Month: May 2021

US equity markets hit a vacuum to the downside briefly this morning shortly after headlines that the $6 trillion Biden budget malarkey includes the assumption that a retroactive capital gains tax hike would be included (which would have started in April).

The Wall Street Journal reports that President Biden’s budget assumes that his proposed capital-gains tax rate increase took effect in late April, meaning that it would already be too late for high-income investors to realize gains at the lower tax rates if Congress agrees, according to two people familiar with the proposal.

Mr. Biden’s plan would raise the top tax rate on capital gains to 43.4% from 23.8% for households with income over $1 million. He would also change the tax rules for unrealized capital gains held until death.

The market took a quick dislike to that idea…

That suggests the odds of getting the budget through as is are lower, as Congress must still approve any rate changes and retroactive effective dates, and there is already reluctance building among some congressional Democrats.

But, as one can see in the chart – the stumble in stocks is quickly being erased because – BTFD on any govt spending!?

By Michael Every of Rabobank

The Push-back

There are push-backs all round right now, and they are going to buffet markets – largely because they aren’t all pushing in the same direction.

We still have the “this inflation is transitory” mantra from the Fed, seeing market expectations for any tapering at Jackson Hole rolled back. And, to be fair, we are also seeing a continued decline in the price of most agri commodities, representing a real push back against the inflation narrative – or at least for food-eating US consumers. China temporarily cancelling a shipment of corn imports from the US is an extra little finger in that push in the last 24 hours. An Iran nuclear deal, regardless of the longer term risks involved, would also help on the oil front, which is another reason why it is being pursued even as Iran is playing hard ball.

Yet the RBNZ, are pushing the other way. The Kiwis just flagged that their first hike is likely to be in H2 2022, and that all being well they hope to be well into a normalising cycle by the end of next year, and to have hiked six times by the end of 2024. The BoC are also tapering, and the BoE are flagging a rate hike by the end of 2022. Somebody here is wrong (the Fed, or other Anglo economies): or we are going to see really high inflation and a really low USD vs. those crosses.

Serious people, like Stephen Roach, are looking past the latest dip in agri markets and still talking about 1970’s inflation coming back purely from the supply side, which is wrapped up in geopolitics, as I explained yesterday. Underlining the point, Germany’s Angela Merkel was yesterday wailing her country cannot produce the chips needed to complete the cars which are the crown jewels of its industrial economy: who has been running the place for fifteen years and yet didn’t see a scenario coming where there could be a shortage?

Meanwhile, crypto refuses to do what US, Chinese, Turkish, now Iranian, and perhaps Indian regulators want it to – which is to drop off our radar screens. This sends an embarrassing message to central banks that in the public eye, inflation rules, and they don’t. For example –and I am sure the person involved won’t mind me sharing this anecdote– crypto is a market in which one can invest X in “diarrhoea coin”, and see it go up to 10X in a single day. Which should make anyone saying there isn’t too much liquidity out there feel sick to the stomach. Why bother schlepping when you can make instant 1,000% returns trading something of no intrinsic value? This may be something that China, the US, and all other central banks can agree on being opposed to, which would be a rare element of global cooperation we don’t see echoed elsewhere.

For example, US President Biden, in response to CNN reporting he had shut down a pre-existing Trump White House investigation, has now declared US intelligence services have 90 days to unearth the origins of Covid-19. Will it be Russia, given their recent form? Joking aside, this is the hottest of possible potatoes for agencies already up to their necks in politics. What will the domestic push-back be if the report is fudged? And what will the international push-back will be if it comes to at least one clear conclusion? 90 days, folks. Set your alarm clocks.   

Meanwhile, at a time of heightened tensions around the South China Sea, due to the US leaving Afghanistan in July –opening up USD1-3trn in mineral resources for anyone brave enough to dive in– the US Navy is shifting the aircraft carrier Ronald Reagan to help with the logistics. For the first time in a long time, the US has no aircraft carrier in the Pacific. The symbolism is clear: and it leaves some wondering what might happen if push comes to shove.

Indeed, Australia is reportedly considering manufacturing and storing US ballistic missiles in Darwin (next to a port with a 99-year lease owned by a Chinese firm). That’s “levelling up” industrial policy of a sort: military-industrial policy; and at least we have a clearer idea of the targets for the potential Chinese missile strikes against Australia the Global Times recently threatened. Against this backdrop, the tail risk to supply-chains should be clear – even pacifist NZ now sees it.

