Tag: news

As one of the most chaotic years on record comes to a close, the topic of conversation on Wall Street are bonuses. As we’ve noted (see: here & here), traders, analysts, and bankers are set to experience a flat to a slump in bonus payouts this year despite an explosion in trading and debt & equity underwriting.

The message from within Bank of America, according to Bloomberg sources, is that senior executives are likely to keep the bonus pool for sales and trading desks at last year’s level, despite a solid year in revenue, jumping more than 20% in the first three quarters of the year. 

BofA’s top leadership is mulling over large bonuses because the virus pandemic has wreaked havoc over its consumer division department and added expenses. 

Sources said some staff who expected to receive large bonuses for stellar performance are outraged. 

“Executives still have time to lobby for larger payouts to top-performing desks, and may indeed wrangle more money,” the source added.

BofA’s final bonus decision will hinge on how the fourth quarter plays out. Already, conversations have prompted senior managers to decrease bonus expectations as they conduct year-end meetings with subordinates. 

In a recent weekend briefing, a fixed-income manager told traders that they should expect bonuses that are flat compared with last year. 

New York consulting firm Johnson Associates recently released a note showing how third-quarter compensation analysis points to overall year-end incentives, including cash bonuses and equity awards, will decline on the year for Wall Street. 

“The pandemic is wreaking havoc on many parts of the U.S. economy this year, and the financial services industry is no exception,” said Alan Johnson, managing director of Johnson Associates. 

While retail and commercial bankers and asset management firms are expected to see year-end compensation incentive declines, Johnson said, he noted fixed income and equities traders could see large bonuses, anywhere from 20% to +45% over the previous year. 

For big Wall Street banks, the optics of big bonuses for traders may not be a good look as tens of millions of Americas have food and housing insecurity issues. 

By Michael Every of Rabobank

30,000 Dow, 20,000 Leagues

Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000!

Did I mention Dow 30,000?

The Dow – she is slightly more than 29,999.

The Dow is 10,000 above the number in the title of Jules Verne’s classic early sci-fi novel ’20,000 Leagues Under the Sea’.

The above more or less captures the breadth and depth of financial market coverage of ‘key events’ of the past 24 hours. As often repeated here, this is not an equity-focused Daily. However, clearly a US benchmark equity index passing into a whole new “DOW XX,XXX!” baseball-hat territory is worth mentioning. A little. Even President Trump, in-between court cases that still have what some election law experts describe as a ‘Hail Mary’ chance of prevailing, held an emergency press conference to announce the significance of the Dow development, which was very much in keeping with his equity-focused presidency.

So, 30,000. Wow. Who could ever have seen that coming at a time of infinite global central-bank liquidity?

Infamously, economists Hassett and Glassman published a book called “DOW 36,000” (no exclamation point) all the way back in 1999. Pop quiz: how many burst US bubbles ago was that? The book trumpeted that this goal would happen by 2002 or 2004. Maybe we will get there by 2022 or 2024…which economists may still try to call a win, because economists are funny like that. Inadvertently funny, but very much so. By the way, Hassett was Chairman of the Council of Economic Advisors under Trump from 2017-19; Glassman was Under Secretary of State for Public Diplomacy and Public Affairs from 2008-09, and from 2009-13, executive director of the George W Bush Institute (For Policymakers Who Can’t Forecast Good and Who Wanna Learn to Do Other Stuff Good Too).

But back down to 20,000 – leagues. There is a huge amount of important stuff still going on in the depths across geographies and geopolitics and markets. Massive global realignments and structural shifts are about to occur if Biden shifts policy, or if he continues on from what Trump was doing, or even if Trump somehow manages to prevail: that covers all bases.

Yet much of the media are opting to merely dip their toes in these deep, dark waters. For example, yesterday saw one US journalist tweet about Joe Biden’s socks as a contrast with George W. Bush’s.

George H.W. Bush was known for his socks, maybe Biden will be too? Today he wore dark blue socks adorned with lighter blue dogs. (Yes, there are plenty of more substantive things to tweet about but we can have some fun sometimes too.) pic.twitter.com/8xxTusXafQ

— Jennifer Epstein (@jeneps) November 23, 2020

Is this, along with “DOW XX,XXX!” really going to be the kind of analysis we see ahead? If so –and steel yourself for the incoming pun, folks– we are 20,000 Leagues above the ‘see’. Some will love that, while others will be feeling seasick.

At a tangent, I can see some parallels between Verne’s 1870 world of ‘20,000 Leagues Under the Sea’ and the late-2020 world of Dow 30,000.

• Verne’s hero is Captain Nemo. Yes, kids, the fishy Nemo you know today is a post-modern reference to classic 19th century French sci-fi: how about that? And Verne’s own use of Nemo was a translation from the Latin translation of the ancient Greek for “No man”, a reference to Odysseus’s escape after his clash with the Cyclops Polyphemus: how about that? Things that look modern can actually have very deep roots; and there is usually more going on under the surface than the child-friendly animation, and associated merchandising, we see.
• Verne’s iteration of Nemo travels the world’s seas in his futuristic submarine The Nautilus like a crypto libertarian of the kind looking at Bitcoin today and grinning: that after his homeland had been conquered and his family slaughtered by a powerful imperialist nation. (“I am not what is called a civilized man, Professor. I have done with society for reasons that seem good to me. Therefore, I do not obey its laws.”) He is chased down by navy vessels from the US in particular. 
• The Nautilus has a battle with a giant squid: hasn’t the latter been used as a market metaphor by Matt Taibbi in recent years, and aren’t we hearing about a political Kraken from some (leftfield, or rather rightfield) quarters?
• Nemo also offers the following wise words: “…we cannot prevent equilibrium from producing its effects. We may brave human laws, but we cannot resist natural ones.”

