Tag: news

Authored by Charles Hugh Smith via OfTwoMinds blog,

Few appear willing to follow the probabilities of a future in which a vaccine cannot possibly be the “magic cure” everyone wants.

Let’s attempt the impossible and set aside all preconceptions we might have about a vaccine for Covid-19, and think it through somewhat dispassionately. Let’s start by stipulating that dispassionate analysis is as rare as anti-matter, as everyone’s barely-cloaked self-interest and ideological biases demand an indignant, rabid response to any challenges to the one true faith, i.e. whatever they believe.

Speaking of self-interest, we would blind not to notice the rapacious interest of Big Pharma in reaping billions of dollars in profits from a vaccine or vaccines. What could be better for obscene profits than a vaccine everyone must have to participate in the conventional economy, a vaccine the federal government will let the “owner” price at “market”?

“Owner” is in quotes because the federal government is funding much of the research expenses yet the Big Pharma corporations retain ownership of the results–such a deal for Big Pharma! The gummit puts up the money but Big Pharma gets 100% “ownership” and the right to price their vaccine at “market,” which is whatever the government is willing to pay for the vaccine it funded.

We would also be remiss not to notice that Big Pharma’s track record of releasing medications with glossed-over side-effects and poor efficacy is not exactly spotless. Horrendously costly meds have been passed out like candy with claims of efficacy that have later been shown to be unsubstantiated and side-effects that have been under-reported or otherwise marginalized.

We’ve all heard the comedic fast-talking voice talent listing the horrific side-effects in a blur during Big Pharma’s ceaseless adverts–adverts that were illegal not that long ago. Side effects include hallucinations, dizziness, heart failure, seizures, warts, temporary blindness, compulsive spending sprees, fear of people in white coats, obsessions with travel to Mars, imaginary super-powers, itchiness in the cranial cavity and shortness of breath when eating ice cream. This parody is not far off the actual listings of side-effects.

Yes, it was illegal for drug companies to advertise directly to the public not so long ago. That impediment to additional billions in profits disappeared when the bribes, oops I mean campaign contributions became large enough for politicos to sell the public interest down the river.

Thus a bit of cautious skepticism about Big Pharma’s claims and pricing is in order. The list of people who are now dead after believing Big Pharma’s claims that its opioids were “safe” and “non-addictive” is tragically long.

Then there’s the pesky issue of reliability: can any corona-virus vaccine achieve 99% effectiveness? And for how long? There is some science-based skepticism that a corona-virus vaccine that works for virtually everyone and is effective for a year or longer is even achievable.

If the reliability/effectiveness is significantly less than 99%, that introduces a Russian-Roulette type risk calculus in those getting the vaccine. What if I’m one of the unlucky folks who get the virus despite getting the vaccine?

If the duration of efficacy is variable–maybe it works for a year for most people but considerably less for a significant percentage of those who get the vaccine–then that also introduces the same risk assessment: how can I know if the vaccine will protect me for a full year?

Since Nature often tracks a Pareto Distribution–the 80/20 rule–let’s make some preliminary estimates based on that. Let’s say that the vaccine is 80% effective, and 80% of the populace agrees to get the vaccine. (Let’s set aside the reasons why 20% of the populace might decide not to get the vaccine regardless of its purported effectiveness or the penalties placed on those who refuse.)

The U.S. population is around 330 million, and let’s estimate that institutionalized residents might not be given a choice about getting the vaccine–ot if there are recognized risks, some at-risk institutionalized residents might be refused the vaccine as a matter of caution.

So perhaps 10 million people won’t have a choice in the matter. That leaves 320 million with a choice. If 20% refuse for various reasons, that’s 64 million who will be unvaccinated and 256 million who choose to get the vaccine.

If the vaccine is effective in 80% of these 256 million people, then 205 million will receive the benefits of the vaccine and 51 million might come down with the virus (perhaps in milder cases, perhaps not–that will have to be determined by large-scale double-blind studies).

Again following the Pareto Distribution, let’s estimate that 20% of the 256 million people who get the vaccine will choose to avoid higher-risk settings such as cruises, concerts, etc., even though they’ve been vaccinated, because the uncertainty increases their caution. This would be entirely understandable and prudent in at-risk populations such as those older than 60, those with pre-existing conditions, etc.

