Month: June 2017

It appears that Trump has just officially scheduled his first kick-off planning session for the 2020 presidential elections as NBC News has confirmed that, after a bunch of back and forth, Trump and Putin will, in fact, meet next week at the G-20 Summit in Hamburg.

JUST IN: President Trump will meet with Vladimir Putin at G20 summit next week.

— NBC News (@NBCNews) June 29, 2017

 

As Bloomberg notes, the meeting was confirmed by White House National Security Adviser H.R. McMaster though he declined to provide any details on the meeting’s agenda. 

President Donald Trump and Russian President Vladimir Putinwill hold their first meeting as heads of state during the Group of 20 summit next week in Hamburg.

 

White House National Security Adviser H.R. McMaster, who announced the meeting Thursday, declined to say whether Trump would raise the issue of Russian interference in last year’s U.S. election when the two leaders meet. He said there was no specific agenda yet set.

 

Meanwhile, noting anonymous sources, The Guardian reported overnight that White House aides have been asked to come up with “possible concessions” that can be used as bargaining chips during next week’s encounter.

Donald Trump has told White House aides to come up with possible concessions to offer as bargaining chips in his planned meeting next week with Vladimir Putin, according to two former officials familiar with the preparations.

 

National security council staff have been tasked with proposing “deliverables” for the first Trump-Putin encounter, including the return of two diplomatic compounds Russians were ordered to vacate by the Obama administration in response to Moscow’s interference in the 2016 election, the former officials said. It is not clear what Putin would be asked to give in return.

 

The Trump administration was contemplating handing back the compounds in early May, initially in exchange for the Russian government lifting a freeze on construction of a new US consulate in St Petersburg, according to the Washington Post. That link was reportedly dropped a few days later when the secretary of state, Rex Tillerson, met his Russian counterpart, Sergey Lavrov, in Washington on 10 May.

Of course, the news is less than 10 minutes old and we can already hear the faint cries of ‘collusion’ re-emerging from within the bowels of CNN’s headquarters.

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Two weeks ago, when discussing the self-reinforcing dynamics among systemic vol-sellers, JPM’s head quant had a dramatic warning: in a nutshell, he said contrary to the assumption that the market will always rebound in a BTD kneejerk response, days like May 17th and similar events “bring substantial risk for short volatility strategies.”

While there was much in his research report from June 13, it was his conclusion on why the current market tranquility is masking what may be a “catastrophic”, self-reinforcing “market” crash as all those vol-selling strats suddenly go into reverse, that was most notable:

Given the low starting point of the VIX, these strategies are at risk of catastrophic losses. For some strategies, this would happen if the VIX increases from ~10 to only ~20 (not far from the historical average level for VIX). While historically such an increase never happened, we think that this time may be different and sudden increases of that magnitude are possible. One scenario would be of e.g. VIX increasing from ~10 to ~15, followed by a collapse in liquidity given the market’s knowledge that certain structures need to cover short positions.

Well, following the dramatically hawkish posture by central bankers in the past 72 hours, the market finally woke up, and as of a few moments ago, VIX above 15, hitting 15.16, rising more than 5 points, or putting the market right into Kolanovic’ “catastrophic loss” territory.

What about overall market liquidity? Courtesy of Nanex, here is where we stand right now.

 

Which leads to two questions: i) Will today’s selloff lead to a broad deleveraging among vol-sellers who are forced to cover into a sharply rising VIX, and ii) will the risk parity funds finally be forced to unwind?

We’ll know the answer soon, but as a reminder, here is the risk-parity liquidation matrix based on intraday moves in both bonds and stocks. Any moves into the orange space could be hazardous for bulls’ health.

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The
last few days have seen the biggest outflows from S&P ‘growth’ ETFs
on record, and as Deutsche Bank AG’s chief global strategist, Binky
Chadha, notes the cheapest U.S. stocks relative to earnings, sales and
assets are poised to turn the tables on faster-growing peers…

In a report Wednesday, Chadha cited three reasons for a rebound. The first was the ratio between the S&P 500 Pure Value and Pure Growth indexes since 2010, which indicates value shares have room to recover from a first-half slump.

