquidity crisis lurks ahead.
Systemic risk incubated in the structure of the market over recent years.
In heavily-manipulated markets such as these, three key factors emerged and are dangerously interacting today:
Daily liquidity vehicles, be it ETFs or several other formats in major economies, have never been as dominant as they are today.
supposedly-active-but-turned-passive.
Passive auto-pilot vehicles, either in the form of fully-quant funds, systematic, quantamental, CTA or supposedly-active-but-turned have never been as large a share of the total as they are today.
Fickle retail investors never had as easy a direct access to markets as they have today through ETFs of the most disparate natures, often overselling liquidity (way above that of their underlyings) and diversification (often a fraction of what is portrayed).
Unlocked hot money, retail driven, passively managed: the daily liquidity risk is highly underestimated today. With it, the so-called ‘gap risk’, especially overnight gap risk. Which bring us to the real danger in markets these days being the market itself, which may implode under its own weight at a moment’s notice.
Liquidity, defined as the ability to get out of positions at times of market stress, is nowadays overestimated by the proliferation of passive vehicles and daily liquidity vehicles. Now more than at any point in the past decade, investors have the ability to fire-sell positions on any given day for full amounts. If a large-enough shock event takes place, the market system may find it hard to absorb selling flows, therefore leading to a snowball effect of more selling flows and large downside gap risks.
The risk of a $2trn daily margin call or redemption event in markets is no longer a theoretical exercise, it is indeed nowadays workable assumption.When the top three US asset managers alone command a staggering $14trn of AuM, for the most part retail/daily/passive, the issue should be on every market regulator/participant table, and is not. Against that, there is no FED, ECB nor BoJ put together. A massive move overnight is then made entirely possible, by undiversified retail passive daily money.
Our blueprint for the next crisis is not 1987, 2000 nor 2008. But rather the ‘Quant Quake’ of August 2007. Also referred to as the ‘August factor’. At that time, renowned quant funds, including the famed Goldman Sachs QIS fund, lost 30% in short order: without any apparent reason – which itself tells a lot about market brittleness. Except this time around it may be 10-fold worse, insofar as it would not be isolated to quant funds but rather sprawling across fast through the undiversified passive expensive financial network.
Trash Ratios Have Never Been Trashier
Daily liquidity, passively-managed and retail-driven. Liquidity gaps have enough to work with. But this is not all. The daily liquidity is an obsession for investors in Europe, representing the vast majority of investment strategies in the continent these days. In a zero-yield world, managers have wanted to include in their portfolios as much illiquidity premium as possible, by investing into near-unsellable securities up to the statutory limits of their funds. For UCITS funds, the common vehicles for daily liquidity in Europe, that limit was the 10% Trash Ratio. The recent cases of Woodford, H2O, GAM – where illiquid pockets were found in supposedly liquid portfolios and caught the market by surprise – depict a trend which is widespread across the industry, and measures the desperation for performance (and survival) of asset managers after 10 years of yield repression.
This can be expected. It is a logical consequence of the persisting zero-yield environment.
Mark Carney, Governor at the Bank of England, referred to the issue of liquidity mismatches as follows: “This is a big deal. You can see something that could be systemic. These funds are built on a lie, which is that you can have daily liquidity for assets that fundamentally aren’t liquid. And that leads to an expectation of individuals that it’s not that different to having money in a bank,”.
Trash ratios are not alone in housing illiquidity risks across UCITS funds. Other sources of illiquidity include:
Overlay derivatives, where managers sell volatility to enhance performance and revive carry, on both Equity (sell puts or calls to take in premium upfront, reverse convertibles / autocallables), Credit (sell swaptions on rates, sell credit spread options, sell CDS or other unfunded instruments), Currency, or combinations (exotic options)
Those ETFs – and other daily liquidity vehicles – where liquidity and diversification are overstated, at the source: theoretically sellable on a daily basis but, in reality, liquidity will evaporate when is most needed on steep market downturns – illusory liquidity
Back To Square One, After Trump Sugar Rush Digression
When was the last time that we had rates moving to negative territory en mass, the US Dollar was feared to appreciate wildly, the Renminbi to break into new lows and create havoc, PMIs tumbling? At the end of 2015.
In between now and then, stands globally-coordinated monetary intervention and then, in late 2016, the preparatory work that would lead to the ‘’Trump fiscal sugar rush’’ of massive tax cuts.
If monetary intervention worked wonders at the time, we can expect a lower marginal effectiveness today, as most ammo have been spent, and global Central Bank coordination itself is more arduous today on account of trade tensions and political interference.
If the market is a bubble now, it was a bubble a year or two ago too, one which got blown some more by monetary and fiscal steroids. The can was kicked down the road at great cost.
The Next Jolt in Europe: Banks
Abstracting from a changing market structure and secular trends, and going back to traditional market analysis for a moment, the most imminent issue the market will have to deal with in H2 2019 seems to be in Europe, even before trade wars.
