Month: March 2016

Back in November, when it was laying out its (five out of six wrong) Top Trades and predictions for 2016, Goldman strategists forecast that because the “US will be the first to grow GDP demand above potential” the stock market party would be over and that the “Bernanke Put” would be replaced with the “Yellen Call.”

Specifically, this is what Goldman predicted:

We see a risk that the ‘Bernanke put’ will gradually be replaced by the ‘Yellen call’. The ‘Bernanke put’ captured the intuition that when the risks to growth, inflation and market sentiment are skewed to the downside and the Fed has an easing bias, monetary policy reacts aggressively to bad news. Now that these risks have receded, we expect the Fed will shift to an easing bias, implying that monetary policy will likely begin to react more aggressively to good news. The inflection point for this shift to an easing bias will arguably arrive in 2016, beyond which rallies in risk sentiment may be met by less accommodative monetary policy – the ‘Yellen call’.

We did not see things this way and said the following:

“while we agree with Goldman that multiple contraction is long overdue, we fail to see where earnings growth will come from, especially if, as Goldman also said recently, companies are now punished for buying back their own stock which in turn is the main driver pushing EPS to record highs in recent years. In fact, just like global GDP growth, we expect EPS to continue declining in the next year now that margins have peaked, if companies indeed are raising wages. Because with revenues set to drop for 4 consecutive quarters, there is simply not enough growth, either in the global economy or on corporate income statements, to justify being bullish about either.”

We were right not only about earnings crashing (Q1 EPS is now expected to plunge -8.7% compared to a consensus increase in December), but also about global growth slowing down (Altana Fed’s latest Q1 GDP forecast is 0.6%, nuf saif); Goldman was wrong.

We also said the probability of “bad news being bad news” again is slim to none. And, as Yellen just confirmed following the Shanghai Accord that shall not be named, bad news is once again good news, much to the delight of 18 year old hedge fund managers.

So, nearly give months later, here is Goldman again admitting its call for a “Yellen Call” was wrong, although the central bank-incubating hedge fund does not give up, and instead merely pushes back its forecast to the second half. From Charles Himmelburg:

Global Markets Daily: The ‘Yellen call’

 

In our “Top 10 market themes for 2016”, we argued that the ‘Bernanke put’ might gradually be replaced by the ‘Yellen call’. Recall, the ‘Bernanke put’ was the idea that meaningful declines in market sentiment would be met with aggressive monetary action, thus providing a buffer to downside risk. Our notion of the ‘Yellen call’ was the converse of this – that with labor markets approaching full employment and core PCE inflation rising towards target, meaningful rallies in market sentiment would likely be met with a more robust withdrawal of policy accommodation. And this, logically, would tend to buffer or ‘cap’ the upside potential for risky assets.

 

It hasn’t happened. Market conditions have been considerably more volatile and uncertain than we expected over the first quarter. While we correctly anticipated the downside risk to oil prices and cautioned that this would likely weigh on credit spreads (#4 of our top 10 risks), we nonetheless failed to appreciate how widely this shock would reverberate throughout the global economy – and, with it, drag down risk appetite among all risky assets.

Actually what Goldman failed to anticipate is the very same thing that Yellen has failed to anticipate: in a world as centrally planned as this one, where markets are only up due to constant central bank intervention (and now we know for a fact that the PBOC is also directly manipulating stocks) is just how reflexive the central bank – market relationship has become. And, furthermore, any time “good news is good news”, at least on paper, and stocks tumble, the market finds a very quick way of tumbling even more to stun central bankers out of their inactivity and prompt them right back in. With all central banks currently all in on market manipulation, and thus economic micromanagement, there is simply no way out. The Fed is starting to grasp this; Goldman will too soon enough.

Conitnuing with Goldman’s note:

The oil price sensitivity of global risk sentiment (and hence global growth risk) is now clear to see. Over the course of Q1, oil prices first fell by over 25%, then staged a straight-line back to new highs on the year that briefly exceeded $41/bbl (WTI fell from $36.76/bbl on Jan. 4 to a low of $26.21/bbl on Feb. 11; it closed yesterday at $38.32). Risky assets – notably credit, equity and equity vol – traded this move with an unusually high beta. Spreads on the BAML HY credit index widened by nearly 180bp, an unusually sharp sell-off that we judged to be considerably in excess of the changes in fundamentals implied by lower oil prices. Equity prices also fell harder than warranted by fundamentals, although from higher valuations, and hence to less obviously ‘undervalued’ price levels. 

Well of course they did: market participants understand and know that fair values without central bank support are materially lower and nobody wants to be the last one holding the bag to find out just how much lower. Yes: the more central bank intervention, the bigger the crash in the end, because with every trillion in central bank liquidity injected, the more disconnected from fair values risk assets become. And the market knows this!

