April 2018 – Page 5

“Avalanche Beginning?”: Foreign Central Banks Dump Most Treasuries In Over 2 Years

Over the weekend, in its attempt to explain the sharp Treasury selloff in the second half of April which sent the 10Y briefly above 3.00%, JPMorgan cast the blame almost exclusively on momentum-chasing funds, i.e. CTAs, whose sharp momentum reversal from net long to net short…

… took place at a time when investors were already record short the TSY futures complex as we first showed on Saturday morning.

The implication was that with CTAs – which trade on nothing but pure technicals and momentum and are oblivious to fundamentals such as inflation or central bank policy, having flip-flopped twice in one month, much of the downside pressure on Treasury prices would be removed:

Given that a shift to shorts by CTAs is likely to have taken place over the past week and a half in our framework, we think that momentum traders are less likely to remain as a strong bearish force for 10y USTs going forward

But while that explanation was clear and clean enough, there was more.

As we showed last night, in addition to CTAs reportedly dumping their long exposure, someone else was busy selling: foreign central banks. To be sure, while there is no foolproof, coincident indicator of what official public accounts and monetary authorities do with their Treasury holdings, the Fed’s weekly report of Treasurys held in custody is the closest thing there is to a real-time indicator. It is here where we find the biggest weekly drop in holdings since the China deval days of January 2016, which implicitly suggest that China may indeed have been liquidating at least a modest portion of its TSY holdings as many people suggested, if only tongue in cheek.

Shortly after we first published out observation last night, Bloomberg picked up on it, and in a note by Kyoungwha Kim, the Markets Live commentator wrote that “foreign central banks look to have pulled back last week when the 10-year yield breached 3%, paring their near-record holdings.” Kim also noted that bank sales accelerated as hedge funds built up an unprecedented Treasuries short, as we first demonstrated on Saturday. Bloomberg’s ominous assessment:

“An avalanche of selling may follow. Piling on fuel in the form of tax cuts and infrastructure spending to an already booming American economy raises the risk of inflation. Pension funds and other institutions may be the next to start selling.”

It wasn’t just us and Bloomberg, however, warning about the sliding foreign appetite for Treasurys. This morning the WSJ also writes that “foreign investors’ appetite this year for U.S. debt hasn’t grown at the same pace as the government’s borrowing needs, which some analysts worry could push bond yields higher and eventually threaten to slow economic growth.”

WSJ focuses on another aspect of foreign demand represented in Treasury auctions, namely the takedown by Indirect Investors, which comprise mostly of foreign central banks and other official institutions:

“Investors in a broad category known as “indirect bidders,” which includes both mutual funds and foreign investors, have been winning the smallest percentage of the bonds they’ve bid for since 2011, according to bidding data for recent Treasury bond auctions. The average percentage of the auctions won by this group fell for the first time since 2012, a decline some analysts attribute to both lower demand from investors outside the U.S. and their recent tendency to post less-aggressive bids.

As the WSJ notes, “the behavior of these bidders is crucial for the ability of the U.S. to fund itself, at a time when the budget deficit is forecast to surpass $1 trillion by 2020 and remain above that level for the foreseeable future. Foreign investors currently hold about 43% of U.S. government debt, the lowest since November 2016, a proportion that has steadily declined from its peak of 55% during the 2008 financial crisis.“

Declining foreign demand at a time of soaring budget deficits and funding needs, not to mention a Fed which is no longer monetizing the $1+ trillion US budget deficit is, needless to say, a major problem.

“We cannot exist at these growth rates with these deficit projections without foreign participation,” said Andrea Dicenso, a portfolio manager and strategist at Loomis, Sayles & Co.

Foreign holdings of Treasurys rose last year for the first time since 2014, keeping pace with the increase in government debt outstanding. In February, they climbed to $6.29 trillion of the $14.7 trillion of then-outstanding U.S. government debt, the Treasury said April 16, up from $6.26 trillion the prior month.

As we highlighted after the latest TIC report, China’s holdings rose by $8.5 billion to $1.18 trillion while, Japan’s fell by $6.5 billion to $1.06 trillion; however both have seen a decided move lower in recent months.

And while there is still clearly interest for US paper among foreign borrowers, it is clearly fading:

Foreign investors are probably going to be slower to adjust to the expansion of U.S. borrowing because “they have limited flexibility in terms of how many dollar investments they can make,” Mr. Vogel said.

A separate set of Treasury figures known as allotment data shows foreign demand fell below its five-year average in March, after rising to a 21-month high in February. And the backdrop for this year and the foreseeable future is more challenging.