As I explained in Consumer Spending Will Not Rebound–Here’s Why (May 18, 2020), this older, at higher-risk cohort happens to collect the lion’s share of household income and own the lion’s share of household wealth. Their decisions to limit participation in riskier activities have an outsized economic impact because they collect almost half the income and own about 85% of all household wealth.

Following the 80/20 rule, we end up with 64 million unvaccinated and 51 million vaccinated who choose to avoid higher-risk activities. That’s 115 million people who will not resume their pre-pandemic lifestyles either because they may be barred from activities because they’re not vaccinated or because their at-risk profile and the inherent uncertainties of the vaccine cause them to avoid higher-risk activities.

Those assuming that requiring vaccination to board a airliner will boost vaccination to nearly 100% could be underestimating the strength of the motivations of those who decide not to get the vaccine. It would also be unwarranted to assume that everyone who chooses not to get the vaccine is a rabid anti-vaxxer.

Given the latent uncertainties and the self-interest of those pushing for a rapid approval of a vaccine, it would be entirely prudent to choose to let the first wave of residents get the vaccine and then await the results of large-scale studies of efficacy, duration, etc.

Given the rapacious greed of Big Pharma corporations and their track record of playing fast and loose with claims of safety and efficacy, we can also anticipate multiple vaccines battling for market share, a struggle that will create incentives to inflate claims of efficacy and marginalize side-effects.

As for bans on air travel, concerts, etc. for the unvaccinated, many people will simply drop out of the mainstream economy. The wealthy will book seats on private charter aircraft and hire performers in open-air venues, etc., the unwealthy will seek unconventional options and give up flying, going to sports events, etc.–activities they may no longer be able to afford anyway.

What kind of economy will we have if a third of the populace–100+ million people–are no longer participating at pre-pandemic levels for one reason or another? An accurate description might be The Greater Depression.

Few appear willing to follow the probabilities of a future in which a vaccine cannot possibly be the “magic cure” everyone wants. Some percentage of the populace will not be participating in the economy at pre-pandemic levels for one or more of these reasons:

1. They choose not to be vaccinated.

2. They choose to be vaccinated but remain cautious in their activities and spending.

3. They no longer have the income or wealth to resume their 2019 level of borrowing/spending.

Lastly, imagine the impact if a few people die of the virus after getting the vaccine. Human risk assessment does not necessarily track probabilities like a computer. Assuring everyone that only 1% of the recipients of the vaccine become ill or die within a year will not be as reassuring as proponents hope.

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China is severely lagging behind purchase commitments laid out in phase one trade agreement with the US.

The Peterson Institute for International Economics’ (PIIE) trade tracker of China’s monthly purchases of US goods covered by the deal through June reveals purchase levels were only at 47% of year-to-date targets. 

According to the agreement, China would purchase goods and services by a combined $200 billion over 2020 and 2021 from 2017 levels. This PIIE Chart below tracks China’s monthly purchases from July show China hasn’t bought enough American goods. 

China’s year-to-date total imports of covered products from the US are around $40.2 billion, compared with a prorated year-to-date target of $86.3 billion. This means China is behind $46.1 billion in purchases. 

As a result of Beijing’s inability to uphold the flimsy trade agreement, President Trump recently said he’s not focused on the next phase of the trade deal, otherwise known as “Phase Two.”

Since the coronavirus pandemic, bilateral relations between both superpowers have been severely damaged. President Trump routinely blames China for releasing the “plague” that has crashed the US economy. The status of the trade deal agreement appears to be a dud ahead of the US presidential election. 

Even before the phase one deal was signed, in early January, we warned: “Why The “Phase One” Trade Deal Is Impossible, In One Chart.” 

Authored by Erik Lytikainen via RealInvestmentAdvice.com,

2020 has been quite a year for the stock and options markets. We have witnessed a gut-wrenching roller coaster ride from highs to lows and back to highs. The volumes of both stock and options trading have ballooned as discount brokers offer zero commission trading.

What few seem to realize is that the proliferation of options trading has created a new market dynamic. This dynamic can create feedback loops that could generate significant volatility. If we compare a feedback loop to a snowball rolling downhill, one can view the recent spike in options trading as a snowfall leading to a potential avalanche.