Chadha also cited the likelihood of more positive economic reports and higher interest rates.

via http://ift.tt/2sVoKza Tyler Durden

Three months ago, in the aftermath of the Fed's March rate hike we reported on what we thought at the time was a shocking development: instead of tightening, financial conditions eased. Dramatically. So much so, in fact, that Goldman chief economist Jan Hatzius wrote about it, saying that the "the Fed's 0.25% rate hike had the same effect as a 0.25% race cut!" and adding that "this was not the reaction the Fed wanted."

In short, Hatzius said that the Fed appeared to have lost control of the market.

Two months later, as financial conditions continued to get looser, Goldman doubled down, and asked – again – if Yellen has lost control of the market, and warned that only a "policy shock" may be left to normalize the market's "reaction function"to what the Fed was saying… and doing.

Now, moments ago, St. Louis Fed President James Bullard effectively confirmed that Goldman was right, and admitted that the may have indeed lost control of the market when he said that:

FED'S BULLARD SAYS FINANCIAL MARKET REACTION TO MARCH TIGHTENING HAS NOT BEEN GOOD, WOULD HAVE EXPECTED YIELDS TO RISE WITH POLICY RATE

* * *

The yield curve has collapsed since The Fed started hiking rates…

 

And as Bullard spoke the markets started to break down…

With VIX up nearly 4 points today.

But don't worry: should things go south fast, Bullard has a solution for that too:

• FED'S BULLARD SAYS NEED TO CREATE POLICY SPACE IN GOOD TIMES IN CASE NEED MORE QE IN FUTURE

Translation: time to start trading on QE4

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Former FX trader and fund manager Richard Breslow is worried. Worried about investors' level of delusion in the markets and worried that central bankers are so convinced of their own omnipotence, that they have become blind to any potential risks just out of their immediate sight. One glimpse at the following chart is all you need to know, Central Banks are the only game in town… and given their recent statements, they don't know that (even though investors believe they do)…

 

Via Bloomberg,

Well, if you like central bank excitement, you’re having a pretty good week so far. Round and round the latest messaging wheel has gone with the little ball settling in the hawkish slot. Of course, as we should all know by now, no sooner do the chips get swept away after all the stops have been run, then the wheel is spun again. And that is precisely the problem. We continue to live from hand to mouth in our attempts to return our economies to “normalcy”. Don Quixote would be very comfortable in the world we have created.

Still, there are some important takeaways that are worth considering beyond the simple message that there will be an attempt to inch away from crisis policies. But remember there are certain classes of drugs that they just don’t know if they’ve worked until the patient is weaned off them. And despite any protestations to the contrary, extreme QE is one of them.

 

There has been a tremendous benefit to the U.S. from being first out of the gate in snugging rates. They were smart or, at least, opportunistic. The Fed has enjoyed free-ridership of doing so while everyone else is still printing away. This has meant that financial market conditions have taken it wholly in stride. To assert that this will be the case when everyone else join is making a big assumption about the efficacy of the cure.

 

Investors remain properly skeptical about the timing and speed of any rate hikes. This latest run-up in euro and sterling may have as much to say about how we’ve structured liquidity provision in the modern marketplace as a view that a baby step on rates really changes the world. I’m as impressed as anyone with the “spike” in bund yields. But we’re talking about a move up to 42 basis points. And you won’t have heard the last from Mario Draghi if his currency really starts motoring.

 

Asset prices are somewhat elevated. But there aren’t any bubbles. However, rates need to go up to deal with this profligate risk-taking. Which we don’t see as currently a problem. The bottom line is, investors are utterly convinced that, push comes to shove, the “put” is very much alive. And they’re very much correct.

 

If you really want to pour cold water on all this optimism, consider the dangerousness of the thought that because of all the great things that have been done, it’s unlikely there will be another global financial crisis in our lifetime. If this is a view that is circulating behind the closed doors of central bank meetings and forums, we’re in a lot of trouble. Black swan events happen a lot more often than they’re supposed to. And often because it’s to the benefit of special interest groups to see how close we can get to the edge. Incrementalism can be a nice word for chipping away.

 

One last thing on a different but obviously related topic since inflation expectations play such a big role here. Oil is a financial instrument first and makes your car go second. It’s made five distinct moves so far this year, signifying nothing but having policy forecasters running to their extrapolators each time.