So having been so grotesquely wrong, what does Goldman think will happen?

Where to from here? Were it not for this rocky path of risk sentiment since Jan. 1, we think it is likely that the ‘Yellen call’, having already been exercised in December, would now be posing a material headwind for risky assets (especially in equities, given their higher sensitivity to discount rates and current fullness of their valuations).

Oh, so if the market had not crashed when the Fed said it would hike rates, everything would be ok. Well… brilliant!

But what a difference a quarter makes. Downside risks to global growth visible in Q1 economic data (and still priced, despite the recent rally in risky assets, in global interest rates) have clearly risen to the forefront of Chair Yellen’s concerns. In a surprisingly dovish speech presented to the Economic Club of New York on Tuesday, Chair Yellen emphasized downside risks to the US economic outlook stemming from slower global growth. She cited this weakness, coupled with the FOMC’s “asymmetric” capacity to respond to economic shocks, as the key reason for the Committee’s lower path for the funds rate in March (“Yellen Comments Emphasize Downside Risks”, US Economics, March 29, 201).

 

Chair Yellen’s dovish tack was unmistakable. While she acknowledged that core inflation had risen “somewhat more” than she expected in December, this was heavily qualified with her view that it is “too early to tell if this recent faster pace will prove durable”, and that, given the risks to the outlook, it would be appropriate to “proceed cautiously in adjusting policy”.

 

This adjustment says to us that the risk to risky assets stemming from the ‘Yellen call’, in other words, is temporarily postponed. In particular, we do not expect the ‘Yellen call’ to be reactivated until the second half of the year, by which time our economics team expects that US growth will have pushed unemployment rates lower and core inflation rates higher. This will likely justify a resumption of rate  hikes in the second half of the year, and likely at a pace faster than is currently envisioned in the ‘dots’ offered by FOMC members. But, between now and June, risky asset markets have been given a reprieve.

Then again, it is possible that Goldman is just wrong. Again.

Perhaps sensing the muppets’ rage if they are all piledriven once more, Goldman provides a useful test to determine if at least this time it will right: that test will be the market’s reaction to tomorrow’s payrolls. Goldman says that as of this moment “good news should be good news for risky assets” – well, tomorrow’s NFP will demonstrate that: if payrolls come in above the 210K consensus, then stocks should surge… assuming Goldman is right.

Put differently, with monetary concerns temporarily sidelined, good news should be good news for risky assets. Tomorrow’s economic calendar will provide an interesting test. We expect US data to be moderately stronger than expected. Consensus forecasts expect nonfarm payrolls to rise 210k vs. 220k for GS (from 242k last month) and ISM manufacturing to rise to 50.5 vs 51.0 for GS (from 49.5 last month).

Alternatively, if payrolls miss big, then the market should tumble. We’ll know if Goldman, which two months ago said to short gold, will finally have at least one correct call.

via Zero Hedge http://ift.tt/1M3MHde Tyler Durden

From the Slope of Hope: When I saw this article yesterday, I could hardly believe what I was reading. I have never in my life read such naked hubris from a central banker. You just know this remark will be quoted in history books decades from now.

 

To that I only have one response:

via Zero Hedge http://ift.tt/1MWH8bj Tim Knight from Slope of Hope

Gold's 16.1% surge in Q1 2016 ias the best start to a year since 1974. Overall, this is the best quarter since Q3 1986 and is the best performing major commodity of the year.

Gold rallied this year as it cemented its status as a store of value amid financial market turbulence and concern about the global economy, which led to speculation that the Federal Reserve would pause on tightening monetary policy in the U.S. Having seen BlackRock's gold ETF halted due to inability to meet physical demand, it appears pet rocks and barbarous relics are 'worth' something after all.

 

As Bloomberg reports,

Gold rallied this year as it cemented its status as a store of value amid financial market turbulence and concern about the global economy, which led to speculation that the Federal Reserve would pause on tightening monetary policy in the U.S.

 

A gauge of the U.S. currency headed for the biggest quarterly loss since 2010 after Fed Chair Janet Yellen said Tuesday the central bank will act “cautiously” as it looks to withdraw stimulus. Investor holdings in exchange-traded products have expanded by about 300 metric tons this quarter, the most since March 2009.

 

“The dovish remarks by Yellen earlier this week which reinforced the Fed’s stance to proceed gradually and cautiously with rate hikes this year have weighed on the U.S. dollar index, which is a positive for gold,” Vyanne Lai, an economist at National Australia Bank Ltd., said by e-mail. “Investment demand for gold appears to be holding up.”