To make our case, we provide a simplified option hedging example to show how this practice can affect order flow in the underlying markets. Specifically, options delta hedging can lead to amplified upward and downward price pressure. With options trading at record volumes, one should not overlook this point.

Options Hedging Example

To illustrate the effects of delta hedging, let’s consider an example. A bank or broker that writes options will usually construct and manage a delta neutral portfolio to manage this risk[1].  For this example, we consider a delta hedger in SPY that ended a recent trading day with a delta-neutral hedged position. We show this in the first table below.

The closing price of SPY is $321/share. The market participant sold 100 call options at the $340/share strike price, with options expiration 28 days away.  To hedge this position close to delta-neutral, the participant sold 57 puts at a strike price of $300/share. There are many ways to hedge the position, and the method we present is common among market makers.

To arrive at 57 puts, the participant calculated how many options are needed to bring the total delta of the position to near zero. As shown below, the call and put delta in the two right columns are essentially equal. However, that will cease to be the case once SPY moves in one direction or the other.

[1] Delta measures how the option price will change as the underlying stock or index changes.

The Next Day

The next day, we assume the value of SPY increases by $4/share to $325/share. The price changes also change the delta values for both the puts and calls. This participant wants to maintain a delta neutral position. To do so, they can buy 8-shares of SPY[1] to neutralize delta (we show the changes to the position in red in the tables below).

The important thing to emphasize is that maintaining a delta neutral hedge requires the participant to buy SPY shares when the price of SPY increases.

To illustrate the same case when the market declines, consider the case where SPY falls by $4/share the next day. In this example, the participant would sell 7-shares of SPY to maintain a delta-neutral portfolio.

Again, the important thing to emphasize is that maintaining a delta neutral position requires the participant to sell SPY shares when the price of SPY decreases.

Therefore, one outcome of delta hedging is that options market makers will buy shares when the market is rising and sell shares when it is falling.

When liquidity is weak and hedging requirements are large, a feedback loop can materialize and amplify price moves. Such occurs when hedge related buying pushes prices higher. As prices rise, hedgers must buy more, which then pushes prices even higher. The same loop can occur on the downside as well.

[1] Since 1-option in the stock markets is for 100 shares, the delta neutral position would require 800 shares of SPY. We are simplifying the calculations for reader understanding.

Risk of Cascading Declines

In the simple example above, we did not consider changes in volatility to adjust our delta hedge. In reality, implied volatilities change rapidly, particularly in a sharply declining market.

When volatility spikes, then the values, deltas, and gammas of options also spike.

Volatility is most likely to rise in falling markets and remain stable to falling in rising markets. The amount of hedging required to hedge downward moves is typically greater than upward moves.

A sharply falling market can result in a cascading feedback loop. Such occurs as delta hedgers must sell increasing numbers of shares to maintain their delta-neutral hedge. Importantly, most of this delta hedging is done by computers, which can further amplify the move as all of the delta hedgers can act simultaneously.

Stock market selling can beget more selling, and in some cases, this can result in a market that looks like a snowball heading downhill.

Gamma Triggers

In studying the options markets, one of our primary goals is to protect your retirement savings from these cascading downward events that can debilitate long term wealth.

To better assess the situation we calculate and share with our subscribers the so-called Gamma Neutral level. This level can be a trigger for follow-on selling and higher volatility in the stock market. As such, it allows us to better understand how options traders are positioned and discover market levels that could trigger a feedback loop.

The chart below shows the historical volatility of the SPX above and below Gamma Neutral levels.

Conclusion

We have provided a simple delta hedging example to emphasize that delta hedging has significant follow-on effects in the stock market. In times of questionable liquidity and record options trading, these implications become magnified. In particular, delta hedging can result in a feedback loop where stock market increases are bought, and systematic delta hedgers sell stock market decreases.

As options trading gains popularity via low or zero-commission trading, the effects of this feedback loop are gaining in importance.

The feedback loop in a market sell-off is proven to be more pronounced as volatility, delta, and gamma all spike. Such results in even larger follow-on selling by machine delta hedgers. The greatest risk of the increase in options trading is the potential for a large, cascading downward move, similar to what we saw earlier this year.

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If you would like to learn more, please visit our website, or download a complimentary report.