If today's start is anything to go by in Europe (DAX at 2-month lows)…

Perhaps the awakening is starting that the "put" is leaving the building.

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A lot changed over the past 4 days, starting with Draghi’s unexpectedly hawkish speech earlier this week (subsequent ECB clarification notwithstanding), followed by a barrage of hawkish Fed speakers – including Yellen – all of whom warned that risk assets are overvalued, then the heads of the BOE and BOC, who also came out surprisingly hawkish and warned rates hikes are coming, and finally the conclusion of the ECB’s forum in Sintra, where the hawkishness was palpable. In short: coordinated global central bank tightening, or at least jawboning.

As Reuters put it this morning, “the world’s top central bankers have delivered what seems to be a collective message this week that quantitative easing is being put back in its box and interest rates are going up – and global markets are taking note.”

Until then at least, stock and bonds had again been trading higher on the premise that the total pot of global liquidity was still swelling despite rising Federal Reserve rates – courtesy of ongoing European Central Bank and Bank of Japan bond buying programmes, most of all.  That’s why Mario Draghi’s apparent change of tack on Tuesday had such an impact on every global asset from Wall Street to London and Tokyo – far more than any of the latest Fed utterances.

 

German Bund yields, a proxy for core Europe’s borrowing costs, doubled, spreads between U.S. debt and almost everywhere else tightened, and a number of big banks declared the dollar rally dead as the euro EUR put it to the sword.

 

Suddenly, the usual central bank noise has suddenly harmonised over what the Bank for International Settlements – where dozens of central bankers met at the weekend – called the “great unwinding” of easy money.

Of course, one can be contrarian, and say that central banks have decided to hike rates, in the process blowing up long-rated yields and sharply steepening curves, at the worst possible time: when private sector loan demand growth has collapsed to zero, when debt charge offs are suddenly spiking, when US GDP can barely rise above stall speed, when China is rapidly removing liquidity from the market and deleveraging, when the global credit impulse has crashed, and – most importantly – when any drop in risk assets will send recessions odds surging.

In any case, however one explains the sharp change in central bank rhetoric in the past few days, one thing is clear: as Deutsche Bank’s George Saravelos writes today, developments over the last two days provide numerous signals to argue for three important regime shifts in markets away from the low volatility equilibrium.

Here are the three shifts he envisions:

1. ECB liberation – President Draghi’s speech on Wednesday was important not because he marked a hawkish shift to policy but because he implicitly signaled that the ECB is not as concerned about low inflation any more: it is now considered temporary. The language shift is critical because it “liberates” the euro, disinflationary strength in the currency may now matter less for the ECB. This language shift coincides with another regime change that has been evolving in recent months and is even more important: the complete  breakdown of EUR/USD with rate differentials suggesting the ECB was losing control of FX anyway. Both these observations are critical because they suggest that the euro can strengthen despite, not because of higher bund yields. In fact, the more the euro appreciates the more ECB tightening will be slowed. The key driver of euro strength is not ECB hawkishness but medium-term rebalancing of structural postcrisis underweights in European assets. The ECB may not able to do much about it.
2. Fed zombification – in the meantime we have another regime shift in play reflected in the market persistently ignoring Fed tightening in both action and words. The key to understanding this behavior is that unlike other central banks the Fed is approaching its own assessment of the nominal neutral rate at 2%. While this is not priced for next year, the market is already priced for a terminal rate slightly below 2% further out the curve. Even if the tightening happens sooner rather than later, the crux of the argument is that unless the market believes the Fed is running behind the curve (eg. US inflation acceleration) tightening will continue to look more like easing: the more the terminal rate approaches, the higher the odds of a Fed “pause” or “time out” until the productivity or inflation pictures improve more.
3. Global co-ordination – the final shift emerging is a co-ordinated shift from developed world central banks in a more hawkish direction, all apparent in rhetoric from the ECB, Fed, Bank of Canada, Bank of England and likely others in coming weeks. This global co-ordination was implicitly confirmed by Draghi’s little-cited comment in the central banker Sintra panel yesterday where he noted the importance of G20 central bank co-ordination in keeping market volatility low. The implicit message here is that if all central banks sound hawkish at the same time then divergence, and therefore FX volatility, will stay low. The problem with this convergence however is that the Fed is already in tightening flight mid-air with other central banks just about to take off the runway. With the next big question

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Authored by Charles Hugh Smith via OfTwoMinds blog,

The incremental increase in systemic complexity is rarely if ever recognized as a problem that additional complexity can't solve.

