Month: July 2017

New York City’s deteriorating subway has a rival for world’s most dysfunctional public transportation system. After only three months on the job, Bruno Rota, the head of Rome’s public-transit company has announced that he's leaving his post, saying that the Italian capital city’s decaying transportation system should declare bankruptcy, according to Reuters.

Rota’s departure is an embarrassment for the anti-establishment five-star movement and one of its most high-profile politicians, Rome Mayor Virginia Raggi. Since taking office last year, Raggi’s administration has been paralyzed by internal tumult while the city’s infrastructure has continued to decay. The party’s failures in Rome suggest that it’s not prepared to govern, and may have contributed to Five-Star’s losses in a series of municipal elections last month. Meanwhile, the situation could hurt the party’s chances in next year’s general election.

Rome Mayor Virginia Raggi

“Bruno Rota quit Atac on Friday, just three months after taking charge of the Italian capital's bus, metro and tram network, saying he was unable to salvage the firm and feared possible legal action tied to any eventual collapse.

 

"It is an appalling scandal," said Rota, who was called down to Rome after helping to turn around the transport system in the northern city of Milan. "The situation is worse than you can imagine," he told la Repubblica newspaper.

 

Rota's dramatic departure has triggered yet another crisis for the city's 5-Star administration, which won power last year in what was seen as a litmus test of whether the anti-establishment group was ready to run Italy.”

City officials are publicly criticizing Raggi, saying that Rome needs a “change in direction" after the city nearly adopted water rationing laws last week amid a worsening drought.

"We need a change of direction. If we carry on like this we will fall apart. The whole city will fall apart," Andrea Mazzillo, Rome's third budget chief in a year, told la Repubblica.

 

In a statement on Facebook, Raggi ordered her team to stop complaining and promised to sort out problems at Atac, which has suffered from many years of chronic neglect and mismanagement.

 

The company has some 1.3 billion euros ($1.5 billion) of debts and a rate of absenteeism amongst its 12,000-strong workforce of 12 percent, company records show.”

Dozens of Atac buses and trains in need of repair are languishing in the company’s warehouses.

According to an internal Atac report, 36 percent of all the company's buses are blocked in garages because they have broken down or are undergoing maintenance, with the figure rising to 50 percent for the city's creaking fleet of trams.

There have also been several embarrassing accidents; earlier this month, a woman suffered severe injuries. When she got dragged down a platform after her handbag was trapped in the door of the train. Videos showed the driver was eating lunch at the wheel and didn’t notice.

Years of underfunding have left the company barely able to pay its employees and contractors, as some Italian newspapers reported that Atac buses were being left in the streets by contractors that had been stiffed by Atac.

"The company is unmanageable. It doesn't have any money left in its accounts," said Rota, adding that Atac was no longer able to guarantee the regular payment of salaries or to buy the spare parts it needed to repair its ageing buses and metro trains.

 

Italian newspapers reported that broken down buses were being left in the street because Atac had not paid the private contractor which it uses to pick up its stranded vehicles."

Meanwhile, Mayor Raggi offered the usual platitudes…

"'The situation at Atac is serious, but we are not frightened by adversity and we will move ahead,' said Raggi on Facebook."

To be sure, Atac has been a shambles for years. And while the transportation difficulties have engendered dissatisfaction with Raggi, it’s unclear if the incident will negatively impact the five-star movement’s electoral chances. Italian voters have a reputation for being mercurial. Case in point: The center-right party of Prime Minister and billionaire media mogul Silvio Berlusconi, who suffered through a series of scandals during his time in office, is leading the 2018 polls with 30% of the vote,according to CNBC.
 

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With elites increasingly sounding the alarm about the state of the stock market, and various market participants fearing the complacency is masking the fragility of the market's true character; it is no surprise that Baupost's recently named President and Head of Public Investments, Jim Mooney, has joined the chorus.

While Mooney (and Klarman's) warning regarding market volatility is not new, perhaps the most interesting nuance is the 'difference this time'.

Confirming JPMorgan's Marko Kolanovic's concern that "we may be very close to a tipping point" as he explained that "low volatility would not be a problem if not for strategies that increase leverage when volatility declines," Baupost's Mooney explains that crucial market structure differences between current times and the 2008 market crash could lead to an exacerbation of any stock market price readjustment.

A Period of Subdued Volatility

"Stability leads to instability. The more stable things become and the longer things are stable, the more unstable they will be when the crisis hits." — Hyman Minsky

…Realized (actual) and implied (anticipated) volatilities hover near their lowest levels ever. The most commonly referenced measure of equity market implied volatility, the VIX has traded at an average of 11 since late April. To put this level in context, since 1990 when the VIX was first created, the index has closed below 10 on only 16 days; seven of those days have been since May 1, 2017. The average closing of the VIX between 1990 and 2016 was about 20 versus a 2017 year-to-date average of roughly 12. Similarly, realized SPX 500 volatility has fallen, with the one and six month levels both at seven. ON these measures, 2017 is the least volatile year since 1965.

Not surprisingly, there is a fair bit of commentary attempting to justify today's historically low levels. The most prominent explanation is that the low realized volatility, which results when asset prices march steadily upward with very few interruptions, naturally causes quantitative models to predict a continuation of subdued volatility, i.e. low implied volatility. Some suggest that dampened market fluctuations result from the consistent bid for equities provided by capital flows into passively managed index finds. Many cite limited realized volatility in underlying U.S> and global economic measures such as economic growth and inflation and conclude we are in a new era of stability. Finally, there is the abiding view that central banks will reliably deploy accommodative monetary policy to arrest any downward market moves.

These explanations almost certainly contain elements of truth, but it is hard not to see a bit of sophistry as well. While there may be a mathematical answer for why volatility is low when nearly every financial asset trades at all-time highs, common sense might suggest the opposite conclusion.

Why does extraordinarily low volatility matter?

