Month: November 2018

Upset victories by a Democratic candidates for US Senate and the Nevada governorship drew national attention to the political news cycle in the Silver State Tuesday night. But lost amid the flurry of headlines was the landslide victory by Nevada brothel owner Dennis Hof, the self-described “Trump from Pahrump”, who clinched a seat in the state legislature despite having died three weeks ago. 

Despite his untimely demise in October while celebrating his 72nd birthday, Hof had been heavily favored to defeat Democratic candidate Lesia Romanov in Nevada’s deep-red 36th Assembly District, as we highlighted last month. The district spans several rural communities and large swaths of desert in the southern part of the state.

Hof was found dead on Oct. 16 after a weekend of partying, and while officials haven’t determined the cause of death, they do not suspect foul play. His body was found at his Love Ranch brothel by porn star Ron Jeremy and a prostitute employed at the brothel.

Hof’s bio featured several notable parallels to Trump’s. He starred in the HBO reality series “Cathouse” and wrote a book titled “The Art of the Pimp,” a play on Trump’s famous “The Art of the Deal.”

His seat will be filled by another Republican who will be chosen during a joint meeting process lead by county commissioners which brings us to the practical considerations that helped buoy Hof’s bid from beyond the grave. Though Hof was running in a deep-red district, some conservative voters had reservations about his business. But by dying, Hof handed these voters the opportunity to vote for a Republican, but avoid being represented by a man who earned his living from legalized prostitution.

Hof’s campaign manager, Chuck Muth, said as much during an interview with the Guardian.

“There are a lot of Republicans who were uncomfortable voting for Dennis because of the nature of his business and they now know that he is not the one who will be serving,” Muth said. “They will feel much more comfortable casting the ballot for him knowing there will be another Republican to replace him,” he added.

Talk about a win-win…

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Authored by Daniel Lacalle via The Epoch Times,

With the 10th anniversary of the Lehman Brothers bankruptcy having just passed and the recent stock market drop, the fear of a new financial crisis is palpable.

And those fears are justified. The question is not whether there will be a crisis, but when? In the past 50 years, we have seen more than eight global crises and many more local ones, so the likelihood of another one is quite high. Not just because of the years passed since the 2007 crisis, but because the factors that typically lead to a global crisis are all lining up.

What Leads to a Financial Crisis?

There are primarily three factors.

First, demand-side policies that lead investors and citizens to believe that there is no risk. Complacency and excess risk-taking cannot happen without the existence of a widespread belief that there is a safety net, a government or central bank cushion that will support risky assets. Terms like “search for yield” and “financial repression” come precisely from artificial demand signals created from monetary and political forces.

Second, excessive risk-taking in assets that are perceived as risk-free or bullet-proof. It is impossible to build a bubble on an asset where investors and companies see an extraordinary risk. It must happen under the belief that there is no risk attached to rising valuations because “this time is different,” “fundamentals have changed” or “there is a new paradigm,” sentences we have all heard more times than we should in the past years.

And the third factor, the realization that this time is different. Bubbles do not burst because of one catalyst, as we are taught to believe. The 2007–2008 crisis did not start because of Lehman; it was just a symptom of a much wider problem that had started to cause small bursts months before—excess leverage to a growth cycle that fails to materialize as the consensus expected.

What Are Immediate Triggers of the Next Financial Crisis?

Sovereign debt. The riskiest asset today is sovereign bonds at abnormally low yields, compressed by central bank policies. With $6.5 trillion in negative-yielding bonds, the nominal and real losses in pension funds will likely be added to the losses in other asset classes.

The incorrect perception of liquidity and value at risk. Years of high asset correlation and synchronized bubble spearheaded by sovereign debt have led investors to believe that there is always a massive amount of liquidity waiting to buy the dips to catch the rally.

This is simply a myth. That “massive liquidity” is just leverage, and when margin calls and losses start to appear in different areas—emerging markets, European equities, U.S. tech stocks—the liquidity that most investors count on to continue to fuel the rally simply vanishes. Why? Because value at risk is also incorrectly calculated.

