Record Weekly Treasury Issuance Concludes With A Poor 7 Year Auction

The week of record Treasury issuance concluded today with a 2Y FRN auction earlier, and a just concluded sale of $29 billion in 7Y paper, the week’s last coupon auction. Which, due to its position at the belly of the curve, a sweetspot for duration vs yield, traditionally is the best barometer of market interest for US paper. Which may be a problem because the just concluded auction was the worst of them all.

Stopping at a yield of 2.720%, below last month’s 2.839%, the auction tailed the When Issued 2.701% by 1.9bps, the biggest tail in years.

The internals were also poor: the Indirects were awarded just 55.85%, the lowest since February 2016, and 10 points below the 6 month average of 65.6%.

Directs also pulled back and took down just 12.1% of the auction, below both the February 15.6% and the 6 month average of 14.2%. This left dealers holding 32.1% of the auction, the highest since February 2016.

Overall, this was a very poor auction, with weak buyside demand, big concessions, a foreign buyers’ strike, and certainly a sour taste to close a week of record Treasury issuance.

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Rosenberg: Household Buying Plans Take A Deep Dive

We previously noted that the personal savings rate has continued to decline, and in the latest month it tumbled from 3.2% to 2.9%, the lowest since November 2007, which as a reminder is one month before the recession started.

This incidentally explains the surge in credit card usages we recently noted. As a reminder, the 13-week annualized credit card balances in the U.S. have gone completely vertical in the last few months of 2017, a troubling sign and yet another confirmation that US household savings are almost gone, forcing Americans to resort to savings.

All of which leads us to Gluskin-Sheff’s David Rosenberg’s comments yesterday.

Rosie asked – rhetorically:

What does it mean when we have booming employment and massive tax cuts… and household buying plans take a deep dive?

This is what that dive looks like – Conference Board ‘Plans To Buy’ Homes, Autos, and Appliance have all plunged in the last three months…

 

And simplifying the noise in that chart, we see the picture loud and clear…

 

And Rosie’s answer is ominously clear:

Here’s what it means — the consumer is debt-strapped and tapped out. Pent-up demand is a relic of the past.

All of which confirms that the US consumer is now effectively tapped out. And the last few times that consumer confidence had spiked on the heels of personal credit expansion hype (and a collapse in the savings rate), things did not end well for stocks…

What happens next?

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Keep Testing Self-Driving Cars, Even if They Kill People

If March 18 was a typical day on America’s roadways, about 90 people lost their lives in car accidents during that 24-hour span.

Unless you were unfortunate enough to know one of them, you probably didn’t hear about the vast majority of those crashes. But you’ve probably heard about the accident that killed Elaine Hertzberg, a 49-year-old Arizona woman who was struck and killed by an autonomous Uber vehicle undergoing testing in Tempe. Video of the incident released by police shows that Hertzberg was crossing the street outside of designated crosswalks, and that neither the self-driving car nor the human back-up driver stationed in it had time to detect Herzberg before the collision took place. Police determined that the pedestrian was at fault.

It was an unfortunate accident, the kind that unfortunately happens every day on roads all over America. The fact that the vehicle was a self-driving car has made the accident a national news story, but policy makers should try not to overreact. Self-driving cars have an incredible potential to save lives, and officials should not put that prospect at risk.

Already, Arizona Gov. Doug Ducey, a Republican, has suspended Uber’s self-driving car testing privileges in his state, citing concerns about public safety. That move is a “a major step back from his embrace of self-driving vehicles,” notes Melissa Daniels of the Associated Press. Ducey had previously welcomed autonomous driving tests to the state after they were subjected to strict regulation in California.

Meanwhile, four state senators introduced a bill this week to ban autonomous vehicles from being tested in Minnesota. “Arizona confirmed my concerns,” state Sen. Jim Abeler (R-Anoka) told Minnesota Public Radio. “I’ve been hearing about this and am very worried about it. And very frankly the idea of driving home while you ride in the back seat is just a recipe for trouble.”

Want to hear an even bigger recipe for trouble? Driving home while he rides in the driver’s seat.

To err is human, and human error is the cause of 90 percent of car crashes. “We should be concerned about automated vehicles,” University of South Carolina law professor Bryant Walker Smith told the Associated Press in 2016. “But we should be terrified about today’s drivers.”

If driverless cars can amass a better safety record than that, they will literally save lives. Unfortunately, those futures lives saved are invisible relative to lives lost in the present, which have significantly more weight for governors, legislators, and regulators.

In aggregate, car accidents are a massive public health problem. And I don’t just mean the deaths they case. Americans spend $230 billion annually to cover the costs of accidents, accounting for approximately 2 to 3 percent of the country’s GDP.

