Month: February 2018

“Worst Case Scenario” – Morgan Stanley Warns Selling Has Shifted Form Systemic To Discretionary

Confirming JPMorgan’s “worst case scenario” that forced de-levering in vol-based strategies would lead to retail ETF outflows and create a vicious cycle downwards, Morgan Stanley’s Christopher Metli warns that today’s moves lower are likely not being driven by systematic supply – this appears to be more discretionary selling.

Risk-Parity funds are seeing some of the biggest losses in history…

But, as we previously detailed, JPMorgan offered hope that this vicious circle of de-leveraging could be stalled – and had been in the past – by dip-buyers from greater-fool retail inflows.

In the past, just as we have seen this year, these risk-parity-correlation tantrums have been cushioned by equity market inflows, and we note that, in particular, YTD equity ETF flows have surpassed the $100bn mark, a record high pace.

If these equity ETF flows, which JPMorgan believes are largely driven by retail investors, start reversing, not only would the equity market retrench, but the resultant rise in bond-equity correlation would likely induce de-risking by risk parity funds and balanced mutual funds, magnifying the eventual equity market sell-off.

Which could be a problem…

As ETF outflows are surging…

And as Morgan Stanley’s Christopher Metli – who previously explained what happens when VIX goes bananas – notes, today’s moves lower are likely not being driven by systematic supply – this appears to be more discretionary selling. 

Systematic supply from vol target strategies is largely out of the way now, while consensus trades are getting hit:  NDX is underperforming SPX, momentum is down 1%, and the Passive Factor is up, indicating actively held names are underperforming names better held by passive funds.

So why now, even though the systematic supply is largely out of the way? 

Well as noted in previous comments, consensus was that this was a dip to be bought and that vol should be sold.  While systematic funds delevered this week, there has been less discretionary supply and end users have bought very little protection. 

This makes the market still fragile to negative shocks – in aggregate less fragile than coming into the week for sure, but still at risk.

The shock today has been higher real rates on expectations of more Fed tightening to come.  After ignoring the original driver of this whole episode earlier in the week, investors have finally returned to the fact that the Fed is going to have to react to a stronger economy.  10y real rates today hit the highest since 2015 indicating tighter financial conditions, and breakevens are down slightly.

In some sense, Metli points out, these ups and downs are a normal reaction to the shock and pain of the Monday selloff, and as noted in previous comments the market usually remains choppy after these events.  A focus on rates and the upcoming CPI report on Tuesday, plus dealers remaining short gamma, likely means the market remains choppy for the next few days.

But Metli does offer some silver-lining hope – just as JPMorgan’s Kolanovic did on Tuesday, another -4% SPX move is unlikely given lower systematic supply and less VIX ETP gamma, and the point of max pain is very likely behind us. 

Choppy means +/- 1 to 2% moves for a few days followed by a gradual moderation in volatility as the market digests a more hawkish Fed.

…unless the bond market becomes truly unhinged, he adds.

Finally, Metli notes that right now, the options market does not fully price in a higher volatility environment for longer, and the inverted curve means forward volatility is relatively inexpensive.

June VIX futures are only in the 35th 10-year percentile, while even further out volatility between June and Dec of 2018 is only in the ~10th 10-year percentile – good value versus a VIX that is in the 90th percentile.

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Hey Donald Trump! Don’t Talk to the Feds, Man: New at Reason

Robert S. Mueller, III If the president were my client, I would advise him not to submit voluntarily to an interview, under oath or not, with Special Counsel Mueller, writes former federal prosecutor, current Popehat blogger, and Reason Contributing Editor Ken White. It offers him nothing but risk, even if it offers the rest of us entertainment or schadenfreude.

And that’s not just good advice for the president; it’s good advice for everyone.

The president is no mere witness. He is at least a subject, and likely a target, of the special counsel’s investigation. In federal criminal parlance, a witness is someone not suspected of wrongdoing who has useful information, a subject is someone suspected of wrongdoing who may well be charged if the evidence supports it, and a target is someone whose indictment is actively sought as a purpose of the investigation. When the feds interview a subject or target, their goal is not mere information-gathering or fact-finding or “clearing a few things up.” Their goal is the hunt.