When assets reach an abnormal level of correlation and volatility is dampened due to massive central bank asset purchases, the analysis of risk and probable losses is simply ineffective. When markets fall, they fall in tandem, as we are seeing lately. The historical analysis of losses is contaminated by the massive impact of monetary policy actions in those years. When the biggest driver of asset price inflation—central banks—starts to unwind or simply becomes part of the expected liquidity—like in Japan—the placebo effect of monetary policy on risky assets vanishes and losses pile up.

The fallacy of synchronized growth triggered the beginning of what could lead to the next recession – a generalized belief that monetary policy had been very effective, growth was robust and generalized and debt increases were just collateral damage but not a global concern. With the fallacy of synchronized growth came excess complacency and acceleration of imbalances. The 2007 crisis erupted because in 2005 and 2006 even the most prudent investors gave up and surrendered to the rising-market beta chase. In 2017 it was accelerated by the incorrect belief that emerging markets were fine because their stocks and bonds were soaring despite the Federal Reserve interest rate normalization.

What Will the Next Financial Crisis Look Like?

Nothing like the last one, in my opinion. Contagion is much more difficult because there have been some lessons learned from the Lehman crisis. There are stronger mechanisms to avoid a widespread domino effect in the banking system.

When the biggest bubble is sovereign debt, the crisis we face is not one of the massive financial market losses and real economy contagion, but a slow fall in asset prices—as we are seeing—and global stagnation.

The next crisis is not likely to be another Lehman, but another Japan – a widespread zombification of global economies to avoid the pain of a large repricing of sovereign bonds, which leads to massive tax hikes to pay the rising interests, economic recession, and unemployment.

Future Risks

The risks are obviously difficult to analyze because the world entered into the biggest monetary experiment in history with no understanding of the side effects and real risks attached. Governments and central banks saw rising markets above fundamental levels and record levels of debt as small but acceptable problems in the quest for a synchronized growth that was never going to happen.

The next crisis, like 2007-2008, will be blamed on a symptom (Lehman in that case), not the real cause – aggressive monetary policy incentivising risk-taking and penalizing prudence. The next crisis, however, will find central banks with almost no real tools to disguise structural problems with liquidity and no fiscal space in a world where most economies are running fiscal deficits for the 10th consecutive year, and global debt is at all-time highs.

When will it happen? We do not know, but if the warning signs of 2018 are not taken seriously, it will likely occur earlier than expected.

However, the governments and central banks will not blame themselves; they will present themselves – again – as the solution.

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With purchase applications tumbling alongside the collapse in refinancings, the headline mortgage application data slumped to its lowest level since September 2000 last week.

This should not be a total surprise as Wells Fargo’s latest results shows the pipeline is collapsing – a forward-looking indicator on the state of the broader housing market and how it is impacted by rising rates, that was even more dire, slumping from $67BN in Q2 to $57BN in Q3, down 22% Y/Y and the the lowest since the financial crisis.

But in the month since those results, mortgage rates have gone higher still… (this is now the biggest 2Y rise in mortgage rates since 2000)…

Sparking further weakness in the housing market…

And absent Xmas weeks in 2000 and 2014, this is the weakest level of mortgage applications since September 2000…

What these numbers reveal, is that the average US consumer can barely afford to take out a new mortgage at a time when rates continued to rise – if not that much higher from recent all time lows. It also means that if the Fed is truly intent in engineering a parallel shift in the curve of 2-3%, the US can kiss its domestic housing market goodbye. 

And, as famed housing-watcher Robert Shiller recently noted, the weakening housing market is similar to the last market high, just before the subprime housing bubble burst a decade ago.

The economist, who predicted the 2007-2008 crisis, told Yahoo Finance that current data shows “a sign of weakness.”

“This is a sign of weakness that we’re starting to see. And it reminds me of 2006 … Or 2005 maybe,”

Housing pivots take more time than those in the stock market, Shiller said, adding that:

“the housing market does have a momentum component and we’re seeing a clipping of momentum at this time.”

The Nobel Laureate explained:

 “If the markets go down, it could bring on another recession. The housing market has been an important element of economic activity. If people start to get pessimistic about housing and pull back and don’t want to buy, there will be a drop in construction jobs and that could be a seed for another recession.” 

