Tag: finance

Submitted by Michael Every of Rabobank

Yesterday afternoon I was listening online to a UK radio host complaining about US President Donald Trump’s claim there were no protestors against him on his recent state visit. The view was that such deliberate misstatements are designed to blur the line between truth and reality, dragging us all down the path to the permanent victory of Fake News. That happened on the same day as Aussie police raided the publicly-owned Australian Broadcast Corporation with a warrant allowing them to not just seize, but alter, documents on national security concerns; and another raid was made on the home of a journalist over a report detailing how the authorities are aiming to win powers to spy on citizens’ communications.

We live in strange times…but what I wanted to shout back at the screen was that we have been on this journey for a long time. As Orwell stated, “He who controls the past controls the present” – and we are misrepresenting that past. Were we really living in halcyon days of truth, justice, and honesty before November 2016?

Does anyone recall the Obama administration aggressively going after leakers, whistle blowers, and journalists? Or the Bush II administration and its infamous Willie Horton election ad, its sneering condescension towards “the reality-based community”, its ruinous war in Iraq based on zero evidence, and its legal arguments for a “Unitary Executive”, a continuation of the Nixonian argument that “If the president does it, that means its legal”? How about ‘Debate Gate’, or ‘Savings & Loan’, or ‘Iran-Contra’ under Reagan, the latter only capped when Bush II pardoned Caspar Weinberger before his trial began? Yes, it was all sunshine and flower pre-2016.

Yet this isn’t a US issue by any means. Does nobody recall the Brexit debate saw outrageous claims from both sides? A few weeks before the vote I recall turning on the BBC six o’clock news and seeing B&W footage of a WW2 German Stukka dive-bomber and the main headline that voting for Brexit meant a risk of war. Nobody seems to be in court for that as opposed to stating the gross weekly figure transferred by the UK to the EU rather than the net number.

Nor is this a Western matter: anyone remember Chinese President Xi Jinping speaking at Davos and getting a standing ovation for his passionate defence of free trade and multilateralism even as he presides over an aggressively mercantilist state that refuses to accept the international law of the sea? Or how about India’s recent military spat with Pakistan, and how many planes and terrorists were or weren’t shot down or bombed?

Nor is this just about politics – which is why it matters to the Daily. I lose track of how many times I have heard central bankers, key economists, and management consultants spread blatantly Fake News that misrepresents facts, data, and history. How about the meme that we have to beware government spending because it might cause hyperinflation and lead to Nazism? Any historian can tell you it was DEFLATION under austerity-Chancellor Brüning that lead to the rise of Hitler. How about the myth that low rates and QE lead to business investment and rising wages when any heterodox economist can point out that as far back as 1943 they were predicted to just lead to asset bubbles and the rich getting richer? How about telling us that markets can efficiently regulate themselves, when anyone could see that they couldn’t? Or that “subprime was contained”? Or how about the slew of Fed speakers now pointing to future rate cuts ahead when they couldn’t see any of the same underlying arguments to cut mere months ago? After all, the Fed’s own Beige Book, based on what people on the ground see, says there was “a slight improvement over the previous period” and that tariff threats were being shrugged off – though that predates the Mexico Sit On that has since erupted.

Indeed, perhaps this Fake News thing seems more in our faces today because of social media; or perhaps it is infuriating more people now because in the “Good Old Days” politicians lied through their teeth, but nobody dared to touch free trade and free movement.

Of course, that’s no longer the case. The talks between the US and Mexico over the border and tariffs failed to reach a conclusion meaning we are just two working days away from a 5% tariff being imposed on everything heading north over the border. The US and China are also still at loggerheads, with the former preparing to find alternative suppliers to Chinese rare earths and Chinese scientists, and the latter warning its citizens not to go on holiday to the States. The US is also responding to China’s Ministry of Peace/Ministry of War regional actions by pressing ahead with USD2bn of arms sales to Taiwan, which will **infuriate** Beijing. None of the above is Fake News – but what is fake is the view that lower interest rates will somehow mean close-to-high equities won’t be hit as a result.

Meanwhile, there are other Orwellian challenges out there. In the EU we had the decision to press ahead with punishing Italy for its debt position while choosing not to do the same for France, when both are in breach of the Brüning-esque fiscal rules. “All fiscal deficits are equal, but some fiscal deficits are more equal than others” apparently. I would imagine that this will put the wind in the sails of the Italian populists as they continue to steer the ship towards outright confrontation with Brussels: tax-scrip/fiscal money/Mini-Bots ahoy? Or is that just Fake News?