In the old westerns, rather than take the trouble of hauling mustachioed miscreants to desultory trials, lawmen would often provoke them into drawing first, thus justifying shooting them down where they stood. A modern federal interview of a subject or target is like that. One purpose, arguably the primary purpose, is to provoke the foolish interviewee into lying, thus committing a new, fresh federal crime that is easily prosecuted, rendering the original investigation irrelevant. Title 18, United States Code, Section 1001, which makes it a felony to lie to the feds, is their shiny quick-draw sidearm. This result not an exception; it is the rule. It happens again and again.

View this article.

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Andrew Napolitano Exposes FISA Court Charade

Authored by Adam Dick via The Ron Paul Institute for Peace & Prosperity,

There is plenty of reason to think that regular United States courts too readily allow surveilling people and searching their homes and property. But, in the US court authorized by the Foreign Intelligence Surveillance Act (FISA), there is not even a pretense of observing Fourth Amendment restraints.

The result is what many Americans who demanded a Bill of Rights be adopted in the early days of the United States sought to prevent from arising in America — routine, sweeping judicial decrees for invading people’s privacy based on little or no credible reason to suspect the people committed criminal acts.

In a Monday interview at Fox Business, legal scholar and former New Jersey state Judge Andrew Napolitano called out the FISA court for its extreme flaunting of constitutional restraints. Presenting a scenario where he is woken in the middle of the night by a call from the courthouse regarding an urgent warrant request that the state police are waiting in the lobby of his building to discuss with him, Napolitano illustrates the difference between the process to obtain a FISA court warrant and the process he employed as a judge. Napolitano explains.

“And they come into my living room, and we spend an hour going through what they have and how they can demonstrate to me that I should sign a piece of paper letting them break down somebody’s door at three in the morning in order to get evidence. It’s a give and take and a give and take, and I am satisfied that it is more likely than not that behind that door is evidence of a serious crime. The court has to go through that kind of give and take, give and take, give and take when they come to you with an emergency application for a warrant.

If the court blithely accepts what the government gives, it’s as much the court’s fault as the government. If the government knows that the court grants 99.9 percent of all warrants requested, which is an unbelievable number — a number never heard of in my career, then the government’s going to get lazy and sloppy, because they are going to walk in there saying ‘we’re going to get this thing, we always do.”

Watch Napolitano’s complete interview here:

The super-accommodative approach of the FISA court also opens the door to easily obtaining permission to search and surveil in order to fish for evidence of a criminal act to pin on someone, for information helpful in advancing an individual or company’s financial gain, for information the potential disclosure of which can be held over an individual to exert influence on him, or for information that can be leaked to the media for purposes including influencing an election, a congressional vote, or the confirmation decision on a presidential nominee.

While the FISA court’s activities are secret, the court did admit in 2013 that it had, during its several decades in existence, approved over 99.9 percent of the US government’s surveillance requests.

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Top DOJ Official Involved In Clinton And Russia Probes Steps Down

An senior Justice Department official who was involved in oversight of the Hillary Clinton email investigation as well as the Russian interference probe has stepped down, citing personal reasons.

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David Laufman, Hillary Clinton

David Laufman, 59, was the DOJ’s chief of the National Security Division’s Counterintelligence and Export Control Section – working his way up the FBI ranks after beginning his career in 1980 as a CIA analyst. Laufman obtained a law degree from Georgetown University.

“It’s tough to leave a mission this compelling and an institution as exceptional as the Department of Justice,” said Laufman, 59. “But I know that prosecutors and agents will continue to bring to their work precisely what the American people should expect: a fierce and relentless commitment to protect the national security of the United States.”

