Month: March 2020

Joe Biden emerged as the unlikely winner last night, after sprinting past an exasperated Bernie Sanders to claim victory on Super Tuesday – sending the MSM into a fever over the resurgence of the establishment darling (while unbelievably trying to frame him as anti-establishment).

Bloomberg notes that Biden’s upset victory spans multiple demographics – from blacks in the Deep South, to whites in the Rust Belt, to rich suburbanites in Virginia and North Carolina. Biden’s biggest delegate win was in Texas, which handed him a whopping 228 delegates.

While the final results aren’t quite in yet, Biden picked up 337 delegates to Sanders’ 270 – propelling the former Vice President to the front of the 2020 pack with 390 total. In order to win the nomination and avoid a brokered convention, the frontrunner will need to have a majority of pledged delegates – 1,991 in this case.

Still, Sanders won California and its 415 delegates, and enjoys support in regions which haven’t yet held their primaries such as the Pacific Northwest. Of note, Washington State’s Democratic primary will be held on March 10, where 107 pledged delegates are up for grabs, while Oregon’s is on May 19 with 74 delegates at stake.

According to PredictIt, Biden has it in the bag:

As constitutional scholar Jonathan Turley notes, the MSM used Biden’s Tuesday win as a rebuke of Sanders – while MSNBC‘s Nicolle Wallace went so far as to suggest Biden’s victory was somehow a victory over the establishment.

“But it’s a lie, I mean, it’s a lie. Listen, and I say this as a dispassionate former Republican who watched my party sort of implode around fake truths and false grievances, the establishment had nothing to do with Joe Biden’s victory. He’s flat broke, he has not a single ad on the air. He’s not advertising in any Super Tuesday states!,” Wallace said.

Former DNC chairman who gave Hillary Clinton debate questions in advance during the 2016 election, exclaimed on Fox News that Biden’s victory was “the most impressive 72 hours I’ve ever seen in U.S. politics,” and told another analyst to “go to hell” for suggesting that the Democratic establishment was once again working to manipulate a nominee into frontrunner status.

The Democrats are in chaos and melting down on live TV.

Donna Brazile just told the @GOPChairwoman to “go to hell” when asked about the chaos.

Best of luck, Donna! Meanwhile, Republicans are more unified than ever! pic.twitter.com/hCwotuF9tx

— Trump War Room – Text EMPOWER to 88022 (@TrumpWarRoom) March 3, 2020

More from Turley:

“This all seems both forced and premature. While the coverage claims an “upset” by Biden, this ignores that he was viewed previously as the leading, if not chosen, candidate. With all of the other candidates lining up for Biden with most of the power brokers in Washington, this seems less than surprising. More importantly, it was not a rout. Rather, Sanders and Biden are roughly even in delegates. Sanders prevailed in California and came close in Texas.

The point is not that Sanders’ victory is inevitable. Indeed, media and political forces seemed entirely aligned and committed to securing the nomination for Biden. Rather, the coverage by the mainstream media continues to be overtly hostile and distortive. Many of my students, who support Sanders, have complained about it and the coverage this morning only reaffirms those objections. There is a sense of relief in the media that “our children are safe tonight” in the Beltway. For those who support Sanders or oppose the establishment, it further deepens the political divide and distrust. This week saw the full weight of the establishment brought against Sanders with clear success. However, the open expressions of relief by cable hosts or analysts leaves one with the eerie feeling of celebratory toasts from the walls of Rome.”

On the heels of PMIs showing China’s services economy collapsing at the worst rate in history, US Services data was expected to slip lower from January, and it did, with PMI back into contraction.

• Markit’s Services PMI plunged into contraction at 49.4 – lowest since 2013 – with orders and employment slumping

• ISM’s Services survey soared to 57.3 – highest in a year – with orders at the highest level since June 2018 and employment at a 7-month high.

You have to laugh…

Markit Services PMI at 49.4 from 55.5 – the weakest level since October 2013…

The service economy is now contracting faster than the manufacturing side of the economy…

The US Composite PMI slipped into contraction…

Commenting on the latest survey results, Chris Williamson, Chief Business Economist at IHS Markit, said:

“The US service sector took a knock from the coronavirus outbreak and growing uncertainty about the economic and political outlooks in February. The fall in the headline index measuring business activity levels was the second largest seen since the global financial crisis over a decade ago, exceeded only by the brief slump in activity during the 2013 government shutdown.