Europe is going through a rough patch, and this is no news. As we argued most recently in January, European Parliament Elections were a criticalevent, well-beyond an over-hyped Brexit topic. The event did not turn out for the best, as populist parties advanced further, inarguably, and a lack of vision for the long-term was still evident. Meanwhile, the political environment in Italy complicated further, with the government disaggregating and new elections in sight. With deep and enduring negative rates, European banks are in a dire situation to say the least. Recent new multi-decade lows of the banking sector are inevitably the variable to watch from here. The ECB will try to buy more time with new monetary stimulus, and Germany will introduce some form of fiscal stimulus (finally). We will need to see the actual policies that will be introduced, before assessing. In general, though, despite such temporary measures in extra time, structural issues do persist, and market forces may at some point prevail. The monetary intervention is marginally ineffective, whatever the size, and fraught with more collateral damage on the banking sector itself. A yield curve control measure is likely to be introduced, to peg long-end yields from imploding further (Germany) or rise uncontrollably (Italy). Incidentally, a stronger Dollar in the process, on a weaker EUR, cannot help risk assets globally either, at a time when the Dollar is strong and threatens to break long-range trend-lines against most of the world currencies.
New Problems New Tools
The reason for our disaffection with traditional market analysis is that it seems impotent to help navigate the historical tectonic shifts we have in front of us.
At a time when traditional market analysis is less helpful than usual to assess the probability and vicinity of a major adjustment from bubble conditions for financial markets, and isolate the critical threshold beyond which events gather momentum and speed, the science of Complexity can instead help shed some light. Differently than in finance, it is often used in other complex dynamic systems, sush as ecosystems, societies, climate, oceans, brain, human immune system etc to help analyse the dynamics of criticality close to tipping points.
A number of factors seem to suggest that we are approaching the tipping point in markets. The early warning signals that we analysed in previous write-ups are enumerated in the Table below.
While inconclusive, such tools help describe system degradation in recent years and today concur in framing systemic risk at high alert status, current market conditions as profoundly fragile, and in proximity to a major shift, a system-wide critical transition.
Source: FASANARA CAPITAL | PRESENTATION, 11th May 2018
Presentation and Video Recording, on Markets as Complex Dynamic Systems and a conceptual framework for rethinking Systemic Risk as a Complexity Problem, in 3 steps: Tipping Point Analysis, Early Warning Signals Analysis, Butterflies Analysis. link.
‘’So then, let us not be like others, who are asleep, but let us be awake and sober.’’
First Thessalonians 5:6
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With this weekend’s G-7 Summit in Biarritz winding down UK Prime Minister Boris Johnson confirmed something that has been bandied about in the British press for weeks, if not months:He warned that, if no deal on the withdrawal agreement is struck, the UK would refuse to pay the £39 billion ($47.9 billion) divorce settlement that it’s treaty bound to pay.
According to the FT, ahead of a meeting at the G7 summit in Biarritz with European Council President Donald Tusk, the prime minister said that while the chances of a revised Brexit withdrawal agreement being finalized were “improving,” the process remained “touch and go.”
Reuters reports that Johnson is planning to pitch Tusk on the possibility that the UK pay up only a small fraction of the money – some £10 billion – if the UK leaves without a deal.
Though a senior French official insisted earlier this week that Johnson’s government would be obligated to make the severance payment regardless of whether a deal was struck, Johnson said the UK would not be obliged to hand over a significant chunk of the divorce bill, something that had been agreed upon by his predecessor, Theresa May.
As Johnson sees it, the severance payment is one of the most potent tools that the UK PM has to coerce the bloc into reconsidering the hated Irish backstop, something that Macron and German Chancellor Angela Merkel have both spoken out against (though Merkel has sounded more accepting of working out an alternative solution).
Johnson has promised the people of the UK that the money could be put to much better use on “other priorities” like the NHS, farmers and “other priorities that are important to our people.”
Though Johnson was careful to manage expectations, saying that the EU was still firmly insistent on keeping the Irish backstop, he told Sky News there was still an opportunity to strike a deal, given the “change in mood” among EU leaders.
“I think what the entire European Union understands is that if we come out without a deal then…the 39 billion is no longer legally pledged,” Johnson told Sky News, when asked if he had told EU leaders this week he planned to withhold the money.
“As I’ve said many, many times we will therefore on November 1 have very substantial sums available from that 39 billion to spend on supporting our farmers…and indeed for investment in all sorts of areas.”
Most of the £39 billion stems from EU budget commitments that the UK had made, but not yet fulfilled, including contributions to EU staff pensions. the EU insists that the UK is still obligated to make the payments. Johnson, unlike his predecessor, has said that the money could be used like a bargaining chip in the negotiations over the backstop.
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Federal Reserve holdings of Treasury’s has risen for the first time since QE ended in 2014.
Quantitative Tightening is over, but is outright QE back???
Ongoing “direct monetization” continues, with un-matched declines in Excess Reserves versus Fed held Treasury’s and MBS.
Interesting that this week, for the first time since QE ended way back in late 2014, Federal Reserve holdings of Treasury bonds rose (yellow columns, below). The $8 billion increase is the first seen since QE ended almost 5 years ago and comes after QT (quantitative tightening) had been decelerating since mid 2019. However, the outright increase in Treasury holdings is still a bit of shocker. Can’t say if this was a one off… but this deserves a bit more attention.