The answer lies in volatility influence on risk-taking and, by extension, leverage. In any elevated market, one very important thing to identify is where leverage exists in the system — both that which is obvious and more perniciously, that which is hidden. While leverage is not directly responsible for every financial disaster, it usually can be found near the scene of the crime. Structural leverage linked to low realized volatility may well prove destabilizing and the precipitant, or at least an accelerant, for the next financial crisis. Realized volatility is a critical reference point for a substantial amount of investment activity. For many investors, the level of market volatility determines the level of risk incurred both in their portfolios as well as in many investment products. The lower the volatility, the more risk investors are willing to or, in some cases, required to incur.

Specifically, realized volatility is the essential input for Value-at-Risk (VaR) calculations, and determines the degree of leverage incorporated in a variety of quantitative and structured investment strategies. For instance, the models used by both risk parity and volatility targeting funds, which use volatility levels to determine asset allocations, have been signalling "risk-on" for some time. This has resulted in steadily increased portfolio leverage as realized volatility has fallen across asset classes. Additionally, certain structured short-volatility ETFs have algorithm-based selling and buying programs that automatically lever up and, critically,d own based on realized volatility.

Over the last several years, one of the most reliable winning betes has been shorting volatility in just about any asset class. Investors have generated significant returns with high Sharpe ratios by capturing the spread between higher implied volatility and lower realized volatility. As realized volatility has remained low, profits have mounted and assets deployed in these volatility-targeting and short-volatility trades have grown tremendously. However, it is hard to ignore that this strategy becomes less and less attractive as the absolute level of volatility declines and the spread between implied and realized volatility falls. As the saying goes, "what a wise man does in the beginning, a fool does in the end "

Although it is impossible to calculate with precision, the volume of assets whose performance is, in some manner, linked to volatility likely runs into the hundreds of billions of dollars. As such, any spike in equity markets realized volatility, even to historical average levels, as the potential to drive a significant amount of equity selling (much of it automated). Such selling would, in turn, further incresae volatility which would call for more de-leveraging and yet more selling.

We cannot know whether a dramatic increase in volatility is imminent or even inevitable, nor can we be certain that a spike in volatility would have cataclysmic results…although it certainly could. One thing, however, is for sure: anyone who is directly or indirectly shorting volatility at the current lows is betting current benign environment will persist. Our experience would suggest that, "benign" and "persist" are not words normally associated with one another.

In addition to our areas of regular focus, we have exposure to hedges designed to help protect the portfolio from a sustained change in the volatility environment.

Mooney concludes, rather ominously…

"As has been the case for longer than we would have imagined, we remain in a market that is broadly expensive and largely indifferent to risk.

 

This continues to be a time for patience and, above all, caution. If there is anything to be taken from Hyman Minksy's words, it is that no one should be lulled into a false sense of comfort by the illusion of stability which surrounds us… We most assurdely, are not"

And if one wants a picture of what that looks like, Morgan Stanley recently explained…A violent rise in volatility could be driven by just a 3% to 4% one-day S&P 500 selloff.  Right now the risk is greatest in the VIX complex, and demand for VIX futures from three main sources could result in 100,000 contracts ($100mm vega) to buy in a down 3.5% SPX move.  For context VIX futures ADV over the last year is 230,000 (although has risen to as high as 700,000 in big selloffs).

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Authored by Andrew McCarthy via National Review,

There’s more than bank fraud going on here.

In Washington, it’s never about what they tell you it’s about. So take this to the bank: The case of Imran Awan, Debbie Wasserman Schultz’s mysterious Pakistani IT guy, is not about bank fraud.

Yet bank fraud was the stated charge on which Awan was arrested at Dulles Airport this week, just as he was trying to flee the United States for Pakistan, via Qatar. That is the same route taken by Awan’s wife, Hina Alvi, in March, when she suddenly fled the country, with three young daughters she yanked out of school, mega-luggage, and $12,400 in cash.

By then, the proceeds of the fraudulent $165,000 loan they’d gotten from the Congressional Federal Credit Union had been sent ahead. It was part of a $283,000 transfer that Awan managed to wire from Capitol Hill. He pulled it off — hilariously, if infuriatingly — by pretending to be his wife in a phone call with the credit union. Told that his proffered reason for the transfer (“funeral arrangements”) wouldn’t fly, “Mrs.” Awan promptly repurposed: Now “she” was “buying property.” Asking no more questions, the credit union wired the money . . . to Pakistan.

As you let all that sink in, consider this: Awan and his family cabal of fraudsters had access for years to the e-mails and other electronic files of members of the House’s Intelligence and Foreign Affairs Committees. It turns out they were accessing members’ computers without their knowledge, transferring files to remote servers, and stealing computer equipment — including hard drives that Awan & Co. smashed to bits of bytes before making tracks.

They were fired in February. All except Awan, that is. He continued in the employ of Wasserman Schultz, the Florida Democrat, former DNC chairwoman, and Clinton crony. She kept him in place at the United States Congress right up until he was nabbed at the airport on Monday.

This is not about bank fraud. The Awan family swindles are plentiful, but they are just window-dressing. This appears to be a real conspiracy, aimed at undermining American national security.

At the time of his arrest, the 37-year-old Imran Awan had been working for Democrats as an information technologist for 13 years. He started out with Representative Gregory Meeks (D., N.Y.) in 2004. The next year, he landed on the staff of Wasserman Schultz, who had just been elected to the House.

Congressional-staff salaries are modest, in the $40,000 range. For some reason, Awan was paid about four times as much. He also managed to get his wife, Alvi, on the House payroll . . . then his brother, Abid Awan . . . then Abid’s wife, Natalia Sova. The youngest of the clan, Awan’s brother Jamal, came on board in 2014 — the then-20-year-old commanding an annual salary of $160,000. A few of these arrangements appear to have been sinecures: While some Awans were rarely seen around the office, we now know they were engaged in extensive financial shenanigans away from the Capitol. Nevertheless, the Daily Caller’s Luke Rosiak, who has been all over this story, reports that, for their IT “work,” the Pakistani family has reeled in $4 million from U.S. taxpayers since 2009.

That’s just the “legit” dough. The family business evidently dabbles in procurement fraud, too. The Capitol Police and FBI are exploring widespread double-billing for computers, other communication devices, and related equipment.

Why were they paid so much for doing so little? Intriguing as it is, that’s a side issue. A more pressing question is: Why were they given access to highly sensitive government information? Ordinarily, that requires a security clearance, awarded only after a background check that peruses ties to foreign countries, associations with unsavory characters, and vulnerability to blackmail.