On which front, an Air France flight to Moscow yesterday insisted on diverting around Belarussian airspace, in line with the new EU directives following the skyjacking of the Ryanair jet; but Russia refused to allow an alternative channel to be used, and the French flight was cancelled. Coincidence, or a push back against the EU’s own recent shove? If it is the latter, again we see the EU’s attempt to go on the front foot geopolitically has seen its ante upped, as happened with China and the now-frozen CAI deal. Russia may be implying if Belarus airspace is boycotted, it can prevent overflight of Russian airspace in sympathy: that used to be called ‘Workers of the World, Unite!’ until neoliberalism came along and took away all the (wage) inflation and threat of international conflict.

If so, the EU either has to back down, or face losing access to more than just Belarussian airspace (and, by the way, 90% of goods coming in to the EU from China via train also pass through Belarus). Or, the only logical strategic alternative would be for the EU to go on the offence and unilaterally cut off air travel to/over Belarus AND Russia, to encourage Moscow to force Minsk to change tactics.

Yet when you base your economy on importing gas from Russia, and exporting luxury cars to Russia, one tends to go weak at the knees at the idea of such realpolitik. Which is why Germany will remain at the mercy of global pricing on chips, among other things, and the EU’s “open strategic autonomy” will be mainly just “open”.

More broadly, this is the kind of ‘resilient’ decoupling the whole liberal world order is still refusing to act on “because markets”. Which, as noted yesterday, is why integrated supply chains aren’t shifting Westwards; and which means Build Back Better really means Back Imports Better, regardless of the push-back that will generate from voters; or that nasty supply-side inflation, regardless of the push-back (and “diarrhoea coins”) that will generate.

Two days ago, when we observed that the Reddit squeeze mania was back with a vengeance after the February frenzy, we pointed out that even though the short interest in many meme stocks had declined (as some hedge funds learned their lesson the hard way), it had exploded in others hitting a record high at Reddit favorite movie chain AMC, and suggesting that another round of the infamous WallStreetBets squeeze was on deck:

AMC short interest pic.twitter.com/w9oIsRK7cK

— zerohedge (@zerohedge) May 25, 2021

Shortly after our tweet, S3 Partners’ Ihor Dusaniwsky echoed out observation, adding that on a scale of 1 to 10, AMC’s and GameStop Corp.’s short-squeeze scores hover at 10. A rally in AMC this week “pushed the possibility of a short squeeze even higher,” he said, adding that “losses are the primary impetus for a short squeeze in crowded stocks.”

Fast forward to today, when with WallStreetBets forums abuzz with positive sentiment about the two original meme stocks, AMC and GME…

… this morning AMC stocks has soared more than 10% again, rising as high as $21.83 (for now) and crossing a market cap of $10 billion for the first time ever.

Today’s surge takes place one day after the volume of its traded options tied for an all-time high.

The same call buying frenzy also boosted Ford Motor, which posted the best day since June amid an options frenzy, while a meme-stock basket jumped by the most since March.

Commenting on the surge in call-buying, Bloomberg notes that if an earlier spike in call-option activity was fueled by a round of stimulus checks, “Wednesday’s day-trader action seemingly came on the absence of news — with the exception of Ford, which said during its capital markets day on Wednesday it can successfully transition to an electric-vehicle space. Whether the comeback of the retail crowd is here to stay is anyone’s guess, but it’s already fraying the nerves of of short sellers betting the Reddit-pumped stocks have jumped too far, too fast.”

Nerves are also being frayed for shorts of that other poster-child of the reddit frenzy: after slumping in premarket trading, Gamestop is also now green for the day, as is Beyond Meat which climbs as much as 15% to the highest since April 16 after Jim Cramer on Mad Money named the company along with Roblox and Ford as potential short squeeze targets for retail traders (according to S3, 27% of BYND shares available for trading are currently sold short).

So now that the retail army has awoken again, and hunt for most shorted names is back on, we expect to update our list of the most-shorted names later today.

Sky News’ Europe Correspondent Adam Parsons is reporting a worrisome huge escalation between the EU and Russia in the wake of the Belarus-Ryanair plane diversion and arrest of Roman Protasevich on Sunday. European carriers have been avoiding Belarusian airspace after widespread condemnation of what was dubbed “state hijacking” after Belarusian MiG fighters escorted the Lithuania-bound flight to Minsk where authorities grabbed the anti-Lushenko activist and his girlfriend based on prior charges.

Britain’s Sky News is now reporting that Russia is “stopping EU flights from entering Russian airspace – IF those airplanes have circumnavigated Belarusian airspace on the way.”

Russia is reportedly stopping EU flights from entering Russian airspace – IF those airplanes have circumnavigated Belarusian airspace on the way.
Bearing in mind the size of Russian airspace, and the position of Belarus – that’s a significant move.

— Adam Parsons (@adamparsons) May 27, 2021

Parson’s follows by emphasizing, “Bearing in mind the size of Russian airspace, and the position of Belarus – that’s a significant move.”