Anyway, I need to come up for air, so let’s raise the periscope and see what’s up there…

Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000!

Just days after UK Prime MInister Boris Johnson confirmed that the 2nd English COVID-19 lockdown would soon come to an end (as England is expected to revert back to the tiered system of restrictions that preceded it), Chancellor Rishi Sunak on Wednesday shared some grim numbers about the state of the British economy with Parliament.

With global stocks on track to clinch their strongest monthly performance in modern history, Sunak warned that the British economy is set to contract by by more than 11% in 2020, the biggest annual contraction in 300 years – a period that has included at least one other global pandemic, and many, many wars.

It’s no secret that the UK has been one of the hardest-hit developed nations. With one of the highest COVID-19 death tolls in the world, British leaders have imposed some of the harshest restrictions on movement and businesses in all of Europe.

With the UK budget deficit ballooning toward a new post-war high, the chancellor is focusing on providing support for jobs and the unemployed, plowing tens of billions of pounds into infrastructure spending, and ensuring the British health-care system is ready for another onslaught of patients.

Bloomberg noted that the double-digit economic contraction appears to be the worst since 1709, when the Great Frost of 1709 (the coldest winter European has seen in at least the last 500 years) caused thousands of Britons to die of frostbite and its economy to contract by 13.4%.

Sunak also unveiled plans for a budget swollen by record borrowing. Although the Conservative Chancellor announced widely expected limits on public-sector pay and cuts to foreign aid programs – a measure that has the support of 60% of the British public, according to public opinion polls =  he also authorized spending including £4.3 billion to help the unemployed back into work, and £3.7 billion for schools and further education colleges, along with the same amount for hospitals. The most noteworthy announcement has been the biggest uptick in defense spending in three decades: a four-year, £24 billion investment in the country’s armed forces.

Source: Bloomberg

Sunak’s budget will ultimately represent the conservatives fiscal legacy during the age of the coronavirus. As Bloomberg pointed out, the spending review isn’t a tax event, and British Treasury-watchers are curious to hear how Sunak plans to guide the country’s finances.

Of course, while forecasts see a strong rebound next year, the OBR – the British equivalent to Washington’s OMB – pointed out that if Brexit deal talks conclude without a deal, Britain could see two whole percentage points of growth lopped off the top next year, while unemployment in the country could also spike if the country’s trading relationship with the EU reverts to WTO rules – what Prime Minister Boris Johnson has  couched as reverting to an “Australia-style” deal.

Authored by Mike Shedlock via MishTalk,

Lacy Hunt at Hoisington Management has two potential sources of inflation on his mind.

Third Quarter Outlook

Please consider the Hoisington Quarterly Review and Outlook for the third quarter of 2020.

 

Lacy Hunt starts off with conditions central banks must meet to stimulate the economy.

Four Conditions

1. The Fed must be able to control the  monetary base by increasing its liabilities

2. The Fed’s power to stimulate economic conditions is a stable relationship between the monetary base and the money supply, M2.

3. The velocity of money (V) must be stable, although not constant. If V is stable, then changes in M2 will control swings in nominal GDP.

4. The Fed must have wide latitude to lower the short-term policy interest rate. It had been long recognized that if short-term rates approached the zero bound, monetary capabilities would be diminished.

Monetary Base and Velocity Discussion

The Fed can of course increase the monetary base at will. 

Regarding Velocity, Hunt’s statement “If V is stable, then changes in M2 will control swings in nominal GDP,” is accurate, by definition. 

V = GDP / M2

However, velocity has no life of its own. It is a result, not a cause. The Fed cannot control velocity now, nor could it ever.

Velocity can rise of fall with rising or falling prices or rising or falling GDP. 

For discussion, please see If the Velocity of Money Picks Up Will Inflation Soar?

Latitude to Cut Rates

Point 4 is the key. The Fed has no latitude to cut rates.

Unlike the ECB, the Fed is even aware of this. They are fearful of cutting rates below the ELB “Effective Lower Bound” 

ELB is the point at which further cuts are detrimental in the long run. 

ELB Discussion

1. June 4, 2019: Powell Ready to Cut Rates to “Effective Lower Bound” via “Conventional” Policy

2. September 25, 2019: In Search of the Effective Lower Bound

3. September 22, 2019: ECB’s New Interest Rate Policy “As Long As It Takes” Huge Failure Already

A Fed study in November of 2019 on Effective Lower Bound Risk confirmed what I had to say in the above links. 

In an empirically rich model calibrated to match key features of the U.S. economy, we find that the tail risk induced by the ELB causes inflation to undershoot the target rate of 2 percent by as much as 50 basis points at the economy’s risky steady state. Our model suggests that achieving the inflation target may be more difficult now than before the Great Recession.

I was not aware of the Fed study on the ELB until now. It came up when I searched for my ELB discussion to add to what Lacy had to say.

Five Negative Impacts of ECB’s Negative Rates

1. Negative rates further weakened already weak European banking system by charging them interest on excess reserves.

2. Negative rates kept zombie companies alive at the expense of productive ones. 

3. Negative rates destroyed bank profits. 

4. Negative rates added to unproductive long term debt.

5. Negative rates increased speculation.

As I have pointed out on numerous occasions, the Fed slowly recapitalized US banks by paying them interest on excess reserves, the ECB weakened them.

The Fed can see that negative interest rates in Europe and Japan were counterproductive. 

Thus, I highly doubt the Fed takes interest rates below zero. However, the Fed may make other huge policy errors.

Only One Condition the Fed Can Control

Currently, of these four conditions, only  the first one prevails, and it is the least important of the four. The Fed can control the monetary base by increasing its liabilities (bank reserves). The three other, and far more critical, conditions are no longer present due to the extreme over-indebtedness of the U.S. economy. 

