Month: July 2021

We Have The First Trillion Dollar Reverse Repo

We Have The First Trillion Dollar Reverse Repo

It’s official: at exactly 1:15pm today, the NY Fed reported that for the first time ever, 86 counterparties parked over $1 trillion in reserves at the Fed’s Reverse Repo Facility for overnight ‘safekeeping’ and collecting a nice, fat yield of 0.05% – representing hundreds of millions in absolutely free money as these are reserves that the Fed has previously handed out to banks – for free – who then turned around and handed it right back to the Fed where it collected a small but nominal interest.

Of course, it is month-end (if not quarter-end) so we do get some window-dressing but even without it, it’s only  matter of time before we got consistent $1 trillion prints… which then become $2 trillion and so on.

In fact, the question of how big the Fed’s reverse repo facility – which as explained previously is just how the Fed recycles all its massive reserves which it keeps injecting into the financial system (if not economy) at a pace of $120 billion per month – is one we discussed yesterday, and highlighted a calculation by Curvature’s repo guru Scott Skyrm who made the following observations:

During the month of April, RRP volume increased by $49 billion. $296 billion during the month of May, $362 billion in June, and $124 billion in July. If RRP volume continues around the same pace, say $200 billion a month, RRP volume will reach $2 trillion by the end of the year.

Looking at the trendline, it puts RRP volume at $2.5 trillion by the end of the year. However, the RRP volume at the end of the year will be a far larger number due to year-end window dressing, meaning it will likely approach if not surpass $3 trillion on Dec 31, 2021.

A few rhetorical questions from Skyrm to conclude: what will be the impact of $2 trillion going into the RRP each day? How will this affect the markets? Will the Fed need to adjust the RRP rate again?

Tyler Durden
Fri, 07/30/2021 – 13:30

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Trump Tax Returns Must Be Released By IRS To Congress, DoJ Orders

Trump Tax Returns Must Be Released By IRS To Congress, DoJ Orders

Conveniently timed to coincide with Trump’s re-emergence on the political scene with rallies being readies in the run up to next year’s mid-terms, the Department of Justice has decided now is the time to affirm that the income tax returns of former President Trump can be released by the IRS to Congress.

The DOJ’s Office of Legal Counsel said that Congress had made a request with a legitimate legislative purpose to see Trump’s tax returns.

“The Chairman of the House Ways and Means Committee has invoked sufficient reasons for requesting the former President’s tax information,” the opinion said.

As a result, under federal law, “Treasury must furnish the information to the Committee,” the opinion said.

The decision, as CNBC reports, comes more than a year after the U.S. Supreme Court said that Trump’s tax returns and other financial records had to be turned over by his longtime accountants to Manhattan District Attorney Cyrus Vance Jr., because of a subpoena issued as part of Vance’s criminal probe of the Trump Organization.

Of course, what this really means is that the likes of Schiff and Swalwell will ‘accidentally’ – allegedly – leak all of this to WaPo or NYT to pour their ‘expertise’ over and create the narrative required…

Which brings us to the most humorous sentence of the statement:

“Executive Branch officials must apply a presumption that Legislative Branch officials act in good faith and in furtherance of legitimate objectives.”

Oh yeah, lots of “good faith” among that crowd.

Full DoJ Statement:

Tyler Durden
Fri, 07/30/2021 – 13:28

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Entering The Worst Seasonal Period Of The Year… Which Ends With Jackson Hole

Entering The Worst Seasonal Period Of The Year… Which Ends With Jackson Hole

One week ago we showed readers some troubling seasonal patterns: having just emerged from the strongest two-week period of the year which is between July 1 and July 15, markets are about to enter the worst seasonal phase of the year: the month of August.

As Goldman trader Scott Rubner showed, seasonals trend lower all of August, for the 4th worst two-week seasonal period of the year…. before culminating with the Jackson hole central bank symposium when the Fed is widely expected to announce tapering. Furthermore, since 1950, there have been 19 times in 72 years that the S&P was up at least >10% through the first half of the year – like now – and the median return for August specifically, following a strong 1H is typically down -51bps.

The topic of August being the cruelest month for stocks was also the the inspiration behind today’s Chart of the Day by Jim Reid.