The Washington Post goes to great lengths to describe Laufman as a conservative – citing an incident in which a Democrat wouldn’t write a letter recommending him for a job as the Pentagon’s inspector general:

“I asked a lawyer friend of mine, a Democrat, to sign the letter,” Thompson recalled. The lawyer, a former Justice Department official, consulted Democratic colleagues, who told Thompson they considered Laufman “a conservative — someone they couldn’t support, and so she declined. –WaPo

However The Post then points out that Laufman contributed around $880 to Obama’s two presidential campaigns, according to FEC records – which caused critics to label him a “holdover.” 

Journalist Mike Cernovich, who broke the Susan Rice “unmasking” story, claimed that Laufman was the source of “several national security leaks” to the media. 

Laufman is hardly the first official to leave the DOJ or FBI in recent months. Last week, former FBI Director James Comey’s assistant, Josh Campbell, left the FBI in order to take a new position at CNN – Defending the FBI according to a flyer for a party thrown by the agency. 

In a New York Times op-ed, Campbell wrote, “To be effective, the F.B.I. must be believed and must maintain the support of the public it serves. … These political attacks on the bureau must stop, adding “If those critics of the agency persuade the public that the F.B.I. cannot be trusted, they will also have succeeded in making our nation less safe.” 

In late January, James Comey’s chief-of-staff resigned as well. 

Finally, Deputy Director Andrew McCabe also stepped down in late January, following what was reportedly a forced retirement according to Fox News. 

McCabe, who briefly served as acting director last year after Trump fired Comey, first let it slip to the Washington Post late last year that he would be retiring in the coming months as Congressional Republicans targeted him for criticism surrounding his pro-Clinton bias (McCabe’s wife even secured campaign funding from Clinton ally Terry McAuliffe, something he initially failed to disclose).

 

 

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Congress Navigates Spending Plan, White House Names New IRS Head, Emotional Support Hamster Flushes News Cycle Down a Toilet: P.M. Links

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Peter Schiff Warns “Trump’s The Fall Guy… There’s No Way To Stop This”

Authored by Mac Slavo via SHTFplan.com,

Peter Schiff, a market analyst who had accurately predicted the 2008 recession and the recent stock market plunge says more is coming.  Wait until you hear what he says is on the horizon for America and the global economy in the Trump era.

In an interview with Infowars‘ Alex Jones, Schiff details what we can all expect from the economy.  And even though Trump has fought to save the economy, the federal reserve is working against the president. “Unfortunately, he is the fall guy. There’s no way to stop this,” Shiff begins.

“The problem is so big that the minute the Fed has to try to solve it, it’s gonna unleash a much bigger one [problem],” Shiff says.  Jones begins his intro by not sugar coating the problem the economy is in thanks to government interference. The economy is a giant bubble and it will pop at some point, not just deflate.

“The Fed were dragging their feet in raising rates while Obama was president.  They talked about raising rates but at the end of the day, they barely moved them up. The pace of hikes has increased since Trump was elected, but part of the reason for that…I mean, the media is not talking down the economy; if anything they’re overhyping the economy.  Everybody’s talking about how strong the economy is, how everything is great. Everybody is taking credit for this great economy. The Fed wants to take credit for it, Trump wants to take credit for it, so if everybody wants to talk about how great the economy is, the Fed doesn’t have any excuse if it doesn’t raise rates…in order to keep up the pretense that the economy is as strong as everybody thinks, the Fed is in this box where it has to raise rates.

But they [the Fed] can’t tell the truth that it’s really a bubble, and if we raise rates, we’re gonna prick it, so they’re kinda in this bind.  And they are still telegraphing that they’re gonna raise rates three or four times this year.  And that is the problem.“

Schiff then goes on to explain some of the problems Trump inherited from Obama that will be difficult, if not impossible to solve without a crisis.

“One of the things the happened under Obama, is he inherited a massive deficit from Bush. The deficit skyrocketed in 2008/2009 and so, after a couple of years, the deficits were slowly falling while Obama was president. Now, they were falling from a very high level, but at least they were going down. All of a sudden, deficits are skyrocketing and they’re about to explode out of control. Yet, we have no way to finance them. So interest rates have no place to go but way up. Not just a little up.”