These characters could not possibly have qualified. Never mind access; it’s hard to fathom how they retained their jobs. The Daily Caller has also discovered that the family, which controlled several properties, was involved in various suspicious mortgage transfers. Abid Awan, while working “full-time” in Congress, ran a curious auto-retail business called “Cars International A” (yes, CIA), through which he was accused of stealing money and merchandise. In 2012, he discharged debts in bankruptcy (while scheming to keep his real-estate holdings). Congressional Democrats hired Abid despite his drunk-driving conviction a month before he started at the House, and they retained him despite his public-drunkenness arrest a month after. Beyond that, he and Imran both committed sundry vehicular offenses. In civil lawsuits, they are accused of life-insurance fraud.

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Chris Whalen, Chairman of Whalen Global Advisers and a very well-known financial analyst (he was one of the original forecasters of Lehman's inevitable demise) appeared on MacroVoices podcast this week to discuss the equity valuations, the path of the US dollar and DoubleLine Capital founder Jeff Gundlach’s declaration that the 35-year bull market in bonds is dead. Some of the key highlights:

"Erik: I want to start with the US dollar because, you know, we’ve had quite a few guests talking up a secular bullish argument on the dollar and, boy, it really all sounds very compelling, but look at the chart. The dollar bulls—the chart is telling us dollar bulls that we’re wrong. So how do you see this playing out? What do you think is driving the weakness that we’re seeing in the US dollar? And does it represent a secular change in direction, or is this just a natural pullback in an ongoing bull market?

 

Chris: Well, you know, it’s hard for analysts to get their hands around the dollar because the old relationships, particularly interest rates and trade balances, which used to give you a good idea of where a currency was going to go don’t seem to matter anymore. So the dollar was rising against major currencies after the financial crisis, and particularly over the last four or five years, in large part because people were fleeing whatever country they were in and going to the perceived safety of the United States. So Russian oligarchs, members of China’s communist party, they sent trillions of dollars to the United States over the past five years. Much of it went into American real estate. They also like Canada by the way, because both the US and Canada protect property rights, and they have a reasonable degree of confidentiality when it comes to investment flows. So if you’re a communist party cadre in China and you’ve stolen millions of dollars, you want a safe place to hide it.

 

 

And so this all, this capital flight contributed to the strength of the dollar, really, apart from the normal considerations of trade deficits and interest rates and everything else. Now it’s kind of reversing because there’s been this narrative on Wall Street, particularly in among the private investment community too. That said, well, you know, places like Brazil, Europe, even Asia, even Japan are all of a sudden attractive. And so you’ve started to see money flowing out again. Whether it’s going to be maintained or not I don’t know. Because, as I say, the old measures for whether a currency was going to appreciate or depreciate really have lost their validity since 2008."

Moving on from the greenback, Townsend and Whalen discuss the equity market, ballooning valuations and the role that the Federal Reserve’s interest-rate cuts have played in attracting a flood of capital stocks. Whalen said he agrees with other Macrovoices guests in believing that the equity market is overvalued, despite the many “rationales” for high valuations dreamt up by Wal Street analysts. In Whalen’s construction of the rally, corporations eagerly took advantage of low interest rates, borrowing excessively to buy back their stock and pad CEO paychecks. While market conditions will likely continue to support stock prices for the immediate future, according to Whalen, the Fed’s “social engineering” has already created the template for the next crisis as these companies struggle with these large debt burdens as interest rates rise to 3% and beyond. But for right now, at least, it appears stocks are safe. There’s so much capital that investors are bidding up “surreal” assets like bitcoin.  

“Erik: Let’s move on to the US equity market. We’ve had a lot of people on the program arguing that the market is way overvalued, this thing is overdone, it just has to crash here, the top has to be in. Yet it continues to march higher. And we’ve also heard the other opposite argument, which is that there’s so much new liquidity in the system in terms of the feds supporting the market, even if we’re supposedly talking about shrinking the balance sheet now it’s shrinking very slowly. Which way do you see this, or where do you think it’s going? What’s your outlook for short, medium, long-term in the equity markets?

 

Chris: Equity markets are clearly overvalued. They’re very much like what you see in the residential real estate market in the United States and also in commercial real estate. The Fed manipulated the credit markets, they took four trillion dollars’ worth of securities out of the market, and they’ve essentially forced all of us to invest in something else. And so you’ve had a situation where low interest rates have driven money into stocks.

 

You’ve also had companies buying back their stock because debt is so cheap. Look at IBM. They’ve a negative book value for the company now, because they’ve levered up so much and bought back so much stock. And so you have a scarcity of supply. And so I would not disagree at all with your other guests that the stocks are overvalued.

 

The Street keeps coming up with rationales why that’s not so, but I think it’s clear that it is. But on the other hand, do I expect the market to crash? No. Because, remember, the constraint here is supply. And there’s so much money looking to invest that it’s going into all of the possible asset classes and in some cases into surreal asset classes like bitcoin and all of these digital currencies.

 

It’s very much a function of the central banks. And I think that’s a problem, because when we “normalize” interest rates we’re going to see a lot of credit losses on the books of banks and bond investors because crappy companies are able to go out and borrow money like they were good companies. Thanks to Janet Yellen. There is a cost to the social engineering that the Federal Reserve Board engages in, and, you know, I think it’s going to—over time the history is not going to be kind to Yellen and her colleagues. Because they have created the next problem. We just haven’t gotten there yet. Rising interest rates could quickly expose the companies’ “short-term thinking” surrounding how we paid for buybacks.”

Companies, it appears, are eager to return capital to investors, but have so far hesitated in their business, which is one reason for slow GDP, Whalen said. Luckily, they might have another opportunity. Whalen believes 10-year rates are headed back to 2%, even as the Fed forces short-term rates higher.  