When reminded that 2006 predated the greatest financial crisis in a lifetime, RT notes that Shiller acknowledged that any correction would likely be far less severe.

“The drop in home prices in the financial crisis was the most severe drop in the US market since my data begin in 1890,” the Yale economist said.

“It could be that we’re primed to repeat it because it’s in our memory and we’re thinking about it but still I wouldn’t expect something as severe as the Great Financial Crisis coming on right now. There could be a significant correction or bear market, but I’m waiting and seeing now.”

Tick, tick, Mr Powell.

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One week ago, Nomura’s cross-asset expert Charlie McElligott observed that following the market’s sudden surge from its October lows, it appeared as if there was a source of “short gamma”, forced to levitate risk assets. This morning, Charlie is back with his “elections, schmelections” post-mortem, in which he writes that last night’s events – which were largely a distraction for traders – notwithstanding, he continues to expect a “near-term tactical pain-trade HIGHER for U.S. Equities, almost entirely due to the past month’s gashing of “market” exposure from the fundamental community throughout the performance drawdown,” which forced “net-down” / “gross-down” / “beta-down” behavior, and which accelerated particularly over the final week of October.

To underscore this point, he observes that since the start of October, his hedge fund L/S model has seen at least 9 sessions of greater than 50bps of underperformance vs SPX out of a total of 27 trading days, confirming that for hedge funds the latest market whipsaw, first sharply lower then higher, has been pure torture.

And it’s not “just” a Hedge/Leveraged Fund struggle: overall Asset Managers have sold down -$91B between SPX-, NDX- and Russell- futures over the past month, shown in the charts below, amid a near record deleveraging/degrossing.

Asset Manager total equity futures cumulative position (SPX, NDX, Russell) since 2006

Asset Manager equity futures net position reduction YTD:

This is the same “risk off” response that led pensions funds to buy a record amount of STRIPs in October as they panic-sold risk assets, as we observed last night.

McEllgiott then picks up on his point from last week, and writes that in the context of this lagging underperformance by active managers, the “fundamental” active equities universe “has essentially become a source of synthetic “short gamma” in the market, as with any rally in stocks, said performance-burned funds effectively “get short-er” the higher Equities travel, in-turn contributing to these violent bear-market rallies on “up” days, with funds grabbing exposure “dynamically hedging” futures on said move.”

So looking at today’s market reaction to the midterm election results, the Nomura strategist writes that it feels like one of those “it’s so obvious that it has to work” moments, in which we preemptively traded higher into the Election results as a “tell”—regardless of outcome—due to the masses “not being there.” 

As a result, he thinks it is likely that today we will pile-on “melt-up fuel” as the election hedges are unwound thereafter, and notes that the 2800 strike still matters the most from a gamma hedging perspective, i.e., the market will likely be chased higher for another 20 or so ES points.

However, as we discussed two weeks ago, funds remain boxed in the current upswing, as existing shorts continue to outperform longs, resulting in even more pain as they scramble to relever. McElligott explains:

The challenging part for the single-stock world is that we continue to see “shorts outperforming longs” on the “up” days, due to forced de-grossing with longs- and shorts- exceeding risk budgets (too much $ exposure so longs are sold / shorts are covered), ESPECIALLY as the legacy portfolio construction as noted so often here is long “Growth,” short “Value.”  We saw that again yesterday with “Value” market-neutral strategies generally +1SD on the session, with “Growth” factor m/n strategies again lower.  This dynamic will remain a performance headwind “under the surface” until both legs of the trade get “cleaner.”

This is shown below.

What is most important according to the Nomura strategist, however, is that the S&P has shown us that throughout the 2.5% MTD rally in minis that the market can “work” with “Value” leading—4 of the S&Ps top 5 sectors so far in November are Materials, Industrials, Energy and Financials.

And even though Charlie expects the resumption of TSY curve flattening – “via the ongoing deficit-funding “supply shock” story and market slowly again pricing-in additional Fed hikes through 2019″ – to take some wind out of the “Value” sails and instead provide some relief for “Growth”, this will again allow “all parts” of the market to participate as exposure is rebuilt into year-end. 