In short, we are drowning in Orwell…and it won’t end well.

via ZeroHedge News http://bit.ly/2MveWrt Tyler Durden

The key to trading this market: “empty your mind”…

China continues to catch down to US and European stocks’ liquidity-fueled pumpathon this year…

Chinese markets slipped lower overnight, once again led by the tech-heavy indices…

Shanghai Composite broke key support…

And the small-cap, tech-heavy ChiNext has entered a bear market…

European banks fell on disappointing TLTRO and talks of rate-cuts from ECB…

Dragging European markets broadly lower.

 

US markets were mixed early on with the overnight weakness (Mexico and China) ignored and bid into the green before the cash open. Small Caps and Trannies (most exposed to short-squeeze) were red from the start but the rest of the majors trod water holding modest gains (despite more Mexican tariff headlines)…

This is The Dow’s first 4-day win streak since March, the best week for stocks since November, and the best start to June since the year 2000!

4th day in row that stocks suddenly became cheap in the last hour of trading…

Dow futures are up a stunning 1200 points from Sunday night’s lows…

 

Defensive stocks are up 4 days in a row – notably outperforming cyclicals in this ramp…

 

This is the biggest 4-day surge in defensives since Dec 31st…

 

“Most Shorted” stocks leaked lower for the second day (explaining Small Caps and Trannies underperformance)…

 

Bonds were very mixed today with the action being the exact opposite of yesterday – long-end outperforming notably…

NOTE – yields spiked on the tariff delay headlines but with no follow through

And Bond vol is exploding…

 

The dollar index fell on the day, erasing yesterday’s gains…

 

Euro rallied on Draghi’s not-dovish-enough disappointment…

 

 

The peso spiked on headlines about delaying the tariffs (but slid back on reports expecting tariffs to hit)

NOTE – stocks did not retrace like peso.

 

Cryptos were mixed today with Ripple up and Bitcoin Cash lower, but ugly on the week…

 

Oil surged after the tariff delay headlines but PMs were higher as copper slipped (even with a lower dollar)…

 

Gold gained for the 7th day in a row…(longest win streak since Jan 2017)

 

Oil bounced on the day (after the tariff delay headlines) but some context is worthwhile…

 

 

Finally, after a string of dismal macro data, Bonds & Stocks remain drastically decoupled…

And, as Bloomberg reports, Retail traders are now the least bullish on the country’s equities since December, when the S&P 500 sank to a 20-month low, according to a weekly survey by the American Association of Individual Investors.

What will payrolls say?

via ZeroHedge News http://bit.ly/2WNJkBj Tyler Durden

Twitter has, yet again, suspended a parody account of Alexandria Ocasio-Cortez. This time, the account was @AOCOffice, following Twitter’s suspension of @AOCPress last month, which had 85,000 followers.

The new account had described itself as a parody account, per Twitter rules, stating: “Parody for Da Boss of NY-14 (Bronx + Queens)”. The account had over 29,000 followers. 

BREAKING: Twitter has banned @AOCoffice another popular AOC parody account pic.twitter.com/kzBz48t81T

— Jack Posobiec 🇺🇸 (@JackPosobiec) June 5, 2019

As some followers may have been confused as to whether or not the account was a parody, the @AOCOffice account had jokingly Tweeted in early May:

For those asking if this is a parody account, you can just step right off. If I was a white male nobody would be asking. It’s racist, full stop. Knock it off.

The original @AOCPress account was suspended on May 7 for “manipulating the conversation” despite having “parody” clearly marked in the account’s name. Its bio said: “I’m the boss… you mad bro (parody)”.

The founder of that account, Michael Morrison, also found his personal account – and its 50,000 followers – suspended. Twitter cancelled his account under its spam policy, which states that an account can be suspended “if you post duplicative or substantially similar content, replies, or mentions over multiple accounts or multiple duplicate updates on one account, or create duplicate or substantially similar accounts.”

As Mediaite pointed out, common Tweets from his account included things like:

• If socialism doesn’t work then explain to me how Bernie Sanders has become a millionaire being a socialist.

• Not only am I Christian, I’m actually more Christian than Jesus was.

• In Venezuela they have hotdogs made from real dogs. Not some cheap knockoff like hear in the USA.

Morrison commented: 

“In the past month and a half alone, the account grew by roughly 50,000 followers. We’ve had tweets with over 30,000 likes on them, so I think Twitter decided it was time for [the account] to go.”