“Erik: I want to go a little bit deeper on this subject of corporate buybacks, because I couldn’t possibly agree more with you. And I know you’ve done a lot of work on this and written quite a bit about it. That, you know, corporations basically looking at the cheap credit market saying, you know, forget about what’s good for our business. What’s good for the executives is to pump the stock price up. Let’s borrow a bunch of money, buy back our own shares; it may not make business sense, but it makes sense for my pocket if I’m the CEO. You know, you just have to go back to the old adage of what could go wrong here? It seems to me a lot could go wrong but what I can’t get my head around, Chris, is how does this actually end? Because it seems to me like if we do see interest rates start to back up, they’re going to back up slowly. There’s still going to be more opportunity.

 

Where we saw, you know, oh bottom, bottom, bottom prices on money, let’s buy more stock, well now it’s going to be a little bit more expensive. It’s going to lead to let’s do some more stock buybacks before it’s too late. When does this eventually end, and what could happen?

 

Chris: One scenario I’ve been pondering is, you know, companies are not very good at predicting the movements of financial markets. They’re very short-term in their thinking. And if interest rates were to rise significantly—let’s say we got the ten year bond up to three-and- a-half, four percent, which is a lot given where we are—companies might have to start rotating out of the debt that they incurred to buy back their stock and start issuing stock.

 

In other words, they have those shares, they’re sitting in Treasury on the books of the company. They can reissue that stock and raise money. But they may be forced to do that at a price that’s lower than the price they paid to buy the stock back, in which case they’ll take a loss. So, I think there are a number of scenarios that could unfold when you look at the balance sheet of corporate America and the huge amount of debt that they’ve taken on. But the one saving grace is that deflation is still a dominant tendency in the market today. So, while the Fed can push short-term rates up (by brute force in this case), the ten-year bond is still dropping. You know, mortgage rates have been falling for the last two months. And I think that the secular demand for paper—that hunger on the part of investors for what we call duration, which is another way of talking about the bond market—is quite profound.

And I’ve been telling people I think the ten-year treasury will go back to two percent, which is another half point in yield. That’s a lot. So, in the near term I don’t think that medium to long-term interest rates are going to go higher. The markets are very keen. Look at the last treasury auction. It went extremely well. They want the paper.

But the real issue to me is why aren’t these companies investing in their businesses instead of buying back their stock? You know, people always—in the economics profession they’re always talking about how can we get companies to invest? How can we increase productivity? Which is their big thing obviously, because at the end of the day growth is a function of population growth and how productive your workers are. How much is that increasing? And productivity hasn’t been increasing in over a decade. It’s flat.

 

So that’s why you’re not seeing GDP growth much more than about one-and- a-half, two percent annually. That’s not good, because when you look at all the debt these countries have, public sector debt, they need to grow faster (laughter). You know, the low interest rate environment since 2008 was meant to help debtors. It was an explicit transfer from savers to debtors. And, instead, all of these countries continued to go out and incur more debt. So, you know, we have a fundamental problem in our society with governments that can’t live within their means. They can’t say no to the voters because the politicians will get voted out of office.

 

And private sector investors and companies have to live in this same environment. And that’s, you know, that’s a difficult thing going forward. I don’t know how we’re going to preserve value for our families and our future if governments are borrowing from everyone every day with no intention of repaying. There’s not even a discussion of repaying.
When I was a kid a billion dollars was a lot of money. Now nobody cares. They just kind of say, oh well, it’s okay. But I think that’s really the issue. I’m not worried about a short-term crisis for companies that have, you know, levered up to buy back their stock. But if rates pop you could see quite a scramble from corporate America to try and rebalance their capital structure back to something that makes more sense.”

When Treasury yields fell to all-time lows last July following the UK's vote to leave the EU, many analysts said the 35-year bull market in Treasury yields had finally reached its zenith, and that interest rates would only move higher from there. Doubleline Capital’s Jeff Gundlach was among the big names calling for a shift in the secular trend, though Gundlach later said the bull market would be over once the 10-year Treasury yield reaches 3%.

“Erik: Let’s come back to treasury yields, because, obviously, a little over a year ago Jeff Gundlach made this big profound announcement that the 35-year bond bull market was over and that’s it. The top is in on price, the bottom is in on yield, it’s all the other direction from here. We’ve heard quite a few views in the opposite direction. Lacy Hunt on this program made a very compelling argument that if you just look at the over-indebtedness of the world and of governments, it’s impossible to get to what we think of as historically normal rates. Now, you just said a minute ago you definitely see a move back toward two percent. Does that mean that you think that Gundlach is right and this is just a correction towards two percent? Or do you think that the jury’s still out on whether or not the 35-year bond bull market is over or not, or how do you see this in the longer term?

 

Chris: Well I think Gundlach is right, but he’s way early. You know, in order for you to have a selloff in the bond market and really see interest rates move higher, especially medium and longer-term rates, that money has to have somewhere to go. There isn’t an obvious outlet or venue for the funds that are currently invested in US treasuries, US corporates, US high-yield debt. Where else is it going to go in the world? We’ve created so many pieces of paper with pictures of presidents on them that they all want a home and they all want a positive return. And you’re right. The indebtedness of the world, especially the public indebtedness of countries, I think is the real driver behind central bank action. The reason is the dropping interest rates has ceased to be an effective way to get economies moving.

 

You know, back in the 70s and the 80s you dropped interest rates a point or two and the economy would increase, quickly. Now there’s nothing. In fact there’s an argument that says that deficit spending is actually bad for growth. It’s almost like the old crowding-out argument from economics which had been dismissed long ago.

 

So I think that the secular tendency of markets has not yet changed. You know, the hedge funds would love to go and make some money on a rising interest rate trade, and many of them have tried over the last couple of years, and they’ve all gotten annihilated. So I think people have to realize that the weight of debt, and also the posture of all the major central banks, is such that low interest rates are going to be with us for a while. And until you see a change in demand so that treasury auctions are not as successful and yields in fact have to rise to attract investors, I really don’t see that changing.”

You can listen to the full interview below:

 

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FX Week Ahead, by Shant Movsesian and Rajan Dhall MSTA of fxdaily.co.uk

Is the SNB at it again? EURO-phoria takes off as longer term investors get the nod.