Among other factors pressuring demands for US Treasuries is the weak dollar which is also making it more difficult for some overseas investors to buy Treasurys by making it more expensive to hedge currency risk. While this is less of a problem for investors willing to bet on the greenback and for foreign central banks that buy the debt to weaken their own currencies, some investors have opted to buy European or Asian government debt instead.

Then there is the issue of hedging: as the Fed has continued to hike rates and diverge from other major central banks, hedging costs have become more expensive for foreign investors. As shown in the chart below from Deutsche Bank, 10-year Treasuries no longer offer a yield pickup for European-based investors on a currency-hedged basis. The same dynamic is true for Japanese-based investors. This means that unless funding cost drop sharply soon, demand for US paper will only decline in the coming months.

Still, even as investors and analysts become increasingly concerned about the level of foreign demand proliferate, global economic linkages and international trade create strong incentives for foreign investors to continue to buy Treasurys according to the WSJ. To be sure, major exporters such as China and Japan, which are also the biggest foreign lenders to the U.S. government with a combined $2.23 trillion of its debt, have their own motives to lend to the largest customer for their exports and to keep their interest rates down, said David Ader, chief macro strategist at Informa Financial Intelligence.

“It behooves them to underwrite our debt because if we’re in a recession or worse, it would hurt their economies as well,” Mr. Ader said.

Yes… to a point. As Deutsche Bank pointed out in a disturbing analysis that found that the chance of a US debt funding crisis is rising, and is now the highest it has ever been outside of recession…

… there is a point after which the US debt load will no longer be unsustainable…

… as none other than Goldman warned previously.

OK, but when? Recall Deutsche Bank’s conclusion:

“We cannot say exactly what level of debt (85% of GDP? 100%? 125%?) will prove to be the tipping point, but we do believe that the latest fiscal developments have increased the odds of a crisis.”

Which in turn brings us back to what BofA said last week: “The 10Y Treasury Is No Longer A “Safe Asset”. Soon the market may have the unpleasant experience of discovering just what that means.

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Thanos, the Villain in Avengers, Is Just Another Environmentalist Worried About Overpopulation: New at Reason

Thanos believes that there are finite resources in the universe — an appropriately illiterate idea, considering that the universe is infinite. Thus, if population growth is left unchecked, rising demand for resources will inevitably bring ruin to everyone. Halving the population of the universe is, in Thanos’ mind, “not suffering, but salvation,” for it is intended to avoid famine and poverty. The premise is misguided, but what is striking is the number of people here on earth that share it.

Thanos’ concerns are identical to those of Stanford Professor Paul Ehrlich, who, in his influential 1968 best seller HumanProgress.org.

View this article.

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This billionaire’s “$5 million test” will make you a way better investor

[Introduction from Simon: Notes readers know I’m nervous about the market today.

Prices for stocks, bonds and real estate are near all-time highs. Meanwhile, government, corporate and consumer debt are also at all-time highs.

And in the face of record valuations and record debt, we’re seeing rising interest rates (the yield on the 10-year Treasury hit 3% last week for the first time since 2014) and other signs of inflation like rising oil and copper prices.

Who knows how much longer this bull market, fueled by $4 trillion from the Fed and low interest rates, can continue.

That’s why I’ve been advising you to raise some cash. But, even in today’s market, you can find value if you know where to look.

And Sovereign Man’s Chief Investment Strategist, Tim Staermose, recently found one of the most exciting opportunities I’ve seen in awhile.

Since we’ve been talking so much about finance and economics so much in Notes recently, I wanted to share a great piece on value investing we originally ran last year.

You’ll find it below…]

In 1982, a man named Jim Tisch bought seven supertankers for $42 million. He found them by cold calling companies he found in the Yellow Pages.

Yes, $42 million is a lot of money… but these tankers were each four football fields long. That’s a lot of steel. And they could carry between 2-3 million barrels of oil.

And these ships were built just eight years earlier at a cost of $50 million apiece.

Jim Tisch is the son of the legendary Laurence “Larry” Tisch, the late billionaire founder of Loews. Corp – a conglomerate that has owned hotels, movie theaters, insurance, cigarettes, oil and watches over the years.

And like his Dad, Jim had a nose for value…

Low oil prices in the early 1970’s (around $3 a barrel) caused demand to soar. To keep up with the growing demand, everyone rushed to build supertankers (which can take years to complete).

Then the Arab oil embargo in 1973 sent oil prices soaring to $12 a barrel by 1975.

