Month: November 2018

Have BlackRock CEO Larry Fink and Russian President Vladimir Putin been comparing notes?

In comments that sound eerily similar to a warning issued by Putin, who warned during a speech last month that the US risked undermining the dollar’s reserve currency status with its sanctions regime, the CEO of the world’s largest asset-management firm said Tuesday during a panel discussion at the New Economic Forum in Singapore that the US dollar’s status as the world’s dominant currency wouldn’t last forever.

And instead of citing external factors like China’s expanding economic clout and influence, or an insurgent Russia, Fink pointed to the widening US budget deficit as the biggest risk to the dollar’s status as the global hegemon. And while it might not happen tomorrow, or next year, over time, as US interest rates rise and the federal government strains under its tremendous debt burden, the creditors who were once eager to buy up Treasury bonds will gradually disappear.

“We’re going to move there over time” Fink said.

Instead of working with its creditors like China, the US is fighting them by engaging in an acrimonious trade war. Fink said that, in his experience, it’s never wise to fight with your lenders.

“The problem is we are living with a deficit that is very large. We are fighting with our creditors right now worldwide,” Fink said.

“Generally, when you fight with your banker, it’s not a good outcome,” he said.

“I wouldn’t recommend you fight with your lenders, and we’re fighting with our lenders. Forty percent of the U.S. deficit is funded by external factors. No other country has that.”

And as interest rates rise and the government struggles with its newfound debt premium, collateral damage in the equity market will be almost inevitable.

The US will have a “supply problem” as the widening deficit requires more borrowing. The threat of “interest rates becoming too high to sustain the economy with its growth rates” is becoming a real concern for the US.

“We are going to have more and more debt because of the deficits, and because of the deficits, the investors are going to demand a bigger premium,” he said. “We have greater risk for higher rates and will not allow the equity markets to flourish.”

“There are some great needs in society right now,” Fink said. “And a $1.3 trillion deficit as the economy slows down is a real problem.”

If history is any guide, the US dollar’s dominance of the global financial system is already looking a little late in the cycle. In the past, reserve currencies have reigned for roughly 100 years. The US dollar has dominated for about 80 years.

But for anybody who has followed our coverage of the growing mutiny against the dollar, the structural problems with the US national debt aren’t the only threat. Just as the dollar emerged to global reserve currency status as its economic might grew, so the chart below suggests the increasing push for de-dollarization across the ‘rest of the isolated world’ may be a smart bet…

Of course, the decline of the dollar could be a good thing…for the rest of the world. According to former World Bank Chief Economist Justin Yifu “the dominance of the greenback is the root cause of global financial and economic crises.”

Yifu’s solution was to replace the dollar and all other national currencies with one global currency. But already, Putin and Chinese President Xi Jinping are working on a different solution of their own.

via RSS https://ift.tt/2qxfsY6 Tyler Durden

500 Dow points… on an expected outcome? “That escalated quickly…”

Since The Dems were confirmed as taking the House last night, the dollar is down but bonds, stocks, and gold are all higher…

NOTE the odd panic bid in stocks at 3am.

After two afternoon sessions of recovery gains, China dumped into its close…seemingly unimpressed with Trump holding on to the Senate…

 

European stocks surged at the open and held gains (no extended push though)…

 

US Futures show a surge at Asia open, European open, and US open… (Dow futs 650 point range)

 

And a non-stop bid during the day session… Nasdaq’s 2.4% surge was impressive to say the least… (UNH provide 75 of the Dow’s points gain)

The Nasdaq Composite is up over 2%, yet only 62% of stocks in the index are higher, below the readings seen during October’s snap-back rallies. Another factor that suggests a lack of verve is the percentage of volume in advancing stocks on the NYSE

Strong bid all day…

But another super-low volume day…

 

Dow, S&P, and Nasdaq all surged to or above key technical levels…

 

Healthcare led the markets (Obamacare handouts for all) and Tech and Consumer Discretionary