“Business sectors such as travel and tourism are reporting weakened activity due to the virus outbreak, most notably in terms of foreign visitors and overseas sales. However, other sectors such as financial services and business services are reporting virus-related hits to demand, suggesting a more broad-based weakening of demand across the economy, exacerbating the supply-shock that is constraining manufacturing.

“Companies have meanwhile grown increasingly concerned about client spending and investment being curbed ahead of the presidential election. Political and economic uncertainty, the coronavirus outbreak and financial market turmoil all risk building into a cocktail of risk aversion that has severely heightened downside risks to the economy in coming months. Much will depend of course on the speed with which the virus can be contained and how quickly business can return to normal.”

Finally, Williamson notes, that “combined with a weak manufacturing survey in February, the data are consistent with annualised GDP growth slipping from around 2% at the start of the year to just 0.7% midway through the first quarter.”

Perhaps that’s why the market is demanding two more rate-cuts in March still… despite yesterday’s emergency 50bps cut.

When discussing the positional imbalance in the market ahead of yesterday’s market plunge, Nomura’s Charlie McElligott noted that the market was “trading short”, because it was, largely on the back of the vol-trigger deleveraging flows we discussed first over the weekend, and the extreme negative Delta for options holders, which alongside dealer negative gamma would accelerate any market move into whatever direction sentiment would take it.

So in retrospect, having been short – even if synthetically – yesterday’s action, one would argue that the market is now in the process of closing out some if not all of its latest hedges and undoing its huge negative delta exposure. Sure enough, that’s what McElligott highlights in his latest daily note in which he writes that “one of the two “left tails” which set-off this larger multi-week, rolling gamma- and vol- event is now in the process of being “downgraded” as a probability for markets…

… with the rather remarkable 48-hour upward swing seen in Joe Biden’s trajectory as once-again “front-runner” for the Democratic nomination, a moderate and “market-friendlier” choice against the perceived “hard” negative growth shock implications of a Sanders selection—which was an unthinkable risk at the same time that Coronavirus economic “contagion” impact was being realized.”

And since quants tend to use about 90% more words than they need (it’s called hedging just in case someone actually understands what they are saying and they end up being wrong, a practice perfected by Greenspan), what he actually means is stocks rocketed higher after traders closed out positions after Monday’s rout, and the narrative used to explain the move was the Biden-friendly Super Tuesday results.

With this backdrop, Charlie goes on to note that heading into Tuesday we are experiencing yet another blistering 100-handle “low to high” rally overnight in S&P futures, in which dealer option hedging, or “short gamma”, is still a clearly a partial culprit behind these “accelerant” moves into extremes in both directions (particularly the amazing late-day moves in the US session in recent days), coupled with the general “synthetic short” in the market noted above.

All of this feeds into the market’s stunning reaction to the Fed’s rate cut of course, which as we discussed yesterday, is not what Powell had envisioned:

Clearly the Fed’s first intra-meeting rate cut since the GFC (although essentially “just” pulling-forward the 50bps of easing which the market had already priced-in) still set-off further daisy-chain within markets, with front-end Rates / USTs seeing extraordinary rallies and a violent “bull-steepening,” as even more cuts are now priced-into market expectations

Our econ team updated their forecasts, now expecting 25bp cuts in both Mar and Apr meetings, with markets pricing-in 2.75 more cuts cumulatively before year-end

Why?  Well the Fed has already told us that “when they go, they will go HARD and FAST”…which fits the historical analog: The FOMC’s past conference calls during the inter-meeting periods where the Committee decided to cut rates in Sep 2001, Jan 2008 and Oct 2008 were ALL followed by another cut at the subsequent regular meetings

Equities – which are now more driven by liquidity, sentiment, a greeks than any fundamentals – aside, most traders will argue that the real repricing took place in the bond market where the 10Y dropped below 1% for the first time ever yesterday, and today we see the move in TSYs moderating – after all there is less than 100bps left until we hit zero on the 10Y – while the curve is once again steepening.