The Collapse of Complex Societies fame has observed that societies increase complexity to solve pressing problems that cannot be resolved with existing solutions.

What is complexity in this context? More organization, more layers of management, higher levels of specialization, an expansion of roles and differentiated areas of expertise, more channels of communication, more feedback loops, and an increase in the quantity and types of communication.

All of which consumes more energy and more treasure, not just to build the infrastructure of this increased complexity but to train the staff and maintain the higher costs going forward.

Which raises the obvious question: how does increasing cost solve anything? Doesn't increasing the cost of a system create the problems resulting from taking money from some other source to pay the higher costs?

There are several different answers to this question.

1. The problem that must be solved is an existential threat to the society, and therefore cost is no longer an issue. World War II offers a historical example of an existential threat requiring a vast expansion of complexity and cost.

The upside of this dynamic is the problem is resolved relatively decisively by either victory or defeat. The downside is the vast sums borrowed to fund the war effort must be paid, or at least the interest must be paid–or the enormous debts must be renounced, crippling trust and the credit system.

2. The gains reaped by increasing complexity more than offset the higher costs. Amazon seems to offer a commercial example of this dynamic. By investing heavily in complex technology, Amazon has created financial incentives for consumers to shop online and have their purchases delivered to their door.

Consolidating consumption is this fashion lowers costs in many ways. Instead of 100 consumers getting in 100 vehicles and driving to a mall/retail center, a handful of delivery vehicles distribute the purchases, reducing energy consumption, air pollution, traffic congestion, fuel burned while waiting in traffic, etc.

The increased complexity of online shopping and delivery has impacted the higher fixed-cost bricks and mortar retail sector, as this higher cost shopping-distribution system is experiencing stagnant sales and plummeting profitability.

3. The initial costs of increasing complexity are offset by lower operating and maintenance costs. With the costs of labor and labor overhead (healthcare and pension costs) rising, investments in automation complexity may reduce operational expenses significantly, more than offsetting the costs of increasing complexity via automation.

But many of the increases in complexity in our socio-economic system aren't intended to solve existential or cost problems; they're designed to address political issues or to foster perceptions that problems are being addressed.

Many increases in complexity are intended to reduce exposure to liability–legal threats that increase operational costs without offering much in the way of offsetting benefits.

Increasingly complex laws and regulations are passed to mitigate politically pressing issues, and the pressure on politicians and regulators to "do something" leads to regulatory and legal thickets that may well have limited impact on the problem but serve to signal to constituencies that "your problem has been addressed."

The added costs of this complexity are rarely considered in the political process, which focuses on easing the short-term pain of political pressure.

Another source of increasing complexity that yields diminishing returns is institutions and agencies whose raison d'etre is to generate and enforce regulations. These agencies must continually produce more regulations to justify their budgets and staffing, and adding systemic costs is not an issue.

The regulatory institutions have no mechanisms, processes or incentives to reduce systemic complexity or accurately assess the costs of increasing regulatory burdens.

This incremental increase in systemic complexity is rarely if ever recognized as a problem that additional complexity can't solve. In solving liability, regulatory and political issues with added layers of complexity (that created more complexity as they interact in unexpected ways), we have increased the systemic load of complexity in ways that may only become visibly destabilizing when the system stops working or slides into insolvency.

Why is insolvency a potential result of rising complexity? Rather than pay the higher costs by taking funding from other programs–a politically risky move, as those whose funding has been cut will ignite a political firestorm of protest–our political "leadership" has borrowed the costs of increasing complexity from future earnings and future taxpayers.

All borrowed money accrues interest, and eventually the mountain of debt crushes the economy by either bleeding investment and consumption to pay the interest or by destroying the purchasing power of the currency as the government inflates away the debt by debauching its currency.

What problems are we solving by increasing systemic complexity? What problems are we exacerbating by adding systemic complexity? We'll know the answer when systems start breaking down and a stark choice between destroying the purchasing power of our currency or insolvency presents itself.

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