Having focused on the USD in recent weeks, and how the market has rounded on the greenback ‘en masse’, we can finally look to some exchange rate moves outside of the major spot rates.  Sharp losses in the CHF have shown that the big money is taking note of the recovery in the Euro zone, and that investment prospects look good as the smaller member states are gaining traction alongside the power house that is Germany.  Last week, IFO economists said they saw little which could derail the domestic economy, including the strengthening EUR, which has traded to a little shy of 1.1800 in the past week, but more significantly, taking out the 1.1711/12 (long term range highs in the process.  This led to the ‘follow through’  which saw EUR/CHF shooting up to levels close to 1.1400, having spent a year long slumber inside a 1.0600-1.1000 range. 

More data out next week is expected to confirm the above, headlined by EU wide Q2 GDP on the Tuesday, with updated manufacturing PMIs due out for all the leading states, as well as unemployment data.  Focus on Germany will be shared out a little to Spain and Italy, also seeing marked improvement in economic activity.  Spanish jobs have increased significantly, and in Italy, industrial orders have taken off, so no surprise for widespread calls for the ECB to rein in their APP, but once again, market forces are threatening to choke off some of this recovery.  As such, there is growing sentiment that once the ECB do signal policy change in Autumn, there will be a sense of disappointment – naturally linked to the rampant gains in the EUR seen already.  German 10yr hit levels shy of 0.65% a few weeks back, but the moderation of some 10bps or so looks to have been a short lived affair as Bunds took a sharp hit as the regional inflation data out of Germany saw healthy pick up.  On Monday we will see whether CPI is rising across the region as a whole, but consensus is looking for 1.3% in the headline, 1.1% in the core.

These levels remain a major concern for the ECB at the present time, but the market has been aggressively calling president Draghi’s hand.  The Fed are similarly wary of tepid inflation rates – below 2.0% – but despite comparatively higher levels, the USD selling spree continues in certain quarters.  There are further signs that this is nearing a pause – or correction – for now, but we still see traders pouncing on any opportunity to offload, with Friday’s mix of data case in point.  On Thursday, the large contribution from Boeing’s large order books saw Jun durable goods rising 6.5% on the month, and this was backed up in the ex air and defence numbers, which although soft in Jun, were revised higher in May to offset this.  Cue the upwards revisions to Friday’s Q2 GDP, but the 2.6% rise was pretty much on consensus.  Fingers were pointed at the soft advance PCE prices however, and along with a lower than expected employment cost index, it was business as usual with the USD index was hit back towards the weekly lows – though these held. 

EUR/USD as mentioned above could not get back into the upper 1.1700’s again, but we saw USD/JPY pulled back into the mid 110.00’s.  USD/CAD stole the show however, as the 0.6% GDP read for May blew the consensus 0.2% forecasts away, but I am still a little bemused as to why these weren’t upgraded after some of the component readings for that month – notably wholesale sales at a much better than expected 0.9%.  Fresh from turning back off the low 1.2400’s, the retracement into the mid-upper 1.2500’s lasted less than 24 hours, and we were swiftly back near the lows again, but as above, excessive strength was curbed into the weekend. It is hard to argue that a 10% appreciation (1.3800 to 1.2400 give or take) in 10 weeks is not excessive.

Looking into next week, we have more on the US PCE as the Jun data is released on Tuesday.  Markets will have a chance to calm a little with Monday’s schedule showing only pending home sales, but the following day we also have the ISM manufacturing PMIs for Jul, along with the personal income and spending stats which accompany one of the Fed’s favoured metrics (core PCE).  The familiar main event at the start of the month is Friday’s payrolls report, where once again the market is looking for average earnings to edge up to 0.3% from the flat-line 0.2% seen of late, while headline jobs growth is expected to come in around 175-180k vs 187k posted in Jun.  Again we expect some moderation in the USD ahead of this, but there is plenty before this, including ADPs, which will make it another bumpy ride, though any pullbacks vs JPY will be limited ahead of 112.00, and likely pre 1.1600 vs the EUR. 

The Canadian jobs report is also due at the end of the week, with little reason to believe the data will not signal continued improvement in the economy.  However, just as we are seeing in the EUR, the speed of the CAD recovery could be disruptive, and we have had some unsubstantiated reports that the government is a little concerned over the BoC’s rate path trajectory.  The recent 25bp hike as it stands has come in the face of a housing market on the turn. Oil prices are also nearing some key levels, so there are mounting reasons for some consolidation here at the very least.  Notable levels seen just below here into the mid 1.2300’s while a 1.2575 breach up top should signal a deeper correction, possibly to 1.2700 or so initially. 

A big week for GBP as Thursday’s MPC meeting will show any further change in sentiment over the bias (on timing more than anything else).  Rising inflation rates have clearly been exchange rate led, but with the economic prospects still very much in the balance, a reversal in last year’s 25bp cut is not the clear cut answer.  We still feel the BoE misjudged the pre-emptive move last summer, so there is an element of having backed themselves into an unnecessary corner. Tentative signs that CPI is softening already, with the latest data showing the yearly rate backing off 2.9% and saving the statutory letter to the Chancellor.

Will this be enough to keep the rate hawks at bay?  5-3 was the vote split at last month’s meeting, and we may need some retraction here if Cable is to give up some of the bid tone which sees us pushing further into the mid 1.3100’s.  1.3170-90 the next area to watch here.

This is also being helped by the strong defence in EUR/GBP ahead of 0.9000.  This proved a strong sticking point in November last year, but sellers will be getting a little nervous as pullbacks are finding strong buying interest below 0.8900.

Even though the robust nature of the UK at present is proving supportive against an ailing USD, Brexit uncertainty and the positive mood in Europe should see EUR/GBP dips well contained for now.  Worrying were the comments from chief EU negotiator Barnier that he had no clear idea on UK policy on a number of issues, so the focus on hard or soft Brexit could start to fade as traders focus on the overall capabilities of the government as it stands in getting the UK the ‘best deal’ at the negotiating table. 

Services PMIs are due out on the morning of BoE announcement day, and preceded by manufacturing on Tuesday and construction on Wednesday.