And speaking on the front-end, in the aftermath of yesterday’s collapse in short-dated rates, first thing this morning we got 3M USD LIBOR crash by -31bps, the largest decline since Oct 2008, and causing the front of the Eurodollar curve to again spike.

So going back to equities, the Nomura quant finds that despite yesterday’s unwind, stocks continue to trade “short” and after the perceived removal of the US Election “left tail” last night, Vol is again resetting sharply lower, which McElligott notes means a (lagging) releveraging to come from the systematic/target vol universe, as trailing realized windows begin to “catch-down”—thus the crash-down, crash-up “rinse, repeat” that so often happens when market volatility spikes.

What does this mean practically in terms of buy/sell thresholds?

According to Nomura, the Super Tuesday aftermath which the market (erroneously) believes means Bernie Sanders is no longer a contender, has left spot S&P trading effectively at the next “buy” level in the CTA Trend model, which means that a close above 3079 today would see the signal go from current “+16%” (long) back to “+100%” signal, leading to further aggressive buying and more shorts squeezed.

Finally, with market nervousness at all time highs, resulting in S&P skew is at near record extremes (1m at 93rd percentile)…

… and a massively inverted term structure…

… “all back-test for significant rallies to come in Equities—but again, this sentiment is pushed / pulled by the inevitable Coronavirus tape bomb fear” according to McElligott, who concludes that the pressure then builds for “further violent upside shocks (boosted by the vol reset LOWER and the now post deleveraging UNDER-ownership by systematics), which you want to take advantage of to hedge your downside (the 2700 / 2900 1×2 PS I discussed two days ago traded for a CREDIT yday at one point).”

In under two weeks Iran’s leaders have gone from denial, to a seeming attempt at cover-up, to in some cases getting sick themselves to now talking a major military and volunteer mobilized response. This as the official death toll as of Wednesday has risen to 92, including 2,922 confirmed cases as overnight 586 new cases were reported.

And in the latest sign that desperation and panic have kicked in as coronovirus victims’ bodies pile up at local morgues, Tehran is actually freeing prisoners on a mass scale in what appears a sign that Covid-19 is rapidly spreading among the country’s crowded prison population.

“Iran has temporarily released more than 54,000 prisoners in an effort to combat the spread of the new coronavirus disease in crowded jails,” the BBC reports.

The stipulation, according to a statement from Iran’s judiciary, is that inmates post bail but more importantly that they test negative for Covid-19.

Importantly, this could potentially lead to the freedom of some political prisoners and foreigners from the West who’ve long been languishing in Iranian jails, including the infamous Evin political prison in Tehran.

The deadly virus is reportedly spreading among the close-quartered inmate population, threatening at least one American detainee, as NBC reports:

The lawyer for an American held in Iran said on Monday that his client is at “serious risk” of contracting the coronavirus after another inmate held near his cell tested positive for the illness.

A detainee held in the same prison ward as Iranian-American Siamak Namazi was diagnosed with coronavirus and has been removed, Jared Genser, a U.S. lawyer working on behalf of Namazi, said in a statement.

Namazi has been held since 2015 after being charged with “collaboration with a hostile government,” the United States. His lawyer said further: “To keep Siamak at Evin prison in the midst of a coronavirus outbreak and without access to testing or even basic medicines constitutes cruel, inhuman, or degrading treatment in violation of Iran’s obligations under the Convention Against Torture,” according to the report.

There’s also growing concern in the UK over British detainees at the prison, with a Foreign Office spokesman saying Tuesday: “We call on the Iranian government to immediately allow health professionals into Evin prison to assess the situation of British-Iranian dual nationals there.”

Concern is focused on British-Iranian charity worker Nazanin Zaghari-Ratcliffe, also jailed five years ago after allegations of espionage, which she had denied. According to the BBC:

Tulip Siddiq cited the Iranian ambassador to the UK as saying that Ms Zaghari-Ratcliffe “may be released on furlough today or tomorrow”.