Maybe a better answer for @Jack and Twitter would be to spend less time policing the web and more time wondering why AOC is so easy to parody to begin with.

via ZeroHedge News http://bit.ly/2IrO3PO Tyler Durden

Submitted by Joseph Carson, Former Chief Economist, AllianceBernstein,

Decisions to change official rates can no longer be made exclusively on economic growth and price considerations as the dynamics of business cycles have changed. The new business cycle consists of growth and financial leverage (debt), replacing the old cycle of growth and price leverage.

As such, decisions to provide more monetary accommodations to sustain growth or lift inflation to the preferred target has to be weighed against growing financial vulnerabilities associated with the sharp rise in private sector debt. Promises by policymakers to provide additional monetary accommodation to sustain the growth cycle is more likely to do more long-term harm than good as it will only increase the scale of financial vulnerabilities.

In recent decades, monetary policy through its adjustments and control of short-term interest rates has had more influence on financial transactions than economic ones as individuals and nonfinancial corporations have engaged in active management of the liability side of their balance sheet, taking on record amounts of debt at relatively low rates, elevating real and financial asset prices in the process, while providing only modest benefits to overall economy.

For example, since 2011 nonfinancial corporations have added to $5.2 trillion in debt to their balance sheets. Corporations used this debt for a variety of purposes, such as acquiring other companies, purchasing real estate, buying back their own stock, while also investing in plant and equipment to run their regular business operations. Yet, the incremental growth in nonresidential investment has been a little more than $1 trillion. In other words, for every $5 borrowed by nonfinancial corporations only $1 has found itself redeployed in the real economy.

In the 2000s cycle, households also went on a borrowing binge, adding over $7 trillion in new debt over the span of seven years. Most of the new debt was invested in real estate. Over the course of the 2000’s growth cycle households added $2 of debt for every $1 increase in consumer spending and investment in housing. Much higher ratios of debt to new investment occurred during the dot.com boom of the late 1990s and the the commercial real estate boom of the late 1980s.

All of these episodes highlight the new linkages and tradeoffs between monetary policy and financial activities. Yet, the failure to adapt, and even recognize, the changing linkages caused policymakers to miss, or downplay, the buildup of financial vulnerabilities in the system and the adverse shocks to the economy and the financial system were repeated time and again.

Each period of excessive credit and financial leverage was followed by a long bout of debt-deleveraging forcing the Fed to engage in a “financial engineering” campaign to cushion the economy and bring stability to the financial system. Following the commercial real estate crash of the early 1990s the Federal Reserve lowered official rates 650 basis points; 550 basis points following the dot-com bubble; and 500 basis points (and probably an extra 200 basis points of easing occurred with the Fed’s asset purchase program) after the housing bubble.

Today, even though the current environment has similar characteristics—large increases in debt and elevated asset prices–that preceded each of the past three recessions policymakers do not seem to be concerned about the growing buildup of financial vulnerabilities. Yet, the financial markets with Treasury yields out to 10 years trading well below the target on the federal funds rate suggests that the limits of the Fed’s “financial engineering” have been reached and additional monetary accommodation will have a negative trade-off between costs and benefits.

In fact, it would not be a surprise if market yields stay near current levels even if the Fed decides to lower official rates since encouraging more debt growth would only tip the scale more so to a bad outcome down the road.

via ZeroHedge News http://bit.ly/2HZUudY Tyler Durden

For many asset managers having a trading desk simply isn’t worth it anymore (certainly those who are gating investors amid massive redemptions), according to Bloomberg. In fact, the buy-side trader looks as though it’s going to be the latest job du jour to be outsourced across the industry. The move comes as asset managers are struggling with the rising costs of salaries, data feeds, computers and requirements of keeping up with new regulations, like MiFID II.

This is where outsourced trading comes in: it used to be a niche business that was aimed only at start ups, but it is a business that is now seeing demand from larger firms as money managers everywhere attempt to cut costs.

Northern Trust Corporation, which is a custodian for $8 trillion in assets, is in talks with 40 potential new clients for its outsourced trading platform. Since 2017, it has already taken on 38 clients. At the same time, Bank of New York Mellon’s corporation subsidiary says it’s tapping into more UK wealth managers that are seeking to offload trading. Jefferies, which has taken on more than 60 clients since entering the business in June, is expanding their offering into Europe and Asia.

Gary Paulin, London-based global head of Integrated Trading Solutions at Northern Trust Capital Markets said: “When faced with more margin pressure, what do you have to do? You have to look at your operating model. You have to address what fixed costs you can remove.”

Not all asset managers have trading desks to begin with. Smaller managers rely on outsourced teams and even their own fund managers to buy and sell securities. But it is now the larger players that are showing increasing interest in outsourcing this role.