Thus, monetary policy is left with one-sided capabilities i.e., they can restrain economic activity by reducing reserves and raising rates, but they are not capable of stimulating economic activity to any significant degree.

Indeed, the risk is that the Fed has already overshot the ELB as that rate is somewhat above zero. 

It certainly is not less than zero as evidenced by the miserable results obtained by the ECB and Bank of Japan.  

What about inflation risks?

With that question, let’s once again turn back to Lacy.

Inflation Tail Risks

We identify two tail risks for long term Treasury investors: (1) a huge new debt financed fiscal package and (2) a major change in the Fed’s modus operandi. The first risk would change the short-run trajectory of the economy. This better growth, although short lived, could place transitory upward pressure on interest rates in a fashion that  has been experienced many times. Over the longer run, disinflation would prevail and the downward trend in Treasury yields would resume. 

The second risk would bring a rising inflationary dynamic into the picture, potentially becoming much more consequential. As this dissatisfaction intensifies, either de jure or de facto, the Federal Reserve’s liabilities could be made legal tender, or a medium of exchange. Already, the Fed has taken actions that appear to exceed the limits of the Federal Reserve Act under the exigent circumstances clause, but so far, they are still lending and not directly funding the expenditures of the government in any meaningful way. But some advocate making the Fed’s liabilities spendable and a few central banks have already moved in this direction. If the Fed’s liabilities were made a medium of exchange, the inflation rate would rise and inflationary expectations would move ahead of actual inflation. In due course, Gresham’s law could be triggered as individuals move to hold commodities that can be consumed or traded for consumable items. This would result in a massive decline in productivity, thus real growth and the standard of living would fall as inflation escalates. 

As long as the federal government’s policy prescription is ever higher levels of debt, the path toward disinflation will hold and long Treasury bonds will be the preferred area of the curve. The continuing shift in economic conditions over the past forty years has necessitated several dramatic changes in our yield curve positioning. That flexibility remains constant. 

Looking for Inflation in All the Wrong Places

Those are very important paragraphs by Lacy. They explain why inflation has not picked up as most economists including the Fed expected.

There is inflation of course, and huge amounts of it. But the Fed is looking for inflation in all the wrong places.

Inflation exists in asset prices of stocks and junk bonds. Speculation is rampant. Robinhood has turned millions of millennials into day traders who are now convinced that stock prices only go up. 

Meanwhile the economic bubbles keep expanding and when they bust we will see a deflationary credit bust that the Fed ought to fear instead of the CPI deflation which the Fed foolishly does fear.

Economic Challenge to Keynesians

Of all the widely believed but patently false economic beliefs is the absurd notion that falling consumer prices are bad for the economy and something must be done about them.

My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.

BIS Deflation Study

The BIS did a historical study and found routine deflation was not any problem at all.

“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the BIS study.

For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?

Conclusion

Central banks are fighting a deflation boogie man that does not even exist, creating a debt deflation monster in the process.

The tail risk is the Fed goes too far down the rabbit hole unleashing a different kind of monster.

*  *  *

US durable goods orders were expected to slow their growth in preliminary October data, but instead rose more than expected, up 1.3% MoM (vs +0.8% exp). However, despite the beat, durable goods orders remain down 1.1% YoY…

Source: Bloomberg

After March and April’s collapse, durable goods orders have risen for 6 straight months.

Shipments of core capital goods, used to form estimates of business equipment investment within the government’s gross domestic product report, surged 2.3% MoM (well above the +0.4% MoM expected).

With traders’ eyes looking beyond Q4 GDP and to Q1 2021, where some banks such as GDP are already expecting a double dip with a -1.0% contraction forecast, few will care how or why the BEA revised its estimate of the record Q3 GDP, but for the record, moments ago the Dept of Commerce announced that in the third quarter, GDP rose an annualized 33.1%, unchanged from the first estimate released in October, and on top of consensus expectations.

Of note, personal consumption rose 40.6% in 3Q after falling 33.2% prior quarter, and just missing the 40.9% estimate. While the overall change in GDP was unrevised from the advance estimate, upward revisions to business investment, housing investment, and exports were offset by downward revisions to state and local government spending, inventory investment, and consumer spending. Imports were revised up.

Specifically:

• Personal Consumption was revised modestly from 25.27% in the original estimate to 25.22%
• Fixed Investment rose from 4.96% to 5.23%
• The Change in Private Inventories dipped from 6.62% in the original estimate to 6.55%
• Net exports detracted -3.17% from GDP, modestly more than the -3.09% in the original estimate
• Government consumption subtracted -0.76% from the final number, up from -0.68% in the original estimate

The BEA also calculated that profits increased a record 27.1% at a quarterly rate in the third quarter after decreasing 10.3% in the second quarter. Corporate profits increased 3.3% in the third quarter from one year ago. Profits were impacted by provisions from the Paycheck Protection Program. More details:

• Profits of domestic nonfinancial corporations increased 43.8 percent after decreasing 12.9 percent.
• Profits of domestic financial corporations increased 5.4 percent after increasing 6.1 percent.
• Profits from the rest of the world increased 10.3 percent after decreasing 18.9 percent.

Finally, for inflation watchers, the GDP price index rose 3.6% in 3Q after falling 1.8% prior quarter; it was unchanged from the original estimate. Meanwhile, core PCE rose 3.5%, also in line with expectations, after falling 0.8% prior quarter.