Her husband said on Saturday that he believed she had contracted Covid-19 at Tehran’s Evin prison and that authorities were refusing to test her.

But Mr Esmaili insisted on Monday that Ms Zaghari-Ratcliffe had subsequently been in contact with her family and “told them about her good health”.

Iranian officials began sounding the alarm last month over the vulnerable prison population as a key demographic through which the virus could spread rapidly. 

“Addressing prison wardens across the country Ali-Asghar Jahangir said prisoners should not be sent to courts unnecessarily and without due coordination,” US media wing Radio Farda earlier reported. “He also said all visits to prisons except for judicial and health officials should stop, prisoners should not be transferred between prisons and family visits to take place behind glass barriers.”

Sanctions-wracked Iran has the worst coronavirus outbreak outside the disease’s believed origin point in China, at a moment the majority of Covid-19 deaths have been reported to be outside China for the first time.

Media reports have lately suggest the true number of infected inside Iran is actually closer to 20,000 with no signs of stopping in the near term.

Authored by Charles Hugh Smith via OfTwoMinds blog,

Once confidence and certainty are lost, the willingness to expand debt and leverage collapses.

Even though the first-order effects of the Covid-19 pandemic are still impossible to predict, it’s already possible to ask: did the pandemic pop all the global financial bubbles? The reason we can ask this question is the entire bull mania of the 21st century has been based on a permanently high rate of expansion of leverage and debt.

The lesson of the 2008-09 Global Financial meltdown was clear: any decline in the rate of debt/leverage expansion is enough to threaten financial bubbles, and any absolute decline in debt and leverage will unleash a cascade that collapses all the speculative bubbles in stocks, real estate, collectibles, etc.

What’s the connection between Covid-19 and the rate of debt/leverage expansion? Confidence and certainty: people will make bets on future growth and take on additional debt and leverage when they feel confident and have a high degree of certainty that the trends are running their way.

Over the past 20 years, the certainty that central banks would support markets has been high, as central banks stepped in at every wobble. Today’s 50 basis-points cut by the Fed sustains that certainty.

What’s now broken is the certainty that central bank interventions will lift risk assets and the real-world economy. Given the uncertainties of the eventual consequences of the pandemic globally, confidence in future trends has been either dented or destroyed, depending on your perspective and timeline.

Certainty that central bank interventions will push markets and real-world economies higher has also been dented. What happens if the market tanks after every 50 basis-points cut by the Fed?

We wouldn’t be in such a precariously brittle state if the global economy hadn’t been ruthlessly financialized to the point that market dependence on central bank intervention is now essentially 100%.

Once confidence and certainty are lost, the willingness to expand debt and leverage collapses, and that reduction in the rate of expansion will pop all the global asset bubbles.

My COVID-19 Pandemic Posts

*  *  *

My recent books:

Audiobook edition now available:
Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World ($13)
(Kindle $6.95, print $11.95) Read the first section for free (PDF).

Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($6.95 (Kindle), $12 (print), $13.08 ( audiobook): Read the first section for free (PDF).

The Adventures of the Consulting Philosopher: The Disappearance of Drake $1.29 (Kindle), $8.95 (print); read the first chapters for free (PDF)

Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).

*  *  *

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.

Yesterday morning, when we discussed the sudden spike in liquidity shortage that resulted in both a (record) oversubscribed term repo and the first oversubscribed overnight repo since the start of the repo crisis last September that spawned QE4 and helped its culprit, JPMorgan report record annual revenues, we said that “if going solely by the amount of securities submitted between the term and overnight repo, the overall liquidity shortage today was nearly $180BN, the highest since the start of the repo crisis, and a clear signal to the Fed that it needs to do something to further ease interbank lending conditions.“

Less than an hour later the Fed cut rates by 50bps in its first emergency intermeeting action since the financial crisis.

So with its emergency action now in the rearview mirror, did the Fed manage to stem the funding panic that has gripped repo markets following last week’s market bloodbath? The answer, if based on the latest overnight repo results, is a resounding no.

Moments ago, the Fed announced that its latest repo operation was once again oversubscribed, with the full $100 million amount of repo accepted.