Driverless cars will not be perfect. Certainly, they won’t be perfect when human beings are darting out into traffic on dimly lit streets where there’s no crosswalk, as Hertzberg apparently did. But we shouldn’t expect perfection. If they can be better than human drivers—and that’s a low bar—then they should continue to be tested and developed. They will only get better.

And even if you’re skeptical of the assumption that computers can drive better than human beings, the only way to find out for sure is to allow more testing. As Megan McArdle of The Washington Post points out, Americans drove 3.2 trillion miles in 2016, with a 1.18 fatalities for every 100 million miles driven. How far have driverless cars driven since they began being tested? Fewer than 100 million miles. It sounds like a lot, but it’s a very small sample size. To get a better perspective, we need a bigger sample.

Prior to the accident earlier this month, Arizonans seemed willing to give autonomous vehicles that chance. A February poll sponsored by the Consumer Choice Center found that 51 percent of Arizonans favored testing self-driving cars in the state, while 42 percent were opposed. Residents aged 18 to 44 were far more likely to support self-driving cars than older residents were.

Those feelings may shift in the wake of Hertzberg’s death, but officials should keep the long-term perspective in mind.

As Reason‘s Ron Bailey wrote in a prescient July 2016 article, driverless cars have the power to make us richer, less stressed, more independent, and safer. “Unless,” he added, “lawmakers and regulators manage to screw everything up.”

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Report: FBI Officials Dragged Feet Breaking into Terrorist’s Phone to Try to Force Apple to Weaken Encryption

Syed Farook and Tashfeen MalikRemember when the FBI went before a judge to demand that Apple break its own encryption and force access into a terrorist’s iPhone? A newly released report from the Justice Department suggests that the bureau may have deliberately avoided alternative solutions in order to go to court and create a precedent.

The case involved a locked work iPhone in the possession of Syed Farook, one of the terrorists responsible for killing 14 people at a San Bernardino Christmas party in 2015. When the FBI asked Apple to help them break into the phone, Apple refused, arguing that doing so would render all their customers vulnerable to intrusion. The bureau eventually gained access with the assistance of a third-party contractor.

Cybersecurity and privacy experts speculated that the FBI was deliberately trying to create a precedent for forcing tech companies to weaken their encryption on demand. An inquiry by the Office of the Inspector General for the Department of Justice should fuel those concerns further.

The purpose of the Justice Department’s investigation was to determine whether then–FBI Director James Comey spoke accurately in February 2016, when he testified before Congress that the FBI was unable to unlock Farook’s phone. The report concludes that Comey was telling the truth at the time. But it also highlights a fair amount of foot-dragging. (The FBI waited til mid-February before looking for outside assistance in unlocking the phone.) The chief of the cryptographic unit, it concludes, did not want a third-party solution. The chief wanted to use the case to force Apple’s compliance:

[Executive Assistant Director Amy Hess] became concerned that the [Cryptographic and Electronic Analysis Unit] Chief did not seem to want to find a technical solution, and that perhaps he knew of a solution but remained silent in order to pursue his own agenda of obtaining a favorable court ruling against Apple. According to EAD Hess, the problem with the Farook iPhone encryption was the “poster child” for the Going Dark challenge.

“Going Dark” is law enforcement jargon used to describe their inability to bypass encryption and cybersecurity tools to engage in surveillance or access data of targets of investigation.

The chief apparently became frustrated when the third-party solution undercut the legal challenge, reportedly asking another official: “Why did you do that for?”

Apple was put under enormous political pressure to comply with the FBI. Donald Trump, then still a presidential candidate, called for a boycott on Apple. Other GOP candidates demanded that Apple cooperate with the feds. Sens. Dianne Feinstein (D-Calif.) and Richard Burr (R–N.C.) crafted terrible legislation that would require tech companies to follow the feds’ demands that they weaken their cybersecurity. The bill failed, fortunately.

During that whole public fight, some FBI officials were deliberately trying to fail. All to sell a narrative that they had no choice but to make Apple weaken its own security—and yours as well.

Read the inspector general report here.

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Is The Fed Paniccing? Yield Curve Tumbles To Fresh 11-Year Lows

Despite the stock market’s Amazon-bounce gains, US Treasury yields are lower and the yield curve flatter once again – tumbling to its flattest since Oct 2007.

Deja vu all over again…

10Y Yields are holding below 2.80%…

 

And the yield curve has crashed to fresh flats not seen since Oct 2007…

 

The entire curve is rolling over…

As a reminder, Bloomberg notes that according to the minutes of the Federal Open Market Committee’s Jan. 30-31 meeting, the most recent for which minutes are available, showed that some policy makers thought it important “to monitor the effects of policy firming on the slope of the yield curve,” noting the strong association between curve inversions and recessions.