The outsourced traders act as in-house trading desks but for a fraction of the money; instead of passing an order to traders at the desk next to theirs, or down the hall, fund managers will give it to an outsourced team – perhaps somewhere in New Delhi or Calcutta – for a fee. The outsourced traders offer market commentary and updates on existing positions, just like an in-house trader would.

Cue the front-running lawsuits…

Outsourcing is a way for asset managers to help defend their margins as they try to compete with the onslaught of no fee – and even negative fee – passive funds, which we recently discussed . The move could shrink the industry’s dwindling pool of traders even further. According to Coalition Development Ltd., the largest banks have seen their front office equities head count drop in each of the last five years.

And trading itself has become more complex. Buying and selling global securities means having to navigate time zones and overseas regulation. In the EU, the MiFID II rules put into effect in early 2018 have also increased traders’ regulatory burden.

“They’re forced to be a lot more forensic in terms of the execution quality they get from their brokers,” said Michael Horan, head of trading at Pershing. All of this has combined to act as a great tailwind for outsourced trading:

Opimas, a consultancy, estimates that a fifth of investment managers overseeing more than $50 billion will outsource at least parts of their trading by 2022. Whereas the service used to target newly launched funds, it’s increasingly common for asset managers overseeing more than $5 billion to tap that as well, according to Richard Johnson, vice president at consultant Greenwich Associates.

Now, the service that was once only used by newly launched funds is being used by those overseeing more than $5 billion.

Northern Trust is planning a promotional roadshow in the US later this year and Pershing has seen “significant” business growth since the implementation of the new European regulations, with the typical client being a UK wealth manager that only has 2 to 5 traders to begin with. 

According to Bloomberg, the largest source of growth is among asset managers overseeing $10 billion to $100 billion that are looking to supplement their own desks. Consultancy company Opimas estimates that each buy-side trader costs an asset manager at least $500,000 a year and can handle about $1.5 billion of annual stock trading volume. 

For funds with turnover below that, outsourcing makes sense. For larger funds, keeping your in-house team may have more perks.

Anish Puaar, European markets structure analyst at Rosenblatt Securities Inc. in London said: “Most larger buy-side firms will probably just want to keep control of their trading desk. A lot of the bigger firms will see the ability to understand today’s complex market structure as a differentiator.”

Horan from Pershing concluded: “The cost of running a trade desk is a very capital-intense business. There’ll be more of a move toward outsourced trading, but for the time being, the sweet spot is certainly the kind of mid-market-level.”

via ZeroHedge News http://bit.ly/2ZabzaU Tyler Durden

Mount Carmel Health System, the second-largest health care system in central Ohio, began an internal inquiry earlier this year and discovered one of its doctors had over-prescribing potent doses of painkillers leading to over 25 deaths; shortly after a criminal investigation was launched, reported NBC News.

William Husel, the Ohio doctor at the center of the case, surrendered to Columbus police and was charged Wednesday with 25 counts of murder for ordering excessive doses of the opioid fentanyl for patients between 2015 to 2018.

Court documents show Husel prescribed at least 500 micrograms of fentanyl (100 micrograms of the synthetic opioid is normal for a patient) for at least 25 patients, levels that are considered deadly. “At the 500-microgram level there would be no legitimate medical purpose,” said Franklin County Prosecutor Ron O’Brien, according to the Columbus Dispatch. “The only purpose would be to hasten their deaths.”

Many of the deaths were people who were older and already had severe health issues, but a motive behind why Husel overprescribed dangerous amounts of fentanyl remains a mystery, officials said.

“This is not a murder case,” Husel’s attorney, Richard Blake, told NBC affiliate WCMH. “I can assure you there was never any attempt to euthanize anyone by Husel. At no time did he ever have the intent to euthanize anyone.”

Husel pleaded not guilty and was slapped with a $1 million bond Wedsenday. He has surrendered his passport and wants to clear his name at trial, Blake said.

Husel faces up to 375 years in prison if convicted on all counts. O’Brien said the doses Husel prescribed in the 25 deaths “could not support any legitimate medical purpose.”

Mount Carmel Health System, first broke the news about the case in early January, after prosecutors and police began questioning dozens of witnesses and analyzing medical records.

In one suit, an attorney for the family of Melissa Penix,82, said Penix was given 2,000 micrograms of fentanyl by Husel for stomach pains in November and died five minutes later.

Amy Pfaff’s mother, Beverlee Schirtzinger, 63, had a liver biopsy in October 2017 before her health rapidly deteriorated. Pfaff’s lawyers said Husel ordered 500 micrograms of fentanyl for her.