Jones then wanted to know if Shiff thought there was a way for Trump to help America get out of this mess. Schiff says Trump should come clean on how the economy is really looking.

“The sooner he tells the truth, the better…I don’t think this market is going to roar back and make new highs.”

The other problem is Americans have the lowest savings rate in ten years.  There is no money for the public to buy undesirable bonds that not even the Chinese will buy. Schiff also says that the social justice warriors need to take a break and focus on the bigger picture.

“Social issues need to take a backseat. If the economy crashes, if the market crashes, if we have a worse economy than the one that Bush left Obama, then none of the other stuff matters. Because we’re paving the way for somebody worse than Hillary Clinton.”

Trump is going to get blamed when the economy tanks because the media has already decided that they are on the side of socialism. When all of this happens, prepare for the free market (which we don’t have) to be blamed and prepare for the tax cuts to be blamed. 

This will pave the way for Communism. “I don’t think Trump can get out of dodge in time,” Schiff said. 

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Donald Trump’s Superficial Patriotism at the Twilight of U.S. Empire

Already long ago, from when we sold our vote to no man, the People have abdicated our duties; for the People who once upon a time handed out military command, high civil office, legions — everything, now restrains itself and anxiously hopes for just two things: bread and circuses.

– Juvenal

Despite the title, I don’t want this post to be all about Donald Trump. The truth of the matter is all politicians love superficial patriotism. It’s why they all claim to care deeply about the troops, yet allow veterans to wait weeks or months to see a doctor after sending them to fight pointless imperial overseas wars based on fabrications. All these disingenuous politicians are total frauds, but they tend sell the same destructive policies in different ways. As such, it’s important to understand how they manipulate and divide us.

First and foremost, standing for the National Anthem, saluting the flag or cheering a military parade is not “supporting the troops.” If you think such trivial and superficial acts represent anything beyond lazy surface level virtue signaling you’re a huge part of the problem. Your thoughtlessness and phony patriotism is exactly why our young kids are being sent off to die and murder other young kids halfway across the world to pad the coffers of plutocrats and the egos of empire obsessed sociopaths in D.C. Not only are such acts not patriotism, your phony gestures help grease the wheels of global death and destruction.

continue reading

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“Extreme Fear” Strikes Stocks As Credit Crashes To 10-Month Wides

Dow crashed over 1000 points today….

Time for “Markets In Turmoil” special

Markets “turmoiled” again today as Treasury yields spiked on a weak auction and the implications of a budget deal that means more supply is coming. This spooked stocks once again and XIV, the Inverse ETF, tumbled at the open – after ramping stocks delusionally into the open. As stocks got monkey-hammered again, so bonds were bid and ended with a relatively small rise in rates as plunges in Risk-Parity funds likely prompted forced delevering in stocks and bonds. Perhaps most notably, credit spreads started to snap wider and rate volatility spiked as equity market contagion spreads.

Investors have swung from “extreme greed” to extreme fear” in a record few days…

Source: CNN Money

While the mainstream media attempts to calm investors that this is a “healthy pullback,” one of their pillars of support just snapped. HY credit spreads snapped wider to 10 month wides and even IG spreads spiked…

 

This should not be a surprise as HY and IG ETFs have seen major outflows…

As credit investors fear rising rates more than anything else…

And the last week has seen huge equity outflows from US ETFs…

 

And as Risk-Parity funds see one of their biggest crashes in history…

And Risk-Parity had another ugly day today as aggregate bond and stock returns were negative…

 

So bonds and stocks were sold…NOTE that as stocks dumped, bonds were bid but that never stabilized stock flows…

 

In cash markets the selling started at the open after a gap up…and accelerated into the close!

Dow’s lowest close since Nov 30th

 

Futures show the chaotic manipulated swings…

 

All helped by XIV still!!