Which confirms what The San Francisco Fed warned…  about the flattening of the yield curve

[it] is a strikingly accurate predictor of future economic activity.

Every U.S. recession in the past 60 years was preceded by a negative term spread, that is, an inverted yield curve.

Furthermore, a negative term spread was always followed by an economic slowdown and, except for one time, by a recession.”

Furthermore, as the two Fed authors explain below, the recent decline in the Treasury curve is sending recession probabilities notably higher.

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Killing Ride-Sharing Is Not the Solution to America’s Transportation Blues

Uber has come under fire everything from its safety record to its disruptive effect on transit agencies. But those sins don’t even scratch the surface, Steven Hill writes in The New York Times. The ride-sharing service is rotten to the core, he says, thanks to “a business model that harms drivers, and the environment, and drains away passengers and revenue from public transportation.”

According to Hill, Uber is waging a “predatory price war” aimed at achieving a “transportation monopoly.” It’s shutting out the competition—in this case, saintly public transportation agencies—by charging artificially low fares. In the process, the company is worsening traffic congestion and harming the planet. Only by using regulation to forcibly dismantle Uber’s business model can we write these wrongs and get riders back on buses and trains where they belong.

Or so says Hill. He leaves a few things out.

For starters, for all that he writes about Uber’s low fares, Hill spills not a drop of ink on the fact that those public transportation services are themselves subsidized up to their eyeballs. Unlike Uber, whose losses are covered by shareholders voluntarily sinking cash into the company, transit subsidies come straight from taxpayers, whether they ride it or not.

I am aware of no transit agency in the United States that turns a profit. Few are even able to cover half of their operating expenses with traditional farebox revenue.

Take New York’s Metropolitan Transit Authority (MTA), which runs the city’s buses and subway system. It’s the most heavily used transit system in the country, and it services America’s most densely populated major city, yet it covers only 40 percent of its operating expenses through with farebox revenue.

Hill mentions a colleague who expresses a preference for a $5 Uber ride over a $2.25 bus ride. Hill asks his friend whether he’d make the same choice if that Uber ride was an unsubsidized $10. Given that MTA’s bus service covers less than a quarter of its operating expenses with ticket sales, perhaps Hill should have asked his colleague whether he would prefer a $10 Uber ride or a $10 ride on the bus.

This example is telling in more ways than one. The fact that Uber rides—whatever their level of subsidy—are still more expensive than public transit suggests that price is not the only thing encouraging people to make the switch. Uber and other ride-hailing services offer added comfort while traveling, plus the convenience of being taken directly from point A to point B at a time of your choosing.

It also includes the numerous downsides of America’s public transit systems. Ridership on New York’s public transit systems dipped last year for the first time since 2009. In other words, ridership managed to grow for the first six years that Uber was operating in the city. That it fell in 2017 has at least as much to do with the failings of public transportation as it does with the benefits of Uber. 2017, recall, was the year of the New York subway’s “summer of hell,” which saw track fires, derailments, claustrophobic waits aboard broken trains, sewage spewing from station ceilings, and an on-time arrival rate of 65 percent.

Since then things have gotten worse. The New York Times reported this month that on-time arrivals now average 58 percent. Some lines are performing even worse, with less than 40 percent of trains arriving on time. The fact that ride-hailing companies are giving travelers an alternative to this dismal service is a positive development.

It is of course true that when more people ditching public transit for ride-sharing services, more cars are on the road, increasing congestion. But time spent in traffic is just another cost riders should be free to shoulder or shrug off, depending what works for them. For many New Yorkers, the 15 percent decrease in traffic speeds is still not enough to get them back on the subway.

That’s not to say that policy makers can’t do anything about congestion. Gov. Andrew Cuomo’s Fix New York panel has recommended a $11 charge for any vehicles entering lower Manhattan. This kind of “cordon pricing” is not a terrible idea and is already in place in cities as diverse as London, Stockholm, and Singapore. A better idea might be congestion pricing, where a variable toll is charged to drivers entering the city depending on the number of vehicles on the road. Virginia is trying this out on badly congested stretches of Interstate 66 on the approach to Washington D.C.

The revenue from these fares can then be spent on adding lane-miles to highways or subsidizing bus and transit service.

Hill, by contrast, recommends capping the number of ride-sharing cars, prohibiting “subsidized fares,” regulating Uber like taxis, collecting drivers’ contact information so that it can be handed over to union activists, and forcing the company to pay drivers more.