The State Medical Board of Ohio suspended Husel from the medical system in late Januray, indicating the decision was based on his “failure to meet acceptable standards regarding the selection of drugs, violations of the minimal standards of care and failing to cooperate in a board’s investigation.”

Husel’s wife, Mariah Baird, was also named in one of the suits for administrating 800 micrograms fentanyl to a 65-year-old woman who died in 2015, at the same hospital. 

Hospital officials said 30 employees, including pharmacists and nurses, were placed on administrative leave earlier this year following the investigation, while at least 18 others with ties to the case have left. Even the hospital’s chief pharmacy officer, Janet Whittey, recently abandoned her position after being tied to one of the lawsuits. 

via ZeroHedge News http://bit.ly/2KxJy8Y Tyler Durden

Authored by Lance Roberts via RealInvestmentAdvice.com,

On Tuesday, Federal Reserve Chairman Jerome Powell, in his opening remarks at a monetary policy conference in Chicago, raised concerns about the rising trade tensions in the U.S.,

“We do not know how or when these issues will be resolved. As always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective.”

However, while there was nothing “new” in that comment it was his following statement that sent “shorts”scrambling to cover.

“In short, the proximity of interest rates to the ELB has become the preeminent monetary policy challenge of our time, tainting all manner of issues with ELB risk and imbuing many old challenges with greater significance.  

“Perhaps it is time to retire the term ‘unconventional’ when referring to tools that were used in the crisis. We know that tools like these are likely to be needed in some form in future ELB spells, which we hope will be rare.”

As Zerohedge noted:

“To translate that statement, not only is the Fed ready to cut rates, but it may take ‘unconventional’ tools during the next recession, i.e., NIRP and even more QE.”

This is a very interesting statement considering that these tools, which were indeed unconventional“emergency” measures at the time, have now become standard operating procedure for the Fed.

Yet, these “policy tools” are still untested.

Clearly, QE worked well in lifting asset prices, but not so much for the economy. In other words, QE was ultimately a massive “wealth transfer” from the middle class to the rich which has created one of the greatest wealth gaps in the history of the U.S., not to mention an asset bubble of historic proportions.

However, they have yet to operate within the confines of an economic recession or a mean-reverting event in the financial markets. In simpler terms, no one knows for certain whether the bubbles created by monetary policies are infinitely sustainable? Or, what the consequences will be if they aren’t.

The other concern with restarting monetary policy at this stage of the financial cycle is the backdrop is not conducive for “emergency measures” to be effective. As we wrote in “QE, Then, Now, & Why It May Not Work:”

“If the market fell into a recession tomorrow, the Fed would be starting with roughly a $4 Trillion balance sheet with interest rates 2% lower than they were in 2009. In other words, the ability of the Fed to ‘bail out’ the markets today, is much more limited than it was in 2008.

But there is more to the story than just the Fed’s balance sheet and funds rate. The entire backdrop is completely reversed. The table below compares a variety of financial and economic factors from 2009 to present.

“The critical point here is that QE and rate reductions have the MOST effect when the economy, markets, and investors have been ‘blown out,’ deviations from the ‘norm’ are negatively extended, confidence is hugely negative.

In other words, there is nowhere to go but up.”

The extremely negative environment that existed, particularly in the asset markets, provided a fertile starting point for monetary interventions. Today, as shown in the table above, the economic and fundamental backdrop could not be more diametrically opposed.

This suggests that the Fed’s ability to stem the decline of the next recession, or offset a financial shock to the economy from falling asset prices, may be much more limited than the Fed, and most investors, currently believe.

While Powell is hinting at QE4, it likely will only be employed when rate reductions aren’t enough. Such was noted in 2016 by David Reifschneider, deputy director of the division of research and statistics for the Federal Reserve Board in Washington, D.C., released a staff working paper entitled “Gauging The Ability Of The FOMC To Respond To Future Recessions.” 

The conclusion was simply this:

“Simulations of the FRB/US model of a severe recession suggest that large-scale asset purchases and forward guidance about the future path of the federal funds rate should be able to provide enough additional accommodation to fully compensate for a more limited [ability] to cut short-term interest rates in most, but probably not all, circumstances.”

In effect, Powell has become aware he has become caught in a liquidity trap. Without continued “emergency measures” the markets, and subsequently economic growth, can not be sustained. This is where David compared three policy approaches to offset the next recession:

1. Fed funds goes into negative territory but there is no breakdown in the structure of economic relationships.

2. Fed funds returns to zero and keeps it there long enough for unemployment to return to baseline.

3. Fed funds returns to zero and the FOMC augments it with additional $2-4 Trillion of QE and forward guidance. 

This is exactly the prescription that Jerome Powell laid out on Tuesday suggesting the Fed is already factoring in a scenario in which a shock to the economy leads to additional QE of either $2 trillion, or in a worst case scenario, $4 trillion, effectively doubling the current size of the Fed’s balance sheet.