The Iranian Revolution (and ousting of the Shah) followed in 1979… And Iran drastically slashed its output. Oil jumped to over $37 a barrel.

Now there was much less oil coming out of Iran (and a year later, Iraq), but the tankers were still floating in the water.

Tisch started sniffing around for tankers in the early 80s, when, according to Tisch, only 30% of the global fleet was necessary to meet demand.

That’s why he was able to buy at an almost 90% discount. As he said at a 2006 speech at Columbia University:

[S]hips were trading at scrap value. That’s right. Perfectly good seven-year-old ships were selling like hamburger meat – dollars per pound of steel on the ship. Or, to put it another way, one was able to buy fabricated steel for the price of scrap steel. We had confidence that with continued scrapping of ships and increased oil demand, one day the remaining ships would be worth far more than their value as scrap.

By 1990, the market for tankers was turning around… too many ships were scrapped and the volume of oil coming from the Persian Gulf was increasing.

Noting the strength, Tisch sold a 50% interest in his ships for 10 times his initial investment.

He still maintained half ownership… and collected enormous cashflows from operating those ships.

When he first stepped foot on a supertanker, Tisch said he formulated the “Jim Tisch $5 million test.” From the same speech at Columbia:

And what is the Jim Tisch $5 Million Test, you may ask? While on the ship you look to the front and then you look to the rear – then take a look to the right and then to the left –then you scratch your head and say to yourself – “Gee! You mean you get all this for $5 million?!”

In other words, sometimes a good investment is obvious…

But where do you find obvious value today?

The US stock market is at all-time highs… And companies like Netflix (that lose billions each quarter) march higher and higher.

Bond yields are still scraping the bottom…

And cryptocurrencies have soared so high many are calling it a speculative bubble. Even if you’re a believer in crypto, it’s still not prudent to allocate a large portion of your wealth to the sector at this point.

Likewise, you can’t put everything you have into cash or gold.

But if you do the work, you can find certain securities that are just as safe as cash…

That’s the entire premise behind The 4th Pillar – the value-investing service written by our Chief Investment Strategist, Tim Staermose.

Tim screens thousands of stocks across every global market to find something that – according to efficient-market theorists – shouldn’t exist… “a free lunch.”

What if I offered to sell you a $100 bill for $60… would you take that deal?

Of course you would. It’s literally free money.

But that same opportunity exists in the market today. You just have to know where to look.

That’s why Tim spends all day screening literally ever global stock market until he finds what he’s looking for…excellent companies trading for less than the net cash on the books.

Some of these companies are trading so cheaply because of a short-term problem. Others are just ignored or misunderstood by the market.

But when you’re able to buy an entire operating company for less than the amount of cash it has in the bank… Well, let’s just say that passes Jim’s $5 million test.

After all… How much risk is there if you could take a company private for way less than the amount of cash it has in the bank, cease operations and pay out the cash as a dividend?

Not much…

Remember, there’s still value in the market today… it’s just getting harder and harder to find.

You can start by screening global stock markets for companies trading for less than their net cash… Or you can see how Tim does it.

Source

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The Cosby Status Quo: A Facade Of Wholesomeness Masks Feudal Exploitation

Authored by Charles Hugh Smith via OfTwoMinds blog,

In America’s feudal society/economy, there are two systems of “justice”.

The conviction of Bill Cosby for sexual exploitation/assault serves as a useful metaphor for our entire status quo, which projects a wholesome PR facade (free market capitalism, win-win, democracy, meritocracy, anyone can grow up to win American Idol, etc.) which masks a predatory culture of exploitation.

The most important aspect of the Cosby case is that dozens of reports of his drugging and assaulting women were routinely ignored for decades. The facade of wholesomeness, generated to protect the profit-generating machinery of the Cosby brand, buried accusations with a blizzard of legal and PR maneuvers.

The only difference between the predations of Cosby and those of Harvey Weinstein is that Weinstein had no need for a facade of wholesomeness because his brand/core business did not generate profit from a pretense of wholesomeness like Cosby’s. Weinstein’s predations were an open secret because he reckoned his power and connections rendered him invulnerable. In other words, he was nobility in a feudal society/economy.

In America’s feudal society/economy, there are two systems of “justice”: one for the wealthy and powerful oligarchs generating profits for Hollywood and Corporate America, and an overcrowded gulag of serfs forced to plea-bargain in the other.

The predation and the hollowness of the wholesome image were well-known to those serving the nobility. Hundreds of insiders knew the truth, just as hundreds of insiders with top secret clearance knew about the contents of the Pentagon Papers, and thus knew the Vietnam War was little more than an accumulation of official lies designed to protect the self-serving elites at the top of the power pyramid.