You’ll note that these ideas have little to do with combating the supposedly negative consequences of Uber and Lyft, or even with improving public transit so that more people will consider it a viable option. They’re all designed to limit transportation options that Americans have been freely choosing.

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Nasdaq Scrambles Green As White House Down-Plays Amazon Focus

Nasdaq has managed to scramble back into the green for the day, led by Amazon’s rebound following a White House statement that “there are no specific policy changes regarding Amazon right now, but always looking at different options.”

Nasdaq is green…

 

One wonders if someone told Trump that “Amazon is the market” and he realized he needs to back off…

As goes Amazon, so goes ‘Murica!

 

Nasdaq also seemed to reject going red for the year…

 

Once again the S&P 500 found support around its 200DMA…

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15 Years Of War: To Whose Benefit?

Authored by Charles Hugh Smith via OfTwoMinds blog,

As for Iraq, the implicit gain was supposed to be access to Iraqi oil.

Setting aside the 12 years of “no fly zone” air combat operations above Iraq from 1991 to 2003, the U.S. has been at war for almost 17 years in Afghanistan and 15 years in Iraq. (If the word “war” is too upsetting, then substitute “continuing combat operations”.)

Since the burdens and costs of these combat operations are borne solely by the volunteers of the U.S. Armed Forces, the American populace pays little to no attention to the wars unless a household has a family member in uniform who is in theatre.

Permanent combat operations are now a barely audible background noise in America, something we’ve habituated to: the human costs are invisible to the vast majority of residents, and the financial costs are buried in the ever-expanding mountain of national debt. What’s another borrowed trillion dollars on top of the $21 trillion pile?

But a nation continually waging war should ask: to whose benefit? (cui bono) As near as I can make out, the nation has received near-zero benefit from combat operations in Afghanistan, one of the most corrupt nations on Earth where most of the billions of dollars “invested” have been squandered or stolen by the kleptocrats the U.S. has supported.

What did the nation gain for the tragic loss of lives and crippling wounds suffered by our personnel and Afghan civilians?

As for Iraq, the implicit gain was supposed to be access to Iraqi oil. As near as I can make out, the U.S. imports about 600,000 barrels of oil per day from Iraq, a relatively modest percentage of our total oil consumption of 19.7 million barrels a day.

(Note that the U.S. was importing around 700,000 barrels a day from Iraq before Operation Iraqi Freedom was launched in March 2003–and imports from Iraq declined as a result of the war. So what was the energy-security gain from launching the war?)

Meanwhile, Iraq exports over 2 million barrels a day to China and India, where the presumed benefit to the U.S. is that U.S. corporations can continue to produce shoddy goods using low-cost Asian labor that are exported to U.S. consumers, thereby enabling U.S. corporations to reap $2.3 trillion in profits every year.

(Before China joined the World Trade Organization (WTO), U.S. corporate profits were around $700 billion–less than one-third the current gargantuan sum. Isn’t this suggestive of the immense profits gained by offshoring production to Asia and reducing the quality of the goods being manufactured?)

Since “energy security”, i.e. access to oil, was the implicit reason for going to war, let’s ask: were all the sacrifices of lives and limbs and the direct costs of roughly $1 trillion worth the roughly $200 billion in oil that the U.S. has imported from Iraq– and if history is any guide, could have imported without going to war at all?

It’s far easier to blunder into war than it is to blunder out of war. But hey, it’s certainly been profitable for a few at the top of the financial heap.


*  *  *

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University Cites Eminent Domain to Kick Students Off Property

In a repressive double play, the Rensselaer Polytechnic Institute has both censored student speech and tried to justify its clampdown with an absurd interpretation of eminent domain law.

In Februrary, security guards at the New York college removed two students from a public sidewalk outside a hockey game for passing out buttons and fliers that criticized the university. The students were supporting the “Renew Rensselaer” campaign, an alumni group that seeks to expose adminstrative abuses of powers. When the students pointed out that they had a right to be on public property, the guards suggested that the school controlled the property through eminent domain.

This drew the attention of the Foundation for Individual Rights in Education (FIRE), which had already sent the school three letters about its restrictive approach to students’ free expression. In its fourth letter, FIRE explained that the guards’ argument was “as preposterous as it is legally incomprehensible. Eminent domain is the practice of a public body condemning and seizing real property for a public purpose, not a private institution requisitioning public lands for its own purpose.”

While the institute has not responded to FIRE’s letter, school official Richie Hunter did speak with The Washington Free Beacon about the case. She would not answer questions about the university’s odd interpretation of eminent domain. Instead she suggested that the student handbook gave the school authority to quell the protest. Because these students failed to get prior authorization, Hunter says the school was justified in removing them from the sidewalk.