This is also why 10-year Treasury rates are going to ZERO.

Why Rates Are Going To Zero

I have been discussing over the last couple of years why the death of the bond bull market has been greatly exaggerated. To wit: (Also read: The Bond Bull Market)

“There is an assumption that because interest rates are low, that the bond bull market has come to its inevitable conclusion. The problem with this assumption is three-fold:

1. All interest rates are relative. With more than $10-Trillion in debt globally sporting negative interest rates, the assumption that rates in the U.S. are about to spike higher is likely wrong. Higher yields in U.S. debt attracts flows of capital from countries with negative yields which push rates lower in the U.S. Given the current push by Central Banks globally to suppress interest rates to keep nascent economic growth going, an eventual zero-yield on U.S. debt is not unrealistic.

2. The coming budget deficit balloon. Given the lack of fiscal policy controls in Washington, and promises of continued largesse in the future, the budget deficit is set to swell back to $1 Trillion or more in the coming years. This will require more government bond issuance to fund future expenditures which will be magnified during the next recessionary spat as tax revenue falls.

3. Central Banks will continue to be a buyer of bonds to maintain the current status quo, but will become more aggressive buyers during the next recession. The next QE program by the Fed to offset the next economic recession will likely be $2-4 Trillion which will push the 10-year yield towards zero.”

It’s item #3 that is most important.

In “Debt & Deficits: A Slow Motion Train Wreck” I laid out the data constructs behind the points above.

However, it was in April 2016, when I stated that with more government spending, a budget deficit heading towards $1 Trillion, and real economic growth running well below expectations, the demand for bonds would continue to grow. Even from a purely technical perspective, the trend of interest rates suggested at that time a rate below one-percent was likely during the next economic recession.

Outside of other events such as the S&L Crisis, Asian Contagion, Long-Term Capital Management, etc. which all drove money out of stocks and into bonds pushing rates lower, recessionary environments are especially prone at suppressing rates further. But, given the inflation of multiple asset bubbles, a credit-driven event that impacts the corporate bond market will drive rates to zero.

Furthermore, given rates are already negative in many parts of the world, which will likely be even more negative during a global recessionary environment, zero yields will still remain more attractive to foreign investors. This will be from both a potential capital appreciation perspective (expectations of negative rates in the U.S.) and the perceived safety and liquidity of the U.S. Treasury market. 

Rates are ultimately directly impacted by the strength of economic growth and the demand for credit. While short-term dynamics may move rates, ultimately the fundamentals combined with the demand for safety and liquidity will be the ultimate arbiter.

With the majority of yield curves that we track now inverted, many economic indicators flashing red, and financial markets dependent on “Fed action” rather than strong fundamentals, it is likely the bond market already knows a problem in brewing.

However, while I am fairly certain the “facts” will play out as they have historically, rest assured that if the “facts” do indeed change, I will gladly change my view.

Currently, there is NO evidence that a change of facts has occurred.

Of course, we aren’t the only ones expecting rates to go to zero. As Bloomberg noted:

“Billionaire Stan Druckenmiller said he could see the Fed funds rate going to zero in the next 18 months if the economy softens and that he recently piled into Treasuries as the U.S. trade war with China escalated.

‘When the Trump tweet went out, I went from 93% invested to net flat, and bought a bunch of Treasuries,’ Druckenmiller said Monday evening, referring to the May 5 tweet from President Donald Trump threatening an increase in tariffs on China. ‘Not because I’m trying to make money, I just don’t want to play in this environment.’”

It has taken a massive amount of interventions by Central Banks to keep economies afloat globally over the last decade and there is rising evidence that growth is beginning to decelerate.

While another $2-4 Trillion in QE might indeed be successful in further inflating the third bubble in asset prices since the turn of the century, there is a finite ability to continue to pull forward future consumption to stimulate economic activity. In other words, there are only so many autos, houses, etc., which can be purchased within a given cycle. 

There is evidence the cycle peak has been reached.

If I am correct, and the effectiveness of rate reductions and QE are diminished due to the reasons detailed herein, the subsequent destruction to the “wealth effect” will be far larger than currently imagined. There is a limit to just how many bonds the Federal Reserve can buy and a deep recession will likely find the Fed powerless to offset much of the negative effects. 

If more “QE” works, great.