It is also a busy one for Australia, as the RBA meet to deliver their latest assessment on the economy.  The last meeting was a little more cautious than some had expected, though the minutes were taken in a more positive light.  AUD was going through a purple patch as were all the ‘risk’ currencies, but having pierced the 0.8000 mark, references to the exchange rate and how it may unbalance economic growth will be under scrutiny, as will inflation falling back under 2.0% – marginally so, and still comparatively firmer than elsewhere.  Against this we have seen a strong rise in commodities – Copper rising to $2.90 – but despite scepticism, this will contribute to positive factors as will the healthier jobs market.  Even so, the market has erred towards a more hawkish stance, so the risks here lie to the downside.  AUD may well take another dip lower, but against the USD, the breakout area at 0.7850-35 will provide the first point of support. Higher up, pre 0.8200 is the upper end of the medium term target range, and we do note rule out a push towards these levels, but it will be a slow grind at best.

Plenty of data alongside RBA meeting, with housing and private credit, the AIG manufacturing index, trade and retail sales all due for consideration. 

The RBNZ do not meet up until the week after, but late Tuesday we get the latest employment report, while ahead of this we get the results of the latest Fonterra dairy auctions.  In the meantime, NZD is following the rest of the pack, but looks slightly better supported given another dip back in AUD/NZD.  We still expect to see losses limited below the 1.0500 mark, with only a major fallout in broader risk sentiment prompting greater volatility here.  NZD/USD is still looking to probe higher, but above the 0.7500 mark, the central bank may choose to impart some well chosen words to temper further strengthening. 

Renewed optimism in China’s economy has prompted the pick up in commodity prices led by metals, giving the added impetus to AUD and the rest of the Pacific Rim yielders, and we will get more evidence of this (or not) from the official and Caixin manufacturing PMIs on Monday and Tuesday respectively. 

The JPY carry trade is bolstered as a result, but there looks to be some hesitancy across the board, with the USD/JPY rate naturally pressured in the current climate.  Economic activity in Japan is also rising, though at a gradual pace, but enough to prompt upgrades to growth forecasts. The BoJ will maintain their ‘whatever it takes’ mantra with inflation still way off target, so alongside industrial production forecasts, we also look to the monetary base figures on Wednesday.  110.50-30 support looks set to be tested again but low volatility reinforces this base to a degree, with the high correlation to the VIX underpinning the resilient appetite for risk – irrespective of your views further down the line. 

Strong growth numbers out of Sweden on Friday, which prompted another SEK surge against the USD, but this proved short lived initially before the greenback was hammered again late on.  NOK/SEK also took a tumble from above 1.0300 to a little shy of 1.0200, then also recouped, so SEK buyers need to be selective here, and as we started out in the preview, CHF looks to be the obvious choice for now.  Oil prices are bolstering the NOK as much as the Norges bank stance, though we should see the Riksbank starting to abandon their uber cautious tone in light of the latest data, so we see 1.0350-60 capping the cross rate for now.  PMIs the only standout readings to watch for next week. 

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Authored by James Howard Kunstler via Kunstler.com,

I know I’m not the first to point out how Anthony Scaramucci, President Trump’s brand new Communications Director, is suddenly and eerily carrying on like his namesake, the arch-rascal / buffoon of the Old World Commedia dell’Arte in lashing out at his fellow scamps and bozos in the clown school that the White House has become. Of course, these antics only reflect the astounding violent vulgarity of current US culture in general, especially as it recursively re-amplifies itself in the distorting echo chamber of TV. It’s how we roll nowadays – right up the collective butt-hole of history until some fateful event provokes a last frightful purging of our own bullshit.

Still, it was rather shocking to hear Scaramucci refer to (now former) White House Chief of Staff Rance Priebus as “a fucking paranoid schizophrenic” and Trump ultra-insider Steve Bannon as someone who “enjoys sucking his own cock.” It’s kind of like Paulie Walnuts of “The Sopranos” wandered into the West Wing of “Veep.” Somebody’s gonna get whacked, and it’ll be a laugh-riot when it happens.

We need a little comic relief in these midsummer horse latitudes of the mind as the ill-starred Trump Show appears to enter its ceremonial death dance. There’s also something satisfyingly Napoleonesque about Scaramucci. Here’s a guy who cuts through the odious blubber of US politics right to the bone of things with a flensing blade of profane righteousness. Personally, I’d like to see him take some whacks at a few more deserving targets, and I can even imagine a somewhat farfetched scenario where the little guy shoves Trump out during a concocted national emergency and manages to declare himself First Citizen, or some such innovative title allowing him to run things for a while — say, until the generals toss him out a window. Or maybe he’ll last less than a week in his current position. I would not be surprised, either, if Mr. Bannon beats little Mooch to death with an Oval Office fireplace poker right in front of the Golden Golem of Greatness himself.

The mills of the gods grind slowly, but they grind exceedingly fine – in this case, inexorably toward the restorative medicine of the 25th amendment. There is, after all, that hoary old artifact called the national interest lurking somewhere offstage aside of all this colorful mummery, especially as the Russian Meddling gambit appears to be dribbling away to nothing. It’s more than self-evident that poor Trump is in so far over his head that he’s come down with something like the bends, a debilitating systemic disorder rendering him unfit to execute the powers of office. Decades from now, they’ll say he had “the tweets.”

This is a melodrama of a type the world has seen before in a hundred royal palaces and other centers of mis-rule. The need to get rid of the head of state becomes so painfully self-evident that idle chatter about it ceases and all intention is signaled in mere eye-rolls, sighs, portentous glances, and other fraught devices of body language. That’s what’s going on now in the senate, the agency executive suites, the terraces of Martha’s Vineyard, and surely the hallowed corridors of the White House itself. One way or another, the knives are coming out.

The most economical script would have Trump graciously “resign” and be allowed to return to his familiar money-grubbing activities in real estate, where he can really only do harm to his own bank accounts and family posterity. Or, he could be dragged kicking and screaming from the premises, shall we say, and thrown to the bloodthirsty beasts of Deep State justice. That will not be pretty. Either outcome could provoke a lot of mischief “out there” among those who voted for him.