The precious metal was the best performing asset in Q1…

 

Having gone through a "golden cross"…

 

Gold now has to breakout from its longer-term channel…

Finally for the skeptics that cannot comprehend why anyone would buy gold (instead of AAPL or AMZN or TWTR), consider this (from Kyle Bass):

"buying gold is just buying a put against the idiocy of the political cycle. It's that simple."

And from what we have seen the world's political and economic leaders are about as "idiotic" as it gets.

via Zero Hedge http://ift.tt/1MWH7Eu Tyler Durden

Last night we noted the odd "messaging" that was apparent in The PBOC's Yuan fix shifts into and after The Fed and Janet Yellen spoke…

 

 

Almost as if The Fed had "outsourced its monetary policy" to China once again. But as DollarCollapse.com's John Rubino notes, it appears Janet Yellen has instead outsoured US monetary policy to the financial markets…

In that deservedly-famous 2006 CNBC debate between Peter Schiff and economist Arthur Laffer (in which the latter manages to be both arrogant and wrong about literally everything), Laffer celebrates the fact that “we are outsourcing our monetary policy to China” (minute 5:17).

Alert listeners probably wondered what he meant by that, and also probably found the idea vaguely disturbing. But whatever it was we were doing, it turned out to be bad because within a year the global economy was in free-fall.

And now that strange, ominous concept has returned — but this time we’ve put our monetary fate in even less-stable hands:

Yellen Outsources U.S. Monetary Policy to the Financial Markets

 

(Bloomberg) – Fed Chair Janet Yellen told the Economic Club of New York on Tuesday that policy makers had scaled back the number of interest rate increases they expect to carry out this year after investors did the same.

 

She argued that the downgrading of rate expectations in the market had led to lower bond yields, providing the economy with needed support in the face of weaker growth overseas. The Fed then followed suit this month by reducing its anticipated rate hikes in 2016 to two from four quarter-percentage point moves projected in December.

 

“That’s a good thing,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, commenting on the sequence of actions. "Monetary medicine gets into the blood stream faster if the public can anticipate what the Fed’s response to an economic shock will be.”

 

There are pitfalls. Investors may become so impressed with their ability to influence Fed policy that they’ll press for more stimulus than the central bank is willing to supply.

 

Forcing Fed

 

“The risk is that markets’ perception of such continued accommodation will embolden them even more to try to force the policy hand of the Fed,” Mohamed El-Erian, chief economic adviser at Allianz SE and a Bloomberg View columnist, said in an e-mail.

 

Indeed, investors in the federal funds market are betting that the central bank will raise rates just once this year, not the two times policy makers envisage.

 

The Fed’s experience over the last six months also shows how difficult it can be for the central bank to align investors’ view of optimal monetary policy with that of its own.

 

“It’s a constant learning process by both the Fed and the markets,” said Joachim Fels, global economic adviser for Pacific Investment Management Co., which oversees $1.43 trillion in assets.

 

Automatic Stabilizer’

 

Yellen used her spoken remarks though to extol the symbiotic relationship between the central bank and the financial markets. “This mechanism serves as an important ‘automatic stabilizer’ for the economy,” she said.

 

Her comments come against the backdrop of continued criticism from Republican lawmakers and economists that the Fed is following a discretionary monetary policy that investors don’t understand and is hurting the economy as a result. They want the Fed to follow a monetary policy rule, such as the one espoused by Stanford University professor John Taylor. It uses a simple equation to link changes in interest rates to movements in inflation and the economy.

 

With her remarks on Tuesday, Yellen was “implicitly defending the Fed’s approach in the rules versus discretion debate as being one that’s systematic” and understood by the markets, Crandall said.

I’m not going to try to explain (or even understand) any of this, except to say that putting oneself at the mercy of financial market sentiment seems a bit risky, given that Mr. Market is a well-known manic depressive.

It’s also an inversion of the proper relationship between “money,” or more accurately the monetary environment, and the players who act on that stage. Placing monetary policy in the hands of stock, bond, and derivatives traders is like putting the definition of meters and seconds into the hands of Olympic athletes: Within a few years the self-interest of the participants will make past records meaningless.

Some other fun analogies: putting criminals in charge of the legal system, putting kids in charge of the dinner menu, putting car makers in charge of auto safety testing, putting food companies in charge of nutritional reporting. All are recipes for incoherence if not disaster.

Apply the same process to interest rates and currency creation, and the price signaling mechanism of the capital markets will go haywire. And without accurate price signals, modern market-based capitalism descends into chaos.

via Zero Hedge http://ift.tt/1MWErXt Tyler Durden

Remember when 2016 was the year when the US economy was finally supposed to take off on “above trend” growth? Make that 2017.

Here is JPM’s chief economist Michael Feroli doing what banks are so good at doing: cutting their own US GDP growth forecasts.