In other words, for the second day in a row the overnight funding repo operation was oversubscribed (and it is virtually certain that tomorrow’s downsized term-repo will be oversubscribed as well).

What is perhaps more notable is that the amount of securities submitted into today’s repo op was a whopping $111.478 billion, which was not only higher than yesterday’s $108.6 billion, but it was an all time high amount of overnight funding needs expressed by dealers.

Which, stated simply, is rather bizarre as it means that not only did the rate cut not unlock additional funding, it actually made the problem worse, and now banks and dealers are telegraphing that they need not only more repo buffer but likely an expansion of QE… which will come soon enough, once the Fed hits 0% rates in 2 months and restart bond buying.

Will that be enough to stabilize the market? We don’t know, but in light of the imminent corona-recession, overnight Credit Suisse’s Zoltan Pozsar repo guru published a lengthy piece (which we will discuss more in depth later), and whose conclusion – at least on the liquidity front – is that the Fed should “combine rate cuts with open liquidity lines that include a pledge to use the swap lines, an uncapped repo facility and QE if necessary.“

In short, a liquidity avalanche is coming to prevent a market crash. It’s only a matter of time.

Just think about this. Sure, coronavirus may wind up ravaging our country and affecting many of our loved ones. Perhaps you will even die from it. But the silver lining is that you will die knowing you shaved 50 basis points worth of interest off of your mortgage payments. 

Now that’s a way to go out!

Americans are rushing to their lenders as rates plunge over the last several weeks, causing refinance volumes to spike and total mortgage application volume to go with it. While refinances were up 26%, mortgage application volume was up 15.1%. 

The average contract interest rate for 30-year fixed-rate mortgages with balances of $510,400 or less decreased to 3.57% from 3.73%, with points decreasing to 0.26 from 0.27 for loans with a 20% down payment, according to CNBC.

Now, rates have fallen even more, prompting the surge in refinances, which are up 224% from last year. Last year, the average rate was at 4.67%.

Mike Fratantoni, MBA’s senior vice president and chief economist said:

 “The 30-year fixed rate mortgage dropped to its lowest level in more than seven years last week, amidst increasing concerns regarding the economic impact from the spread of the coronavirus, as well as the tremendous financial market volatility. Given the further drop in Treasury rates this week, we expect refinance activity will increase even more until fears subside and rates stabilize.”

Quicken Loans said they saw “record setting” volume on Monday and Tuesday as rates fell. CEO Jay Farner said:

 “The way that we leverage technology to communicate with our clients, to make it easy for them to make a mortgage application, for our underwriters, we can scale very quickly, which helps us when we see increased volume like this.”

He continued:

“As application volumes increase, our turn times are remaining steady. We can scale with our clients and still can expect to make application and close a mortgage within a few weeks and not have to wait months and months as volumes increase.”

Isn’t it great? Prosperity for everyone! And if you get a good enough deal on your mortgage, scientists say you’re no longer at risk of the biological pathogen that’s sweeping the nation. Maybe next, to spur additional homebuying and growth, the Fed can revert back to the no-doc NINJA loans of the 2000’s.

Those really helped the market take off!

Submitted by Michael Every of Rabobank

“It’s criminal; there ought to be a law

Criminal; there ought to be a whole lot more”

Yesterday’s G7 meeting heard the great and the good say that they were prepared to use fiscal measures to fight the virus, where appropriate, and that central banks were also standing by. Then there was a brief interlude where we all thought: ‘is that it?’ Obviously markets did not like that; and then the Fed stepped in within an emergency 50bp rate cut, taking Fed Funds to 1.25%.

Guess what? The market didn’t like that either. Equities tanked, the S&P down 2.8%; bond yields plunged, with the 10-year US Treasury down around 15bp yesterday and a further 2bp this morning to take us clearly through the 1% level I spoke of being inevitable just a few days ago; and USD tanked against most crosses. So aggressive was the Fed action that our US strategist Philip Marey has brought forward his expectation of when we get back to zero lower bound there from September to June. He now sees a 25bp cut at the scheduled meeting on 18 March, again inter-meeting in early April, at the 29 April meeting, and at the 10 June meeting – with risks of more 50bp moves taking us there more lumpily.