This could mark the beginnings of a “battle” over crucial Eastern Europe and Baltic airspace and flight paths as more countries also ban airspace for Belavia flights (state airline of Belarus) in the wake of the Ryanair controversy and fallout, which has further put President Alexander Lukashenko back in the crosshairs of the West and expanding sanctions.

🇪🇸 Spain now telling Spanish operators and aircraft to avoid Belarus unless needed in an emergency. Also telling aircraft bound for Spain to avoid overflying Belarus. pic.twitter.com/9ADzCO1flF

— Flightradar24 (@flightradar24) May 27, 2021

All of this is set to potentially be economically devastating for both sides, and as it grows will most certainly severely disrupt international travel paths as more and more people take to the skies again after pandemic lockdowns.

As of Tuesday, Belarusian airspace appeared almost empty…

developing…

With existing– and new-home sales both taking an unexpected tumble in April, despite soaring homebuilder sentiment, analysts expected pending home sales to buck the trend and rise 0.4% MoM. They didn’t!

Completing the trifecta of terrible housing data, pending home sales tumbled 4.4% MoM in April…

Source: Bloomberg

That is the 3rd drop for pending home sales in the last 4 months.

That shifts the NAR index to its lowest since May 2020…

Source: Bloomberg

Of course, NAR is careful to point out that its lack of inventory (of affordable homes) that is the problem…

“Contract signings are approaching pre-pandemic levels after the big surge due to the lack of sufficient supply of affordable homes,” said Lawrence Yun, NAR’s chief economist.

“The upper-end market is still moving sharply as inventory is more plentiful there.”

Pending home sales by region:

• Northeast declined 12.9% to 85.3

• Midwest increased 3.5% to 101.1

• South fell 6.1% to an index of 128.9

• West decreased 2.6% in April to 92.0

“The Midwest region, which has the most affordable homes, was the only region to notch a gain in the latest month,” Yun noted.

“Some buyers from the expensive cities in the West and Northeast, who have the flexibility to move and work from anywhere, could be opting for a larger-sized home at a lower price in the Midwest.”

And, as we have noted recently, the enthusiasm of homebuilders (near record highs) is mirrored almost perfectly by the total disdain of homebuyers (near record lows) as rates rising alongside home prices removes all but the wealthiest from the American Dream pipeline…

Source: Bloomberg

So, Mr. Powell, keep pumping (and face even bigger crises), or pull the rip cord now and deal with the carnage?

Earlier this week, JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said during a congressional hearing that “there is a little bit of a bubble” in housing.

Authored by Steve Watson via Summit News,

Senator Rand Paul, who has spearheaded the renewed push to investigate the origin of the coronavirus pandemic, has called for Dr Fauci to be placed under oath and made to testify about the murky ‘gain of function’ research he was involved with funding at the Wuhan Institute of Virology.

Paul also urged that Fauci “needs to be excluded from the investigation” because he is too deeply involved in the whole thing.

Appearing on Fox News, Paul spoke about the funding that Fauci and the NIH supplied to China.

“Well, sure it’s a lot. And there are some reports that it added up to millions over time. But the other thing he said was that there was no gain of function in the application. There are scientists who looked at the application and who absolutely and categorically disagree with him,” Paul noted.

“The other evidence that we have is Dr. Shi from the Wuhan lab published a paper that is clearly about gain of function and it that she thanks her group and Dr. Fauci for funding that paper. So there are a lot of contradictions going on,” Paul added.

“I think Dr. Fauci should be made to testify under oath about the money that was given to the lab,” Paul said, adding “The good news is yesterday I passed an amendment on the Senate floor that says no more gain of function money can be sent to China.”

“The bottom line, he cannot investigate himself. If he was responsible for giving this money. He has every incentive to cover it up and not reveal the truth about it because if the pandemic did come from the lab, he would have great culpability in this,” Paul further emphasised.

The Senator, who continues to receive death threats after being so vocal against Fauci, added that “he can’t be investigating this, nor can any of his people that he picks be investigating this. He needs to be excluded from the investigation.”

“This is very important because this could happen again,” Paul warned, adding “I mean, they are experimenting with the SARS virus, which is 15 times more deadly than COVID-19. COVID-19 kills 1%… more than 3 million people. If SARS got out of the lab, that could be 50 million people. This is a very important task ahead of us. We have 11 labs in our country that do this kind of research.”

Watch:

In a separate appearance on the Christian Broadcasting Network on Tuesday, Paul called for Fauci to be fired, asserting “The nicest way to say this, I think he’s obfuscating the truth.”

After denying for months there was even any gain of function research going on at the Wuhan lab or that it was being funded by the US, Fauci completely reversed his position, admitting that there was ‘modest’ funding of the research, leading Paul to accuse Fauci of ‘perjury’.