For the second week in a row, the number of Americans filing for first time unemployment claims has risen (printing at 778k vs 730k exp and 742k prior)…

Source: Bloomberg

Illinois, Michigan, Washington, and California (all Democrat-run) were the states that suffered the largest surge in initial claims while Louisiana and Massachusetts saw the biggest drop in claims…

But as continuing claims fall – but were worse than expected – the Pandemic Emergency Claims are soaring as Americans drop off the standard unemployment benefits…

Source: Bloomberg

Worse still, the aggregate number of Americans receiving unemployment benefits rose over 130k last week to well above 20 million. This is the first increase since Sept 11th…

And this is before the more wide-spread lockdowns have hit.

Authored by Bill Blain via MorningPorridge.com,

“Six impossible things before breakfast…”

As US Stocks hit a cosmetic high, Bitcoin roars higher and Tesla defies gravity, what does it all mean? Have you planted your spring bulbs yet? 

Markets will remain irrational longer than I can keep shouting how daft they are. I am getting a little hoarse from my repeated warnings. (Does that explain this morning’s picture?)

Dave Portnoy, sports commentor turned stocked picker, is apparently right – stocks do only go up.  It hurts to have been be so wrong about Tesla – my wallet knows I’m an idiot because Tesla has risen around 700% higher since I sold the bulk of my position in 2018. Ouch. Bitcoin is the new gold – as I warn it’s a scam, it soars towards $20,000. There are a deal of stocks that have quintupled this year, and I own very few of them. 

For all the market fears, stock markets have never been so busy. Volumes are up 75% – largely on retail finding something to do during lockdown! The retail no-fees brokerage sites keep crashing, unable to keep up with demand. Does that ring any alarm bells? Perhaps it should be. When shoe-shine boys are giving you stock tips.. beware.

From an investment perspective, not listening to me rant about bubble stocks and scams makes sound financial sense. Which is a very good reason to keep reading the Morning Porridge every day – remember my musings are only my opinions, but learn from my mistakes and what I miss. And, for every day that I am resoundingly wrong about everything…. increases the probability I will eventually be right.. Probably. Maybe.. (I was right about WeWork, but it took time..)

In terms of the larger market I am currently in a quandary – or maybe schizophrenic. Maybe Portnoy et all are right? Maybe this time it is really different? Maybe the background to rising stock prices is strong because the whole investment ecosystem is so changed? 

There is certainly some logic in that argument. The big picture is simple: ultra-low interest rates have repressed yields – meaning investors have to take greater risks to achieve returns. That favours stocks (even tho returns don’t justify the risks). All these years of pumping money into financial assets via QE means there are huge amounts of money sloshing around financial markets – which will be more than enough to fuel ongoing stock market upside. If Democrats get their way, (and win Georgia senate races) then Janet Yellen could be pumping trillions more into markets. 

Financial markets are also fractal. The same patterns and relationships we see from the top-level big-picture perspective repeat right down to individual financial assets, stocks, bonds, contracts and commodities. What happens on high reflects at street level.

The amount of money available, ongoing QE and interest rate repression and the imminent pandemic recovery all favour stocks – but they are not valid reasons to believe in the existence of gold lined unicorn poop. 

Every morning I face this cursed computer screen and try to say something sensible about markets. The problem is… I’ve got all the wrong qualifications for trying to logically explain this stage in the market cycle and the peculiar madness of crowds. I’m a bond salesman, an economist with a modest ability to turn a phrase on the word processor – I’m not a shrink! I know diddley-squat about mass psychology, shared-delusion-syndromes, the power of “We”, all of which might rationally explain irrational beliefs in improbable things like the value of Tesla, that Bitcoin will beat big-government, or that Comet Hale-Bopp is a spaceship come to rescue us from Earth. 

How quickly we forget. 

Its barely a month since Donald J Trump warned us the stock market would crash if Biden won the election. Yesterday he made a guest appearance in front of the White House press corps crediting his administration for the Dow rising through 30,000 yesterday. The man is hailed as a genius, and he didn’t waste our time talking about any of the other less important stuff. 

Some serious stock picking types are on the wires this morning saying yesterday’s gain reflected the reality of Biden being effectively confirmed as President-elect, the smart choice of Yellen as Treasury secretary, and pandemic vaccines as collective and reinforcing reasons why the Dow broke the 30k barrier. The market chose to ignore the imminent lockdowns in California and NY just a day ahead of the Thanksgiving holiday. 

30,000 on the Dow is just a number, but it has resonance with investors who want to be validated, vindicated and affirmed for their financial acumen backing this market, improbable stock stories, and imaginary currencies only a cartel chief gets any utility from. Their success has got everyone else thinking – how can I get so rich so quick? Let’s put my corona-savings into the stock market, they all think, terrified by the Fear Of Missing Out – FOMO. 

And yes, I think it’s terribly unfair. These poor people… They know what they are doing; getting horribly rich by joining an apparently unstoppable stock market rally. 

And it hurts. Because I am missing out by not buying the Tulip stocks. My stock portfolio is doing nicely in solid equity names I understand and have hopes for – but a 700% gain would have accelerated my retirement plans if only I hadn’t sold most of Tesla position!

The problem is… I suffer from a fairly bad case of a dread financial disease. It’s the asbestosis of financial markets, brought on by too many years spent at the coal face of broking. It’s called Experience. I have seen all this before… I have seen hopes, dreams and expectations shot down in flames. I have felt the agony of beautifully crafted financial structures collapsing into the dust. 

As a mere office-lad I survived the Great Perp Crash of ’85 and Black Monday in 87. I’ve subsequently spent a career dodging bullets like the Gulf War sell-off, Black Wednesday as Sterling tumbled and my mortgage rate hit 16%, the Asian crisis, the Russian crisis (where I bought Russian zeros as a joke (I had a couple of Tsarist Bonds on my wall and thought I’d continue the series)), the Dot-Com bubble bursting, 9/l1, the Global Financial Crisis of 2007-31, the European sov debt crisis, and now the Pandemic… 

(Please Grandad.. tell us all about the war…)

These were just the highlights. There were innumerable pinnacles and troughs of doubt and despair in between the big moments. Wondering what a downgrade would do to a stock price, what an announcement really meant, how an unexpectedly strong jobs number would crash the whole bond market, anticipating how the EU would nix or save Greece, or what the death of business founder might mean for the stock. Every moment was a lesson.