But as investors, with our retirement savings at risk, what if it doesn’t?

via ZeroHedge News http://bit.ly/2EX0ZfT Tyler Durden

Did Trump just fold (again)?

The peso and US stocks spiked on a Bloomberg headline stating that:

• U.S. WEIGHS DELAYING MEXICO TARIFFS AS TIME FOR DEAL RUNS SHORT

But, shortly after that, another headline hit:

• *U.S. TARIFFS ON MEXICO GOING INTO EFFECT MONDAY STILL POSSIBLE

Confirming that a delay is not an actual end to the threat of tariffs.

Markets retraced a little…

And stocks…

 

 

 

 

via ZeroHedge News http://bit.ly/2Wj8vY4 Tyler Durden

When discussing yesterday the ongoing devastation of one-time investing “legend” Neil Woodford, and the accelerating liquidation of stocks across his various investment vehicles to meet the surge in redemptions across fund that still have yet to be gated, we quoted Justine Fearns, a manager at Chase de Vere, who said that “considering all of the negative publicity surrounding Woodford, the fund [Income Focus] will probably, rightly or wrongly, be tarred with the same brush as the Equity Income fund,” adding that she expected outflows from Woodford’s Income Focus to continue.

We then added that “the only question is when this next fund will itself be permanently gated, as will Woodford’s career in the asset management industry.”

24 hours later we may have the answer.

According to the FT reports, on Thursday, Neil Woodford lost his last remaining large client, sending his AUM plunging to just £5 billion, roughly half where it was just days earlier as the advisory network Openwork withdrew its support from Britain’t best-known fund manager on Thursday, replacing Woodford on a £330 million mandate.

The relentless – and now terminal – exodus of funds is the latest in a series of “devastating blows” that have decimated the once legendary manager’s assets under management in the past week, following his decision to block trading in Woodford Equity Income, his flagship fund, trapping £3.7 billion of investors’ money.

Openwork’s decision came just one day after we reported that wealth manager St James’s Place pulled a whopping £3.5bn from Mr Woodford, wiping out 40% of the manager’s assets under management. In retrospect, the move was prudent as it wasn’t caught be the imminent gating that will befall any remaining Woodford investors.

According to the FT, Woodford managed the £330m Omnis Income and Growth fund on behalf of Openwork, a network of more than 2,000 financial advisers. But what is worse is that even aside from the recent gating shock, the fund had already lost 25.3% in value in the past 12 months compared to a 3% drop in UK stocks.

OPenwork’s wealth and platform director, Mike Morrow, said: “We have been working hard with the Omnis Investment Team [Openwork’s specialist investment company] over recent months to ensure that the Omnis Income and Growth fund is delivering to its mandate and have the utmost confidence in the value of portfolio and the underlying investments within it.”

Woodford’s spectacular implosion began on Friday when Kent County Council pension fund voted unanimously to withdraw a £263m mandate from his company. His funds were also cut from the influential Hargreaves Lansdown list of recommended funds, which account for a large portion of the funds’ assets.

And as the onslaught of redemption requests continues, Woodford Investment Management has been liquidating most if not all of its underperforming, illiquid investments as follows:

• NewRiver REIT to 15.61% from 20.60%
• Purplebricks to 21.51% from 23.87%
• Kier Group to 15.87% from 20.01%
• Provident Financial to 18.43% from 23.44%
• Watkin Jones to less than 5% from 9.19%
• Card Factory to less than 5%
• e-Therapeutics to 14.11% from 17.89%

We expect Woodford’s holdings in all of these names to hit 0% in very short notice.

Demonstrating just how fleeting is the glory of “investment giants”, in a video posted on Tuesday night, Woodford appealed to investors not to abandon the Income Focus fund. “It doesn’t have any exposure to illiquid or unquoted securities and consequently isn’t exposed to the same issues that the Woodford Equity Income fund is,” he said. “And it’s positioned, I believe, for the economic and market environment that we’re likely to see over the medium and long term.”

Alas, as of this moment nobody believes Woodford, and what we are observing is a “terminal run on the fund.”

Which also means that the last remaining question, the one posed by Bill Blain this morning, whether Woodford’s collapse will be a “systemic moment” for the fund management industry, will be answered shortly.

via ZeroHedge News http://bit.ly/2K4lVW7 Tyler Durden

Via Grant’s “Almost Daily”,

Lobby horse

The Department of Defense’s forthcoming $10 billion cloud computing award, known as JEDI, has been mired in controversy and allegations of misconduct involving Amazon.com, Inc.’s web services division (AWS). Does a potential scandal involving AWS and Uncle Sam present a risk to the continuation of Amazon’s unparalleled success?