Only one analyst of the hundreds with access to the truth had the courage to risk his career and liberty to release the truth to the American public: Daniel Ellsberg.

If you want to understand why the status quo is unraveling, start by examining the feudal structure of our society, politics and economy: the endemic corruption, predation and exploitation of the privileged nobility at the very top, the well-paid class of self-serving sycophants, toadies, lackeys, hacks, apologists, flunkies, careerists and legal-team mercenaries who toil ceaselessly to protect their oligarch overlords from exposure and the exploited, powerless serfs at the bottom.

As Orwell observed about a totalitarian oligarchy, some are more equal than others. That is the definition of an exploitive, predatory feudal society.

* * *

My new book Money and Work Unchained is $9.95 for the Kindle ebook and $20 for the print edition. Read the first section for free in PDF format. If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

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Trump’s Economic Illiteracy Has Deep Roots

When Russ Roberts, the George Mason University economist and host of the EconTalk podcast, visited the Reason office last week to be a guest on our podcast, he was asked about President Donald Trump’s economic policies. Roberts offered a succinct, and powerful, rejoinder to the president’s view that America’s trade deficit with China is a problem—an opinion that Trump has repeatedly expressed since well before his campaign for the presidency began, and one that seems to lie at the center of his hardball trade tactics with one of America’s largest trading partners.

“It is certainly true that China doesn’t play fairly in the economic game of international trade,” he said. “But not because we run a trade deficit with them. That’s not a result of unfairness. That’s the result of the fact that we, in general, import more stuff from the rest of the world than they import from us, and at the same time they invest more in the United States than we invest in their countries.”

That’s neither uniformly good nor uniformly bad. It means that America is a good place to invest, and that’s why people invest their money here. That capital surplus means that Americans generally have more money to spend on goods and services—hence why we run a trade deficit with other countries.

This basic dynamic of macro-economics seems lost on the current occupant of the White House. But Trump’s hostility toward China—and, more importantly, the underlying idea that trade is a zero-sum game with winners and losers—is not the product of his late-in-life transformation from hotel mogul to reality TV star to politician. It fits with the rest of the nationalist economic message Trump used to catapult himself to the top of an increasingly nationalistic Republican Party, but it has roots that go deeper than that. For a man as inconsistent as Trump, he’s been remarkably consistent on his views of international trade for decades.

Unfortunately, he’s been consistently wrong.

Here’s something Trump said in a 1990 interview with Playboy:

I think our country needs more ego, because it is being ripped off so badly by our so-called allies; i.e., Japan, West Germany, Saudi Arabia, South Korea, etc. They have literally outegotized this country, because they rule the greatest money machine ever assembled and it’s sitting on our backs. Their products are better because they have so much subsidy. We Americans are laughed at around the world for losing $150 billion year after year, for defending wealthy nations for nothing, nations that would be wiped off the face of the earth in about 15 minutes if it weren’t for us. Our “allies” are making billions screwing us.

If you didn’t know those comments were 28 years old, you might think they were plucked from the president’s Twitter feed this morning (minus the mention of “West Germany”). The basics of Trumponomics are right there. We are being “ripped off so badly” and we are being “laughed at” by our supposed friends while we are “losing” billions in trade.

In the same interview, Trump talked about how he would like to put “a tax on every Mercedes-Benz rolling into this country and on all Japanese products.” He also said he could someday be president because “the working guy would elect me. He likes me.” And, lest you think his tendency to praise authoritarian regimes is new, Trump also praised the Chinese for cracking down on the Tiananmen Square protests, because it showed “toughness.” No wonder that Playboy interview has become something of a Rosetta Stone for understanding Trump, with foreign officials studying it for clues about how to woo the president.

Jibran Kahn, who highlighted those old Playboy quotes in a piece he wrote last week for National Review, notes, points out that there is one Trump comment in the interview that perfectly highlights his misunderstanding of trade. In describing his concern about the booming Japanese economy of the late 1980s and early 1990s, Trump said the Japanese “double-screw” Americans.

“First, they take all our money with consumer goods, then they put it back in buying all of Manhattan,” he said. “So either way, we lose.”

Think about that for just a second. When Americans buy consumer goods from Japan—this is the crux of Trump’s current complaints about a trade deficit with China—that means America is losing. And when Japanese businesses buy real estate in America, that means America is losing again. Apparently, we are losing whether we buy or sell.