There are no hard and fast rules on how markets react to news, new-flow and trends. That’s why the best algorithms will never beat the best traders who can judge and feel the mood while weighing it against the reality. 

What I do know is markets go up and down. I know that every major sell-off is inevitably followed by a recovery. The trick is knowing where the bottom is. I missed the bottom in March – wrong because I underestimated how bullish the market was on handouts and QE Infinity. As it became clear where the market was going I re-entered and have done very well on my core stocks I’ve picked because of solid valid fundamentals. I’ve increased allocations to stocks and Asia. 

But even on my core stocks, the upside has come not from fundamentals, or economic resilience, but because government bailouts and Central Banking distortions have fuelled the market. In some cases that distortion effect has become pure hype. Its difficult to argue with hype.

If there is a theme to hyped markets its: “You Don’t Understand”. 

They are right. I don’t understand – and no one is able to explain. 

Tesla’s inclusion in the S&P has triggered another huge rally. I just look at the numbers; the margins, its sales, the competition, and conclude its valuation makes little sense. I try to understand its’ potential value as car maker, a battery maker, a lithium miner, self-driving software firm, or the latest iteration; an insurance firm. None of the things its claims to be make any kind of financial sense.. but people believe and tell me I don’t understand. 

I wrote about Bitcoin last week and was harangued for not-understanding how widespread adoption will catapult it 15x higher in the next year. When I questioned the motivations behind bitcoin promoters – its latent criminality, the crutch it provides for the loony libertarian right, and want-to-get-rich scams – I was told I don’t understand. 

When I asked for evidence of widespread US electoral fraud I was screamed down and told I don’t understand. 

So… please explain what I don’t understand? Until you do, I will stick to what I do understand:

Blain’s Market Mantra No 1:

The Market has but one objective – to inflict the maximum amount of pain on the maximum number of participants. 

Blain’s Market Mantra No 4:

The magical smart moment to buy/sell is some point before you think about it. Timing is luck.

Blain’s Market Mantra No 5:

Missing the first 10% of a rally is better than catching the first 10% of a crash

Blain’s Market Mantra No 6:

Things are never as bad as you fear – but never as good as you hope. 

Blain’s Market Mantra No 11:

Markets are about emotion – never be emotional in the way you play them. 

You can’t argue with markets – but I still know I am right. Tesla makes decent cars, but it’s not worth a fraction of its current stock market valuation. Bitcoin is a delusion. The thing I don’t know is how much the QE and Interest rate distortions of the last 12 years will sustain the unsustainable? Is this time really different? 

*  *  *

Get your wallets out and please consider making a donation to WWTW’s Walking Home For Christmas appeal! I would consider a small thanks for your daily Morning Porridge, but it’s a very worthwhile charity this difficult year: https://www.walkinghomeforchristmas.com/teams/team-morning-porridge

U.S. equity  indexes futures dropped alongside shares in Europe with Dow futures sliding back under 30,000…

… as a furious three-day rally paused ahead of a slew of pre-holiday economic indicators. Data, from jobless claims to consumer confidence and personal income, are due before markets close and traders head off for Thanksgiving.Ppositive vaccine news and the formal start of President-elect Joe Biden’s transition to power – including the selection of Janet Yellen as Treasury secretary – have fueled optimism about the outlook helping global shares hit record highs earlier on Wednesday, and were on course for their best month ever. S&P 500 futures, which roll from the December to the March contract, rose as much as 0.6% before reversing gains.

“All eyes on U.S. data,” David Madden, an analyst at CMC Markets UK, wrote in a note. He cited durable goods, an advanced reading of the third quarter gross domestic product and jobless claims among some of the indicators traders will be looking at on Wednesday.

Joe Biden on Tuesday introduced his foreign policy and national security team which was basically extracted from the Obama administration, after President Donald Trump cleared the way to prepare for the start of his administration. Reports that Biden planned to nominate former Federal Reserve Chair Janet Yellen as Treasury Secretary, potentially easing the passage of a fiscal-stimulus package to counter COVID-19 damage, also cheered markets. As a result of the newly found optimism, the MSCI all world index rose to a record high of 622.12. It was last trading flat, on course for a record monthly gain, before the rally reversed overnight, although that will likely prove temporary: a Reuters poll found that the rally for global stocks is set to continue for at least six months.

“The world is going to look a lot better this time next year than it does now, and that’s what equity markets are reflecting,” said Mike Bell, global market strategist at J.P. Morgan Asset Management. “The fact is the outlook has dramatically changed in the last month.”

The Stoxx Europe 600 Index edged lower, as cyclicals such as mining and energy firms fell, offsetting advances in defensives including utility shares. ABN Amro Bank NV and Commerzbank AG dropped more than 4% and led euro-area lenders lower after the European Central Bank said the industry will probably have to set aside more money to soak up losses when government pandemic support ends. European banking stocks retreated reversing gains following good news on dividend prospects from an FT report, according to which bank dividends would be allowed in 2021. However, less promising headlines from the ECB’s financial stability review poured cold water on that . While the central bank hasn’t made its stance clear, consensus seems to be that banks with bigger buffers and strong capital generation will be allowed to pay out some of the excess cash. However, dividend futures are barely moving, which implies that markets remain cautious on the outlook for payouts and are probably awaiting more clarity on the path of the economy.