FANG Stocks soared…finally filling the gap-down-open from Oct 26th…

 

After 22 days of inversion (longest streak since 2011), the VIX term structure normalized today (barely)…

 

Abysmal Long Bond auction (2.3bps tail) sparked some ugliness in Treasuries in the afternoon…

 

But the 30Y still ended the day lower in yield (so not exactly reflective of the exuberant risk-on appetite in stocks…

 

But.. we note that this looks more like an equity catch up, yield catch down from early November’s derisking…

 

The dollar was swinging around like a penny stock on Midterm elections before everyone settled on the Dems taking the House and that sparked the selling…

 

And amid all that chaotic dollar movement – yuan went nowhere…

 

Cryptos managed to hold the week’s gains…

 

From Europe’s open, commodities slid lower as the dollar limped off its lows…

 

WTI Crude was ugly – tumbling after the inventory data… Oil is down 8 days in a row – the longest streak since July 2014.

 

Once again Gold was rebalanced back to 8500 Yuan overnight…

 

Finally, we note that Inflation Breakevens have decoupled from Oil’s collapse…

Who’s right?

It’s amusing that pundits are talking about market implications from a political event that consensus had bang-on: a congressional split that’s happened every time in the past 18 midterms after a presidential sweep. Immigration, trade, and Fed policy all unaffected by the results

— David Rosenberg (@EconguyRosie) November 7, 2018

via RSS https://ift.tt/2OxbJDm Tyler Durden

Authored by David Stockman via Contra Corner blog,

We are at a decisive pivot point and its far more consequential than the mid-term elections. Even then, we cannot but marvel at the utter complacency which still prevails in the casino.

We even heard one bubblevision talking head today suggesting that on the off-chance that the GOP retains the US House of Representatives (the Senate is virtually guaranteed to stay Republican), it will be mighty bullish for stocks. That’s because it would mean more fiscal stimulus, presumably another tax cut of the 10%/$200 billion cost variety that the Donald has been plugging out on the hustings.

We actually don’t know which is more pathetic. A putative GOP controlled government that would actually  even consider adding another $200 billion on top of the $1.2 trillion Uncle Sam is already slated to borrow in the 10th year of a flagging business cycle expansion–and in the face of the Fed’s  unprecedented $600 billion bond dumping campaign—or Wall Street operators who apparently do really think that Federal borrowing is what generates economic growth and business profits.

In any event, the boys and girls in the momo trade are about to find themselves up close and personal with the great central bank Pivot soon enough. Even Kuroda-son chimed in the other day from the red hot printing presses at the Bank of Japan suggesting that the time for “extraordinary” monetary accommodation has now passed.

So the hand-writing is on the casino’s lethargically blinking green screens. The 30-year monetary party is over, and the money printers which fueled that global bond bubble of the present era are about to become the bond-dumpers of tomorrow.

Adding to bond supply for sale rather than to demand for bonds to sequester on their balance sheets, central banks will force meaningful yields back into the bond trading pits as the latter perform their job of discovering the yield which clears the market, which most certainly will not be today 3.23% yield on the 10-year UST.

In fact,  what is fixing to happen is that bond market speculators are fixing to jump the shark. That is, the 35- year down-ward trend line, which has been in place since your editor was feverishly contemplating the desultory math of $200 billion Reagan deficits as far as the eye could see in the face of 16% UST yields.

Volcker took care of that problem, of course, by plunging the US economy into a nasty recession and wringing-out the 8% or so inflation expectation that was embedded in the bond yield shown at the upper left hand side of the chart below. Thereafter, of course, incepted the longest-running bull trade in recorded history.

And yet on election eve, the bond pits closed down just 3bps from puncturing the trend line from below; and in the face of an election that is far, far more certain than the chattering commentators even hinted at all day.

To wit, it is absolutely guaranteed that during the next two years there will be a non-functioning government and that Washington’s abject fiscal incontinence will reach the point of downright embarrassment—even down there in the Imperial City.