“You get nothin’ for nothin’; Tell me who can trust””

For the Fed, and for all of us, the fact that their precious equity market tanked is deeply concerning. So is that fact that the 10-year is sub-1%. Clearly, they would have hoped to have seen stocks up and at last the longer end of the yield curve showing some signs of enthusiasm about all the lovely liquidity that is flowing around. Instead, their 50bp bazooka is—as we feared, and repeatedly stressed—merely a pop-gun in the face of a virus that doesn’t care what the borrowing rate it. Monetary policy alone is going to be useless. Or rather even more useless than it already is.

Logically, in a true pandemic the only way monetary policy can help is to support fiscal policy, for example in overcoming critical supply shortages via capital for new hospitals and local production of key goods (e.g., the WHO warning that protective gear supplies globally are “rapidly depleting”). This is exactly what monetary policy does during a major war: ensure a victory that transcends day-to-day politics. Of course, as we have also pointed out many times before, in doing so we pull back the curtain to reveal not just what its critics allege–a central bank that favours capital over labour and assets over wages–but that the fundamental foundations of how the political-economy works are not set in stone, but rather sand.

“We got what you want; And you got the lust”

Capital is not just accrued from saving, as in the neoclassical model, and bank loans are not just made from deposits. Paul Krugman struggles with this, and so do many others in the economics field, but money as we use it today is endogenous, not exogenous. Banks create it via debt with new loans, which then create deposits; and governments can always create it at will if central banks are willing to help – which they always do in a major crisis.

The key issue is, what is a major crisis? Obviously a war. Yet is this virus? It could well be; and with the 50bp flopping, and QE and reverse repo in the toolkit, and the Fed’s balance sheet as a % of GDP actually low compared to the Eurozone and Japan–and US President Trump hardly shy about expanding the fiscal deficit–the ingredients for this policy cocktail are all arguably in place. The second issue is that once you have shown the public that this can be done in an emergency, you then have to explain to them why it should NOT be done more often. (Or at least, not for them: it’s fine for the financial system, as in 2008-09, for example.)

Moreover, if the US is doing it, everyone else is going to want to do it too, surely? Except it is far from clear that everyone else can: Germany is obviously allergic to this kind of thing; and for smaller countries running trade deficits, more so with twin fiscal deficits, good luck persuading markets that you can be trusted with such a radical monetary-fiscal policy.

“If you want blood, you got it”

So first reactions to what happened yesterday are to smash the USD. Even CNY has rallied hard, despite the fact that the Caixin services PMI out today also collapsed to depression levels of 26.5. Yet once this phase passes, people will see that ONLY the USD has both local and international demand if we are to embrace MMT to fight the virus. What else is international trade going to be conducted and priced in? And note that there is going to be a whole lot less trade if things continue like they are – at which point people will soon flip to wondering where the USD needed to cover record global USD debt is going to come from.

Indeed, here is irony for you. When the US is performing well, with a strong economy, there are plentiful USD available via trade and ‘risk on’ markets. That argues for a weaker USD in many ways. When the US is in recession there are far fewer USD available via trade and ‘risk off’ markets. That argues for a stronger USD in many ways. Only the potential availability of Fed USD swap lines might help mitigate to some degree: and it remains to be seen how generous and (geo)political they might be under this White House. Which given a global recession now inevitable says:

“Blood on the rocks; blood on the streets; blood in the sky; blood on the sheets.”

You wanted that 50bp, Mr Market? You got it.

So let’s wrap up with Super Tuesday. At time of writing, and counting, Joe “Night King” Biden has won handily in Alabama, Arkansas, Maine, Minnesota, Massachusetts, North Carolina, Oklahoma, Tennesse, and Virginia. However, Sanders has won California, Colorado, Utah, and Vermont, and remains ahead in the delegate count at 49% to 39% (Bloomberg has 4%, which perhaps he plans to sell to Biden to make a profit on his USD500m campaign investment so far). In short, the Democrats are a toss-up between putting forwards a candidate who would likely embrace MMT and one who would run screaming from it…vs. a president who is surely more likely to embrace it. (Just look at his Fed tweets.)