Still, optimism around vaccine developments and expectations of a recovery in corporate confidence and profitability should also push European stocks to near record highs next year, a separate Reuters survey found.

Earlier in the session, MSCI’s index of Asia-Pacific shares outside Japan fell 0.4% erasing a gain of 1.1%, with Chinese shares capped by worries about rising debt defaults. Japan’s Nikkei rose to a 29-year high, though analysts and fund managers polled by Reuters foresaw a correction in the near term. Markets in Taiwan and South Korea also retreated.

As noted above, there is a literal tsunami of pre-holiday data on deck which includes everything from initial claims, to GDP, to capex, to new home sales, to the FOMC minutes:

• 8:30am: Initial Jobless Claims, est. 730,000, prior 742,000; Continuing Claims, est. 6m, prior 6.37m
• 8:30am: Advance Goods Trade Balance, est. $80.4b deficit, prior $79.4b deficit
• 8:30am: Wholesale Inventories MoM, est. 0.4%, prior 0.4%; Retail Inventories MoM, est. 0.6%, prior 1.6%
• 8:30am: GDP Annualized QoQ, est. 33.1%, prior 33.1%; Personal Consumption, est. 40.85%, prior 40.7%
• 8:30am: Core PCE QoQ, est. 3.5%, prior 3.5%
• 8:30am: Durable Goods Orders, est. 0.85%, prior 1.9%; Durables Ex Transportation, est. 0.5%, prior 0.9%
• 8:30am: Cap Goods Orders Nondef Ex Air, est. 0.5%, prior 1.0%; Cap Goods Ship Nondef Ex Air, est. 0.4%, prior 0.5%
• 10am: Personal Income, est. -0.1%, prior 0.9%; Personal Spending, est. 0.4%, prior 1.4%
• 10am: PCE Deflator MoM, est. 0.0%, prior 0.2%; PCE Deflator YoY, est. 1.2%, prior 1.4%
• 10am: U. of Mich. Sentiment, est. 77, prior 77; Current Conditions, prior 85.8; Expectations, prior 71.3
• 10am: New Home Sales, est. 975,000, prior 959,000; New Home Sales MoM, est. 1.67%, prior -3.5%
• 2pm: FOMC Meeting Minutes

“Now, there’s big event risk up ahead: FOMC minutes,” said Ilya Spivak, head Asia-Pacific strategist at DailyFX. “The worry is that the Fed will continue to signal that they’re keeping to a hands-off posture. No tightening, but no new easing either.”

Despite the overnight market wobble, investors remain optimistic that upcoming virus vaccines would help the industries hit hardest by the pandemic, from tourism to energy. Global energy shares have risen almost 34% so far this month, on track for their best month on record as crude prices rally. Oil prices held near their highest levels since March on the improved global economic outlook. Brent futures were up 1.2% to $48.42 per barrel, touching a high last seen in March.

In FX, riskier currencies gained against safe havens, though the under-pressure dollar showed resilience as the morning went on. The Australian dollar moved to its highest since early September, already helped by investors unwinding bets on additional monetary easing. The Bloomberg Dollar Spot Index erased losses after dipping in early European hours and the dollar traded mixed versus G-10 peers, though most currencies were confined to narrow ranges ahead of the U.S. Thanksgiving holiday on Thursday. The dollar is expected to fall further as progress on a vaccine and the expected choice of Yellen as the next U.S. Treasury secretary relieved two big uncertainties for investors. The euro fell against the dollar, and was last down 0.1% at $1.18835, giving up an earlier gain to trade near the $1.19 handle while Norway’s krone led G-10 gains as oil prices continued to rally. The pound swung between gains and losses, as investors awaited more news on Brexit and U.K. Chancellor of the Exchequer Rishi Sunak’s spending review. The New Zealand dollar held up following the central bank governor’s clarification on negative interest rates and a round of quantitative easing purchases.

Risk-on moves played out in bond markets, too. Yields on benchmark euro zone debt rose from record lows, with German Bund yields edged to near their highest levels in almost a week before reversing.  In the US, Treasuries were slightly richer across the curve in early U.S. trading as S&P 500 futures retreated from near-record highs. Yields were lower by ~1bp at long end of the curve, flattening 2s10s and 5s30s spreads by less than 1bp; the 2- , 5- and 7-year notes sold at auction Monday and Tuesday trade at profits, and potential exists for large month-end buying flows. No coupon supply events are slated ahead of Thursday’s U.S. holiday, however a pending economic data dump includes 3Q GDP revision, October durable goods orders and Nov. 5 FOMC minutes.

Bitcoin edged up 0.8% to $19,1420, staying within sight of its record peak of $19,666 after notching gains of nearly 40% in November alone.

Looking at today’s calendar, it’s a shitshow, with data on everything from initial jobless claims, the second estimate of Q3 GDP, durable goods orders, personal income, personal spending and new home sales, along with the final University of Michigan sentiment reading for November. From central banks, the Fed will be releasing the minutes of their November meeting, the ECB will publish their Financial Stability Review, and the ECB’s Holzmann will be speaking. Finally, the aforementioned spending review in the UK will be taking place.