Following more rebounds in ‘soft’ manufacturing survey data in Europe and Asia (and LatAm – Brazil Manufacturing PMI exploded to a record in July), both ISM and Markit’s measures of US manufacturing sentiment were expected to continue their v-shaped recovery (despite hard data refuses to follow suit).

However, while the July surveys improved over June, Markit’s PMI notably dropped from the flash print but ISM’s report showed major gains…

• Markit US Manufacturing PMI MISS 50.9 vs 51.3 exp and 49.8 prior (51.3 flash)

• ISM US Manufacturing BEAT 54.2 vs 53.6 exp and 52.6 prior

This is the highest ISM manufacturing print since March 2019

Source: Bloomberg

So take your pick – disappointing intra-month decline (as reopenings are rolled back) or best month in 16 months (because nothing matters)?

ISM New Orders have exploded higher to best since Sept 2018 but employment is not catching up to the “V”…

Source: Bloomberg

On ISM, the company’s spokesperson said:

“The PMI® signaled a continued rebuilding of economic activity in July and reached its highest level of expansion since March 2019, when the index registered 54.6 percent. Four of the big six industry sectors expanded.

The New Orders and Production indexes returned to strong expansion levels. The Supplier Deliveries Index remained at a more normal level of tension between supply and demand. Seven of the 10 subindexes registered expansion, up from five in June,”

But on PMI, Chris Williamson, Chief Business Economist at IHS Markit notes:

“Although indicating the strongest expansion of the manufacturing sector since January, the IHS Markit PMI remains worryingly weak. Much of the recent improvement in output appears to be driven merely by factories restarting work rather than reflecting an upswing in demand.

Growth of new orders remains lacklustre and backlogs of work continue to fall, hinting strongly at the build-up of excess capacity. Many firms and their customers remain cautious in relation to spending in the face of re-imposed lockdowns in some states and worries about further disruptions from the pandemic.

“Encouragingly, business optimism about the year ahead has revived to levels last seen in February, but many see the next few months being a struggle amid the ongoing pandemic, with a more solid-looking recovery not starting in earnest towards the end of the year or even into 2021.

Further infection waves could of course derail the recovery, and many firms also cited the presidential elections as a further potential for any recovery to be dampened by heightened political uncertainty.”

Finally, as a reminder, the euphoric (phew, thank the lord that’s over) rebound has sent ‘soft’ survey data hopes to a level that has historically not portended a good reaction in markets…

Source: Bloomberg

Following the worst month for the dollar in a decade, there has been a bout of position squaring as we start August, largely on the back of a slump in the Euro, which is down 200 pips in 2 days, and accelerating weakness in the Yen, which have sent the Bloomberg dollar index to its highest level in a week, surging the most since June 14.

The spike in the dollar has pushed Treasury yields higher from their all time closing lows printed on Friday (as positive purchasing managers readings in China and Europe helped buoy risk appetite), while the sharp reversal has triggered a furious bout of short covering in Dollar futures, which according to the latest CFTC data has printed the most short in 9 years.

The shorting of the dollar accelerated last week, with Goldman’s FX strategists noting that in the week ending July 28, non-commercial traders net sold $5.2bn USD, following net sales of $2.2bn USD the previous week. Currently, they are net short $24.5bn USD. Both asset managers and leveraged funds contributed to the net sales of Dollars. At the same time, asset managers net sold $6.3bn USD, primarily against net purchases of EUR, JPY, and GBP.

The net sales of USD were primarily against net purchases of $5.1bn EUR, which non-commercial traders have also net purchased in eight of the prior nine weeks. Asset managers are currently net long $48.3bn EUR, the highest exposure in years. Leveraged funds also net sold USD, while net purchasing $1.3bn EUR

A similar increase in net longs was also observed in the Yen.

And now that traders are starting to turn their attention to surging covid cases in Europe and Japan while the US situation appears to have plateaued, expect this rollercoaster to reverse fully with the EUR slide only starting and the Dollar uptrend resuming.

What is most surprising perhaps about the reversal in the dollar is the lack of gold weakness – at least for now – despite the surge in the dollar. Keep an eye on precious metals to see if gold strength continues despite the apparent break in the dollar downside trend.

Just weeks after abandoning a planned move to London – a cancellation that was reportedly politically motivated, according to myriad reports in the British press (more on that here) – ByteDance will reportedly shift its headquarters to London from Beijing.