In any case, I doubt that the polity can take much more of Trump after Labor Day – and I say all this as one who was never part of the so-called “Resistance.” I’m not even very much convinced that getting rid of Trump and installing his stand-in, Mike Pence, will leave the government any less dysfunctional. After all, the nation is riding a larger and scarier arc of history as the techno-industrial fiesta winds down, with all the awfully disruptive consequences that implies. But at least there’s a chance that we might at least face this predicament seriously instead of feeling trapped in some sort of cosmic sitcom in an alternative universe of endless fucking nonsense.

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Following a flood of warnings in the past week about both the precarious state of markets and the global economy, most recently from the otherwise stoic Howard Marks warning about bubble-like condition in the market (especially when it comes to passive investors), as well as Robert Shiller who explained what “keeps him up at night”, we were due for some good news. It came over the weekend courtesy of Morgan Stanley’s co-head of economics, Chetan Ahya, who writes in his Sunday Start weekly piece that “2017 is unlike 2012-2016” – a period characterized by an economy that rebounded on several occasions, prompting several narratives of “false starts”, only to see the global recovery fade and keep central banks stuck in printing mode.

In other words, this time – Morgan Stanley predicts – will be different. We are not so confident.

Here is Morgan Stanley’s explanation why this time the handoff from central banks to the private sector should work out:

Why 2017 is unlike 2012-16

 

Over the last five years, the global economy has been through a number of wobbles. Initially, DMs faced unprecedented deleveraging headwinds. Subsequently, China and other EMs underwent a period of deep adjustment. The outcome was a global expansion that was un-synchronous and heavily dependent on policy stimulus, which has been reflected in years of below-par growth. From 2012 to 2016, global GDP growth has averaged just 3.3%Y and more recently, since 2Q14, global GDP growth has averaged just 3.2%Y, well below the long-term average of 3.5%Y.

 

That was then. Fast forward to today, global growth is tracking at its fastest pace since 2Q14. The growth has been broad-based, with upside surprises in Europe and China. While we do expect some moderation in growth in 2H 17 from the current high levels, full year global GDP growth is estimated at 3.6%, which would be the strongest rate of growth since 2011. Moreover, at the current juncture, global growth is tracking better than what we have built in for the full year (2017), principally due to a stronger than expected outturn in 2Q.

 

 

There are a number of factors which differentiate this year versus the preceding five years. First, both DM and EM growth is accelerating for the first time since 2010, and within that, the recovery has been broad-based across individual economies too. Second, global trade in value and volume terms is also growing at its strongest since 2011. Third, the global investment cycle has also improved meaningfully, as global ex-China gross fixed capital formation grew at the fastest pace in 1Q17 since 1Q15 in %Y terms and in a broad based fashion. Finally, while the strength of the recovery is similar to that of 2010-11, it is important to note that the recovery was, to a large extent, driven by base effects and was therefore somewhat statistical in nature as it reflected a recovery from a deep recession and that recovery was driven by aggressive monetary and fiscal expansion in both DM and EM. When evaluated against this context, global growth is currently tracking at the best rate since the 2003-2006 cycle.

 

Despite the recent strength in global growth, our conversations indicate that there is still a fair bit of skepticism. The three key debates are:

 

1) Will tightening by DM central banks cause a sharp slowdown?

 

Investors contend that the recent subdued inflation prints are pointing towards some weakness in aggregate demand and the planned removal of monetary accommodation by DM central banks will hurt the recovery.

 

However, we think that private sector risk attitudes are normalizing, as deleveraging pressures are now behind us. Indeed, within G4, the non-financial private sector has been leveraging up for the past 4 quarters and fiscal policy is not tightening as it was between 2011 and 2015. As the private sector takes on a greater role in driving growth, monetary accommodation can be gradually rolled back without causing a sharp slowdown in growth.

 

2) Will a weakening of credit impulse in China weigh heavily on growth?

 

As regards China, investors are concerned that the recent cyclical strength has been due to past policy stimulus and with policy makers now dialing back the stimulus, growth would decelerate sharply as it did during 2013-15, creating challenges not just for China but would also weigh on the rest of EMs and global economy.

 

There are three offsets to this policy tightening. First, external demand is recovering after five years of deceleration and the contribution of net exports to growth has turned positive. As exports growth is recovering, policy makers in China – who tend to run a counter-cyclical growth model – are relying less on debt-fueled public investment demand, which is resulting in a paring back of aggregate credit growth. Moreover, private sector investment and private consumption are improving, which is lending support to the ongoing recovery. In the property market, inventory levels have been declining rapidly and even though property purchase restrictions have been tightened, the property market is unlikely to require or experience that depth of adjustment that it experienced in 2013-15.

 

 

3) Is recovery in EMXC just about commodity price improvement and China?

 

The third debate revolves around the impact that stimulus in China has had on other EMs via a boost to commodity prices. As China withdraws its stimulus and commodity prices reverse, growth in EMXC will decelerate.

 

In our view, the recovery that is underway in EMXC is not just about commodity prices. Indeed, both commodity exporters and importers have had a recovery in growth. More fundamentally, the majority of EMXC have had to undergo a period of adjustment (payback), as they had pursued unproductive expansionary policies post 2009, which resulted in elevated macro stability risks. This adjustment is now completed in most of these EMs and hence a gradual recovery is now underway.

 

To be sure, there are still risks to global growth, particularly in DM as they are more advanced in the business cycle. In that context, if DM central banks tighten even more aggressively than we are building in, it could weigh on growth. In China, we are watching risks to growth that could emerge if policy makers take up more aggressive tightening from 4Q17 post the 19th Party Congress.

 

Our base case is that global growth will moderate somewhat in the coming quarters from the current high run rate, but will settle on average at above trend for both 2017 and 2018. In other words, the experience of the past five years is unlikely to be a good guide for what will unfold next in the global economy. Reflecting this broad-based, synchronous global recovery, our strategists continue to recommend US and Japan as our preferred equity markets, and have a preference for EM fixed income over US credit. In currencies, they like owning USD against low-yielding currencies like CHF and JPY and selling it against EUR, and select EM currencies like PLN, IDR and MXN.

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When Russia warned on Friday that it would retaliate proportionately after it announced it would seize two diplomatic compounds used by the US in Russia and added that it would reduce the number of US diplomatic service staff in the country to equal the number of Russian diplomats in the US by September 1, calculated by the local press at 455, it wasn’t joking.