Market Snapshot

• S&P 500 futures little changed at 3,632.50
• STOXX Europe 600 down 0.2% to 391.65
• MXAP down 0.06% to 191.33
• MXAPJ down 0.4% to 630.98
• Nikkei up 0.5% to 26,296.86
• Topix up 0.3% to 1,767.67
• Hang Seng Index up 0.3% to 26,669.75
• Shanghai Composite down 1.2% to 3,362.33
• Sensex down 1.6% to 43,813.45
• Australia S&P/ASX 200 up 0.6% to 6,683.33
• Kospi down 0.6% to 2,601.54
• Brent futures up 1% to $48.34/bbl
• Gold spot up 0.3% to $1,812.63
• U.S. Dollar Index down 0.1% to 92.12
• German 10Y yield fell 1.1 bps to -0.574%
• Euro up 0.03% to $1.1896
• Italian 10Y yield fell 1.2 bps to 0.501%
• Spanish 10Y yield fell 1.0 bps to 0.064%

Top Overnight News from Bloomberg

• Euro-area banks will probably have to set aside more money to soak up losses when government pandemic support ends and the economy grapples with massively increased debt, the European Central Bank said
• European Commission President Ursula von der Leyen said the coming days will be “decisive” for trade negotiations with the U.K. and crucial differences between the two sides remain
• As Treasury secretary, Janet Yellen is almost certain to pursue tighter coordination with the U.S. Federal Reserve next year — repairing recent frictions — though observers say she will be careful to avoid any specific move that could trigger a wave of Republican protests
• German Chancellor Angela Merkel is proposing a further tightening of the country’s coronavirus restrictions, setting the stage for another tense round of discussions with the country’s state premiers who favor more lenient measures
• The deadlock over the European Union’s $2 trillion spending package may not be resolved soon, potentially depriving Hungary of much of its funding from the bloc next year, Finance Minister Mihaly Varga told the Vilaggazdasag business daily
• A ECB-backed committee is exploring options for a transition should Euribor, one of the cornerstones of the European Union’s financial system, cease to exist
• A significant number of asset managers risk being locked out of the interest-rate swaps market early next year unless they sign on to a new protocol designed to smooth the transition away from Libor, warned the chairman of the U.S. Commodity Futures Trading Commission
• Coronavirus restrictions in the U.K. will be eased over Christmas to allow as many as three households to meet indoors
• BOE policy maker Michael Saunders warned that the turn of the year will be rocky under the twin impacts of the coronavirus and Brexit — though the latter will ultimately be the bigger challenge

 

 

 

US Event Calendar

• 8:30am: Initial Jobless Claims, est. 730,000, prior 742,000; Continuing Claims, est. 6m, prior 6.37m
• 8:30am: Advance Goods Trade Balance, est. $80.4b deficit, prior $79.4b deficit
• 8:30am: Wholesale Inventories MoM, est. 0.4%, prior 0.4%; Retail Inventories MoM, est. 0.6%, prior 1.6%
• 8:30am: GDP Annualized QoQ, est. 33.1%, prior 33.1%; Personal Consumption, est. 40.85%, prior 40.7%
• 8:30am: Core PCE QoQ, est. 3.5%, prior 3.5%
• 8:30am: Durable Goods Orders, est. 0.85%, prior 1.9%; Durables Ex Transportation, est. 0.5%, prior 0.9%
• 8:30am: Cap Goods Orders Nondef Ex Air, est. 0.5%, prior 1.0%; Cap Goods Ship Nondef Ex Air, est. 0.4%, prior 0.5%
• 10am: Personal Income, est. -0.1%, prior 0.9%; Personal Spending, est. 0.4%, prior 1.4%
• 10am: PCE Deflator MoM, est. 0.0%, prior 0.2%; PCE Deflator YoY, est. 1.2%, prior 1.4%
• 10am: U. of Mich. Sentiment, est. 77, prior 77; Current Conditions, prior 85.8; Expectations, prior 71.3
• 10am: New Home Sales, est. 975,000, prior 959,000; New Home Sales MoM, est. 1.67%, prior -3.5%
• 2pm: FOMC Meeting Minutes

DB’s Jim Reid concludes the overnight wrap

Well I heard “Fairytale of New York” for the first time in 2020 yesterday and my wife put on a Michael Buble Xmas album over dinner last night, but as regular readers know I don’t get into the Xmas spirit until I hear “Last Christmas” by Wham! Today marks a month until Xmas and only 22 trading days until the big day including today. If you assume that Thanksgiving tomorrow and Friday are near write offs then that leaves you with two less. So we are certainly getting to the end of a forgettable but ultimately unforgettable year.

The Santa Claus rally has already been underway since the election with the extra cyclical Santa treat coming in the form of the recent vaccine news. Indeed global equity markets rallied once again yesterday with the notional highlight being the Dow Jones breaking through the 30,000 barrier for the first time as investors were relieved by the prospect of a smooth presidential transition following the General Services Administration’s move to commence the process. Though President Trump said in a tweet yesterday that “the GSA does not determine who the next President of the United States will be”, the move has allayed market fears that the US will face extended political uncertainty in the coming weeks, and comes as increasing numbers of states have moved to certify their election results, with Pennsylvania the latest to announce yesterday. As well as this, another catalyst from after the previous day’s European close was the choice of former Fed Chair Yellen to be Biden’s Treasury Secretary, since she’s seen as someone who’ll coordinate well with the Federal Reserve and be market friendly.

As mentioned, the Dow Jones (+1.54%) moved to an all-time high, aided by a +4.56% move from Boeing. The S&P 500 was also up +1.62% to its own all-time high, though the NASDAQ lagged a little with a +1.31% rise as tech stocks underperformed the broader equity market. Our new favourite measure, namely the equal weight S&P 500, was +2.18% showing the bias to the non-mega caps. On this, in yesterday’s CoTD we showed how the top ten largest companies in the world were at that highest share relative to the next 90 largest since we have data and probably a lot further back than that. We think a vaccine will be the turning point towards normalising that relationship. See the graph here .