US 10-year Treasury bond yield (quarterly log scale chart)

Source: Bloomberg

So now the real price discovery begins down in the bond pits no longer being relieved by the central bank monetary sump-pumps.

And one of the things this belated return to quasi-honest price discovery in the fixed income market will expose—in the manner of  Warren  Buffett’s metaphor about the exposure of naked swimmers when the tide goes out—-is the risible “savings glut” humbug promulgated by Ben Bernanke and other central bankers.

The latter never remotely happened. The “glut” actually consisted of the $21 trillion central bank balance sheets expansion; it was the functional equivalent of “savings” in terms of its impact on the bond market supply/demand equation and therefore interest rates and the level and shape of the yield curve.

It’s as if arsonists were running around a burning building with a can of kerosene screaming that there is a fuel glut. But now for reasons of institutional survival, as we develop below, they have jettisoned the kerosene and manned the water hoses.

Needless to say, you don’t remove $21 trillion of supply from the global bond markets without leaving big-time dislocations and distortions in this massively hollowed out financial space—even beyond the evident and purposeful falsification of interest rates which ensued.

One monumental consequence, of course, was the massive global hunt for yield and risk-asset based returns in the equity markets. During the same 15-year period in which central bank balance sheets soared by $21 trillion, the market cap of the world’s bourses erupted by $50 trillion.

To be sure, some part of that gain was owing to genuine economic and profits growth, but a substantial portion was actually attributable to multiple expansion. That is to say, as the central banks systematically drove bond yields and cap rates lower with their big fat $21 trillion thumb on the scale, the reciprocal effect was to inflate PE multiples and other asset valuation yardsticks.

Our point here is not to begrudge the punters and gamblers who rode this $50 trillion equity market tsunami to fabulous riches: It wasn’t real, and the next stop on the bubble express is something like the 2007-2009 meltdown shown in the graph above when the global equity market cap plunged by nearly 60% from $60 trillion to $25 trillion.

The equivalent plunge this time would amount to $50 trillion, but a reprise of the V-shaped rebound which occurred after 2009 is now out of the question because the central banks have already shot their wad. The various forms and phases of QT—-which were essentially a $21 trillion monetary fraud—- were the work of a one-trick pony.

In fact, the reason the central banks are suddenly pivoting to QT under the leadership of the Fed is to hastily replenish their dry powder. But it’s too late. They will destroy the equity bubble long before they get back to “normal” interest rates and balance sheets—even as they fear that after the next crash they will be impotent to reverse the carnage and that the pony will then be taken out back and shot.

Nevertheless, one of the skeletons lurking inside the world’s $80 trillion stock bubble is the economic corollary of delirious windfall gains on existing financial assets. To wit, on the margin wealth gains from financial asset inflation have supplanted real money savings from current income.

Step-Child Of Bubble Finance—–A Savings Drought

If the aim of investors is a certain stock of wealth relative to current and prospective income, upwards of three decades of financial asset inflation have steadily dulled the incentive and need to save and forego current consumption.

For instance, even though by 2004, global equity markets had been inflating at a far more rapid pace than income growth for upwards of two decades, the $30 trillion of stock market capitalization at the time represented about 68% of global GDP, which was  about $44 trillion.

By contrast, the $80 trillion global equity capitalization at the peak of a few months ago represented about 100% of current year worldwide GDP. So even though worldwide income back in 2004 was undoubtedly over-capitalized in the equity markets, it has now become egregiously so after the post-2008 print-a-thons.

Consequently, even if you give the benefit of the doubt to the implicit 2004 cap rate of 68%, global stock markets today would be worth about $55 trillion. You can characterize the $25 trillion excess at the recent bubble top, therefore, as the windfall to savers and investors owing to central bank financial repression.

To be sure, we doubt whether anything in the real world is clinically mechanical and quantitative to the nearest trillion. But we are quite confident that the fantastic central bank bond buying spree and resulting massive equity bubbles of the last several decades has driven the real money savings rate to rock bottom levels.