The decision, which was motivated by the Trump Administration’s threats to bar TikTok from the American market on national security grounds, follows a quiet agreement between British government ministers and ByteDance. Last night, we reported the confirmation that Microsoft had restarted talks with ByteDance regarding a possible acquisition of TikTok.

The company confirmed the reports Monday, and it appears ByteDance has finally shown itself willing to play ball with the US, despite the brief period of uncertainty over the weekend after ByteDance and Microsoft reportedly broke off talks pending more guidance from the administration.

Whoever buys TikTok will control the app and its global operations, but ByteDance will retain ownership of a separate app called Douyin (“TikTok”) which is Chinese-language and built for the Chinese internet.

Microsoft says it’s aiming to wrap up talks by Sept. 15, giving us a 6-week timeline during which we expect the White House to tone down its rhetoric a little bit, even if the administration does move ahead with imposing new restrictions on apps like WeChat, and companies like Huawei.

As investors tried to piece together exactly what was happening behind the scenes, Reuters came through last night with exactly that: a deeply-sourced report citing White House officials who explained that President Trump’s comments on Friday – that the US would move to ban TikTok – elicited serous pushback from his advisors and Republican lawmakers like Lindsey Graham. Trump initially opposed the idea of allowing ByteDance to sell TikTok to Microsoft. But he quickly relented, and by Sunday night, GOP lawmakers had provided enough assurances to BD and Microsoft CEO Satya Nadella that a deal to buy TikTok would receive the administration’s blessing when the time comes for the CFIUS review.

For decades, American law has required a government board to weigh in – and ultimately approve – every foreign deal involving major American assets and ensure that the deal doesn’t impact American national security priorities. China’s wave of ambitious buyouts around the world over the past 10 years – remember, China owns Smithfield foods, one of the biggest pork producers in the world, and a company that’s technically an American company – has made western governments wary of Beijing’s “neo-imperialist” approach.

Once Trump assented to the deal, CFIUS reportedly gave the two companies 45 days to work out a deal (hence the Sept. 15 deadline shared by Microsoft).

Lindsey Graham tweeted over the weekend that a Microsoft buyout of TikTok would be a “win-win” for America and China.

What’s the right answer?

Have an American company like Microsoft take over TikTok.

Win-win.

Keeps competition alive and data out of the hands of the Chinese Communist Party.

— Lindsey Graham (@LindseyGrahamSC) August 1, 2020

TikTok has roughly 100 million users in the US, and has been valued at $50 billion, reportedly. Though it’s unclear what prices MSFT is looking at.

For some reason, we suspect Beijing doesn’t see things Graham’s way. And as Reuters pointed out, whether Microsoft can successfully separate TikTok’s technology from ByteDance in a way that would successfully assuage security concerns remains to be seen. It’s probably one of the biggest risk factors standing in the way of any eventual deal.

A key issue in the negotiations will be separating TikTok’s technology from ByteDance’s infrastructure and access, to alleviate U.S. concerns about the integrity of personal data. ByteDance owns a Chinese short video app called Douyin that was based on the same code used for TikTok.

Not to say that it can’t be overcome. But it certainly explains the intense government scrutiny at every stage in the process, as CFIUS told Reuters it intends to monitor the negotiations.

The negotiations between ByteDance and Microsoft will be overseen by CFIUS, a U.S. government panel that has the right to block any agreement, according to the sources, who requested anonymity ahead of a White House announcement. Microsoft cautioned in its statement that there is no certainty a deal will be reached.

One idea under consideration is to give Microsoft and ByteDance a transition period to develop technology for TikTok that will be completely separate from ByteDance, one of the sources said.

Microsoft said it did not intend to provide further updates until there was a definitive outcome in the negotiations.

The scrutiny facing TikTok isn’t unprecedented: Scrutiny from CFIUS and the White House recently forced a Chinese company to divest its ownership stake in the American LGBTQ-focused hookup app “Grindr”.

But we can’t help but suspect that Trump’s Friday remarks about barring the app from the US have left a bad taste in Beijing’s mouth. We fear the deal talks might be fraught with ongoing conflict as both companies struggle to balance their own priorities with the demands of their respective governments.

As much as we appreciate a good compromise…