This is some sort of reverse tautology. An argument that is true solely because it is true in Trump’s head. There is no arguing with that.

This is not mere economic illiteracy; it is economic illogic. And it is on this basis that Trump is pursuing policis that he doesn’t seem to understand. Trump’s tariffs have increased the price of steel and aluminum, which have increased production costs for myriad American businesses and left those same businesses at a competitive disadvantage against foreign competitors. Another wave of tariffs against thousands of Chinese goods is planned, and retaliatory tariffs from China will do further damage to American farms and businesses. It’s not the Chinese or Japanese who are trying to “double-screw” America—it’s the guy who says we need protection from the benefits of trade.

As Roberts said at Reason last week, there’s good evidence that China is indeed cheating on trade with regard to intellectual property and technology. But tariffs, he added, are unlikely to solve that problem, and may in fact create many more.

“The trade deficit with China is not evidence that they are cheating,” says Roberts. “That part of the Trump story about the tariffs is misleading, xenophobic, and encourages them to put tariffs on our stuff. It’s horrible.”

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Deranged Man With Metal Pipe Reportedly Targeted Jared Kushner

A deranged man armed with a metal pole was apprehended by police after being caught trespassing in New York City’s Trump Tower with a note in his pocket saying he intended to attack President Trump’s son-in-law and senior advisor Jared Kushner and then hurl himself off the top of the building.

TMZ reported, citing law enforcement sources in NYC, that Matthew Pilling, 30, was found trespassing through the hotel early Sunday and was escorted out by security.

But he reportedly came back a few hours later, armed with a metal pole and trying to break into the hotel’s kitchen area, which is when security immediately called the NYPD.

Piling was arrested and charged with criminal trespass.

Of course, incidents like these must be treated with extreme caution given other acts of violence perpetrated against Trump and his political allies – including the shooting at a practice for the Republican Congressional baseball team that badly wounded Majority Whip Steve Scalise.

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Pending Home Sales Decline For 4th Straight Month, Weather Blamed

Pending Home Sales rose just 0.4% MoM (missing expectations of 0.7% MoM) and saw prior months revised notably lower (Feb down from +3.1% to +2.8%).

Weather remains the ‘go to’ blame factor from realtors as the regional differences suggest…

Northeast fell 5.6%; Feb. rose 10.3%
Midwest up 2.4%; Feb. rose 0.7%
South up 2.5%; Feb. rose 2.9%
West fell 1.1%; Feb. fell 0.7%

Unadjusted pending home sales dropped 4.4% YoY (the 4th straight month of declines – the longest streak since 2014)…

“Healthy economic conditions are creating considerable demand for purchasing a home, but not all buyers are able to sign contracts because of the lack of choices in inventory,” Lawrence Yun, NAR’s chief economist, said in a statement.

“Prospective buyers are increasingly having difficulty finding an affordable home to buy.”

“It is an absolute necessity for there to be a large increase in new and existing homes available for sale in coming months to moderate home price growth,” he said.

“Otherwise, sales will remain stuck in this holding pattern and a growing share of would-be buyers — especially first-time buyers — will be left on the sidelines.”

Purchases dropped 5.6 percent in the Northeast, reflecting multiple winter storms…

“As anticipated, the multiple winter storms and unseasonably cold weather contributed to the decrease in contract signings in the Northeast.”

As a reminder, economists consider pending sales a leading indicator because they track contract signings.

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Oil Surges After Israel Closes Airspace Near Syria Border Ahead Of “Significant” Netanyahu Speech On Iran

Moments ago, Israel’s Channel10 reported that Netanyahu is set to make “significant” televised announcement on Iran on Monday evening at 8pm local time (5pm GMT) in what his office said would be a “significant development regarding the nuclear agreement with Iran“. As Channel 10 adds, Netanyahu previously relayed the Iran info to Trump on Saturday and Pompeo on Sunday, during his visit to Israel.

The speech will come after Israel’s security cabinet convened for an impromptu, unscheduled meeting in the wake of the strike on Syria overnight, which as we noted earlier reportedly killed 11 Iranians.

Meanwhile, hinting that Israel may be about to launch another, far more powerful strike on Syria, Ynet reports that Israel has closed its airspace near the Golan Heights and the Israel-Syria border, most likely in anticipation of one or more bombing/missile attacks on Syrian territory.

Having slumped earlier following the disappointing German inflation data, WTI has regained all losses on the news that Israel may be about to attack Syria, even following Putin’s direct warning to Netanyahu not to continue airstrikes on Syria.