What this means is that the real money savings pool is inordinately shallow and that, therefore, Buffett’s proverbial swimmers—governments, households and companies—which have been borrowing hand-over-fist owing to the negligible cost of carry, are going to be in for the mother of all shocks when they have to refinance their giant debt loads at steadily higher yields.

Indeed, there can be no doubt about the shallowness of the US pool of household savings and it is merely symptomatic of worldwide conditions. For instance, the legendary Japanese savers, who hived away upwards of 20% of income four decades ago, are currently saving at low single digit rates.

Likewise, based on the Commerce Department current method of counting, the US household savings rate historically ranged in the 10-15% range (it’s a residual derivative after all spending has been subtracted from current income). But the savings  rate then dropped into the 8-10% zone during the Reagan era, and has continued to trend lower since, tagging just 6.4% in Q3 2018.

That’s thin gruel when the central banks are no longer sucking up trillions of bond supply annually. So as we see it, the 10-year US Treasury yield will break through 4.0% before the end of FY 2019 and continue to climb steadily higher from there—with 5.0% easily reachable during the years just ahead.

Indeed, it is hard to see any other outcome when the household savings rate in the US is still in the sub-basement of history and when the central banks are on the sidelines; and when, also, the inexorably rising dollar FX rate (due to escalating US yields) will make currency hedging prohibitively expensive for private foreign investors.

On of the insidious Wall Street lies of the present Bubble Finance era is that stocks are to be bought because interest rates are low. The unstated part of that proposition, however, is that they have been ordained by the financial gods to stay low forever, world without end.

But that was a Big Lie. And it’s exactly why the main street economy is in big trouble—-trouble that has been made immeasurably worse by the lunatic Trumpite/GOP fiscal debauch.

The truth is, US household and business borrowers have been implicitly embracing the permanent low interest proposition, too. So doing, they have steadily and systematically driven the US economy’s aggregate leverage ratio to unprecedented heights.

This amounts to a rolling national LBO which has been building since the early 1980s, and which now constitutes a dodgy financial edifice that is not remotely built to withstand the shock of even quasi-normal interest rates.

via RSS https://ift.tt/2Da0leT Tyler Durden

One month after both revolving and non-revolving consumer credit hit fresh all time highs, the Fed reported that in September total consumer credit rose to $3.950 trillion, rising $10.9 billion in the month, or a 3.3% SAAR, and missing expectations of a $15 billion increase.

What was surprising is that or credit card usage unexpectedly shrank by $312 million after jumping $4.6 billion in August. This was the 5th monthly decline in credit card usage in 8 months; it also means that in the 9 months of 2018, there has been a decline in revolving credit in more than half. Incidentally, until 2018, credit card debt had posted a streak of 4 consecutive years in which there had not been a single decline starting in 2014. With this month’s reduction, total revolving debt was $1.041 trillion.

At the same time, growth in non-revolving credit, i.e. student and auto loans, also dipped, increasingly by only $11.2 billion in September, a sharp drop from August’s $18.3 billion increase. With the September increase, the total non-revolving debt outstanding increased to $2.91 trillion. Non-revolving lending to consumers by the Federal government, which is mainly student loans, rose to $1.228t.

And while the drop in revolving credit will once again prompt questions about the resilience of the US consumer as the US economy entered the fall, one place where there were no surprises, was in the total amount of student and auto loans: here as expected, both numbers were at fresh all time highs, with a record $1.564 trillion in student loans outstanding, an material increase of $33 billion in the quarter, while auto debt also hit a new all time high of $1.143 trillion, an increase of $19 billion in the quarter.

via RSS https://ift.tt/2QsRgkT Tyler Durden

“This is the honeymoon,” says former fund manager and FX trader Richard Breslow, reflecting on the buying panic in US equities overnight (despite lower bond yields, lower dollar, and higher gold). However, Breslow reminds the over-enthused: this is “not for the rest of your life.”