On May 24, Amazon competitor Oracle Corp. which vied for the JEDI contract and was eliminated from contention (AWS and Microsoft Corp. are the remaining bidders), filed an updated complaint with the U.S. Court of Federal Claims alleging that the procurement process for JEDI has been rife with conflicts of interest. 

Oracle alleges that at least two employees, Deap Ubhi and Anthony DeMartino, improperly influenced the process to favor AWS at the expense of other competitors, as detailed by Almost Daily Grant’s on April 18. On March 4, the Federal News Network reported that the DoD Inspector General and FBI’s Public Corruption Unit have opened a joint investigation into the JEDI procurement process.

The updated court filing contains no shortage of explosive allegations:

The Department of Defense deviated from its procurement policy and did not require Ubhi, [redacted] or DeMartino (and many others) to complete conflict of interest forms and sign nondisclosure agreements prior to JEDI involvement. Consequently, several DoD officials with clear financial interests in AWS participated in JEDI in violation of applicable laws and regulations.

Mere sour grapes from a losing contestant? In its filing, Oracle cites correspondence on the Slack messaging platform suggesting that Ubhi (who worked at AWS from 2014 to 2016 before joining the Pentagon, and then returned to AWS in November 2017) pressed senior DoD official Jane Rathbun to favor a single-award approach, which is widely believed to favor AWS:

In one message, Ubhi reports “we just won this conversation’ because ‘Jane R. is now moved to our side and is supportive of a single provider.” Ubhi later advised the Defense Digital Service team to “check your email, and see Jane coming to the light”. . . In subsequent messages, Ubhi noted it “puts multi vs. single to bed once and for all hopefully (at least from a technical standpoint.”

Ubhi later indicated to [DDS general counsel Sharon] Woods that he was not worried about the “single vs. double” awardee approach and “if there are people in the building (Pentagon) that (he) need(s) to go see and school, or ally, let’s do that too.”

Beyond lobbying DoD officials to structure JEDI as a winner-take-all, Oracle claims that Ubhi used his position to accumulate intelligence about competitors cloud capabilities, while preparing for his return to Amazon:

In mid-September 2017 (during his employment discussions with AWS), Ubhi helped set up the Google Drive to act as DoD’s “repository for *everything*” JEDI related. Ubhi and the DDS team subsequently convinced all DoD JEDI participants “to data dump” everything into the Google folder.

Ubhi managed untold amounts of nonpublic and acquisition sensitive JEDI-related information based on his access to the JEDI Google drive. At some point prior to rejoining AWS, Ubhi synced the Google Team Drives to his laptop.

Amazon will have a hard time distancing itself from Ubhi’s conduct, if Oracle’s allegations are accurate:

AWS knew of Ubhi’s central JEDI role as AWS courted Ubhi to rejoin AWS. AWS also knew that Ubhi had not recused himself as legally required. Still neither Ubhi nor AWS notified DoD of the employment negotiations.

On October 2, 2017, Ubhi emailed AWS advising that he is “running point on all [JEDI] industry touch points.”

Apart from the criminal investigation into JEDI, Congress has taken a dim view of the winner-take-all approach to the massive contract. In its 2020 budget released on May 20, the House Appropriations Committee stated that due to concerns about committing to a single provider for a 10-year term: 

The Committee directs that no funds may be obligated or expended to migrate data and applications to the JEDI cloud until the Chief Information Officer of the Department of Defense provides a report to the Congressional Defense Committees on how the Department plans to eventually transition to a multi-cloud environment, as described in its January 2019 Cloud Initiative Report to Congress.

That follows an early April decision from the C.I.A. to shift to a multi-cloud strategy by 2021, after signing a $600 million contract with AWS in 2013.

No matter what happens with the government investigation, the competition is collectively taking aim at AWS. Today, Microsoft and Oracle announced an agreement to connect cloud computing units by linking their respective data centers, as well as letting users log into either company with a single user name.

As for Amazon, a $10 billion award over 10 years doesn’t stand out as critical, considering the company reported $242 billion in revenue and $11.4 billion in net income over the 12 months ended March 31. But a loss of government confidence in AWS (which generated $2.2 billion of net income in the first quarter, up 57% year-over-year and representing two thirds of the consolidated total) could be significant. As a D.C.-based observer told ADG in April: “The AWS story, as sold to enterprise customers and the Street, is built upon the [C.I.A] reference case and the cash that has come in from that deal.” 

via ZeroHedge News http://bit.ly/2Z8ZqTx Tyler Durden