Shave and a haircut, first half

We are shaving about a half percentage point off of our estimate for first half US real GDP growth. We estimate Q1 GDP increased at a 1.2% annualized pace (down from 2.0%), and we project Q2 GDP growth at 2.0% (down from 2.25% prior). The downward revision to Q1 follows a string of softer source data, starting with the February durable goods report and punctuated by the downward revision to January real consumer spending.

The downward revision to Q2 owes to slightly lower expectations for consumer spending — thanks to the rebound in gasoline prices and the corresponding hit to real disposable income — as well as to somewhat weaker momentum on capital spending.

If our tracking of Q1 GDP is correct, it would be the second consecutive quarter of growth close to potential, which we estimate at 1.4%. (Though labor markets would suggest we’ve just had two consecutive quarters of above-trend growth: the Q1 unemployment rate will likely be 0.3%-point below the Q3 average, and the employment-to-population ratio will be 0.4%-point above the Q3 figure). Even so, growth in the quarter about to end has generally disappointed expectations set at the beginning of the year.
 
Consumption growth in Q1 appears to have slowed to a 1.9% growth rate, which would be the slowest since the weather-impacted Q1 of last year, which came in at 1.8%. Moreover, the saving rate looks to have moved up from 5.0% in Q4 to 5.4% in Q1, which would be the first increase in a year (though we caution that prior increases in the saving rate over the past year have been revised away, a caveat to keep in mind when looking at the Q1 increase). The Q1 consumption disappointment is primarily due to a weak January outcome. Since then financial conditions have recovered, and most measures of consumer sentiment have held steady at fairly healthy levels. So we are inclined to see the disappointment in consumer spending in Q1 as fairly modest in magnitude and part of the inherent quarterly volatility. We look for a very modest firming in consumption over the remainder of the year to growth in the low- to mid-2’s. Our relatively unfazed assessment of household behavior is also supported by recent solid trends in residential investment — a spending category which likely posted its second consecutive double-digit quarter in Q1. Looking ahead we expect some cooling in housing, albeit to still-above trend growth.
 
Developments in capital spending have been a little more concerning. Business fixed investment spending likely contracted in Q1, the second straight down quarter. Even excluding the energy sector — which accounted for almost all of the slowing in cap-ex prior to Q4 — business investment spending looks roughly flat in Q4 and Q1. We look for total capital spending growth to be subdued in Q2, with modest gains thereafter. Cap-ex in the energy sector took 0.5%-point off of top-line GDP growth last year, and should be a notable drag again in Q1 and, to a lesser extent, Q2. The second-half fading of this drag — as energy cap-ex dwindles to bare bones levels — is an important reason why we see overall GDP growth getting a little better later this year. Business inventory investment has made only slow progress reverting to more sustainable levels. Recent inventory sentiment measures suggest firms are no longer in a hurry to destock, but a more rapid normalization of stockbuilding is a downside risk to our near-term growth outlook.
 
Real government spending had a hiccup in Q4 and Q1, though has generally been trending higher, particularly at the state and local level. We expect that trend to reassert itself, accompanied by a little lift to federal spending as the impulse from last year’s bipartisan budget bill kicks in. The foreign sector has been a drag, as net exports subtracted 0.5%-point from GDP last year. Some relief may be on the way in the form of a recently weaker dollar. Even so, the effects of currency movements on trade tend to exhibit quite long lags, and past dollar strength implies a drag from trade this year of around 0.3%-point (down a little from the 0.5% number pencilled in earlier in the year).
 
Our inflation outlook has been little-changed recently, and we continue to look for core PCE to modestly accelerate to 1.9% by year-end, which would imply about 0.15% average monthly increases over the remainder of the year. While we think a fair bit of the speed-up in core inflation the last two months was transitory in nature, the recent dollar weakness gives us some added confidence that price pressures should continue to modestly firm.
 
We continue to look for the next Fed move in July. Even though GDP growth has been disappointing, labor market performance has (thus far) been quite strong and core inflation has looked a little better lately. Global developments have also been more supportive recently (i.e. the dollar has continued to weaken). We believe these trends are supportive of a move around mid-year, which we also believe is consistent with the most recent dots and communications associated with those dots.

via Zero Hedge http://ift.tt/22SuzdZ Tyler Durden

Just out from Rand Paul:

I have a major endorsement announcement to make tomorrow. Stay tuned…

— Dr. Rand Paul (@RandPaul) March 31, 2016

So will he endorse Trump (as he implicitly did in December) will he run as independent… or is he simply sick of politics and is retiring?

via Zero Hedge http://ift.tt/1MEtUW4 Tyler Durden

The only number that matters…

 

Must.Keep.S&P.Green.For.Q1…

 

We’re gonna need some VIX smashing to keep this up.

via Zero Hedge http://ift.tt/1RAdRp5 Tyler Durden