Moments ago, speaking in an interview on the Rossiya 1 TV channel, Vladimir Putin said that 755 American diplomats will be expelled, or as he phrased it “will have to leave Russia as a result of Washington’s own policies”, a move which as we previewed on Friday will make the diplomatic missions of Russia and the United States of equal staffing.

Speaking late on Sunday, the Russian president said that the time for retaliation has come: “we’ve been waiting for quite a long time that maybe something would change for the better, we had hopes that the situation would change. But it looks like, it’s not going to change in the near future… I decided that it is time for us to show that we will not leave anything unanswered.”

Putin added that “the personnel of the US diplomatic missions in Russia will be cut by 755 people and will now equal the number of the Russian diplomatic personnel in the United States, 455 people on each side” Putin said, adding that “because over a thousand employees, diplomats and technical personnel have been working and are still working in Russia, and 755 of them will have to cease their work in the Russian Federation. It’s considerable.“

Putin also told the Russian audience that “the American side has made a move which, it is important to note, hasn’t been provoked by anything, to worsen Russian-US relations. [It includes] unlawful restrictions, attempts to influence other states of the world, including our allies, who are interested in developing and keeping relations with Russia,”

According to Reuters, Putin also said that Russia is able to impose additional measures against U.S. but he is against such moves (for now).

“We could imagine, theoretically, that one day a moment would come when the damage of attempts to put pressure on Russia will be comparable to the negative consequences of certain limitations of our cooperation. Well, if that moment ever comes, we could discuss other response options. But I hope it will not come to that. As of today, I am against it.”

As we reported late last week, following the House’s approval of new sanctions against Russia, Iran and North Korea, the Russian foreign ministry told Washington to reduce the number of its diplomatic staff in Russia, which currently includes more than 1,200 personnel, to 455 people as of September 1.

And now we await the US retaliation in what is once again the same tit-for-tat escalation that marked the latter years of the Obama regime, as the US Military Industrial Complex breathes out a sigh of relief that for all the posturing by Trump, things between Russia and the US are back on autopilot.

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Via The Daily Bell

I was pretty sure before, but now I am entirely convinced. The executive branch of the U.S. government is simply a reality TV show. It is the latest entertainment from the man who brought you The Apprentice.

And boy does he know how to keep the attention on him.

What the media couldn’t grasp during the entire election is that there is no such thing as bad publicity.

“Yes but in politics…” No. Wrong. Maybe in the past, there were exceptions. But probably not, as Presidential campaigns from the beginning were pretty ridiculous.

Jefferson’s camp accused President Adams of having a “hideous hermaphroditical character, which has neither the force and firmness of a man, nor the gentleness and sensibility of a woman.”

In return, Adams’ men called Vice President Jefferson “a mean-spirited, low-lived fellow, the son of a half-breed Indian squaw, sired by a Virginia mulatto father.”

So perhaps even then, but definitely today, publicity is power. If you have a stage, you have influence.

But how does it help Trump that Scaramucci talked a bunch of trash about Priebus? How does it help that Scaramucci’s wife filed for divorce a day after he got his job at the White House? Why would Trump stoke feuds and rivalries within his administration, giving the impression that he is an incompetent manager? Why does he seem so keen to tell White House staff and cabinet members, “You’re fired!”

Because it gives people something to talk about.

If Trump put together the most stellar team ever conceived, and executed his agenda like clockwork, would the media report that? Would they say, nice job, and tell everyone they were wrong about the Donald, and he is actually really organized and effective?

No! The media was going to find things to criticize, but they weren’t going to be as interesting as what Trump had planned. When Trump hands them the big stories, he controls the narrative. He brings everyone into his grasp. Then he can decide what to do with different segments based on their reaction.

The ones who have the biggest fits help Trump the most. His base absolutely loves seeing the liberals freaking out. The agenda wasn’t to defeat ISIS, and build a wall. The agenda was to piss off social justice warriors and throw it in their faces that a man like Donald Trump has influence over their lives.

It is a reaction from smug liberals telling people that Obamacare was the law of the land. It is the natural outcome of a bunch of people with nothing in common being grouped together and forced to pay for each other’s random whims.

Anyone who thinks they are witnessing Trump’s unraveling or downfall is sorely mistaken. This is exactly what Trump wants. This is his marketing strategy. This is the reality TV show environment in which he thrives. Not as an effective leader, but as a celebrity, a star, an entertainer, a villain, a martyr, whatever.

Prediction

The left continues to take every opportunity to attack Trump. They fail to differentiate between true worthwhile and legitimate criticism (of which there is plenty), versus transparent and self-serving publicity stunts of the critics. They focus on superficial gaffs and quirks that don’t actually matter. They reach too far for hard to prove or unsubstantiated accusations which bore most voters.

Covfefe was a turning point.

When FDR was president, the Republicans attacked him relentlessly, while he stayed mostly silent. He only responded when the Republicans finally criticized him for wasting tax dollars flying his dog to join him on vacation.

FDR joked that he could ignore the attacks on his administration, and he could even handle the personal attacks, but when they criticized his poor defenseless pooch, they had gone too far. Everyone laughed, and this took all the wind out of the Republican sails, even though they were right to criticize the waste and abuse of power.

If Trump does what FDR did and generally refuses to respond, or only hits back with jokes and humor, the public will come to see him as relatable. This will only further frustrate the left, who will double down on the same approach, and subsequently, alienate more people who don’t identify with or understand the shrieking.

By the time the left realizes they have overplayed their hand, it will be too late to recall the flying monkeys, and Trump will return to the field to play out the game after the halftime show.

Just to be clear, I think the whole Presidency is a sham. There is plenty Trump has done wrong, but it probably hardly matters who is in the white house.

It may be the deep state or the New World Order truly running things. It may simply be a bureaucratic train without a conductor heading for the end of the tracks.

But even if you could get “the right people,” elected, I doubt they would be able to change things. A Jesus Buddha ticket could win the Presidency in 2020, and probably still not solve anything. The solutions are not in the realm of politics, they come down to individual action, which adds up to make a difference.

Do you agree?

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