 

VIX is back above 35…

 

As equity vol surged again…

 

All the major US equity indices have broken key technical support levels…

10% Correction Levels:

  • Dow 23954
  • S&P 2585
  • Nasdaq 6755

Financials are now underwater for 2018 (despite soaring rates?) and Tech is also red…

 

While stocks were slammed, bonds actually ended the day with only modest yield rises (though plenty of vol)…10Y and 30Y yields are up on the week…

 

30Y Yields reached new cycle highs and 10Y yields tested them…

30Y INTRA

 

Today’s yield spike early on, spooked stocks again…

 

As rate volatility begins to surge…

 

The Dollar Index ended the day practically unchanged after rallying overnight (on Asia weakness) and selling off this morning…before rallying back as carry trades were unwound…

 

But the last 24 hours has seen incredible moves in offshore Yuan… Yuan is 1.3% weaker in the last two days against the dollar – the biggest drop since Aug 2015’s devaluation…

 

Despite the dollar’s quiet day, crude and copper slid lower while gold and silver trod water…

 

WTI was back to a $60 handle and RBOB back at 1.75…

 

Cryptos were volatile today but Bitcoin ended higher, extending gains from the pre-hearing lows…

Bitcoin held above the $8,000 level but the correlation with VIX remains a worry…

 

Overheard on CNBC this afternoon – “Volatility is here, embrace it, and we go back up again”

Easy eh?

It appears every asset class is starting to “embrace” the vol..

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Rural America Needs Road Infrastructure Investment the Least

Bridge under constructionWhile much of Donald Trump’s forthcoming infrastructure proposal is said to focus on encouraging local, state, and private investment, a big portion of it will still be traditional federal pork. That includes a likely $50 billion for rural infrastructure projects.

Yet according to a new study on highway conditions put out by the Reason Foundation (the nonprofit that also publishes this website), rural America is the place that needs this money the least. With few exceptions, rural states’ roadways are performing head and shoulders above their more urbanized peers.

The western states of Wyoming, Montana, and Idaho all ranked in the report’s top 10. So did South Carolina and several Great Plains states—Kansas, Nebraska, the Dakotas. These states have maintained their rural arterial roads and interstates in better condition. They have also spent comparatively less per mile on building new roads and maintaining old ones.

North Dakota, which ranked number one in the rankings, spent $4,088 per mile to maintain its state-controlled roadways. New Jersey, by contrast, spent $208,736 per mile. South Carolina, which ranked fifth overall, spent $15,675 on capital and bridge disbursements per mile. Compare that to, well, New Jersey, which spent $919,040 per mile.

That isn’t merely a matter of roads getting more wear and tear in the more densely populated states. “The rural states do tend to spend money better,” says Baruch Feigenbaum, one of the authors of the report. “The rural states tend to spend their roadway dollars on state roadways.” Conversely, many of the states that rank poorly devote a lot of federal highway dollars—and state gas tax dollars—to urban transit and to projects not related to transportation at all.

You shouldn’t give rural politicians and bureaucrats too much credit for that, Feigenbaum notes. Their states just tend to lack the large urban projects that draw away dollars that should otherwise be spent on highways.

“In Wyoming,” Feigenbaum says, “there are just not a lot of metropolitan needs.”

Unsurprisingly, these rural states score better when it comes to congestion, too. Wyoming commuters spend only 5.86 hours in rush hour traffic each year. In New Jersey, the number is 72.53.

Again, this reflects a lack of major urban centers, not some amazing Wyoming ability to design congestion-free roads. It does, however, demonstrate that there is not much demand for major new road infrastructure projects in these states.

Despite this, Trump’s infrastructure proposal looks likely to include a healthy slab of pork for rural states. According to a leaked “funding principles” document from January, 25 percent of the $200 billion federal appropriations component of the infrastructure plan will be awarded to rural governors with essentially no strings attached.

That has much more to do with politics than policy. As Feigenbaum says, “It’s pretty obvious the rural funding is designed to get the bill through the Senate. It’s not merit based.”

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