One of the students who was thrown off the sidewalk later emailed Hunter, asking her to clarify what part of the student handbook she referenced. In response, she cited a section called “Use of Institute Buildings and Facilities”—a segment clearly designed to cover private property—and stated: “Activities which groups wish to promote a cause, event, etc. must work either through the Union, Dean of Students Office, or the appropriate location supervisor to receive permission.” The sidewalk in question, again, is public property.

Students at Rensselaer have been involved in an ongoing battle with the administration concerning who controls the student union. The university guarantees that it “shall not impede or obstruct students in the exercise of their fundamental rights as citizens” and that “students and student groups shall be free to examine and discuss all questions of interest to them and to express opinions publicly and privately,” but it has rejected the student body’s request to protest and it has charged a student with “operating an illegal business” to prevent him from handing out information. Videos of the administration tearing down fliers and a recording of guards ordering students not to post literature have been posted online.

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Macquarie: “This Is The End Of The Liberal Order… But At Least No Wars Yet”

One week after Council on Foreign Relations president Richard Haass wrote an op-ed in which he waved farewell to the world he helped create, saying “Goodbye, Liberal World Order.” Then overnight, one of Wall Street’s most original, if underappreciated analysts, Macquarie’s Victor Shvets, gave his own unique take on this increasingly sensitive topic, injecting a dose of his unique pragmatism, in a note that one could say has a silver lining based on the title: “The end of liberal order: De-globalization drift; but no wars, yet.” Unfortunately, in a world in which almost every analyst sounds increasingly as skeptical as this website has been for the past 9 years, that’s as far as the optimism goes, as the following note reveals.

* * *

The end of liberal order: De-globalization drift; but no wars, yet

Investors continue to search for order; there is none

Investors seem to be striving to find order and pattern in a world that has neither. It is only human to search for patterns as without some order, there are no investment strategies. Instead, it becomes a world dominated by noise. Whether it is Trump tariffs, CBs (incessant debate – ‘too dovish or too hawkish?’) or Facebook and the role of social media, investors embark on a fairly meaningless task of calculating likely damages while trying to rationalize these actions within confines of conventional economic theory (trade is good; lack of it is bad). As a result, there is a growing chorus of shrill voices about onset of trade wars and/or need for deep regulatory changes. Similarly, any widening of spreads (however small) is almost immediately interpreted as the onset of major liquidity contraction. In a modern world of signals, noise & AIdriven re-pricing, reality is just ‘fake news’ (or basically facts you don’t like).

De-globalization is a fact of life; both trade & capital

Amongst all the noise, it is still useful to examine the latest trade news with some degree of realism. First, de-globalization has been a fact of life for more than a decade. There are already ~50,000 cases outstanding with WTO, with members introducing various anti-dumping duties & non-tariff measures. This is more than double the case load of ’08, and it is bound to grow exponentially; the US is not even the greatest offender. The liberal trade order had died at least a decade ago. Second, global economy is no longer driven by conventional trade, with elasticity close to one (trade to incremental GDP) vs. ~2x in ‘80s-90s.

There are many reasons for such erosion, but atrophy of supply chains and dominance of technology in trade flows are the key. Third, CBs interference with exchange & interest rates to constrain capital markets is also likely to become ever more pronounced. Neither Japan nor China have a yield curve, why should the US have one? The same applies to constraints on cross-border capital flows. The essence of liberal order was not freedom of shipping but freedom of capital.

The public demands protection from ravages of globalization and wants to see a shift of returns from capital to labour. Investors now reside in essentially a zero-sum world. This explains unorthodox political and electoral outcomes and it seems inevitable that politics would deliver what public demands, one step at a time. Having said that, there is a huge difference between an inexorable slide towards de-globalization and an outright trade war. The former is inevitable, the latter is unlikely, at least for a while; corporate lobbying and desire to avoid the most extreme outcomes is likely to prevent a trade war on a broad waterfront (just see how China has thus far avoided targeting industries that make America Great – soybeans & planes).

Not an anomaly; an integral part of investment landscape

De-globalization and constraints on capital flows are now not anomalies, but are an integral part of the new  investment climate. It implies that it is no longer possible to assess what is ‘safe’. Aggressive public sector & technological disruptions blur lines between ‘safe’, ‘value’, ‘cyclicals’ etc. It explains why value fails to perform or why even disruptions prevent staples from outperforming. It also makes assessment of trade vulnerability hard; Korea, Japan or Taiwan export radically different products vs. Thai or Mal. The former have low substitution & high value while latter is commoditized, facing disintegrating supply chains.

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