So what exactly was the Fed buying? Seven to ten year Treasury’s! The chart below shows the Fed’s mid duration holdings (red line) and the weekly change in those holdings (blue columns). The purchasing this week was only bested by a single week in 2011…when the Fed was feverishly running its QE program?!?
After a long period of selling/rolling off mid duration Treasury’s (red line below), late 2018 and early 2019 saw an end to the selling…and now a sudden burst of Federal Reserve purchasing coinciding with a sharp decline in the 10 year yield (shaded blue area).
As for the shorter durations, the two charts below show the Fed’s holdings of Treasury’s under 1 year, and the 1 to 5 year holdings. No need to guess what the Fed is actively rolling off/selling.
And the unchanging (nearly zero roll-off since 2016) Fed holdings of over 10 year Treasury debt.
And the Feds long duration holdings versus the 30 year Treasury yield. The current move down in the long yield is exactly what was seen, in anticipation prior to QE1, QE2, and QE3. Hmmm.
Charted below are the Fed Treasury holdings, by duration, since 2003 and the impact on the 10 year minus 2 year spread (shaded grey area). The real question isn’t is QT ending, but is QE 4 actually already starting? Purple line are Fed held T-bills, red line 1 to 5 year duration, yellow line mid duration, and blue line is everything over 10 year duration. The fact the Fed has allowed nothing to roll off from the longest duration holdings sure is interesting.
Below, ongoing declines in bank excess reserves versus far smaller declines in Fed held Treasury’s and Mortgage Backed Securities. Some call this $700 billion and growing disparity “direct monetization”, something the Fed said it would never do?!?
And now that QT appears to be over, will bank excess reserves continue falling providing an unofficial QE (with banks leveraging up the direct monetizaton) alongside a potential restart of the Fed’s QE?
Why is this happening? In short, organic potential for growth has been decelerating for half a century but central banks and federal governments are unwilling (unable?) to accept what growth the economy can provide.
They are instead artificially and synthetically pushing up economic growth and financial asset valuations. But every action has a reaction, and like Mother Nature, the more one messes with the economy, the greater the distortions become. Detailing the decelerating potential for organic growth, globally HERE and domestically HERE.
Why this is the end of the positive interest rate cycle…HERE
And why China is facing an existential crisis and has no possible means to compromise on a trade deal…HERE.
EXTRA CREDIT – For those curious what the correlation of Federal Reserve Treasury buying to equity valuations has been…chart below is Fed Treasury holdings versus the Wilshire 5000 (representing all publicly traded US equities). When the Fed buys, stocks go up…when the Fed holds or sells, stocks struggle (except for 2017, but that’s another story).
Invest accordingly.
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Though he had been due in Asia for a scheduled tour to bolster support for relief from US sanctions, Iranian Foreign Minister Javad Zarif’s plane made a surprise landing in Biarritz on Sunday, where the Group of Seven (G7) summit is in session.
Amid speculation over the plane’s unscheduled return to France, Iran’s foreign ministry has now confirmed FM Zarif has arrived in Biarritz for talks at the French foreign ministry’s invitation. However, “There won’t be any meeting or talks with the American delegation,” the statement said.
The Iranian delegation plans to hold meetings on the sideline of the G7 summit, western diplomatic sources have also said. French President Emmanuel Macron will reportedly be involved in the sideline meetings, after he told reporters at the summit he plans to continue holding talks with Tehran in the coming weeks over Iran’s nuclear program. Reports suggest Macron could press Trump for a resumption of the Iran oil waiver program.
Image source: Reuters
He and Zarif discussed moving forward just days ago in Paris. It also must be remembered that Zarif is currently under US Treasury department sanctions, and further it was recently revealed that last month Zarif had rebuffed a secret invitation to meet with President Trump in the oval office, which involved the mediation of Rand Paul.
Currently, there’s speculation over the possibility of Zarif or Iranian intermediaries engaging with US officials or even Trump himself on the sidelines of the summit. On Sunday Trump was asked about these rumors point blank, to which he responded, “no comment”.
Meanwhile, Zarif’s unexpected presence could be part of a French initiative to press Washington for the resumption of the oil waiver program, which had allowed up to eight countries to continue importing Iranian crude on a conditional basis.
French floating an initiative here at #G7Summit to resume waivers on some Iranian oil sales in return for Iran getting back in JCPOA, giving space for talks on missiles and the region. Devil in the details. They might get it past Trump, but what about Bolton, Khamenei and IRCG?
Macron said on Sunday just as Zarif’s plane touched down that G7 leaders “had a discussion yesterday on Iran and that enabled us to establish two common lines: no member of the G7 wants Iran to get a nuclear bomb and all the members of the G7 are deeply attached to stability and peace in the region,” he said.
As regional tensions again begin to soar over Israel’s renewed spate of attacks on Syria, and now it appears unprecedented attacks on Iraq and now Lebanon, will France and Iran make a last minute effort to press Washington toward stabilizing the situation and find common ground?
developing…
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