In short, “expect a broad based rally over the next month, as it is once again the course of “max pain.”

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President Trump on Wednesday tweeted a warning to Democrats who have threatened to investigate him upon reclaiming a majority in the House of Representatives: 

“If the Democrats think they are going to waste Taxpayer Money investigating us at the House level,” Trump said, “then we will likewise be forced to consider investigating them for all of the leaks of Classified Information, and much else, at the Senate level.”

If the Democrats think they are going to waste Taxpayer Money investigating us at the House level, then we will likewise be forced to consider investigating them for all of the leaks of Classified Information, and much else, at the Senate level. Two can play that game!

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

Last December, President Trump’s son, Don Jr. called on the House intelligence Committee to investigate information that was leaked from his closed interview the week before. 

“This committee should determine whether any member or staff member violated the rules by leaking information to the media concerning the interview or by purposely providing inaccurate information which led to significant misreporting,” said Trump Jr.’s attorney, Alan Futerfas. 

In addition, his letter charges that members of the House committee “began disseminating wildly inaccurate information” to reporters that formed the basis of an erroneous CNN report on an email that Mr. Trump and other members of the Trump campaign received in September 2016.

“These disturbing circumstances warrant examination,” concluded Futerfas. 

Rep. Adam Schiff (D-CA), who will lead the House Intelligence Committee, told the Los Angeles Times on Monday that he will revive the investigation into so-called “Russian collusion” – vowing to go after Trump’s personal business interests. 

“The president has sought to keep that off limits, but if that’s the leverage Russians pose that’s a real threat to our country,” said Schiff. 

Schiff insisted in March that there was “more than circumstantial evidence” connecting Trump to Russia, however despite the best efforts of the US-UK-Australian intelligence community and the DOJ/FBI’s multi-year counterintelligence “sting” and now probe, no such evidence has emerged. 

Rep. Maxine Waters (D-CA), meanwhile, who has repeatedly called to impeach President Trump, is set to lead the House Financial Services Committee. As chair, she will be able to subpoena officials at financial regulatory agencies for testimony and other information. 

In September, Waters renewed her calls to impeach Trump – and told a crowed of constituents at a rally that she would “get” Vice President Mike Pence once Trump was gone. 

“I had a conversation here today with someone [who] asked, ‘Well, what about Pence? If you are able to impeach, Pence will be worse,’” said Waters. “And I said, ‘Look, one at a time. You knock one down, one at a time. You knock one down, and we’ll be ready for Pence. We’ll get him, too.” 

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While Democratic Congressional candidates in key battleground districts struggled to defeat a host of surprisingly resilient Republican incumbents, self-described “Democratic socialist” Alexandria Ocasio-Cortez cruised to victory in New York’s 14th Congressional district, which straddles parts of the Bronx and Queens, becoming – at the tender age of 29 – the youngest woman ever elected to Congress.

According to CNN, after turning 29 last month, AOC (as she is widely known) has surpassed New York Republican Rep. Elise Stefanik, who was elected to Congress at age 30, and was the previous holder of that distinction.

Prior to becoming involved in politics, the “girl from the Bronx” (who spent most of her childhood in a comfortable home in suburban Westchester County) and daughter of Puerto Rican parents had been working as a bartender and Bernie Sanders organizer in NYC after graduating from Boston University when she was plucked from obscurity by progressive groups like “Our Revolution.” During her primary race against 10-term incumbent, Queens Democratic Party leader Joe Crowley, a member of the Democratic leadership in the House, AOC won by a double-digit margin in what will be remembered as one of the biggest upsets for the Democratic establishment in recent memory.

AOC, who was championed by the Democratic Socialists of America, an insurgent socialist organization, will now bring her inchoate policy agenda, which includes a “jobs guarantee”, free college tuition, medicare for all, abolishing ICE and “housing as a human right”, to Washington, where she will no doubt find a niche on the far-left of an increasingly progressive Democratic Party.

Though AOC took home nearly 80% of the votes in her heavily Democratic district, Crowley, her former primary rival, still emerged with 6.6% of the vote, despite declining to campaign, after he refused to petition for his name to be removed from the Working Families Party.

Watch her victory speech:

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