Rand Paul: “Dr. Fauci, do you still support funding of the NIH funding of the lab in Wuhan?”
Fauci: “Senator Paul you are entirely, entirely, & completely incorrect. The NIH has not ever funded gain of function research in the Wuhan Institute of Virology.” https://t.co/gsJetSK2M4

— GobiDesertKayaking (@ASREdwards) May 26, 2021

The results of the US-backed gain of function research at Wuhan was published in 2017 under the heading, “Discovery of a rich gene pool of bat SARS-related coronaviruses provides new insights into the origin of SARS coronavirus.”

Fauci has come under increased scrutiny as the NIH’s involvement with the $3.7 million grant to the Wuhan Institute is further being called into question.

*  *  *

Brand new merch now available! Get it at https://www.pjwshop.com/

*  *  *

In the age of mass Silicon Valley censorship It is crucial that we stay in touch. We need you to sign up for our free newsletter here. Support our sponsor – Turbo Force – a supercharged boost of clean energy without the comedown. Also, we urgently need your financial support here.

As was leaked previously, this morning we got confirmation that the GOP will increase its “infrastructure” bid from $568bn to almost $1TN ($928BN to be exact), still well short of Biden’s downward revised $1.7TN ask. This includes $506 billion for roads, bridges and major prodjects as part of a bi-partisan $300BN surface transportation bill.

As expected, this GOP bid does not contain any changes to the US tax code.

What happens next? According to JPMorgan, investors must now consider which outcome is most likely:

• A bi-partisan bill passed of ~$1T with no tax code changes.
• A bi-partisan bill passes and then Dems pursue Reconciliation to achieve the balance of their package
• Dems forego a bi-partisan package to pass some or all of their initiatives via Reconciliation.
• Nothing passes ahead of mid-term elections.

JPM’s view is that if an infra bill passes, it goes through Reconciliation. The differences in what could vs. what should be included fall on party lines and, at this stage in America politics, seems a chasm too wide to be traversed.

Look for details on a potential bill to be release later in June or July for a September passage.

Top trade negotiators between the U.S. and China held their first virtual meeting on Thursday morning since the Biden administration entered the White House, according to a statement released by China’s Ministry of Commerce.

U.S. Trade Representative Katherine Tai and Chinese Vice Premier Liu He “conducted candid, pragmatic and constructive exchanges in an attitude of equality and mutual respect,” the statement went on to say. 

Adding that both sides “believe that the development of bilateral trade is very important, and they exchanged views on issues of mutual concern and agreed to continue to communicate.” 

In a separate statement, the Office of the United States Trade Representative said, “Ambassador Tai discussed the guiding principles of the Biden-Harris administration’s worker-centered trade policy and her ongoing review of the U.S.-China trade relationship, while also raising issues of concern.”​

WSJ sources said the U.S. Trade Representative’s office held a call with their Chinese counterparts on Tuesday night. During the conversation, Chinese officials requested the Biden administration roll back tariffs on Chinese products. 

This week’s high-level meeting between top trade negotiators from the U.S. and China comes after top diplomats exchanged sharp rebukes in the first high-level talks in March.

The Biden administration has yet to make any significant policy change to former President Trump’s tariffs on Chinese products. The tariffs are expected to remain as leverage. A top White House official this week said competition is increasing between both countries. 

“The period that was broadly described as engagement has come to an end,” Kurt Campbell, the U.S. coordinator for Indo-Pacific affairs on the National Security Council, said Wednesday. U.S. policy toward China will now operate under a “new set of strategic parameters,” Campbell said, adding that “the dominant paradigm is going to be competition.” 

As for the Phase One trade deal hammered out under the Trump administration in early 2020, the U.S.-based Peterson Institute for International Economics said Chinese purchases of U.S. goods continues to miss the mark. 

In a regular news briefing, China’s Commerce Ministry spokesman Gao Feng said both sides should work together to implement the trade deal.

Bilateral relations between both countries have soured over the last year, with clashes over technology, virus origins, Hong Kong crackdown, Taiwan, South China and East China Seas, and Beijing’s oil purchases from sanctioned Iran. 

Tai told Reuters that the trade deal should be seen in the context of “the overall U.S.-China trade, and economic relationship which is very, very challenging.” She added, “the overall challenges that we have with China are also still there and they are very large.”

Taoran Notes, a blog affiliated with Chinese state media, said, “there are still many differences between China and the United States and a breakthrough from the current situation requires more in-depth communication,” adding that “the stabilizing role of economic and trade cooperation in Sino-U.S. relations remains important.”

The question we have is what happened to the enforcement mechanism by the U.S. to make sure China lives up to trade purchases under the deal? And why hasn’t Biden insisted on a strong enforcement mechanism?