With the mega-cap tech stocks underperforming the story remains on the normalisation theme. US small caps stocks rose +1.94%, having gained in seven of the last eight sessions. The ratio of the Russell 2000 over the NASDAQ is just shy of its highest level of the pandemic so far with the small cap index on track for its best month ever. On the single stock level, the strong performances by Carnival (+11.28%), United Airlines (+9.85%), MGM Resorts (+8.80%) and Royal Caribbean Cruises (+7.72%) showed how the travel industry continues to respond positively to the vaccine headlines. In other back-to-normal moves, bank stocks continued improving on both sides of the Atlantic with S&P 500 Banks rising +5.53% and their European counterparts rising +4.66% yesterday as core yields continued to rise.

Big moves higher were also seen from energy stocks (+5.16% in US and +4.65% in Europe) as both Brent Crude and WTI oil prices rose to a post-pandemic high of $47.86/bbl and $44.91/bbl respectively. Europe missed out on the last legs of the US rally last night but the STOXX 600 rose +0.91% to reach a post-pandemic high, while the DAX rose +1.26% to move back into positive territory on a YTD basis.

Overnight, Xinhua has reported that Sinopharm has submitted an application in China to bring its Covid-19 vaccine to the market. The application is believed to include data on the company’s Phase III trials conducted in the Middle East and South America. This application will likely make Sinopharm the first developer outside of Russia to see its shots made available for general public use. Sinopharm’s vaccine already had emergency use authorisation in China and according to reports they have been given to hundreds of thousands of people so far. They have not released any public data on the efficacy of its shots though. A Chinese vaccine would be helpful for the ASEAN countries as most of them have pre-dose agreements with China. Elsewhere, we saw new information from AstraZeneca that showed that the more successful half dose/full dose measure was only given to those under 55 years old.

Asian markets are trading a little more mixed this morning after paring early larger gains. The Nikkei (+0.76%) and Hang Seng (+0.44%) are still up while the Shanghai Comp (-0.33%) and Kospi (-0.94%) have turned red. Meanwhile, futures on the S&P 500 are up a modest +0.08% and the US dollar index is down -0.14%.

In other overnight news, Bloomberg has reported that Treasury Secretary Steven Mnuchin will put $455bn in unspent Cares Act funding into the agency’s General Fund which will then require Treasury Secretary elect Yellen to seek congressional approval for using the monies. Most of this money had gone to support the Fed’s emergency-lending facilities. Elsewhere, the FT has reported that the ECB is signaling that it could lift the ban on bank dividends next year.

The flip side of the positive news yesterday was that safe havens struggled once again, and gold prices fell another -1.65% to a fresh 4-month low of $1,808/oz. In FX as well, the traditional safe-haven Japanese yen was the worst-performing G10 currency for the second day running. As referenced above, it was a similar story for core sovereign bonds, with yields on 10yr Treasuries (+2.6bps), bunds (+1.8bps) and gilts (+1.2bps) all rising, though there was a tightening of peripheral spreads in line with the broader rally in risk assets. Notably, yields on Italian 10yr BTPs fell to an all-time low yesterday of 0.61%, and their spread over 10yr bund yields fell to a 2-year low of 1.17%.

One asset that didn’t struggle yesterday was Bitcoin, which surged another +2.84%, closing at $18,945 which was just shy of the all-time closing high of $19,042. It didn’t quite breach its all-time intraday high in December 2017 of $19,511, but the cryptocurrency broke the $19,400 mark intraday. The move still leaves Bitcoin up +164.66% up on a YTD basis. Meanwhile Tesla rose +6.43% to a fresh record high that saw the company’s market cap surpass $500bn for the first time, with the share price having surged +564% since the start of the year.

Here in the UK, attention today will focus on the government’s Spending Review, as well as the Office for Budget Responsibility’s latest forecasts for the economy and the public finances. This is just a one-year review for 2021-22, but it will be interesting to see what the long-term fiscal picture looks like as well as the extent of tightening pencilled in for the year ahead. Fortunately for the government there have been signs that the latest lockdown is having an effect on the Covid numbers, with the number of daily confirmed cases falling to 11,299 yesterday, the lowest since October 2, while the latest 7-day average of 18,295 was also the lowest in just over a month.

Elsewhere on Covid, French ICU occupants which currently sits at just shy of 4500 is expected to fall below 3000 by the end of the month, and to under 1500 by the middle of December according to the Istitut Pasteur. The research centre added that they estimate that 11% of the overall French population has already been infected by the virus. This came as President Macron announced that the lockdown measures will be lifted gradually from this Saturday onward when small stores can reopen. Notably, restaurants will remain closed until January 20, but much of the lockdown is set to be lifted by December 15. However ski resorts will stay shut until the new year which means I now won’t be skiing at Xmas.

In an effort to contain the virus’s spread around the Thanksgiving holiday in the US, New York City will have checkpoints at specific bridges and crossings to enforce the travel quarantine and set up testing appointments. These will not be used for those travelling to contiguous states but the city’s measures will be enforced for those using the city’s airports and train stations.

On the data side, the Ifo’s business climate indicator from Germany fell to 90.7 in November (vs. 90.2 expected). That’s the second consecutive monthly decline and comes on the back of rising restrictions in Europe in response to the second wave of the pandemic. Over in the US, the Conference Board’s consumer confidence indicator also fell in November to 96.1 (vs. 98.0 expected), and the expectations indicator fell for a second month running to 89.5.

To the day ahead now, and there’s an array of US data releases ahead of tomorrow’s Thanksgiving holiday, including the weekly initial jobless claims, the second estimate of Q3 GDP, the preliminary reading of October’s durable goods orders, October’s personal income, personal spending and new home sales, along with the final University of Michigan sentiment reading for November. From central banks, the Fed will be releasing the minutes of their November meeting, the ECB will publish their Financial Stability Review, and the ECB’s Holzmann will be speaking. Finally, the aforementioned spending review in the UK will be taking place.