Via Bloomberg,

Well I think we can all agree on one thing. It’s a good thing that the midterm elections are over. It was just too all-consuming an event to be healthy. Nothing short of war should grab the public attention to such an extent. It is a horrible shame that a democratically held election, conducted on a regular and guaranteed schedule, should inspire an analogy to a martial confrontation. But one thing that is clear is that whatever honeymoon period may ensue, it’s not all going to morph into some domestic and global love fest.

It’s a theme of the morning to say that with this event in the rear-view mirror, we can get back to trading the fundamentals. It matters not to interpret one day’s price action as connoting what these are. Markets may be somewhat good at discounting the future into current prices. But not that good. And events won’t cease to evolve in unpredictable ways. Personnel issues within the administration alone could be the first thing to rock the boat.

Let’s not forget that it wasn’t until Europe got in that equities decided to zoom and the dollar swoon. Until then, the commentary about what this all means was mixed. One conclusion that can be reasonably argued, however, is that this was a clear victory for the Republican party. The Blue Wave never materialized. The Senate is even more comfortably in red hands than before. That means, so is the judiciary. Foreign policy, including trade, won’t be materially affected.

It’s probably safe to infer that further tax cuts are less likely. And bonds should like that. At this point do we really need more late cycle stimulus and more debt to GDP? It’s disingenuous to argue the dangers of servicing an ever exploding level of Treasuries needing to be sold while also advocating for policies that ramp up issuance.

Infrastructure spending is apt to be negotiated in a more bespoke fashion on a case-by-case basis rather than as part of a grand theme. This isn’t going to be some version of a Grand Coalition. And issues like the budget and debt ceiling will only be further complicated. These are things that are more ambiguous for equities. Especially once traders focus on the fact that much of what has upset the international interpretation of domestic U.S. actions is unlikely to materially change for them. The executive branch has a lot of unilateral authority.

It’s also not unreasonable to posit, being in game theory mode, that we are entering a honeymoon period where the Democrats won’t be in a position to push back in the fashion that they will come the new year. Markets have a naive tendency to assume subpoenas will start being issued this afternoon. It might feel quite calm for a while. And, perhaps more importantly for markets, the G-20 in Buenos Aires at the end of the month, has become an extremely important event, where it is in everyone’s interest to make nice leading up to it.

In the preparations for the G-20, you are likely to hear a lot of agreeing to agree without substance attached. Details aren’t a nuance that markets will demand. Between that and a more benign bond environment, emerging markets could have a nice run. Which would make the dollar look offered. That should strictly be viewed as a tactical trade even if it lasts for a while.

Meanwhile, however things develop, as we head into this interregnum period, the S&P 500 futures are breaking above resistance, the dollar index is piercing support. Ten-year Treasury yields are toying with a key day reversal. All of those break-out points are now clear chart points to see if the market’s interpretation of events has legs.

via RSS https://ift.tt/2zBSe7v Tyler Durden

Just one day after Republicans expanded their majority in the Senate, President Trump revealed in a tweet that Attorney General Jeff Sessions has resigned. Matthew G. Whitaker, Sessions’ chief of staff, will become acting Attorney General until Trump can win a confirmation for Sessions’ replacement from the Senate.

Sessions reportedly said in a letter to Trump that he is resigning at the president’s request.

We are pleased to announce that Matthew G. Whitaker, Chief of Staff to Attorney General Jeff Sessions at the Department of Justice, will become our new Acting Attorney General of the United States. He will serve our Country well….

— Donald J. Trump (@realDonaldTrump) November 7, 2018

….We thank Attorney General Jeff Sessions for his service, and wish him well! A permanent replacement will be nominated at a later date.

— Donald J. Trump (@realDonaldTrump) November 7, 2018

Is Rod Rosenstein next?

via RSS https://ift.tt/2RK3eqN Tyler Durden