The DB strategist first recaps the good news, namely absent a dramatic rout today, the S&P 500 will close out with its 6th successive monthly gain, the longest run since 2018. However, echoing the above observations, Reid points out that since 2010 August has been the worst month for markets in terms of the number of declines with 6 out of 11 being negative.

Still, the credit strategist notes that this is not a pattern that has been seen through longer history “so is it random or has something changed?” Well, yeah, something has changed and one look at the Fed’s balance sheet should explain it. The Fed’s takeover of capital markets meant that markets have become more illiquid since the launch of QE and, as Reid speculates, “perhaps holidays in August exacerbate this so that any negative news that takes place is amplified.”

The two most memorable (and largest declines) took place in 2011 and 2015:

  • The first of those coincided with the row in the US over the debt ceiling. Although that was actually resolved early in the month, the US credit rating was then downgraded by S&P from AAA to AA+. Meanwhile, in the backdrop, concerns over the European sovereign crisis continued to fester.
  • Then in 2015, there was major turbulence in Chinese markets amidst concerns about their growth prospects and the surprise devaluation, which in turn spread to other regions including the US and Europe.

A notable addition was August 2019 when we saw the 2s10s yield curve invert for the first time in the cycle which alongside an escalation in the US/China trade war, encouraged declines as well.

So, what could this August bring, the strategist asks, and observes that according to the bank’s June monthly survey, more people are planning to take holidays this (northern hemisphere) summer than in a normal year so liquidity will likely be even lower than usual.

In terms of events, the August focus will be on Jackson Hole, China’s ongoing regulatory crackdown,  and the Delta variant amongst all the usual macro variables, especially inflation.

His advice to traders: “enjoy your holidays if you’re off but keep half an eye open for any surprises in what are likely to be thin markets.”

 

Tyler Durden
Fri, 07/30/2021 – 13:10

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China’s Big Tech Crackdown Shouldn’t Be Cheered by Antitrust Fans in the West


featurechinapix131209

“Among the richest men in China, few have good endings,” Jack Ma, who disappeared for three months this past winter after getting in trouble with his government, famously said.

The richest man in China and creator of online retail marketplace Alibaba was trying to take his finance giant Ant Group—which owns Alipay, a payment platform with over 80 million merchants and 1 billion users—public back in November. At the last minute, Chinese regulators cracked down on the initial public offering (IPO), sending a clear message to Ma that his purported bad behavior at the end of October, when he had thrown barbs at financial regulators and Chinese banks in a speech, had angered Beijing.

He was made into an example: If you act like Ma, the might of the government will crush you, and your little business empire too.

Ma went into hiding for three months after the sabotaged IPO, but the Chinese government’s tech crackdown was far from over.

This past week, Beijing kept teaching companies lessons about submission to the regime. An onslaught of antitrust and data-security crackdowns have threatened the country’s booming online tutoring software sector, plus ride-sharing tech like DiDi (China’s Uber equivalent) and chat/gaming platforms like Tencent. Cryptocurrency exchanges like Huobi and Okcoin shut down Chinese subsidiaries amid the crackdown. WeChat, which is China’s enormous messaging platform owned by Tencent, stopped registering new users, saying it needed to update the app’s security to comply with new regulations. Some companies, like DiDi, Tencent, and search engine Baidu, will be fined by regulators. All in all, two dozen of China’s top companies have come under heightened regulatory scrutiny that the government says will last for six months as they crack the whip.

Though much of this is under the guise of eliminating purported anticompetitive practices—some businesses have been ordered to end “malicious blocking of website links,” meaning companies like Alibaba will soon have to accept competitors’ payment systems—many theorize that this is really about Beijing using state power to double down on its industrial manufacturing sector, shifting manpower away from apps and platforms that benefit everyday consumers. “Beijing would strongly prefer more investment to flow into what it regards as real technology like microchips, batteries, robotics and advanced materials, rather than continuing to endure what it calls a ‘disorderly expansion of capital’ in areas such as internet software platforms,” writes Nathaniel Taplin in The Wall Street Journal. 

“If you wanted to, you might see the Chinese tech crackdown as simply a Neo-Brandeisian movement on steroids,” writes Noah Smith in his Substack. “But the breadth of the Chinese crackdown suggests a major difference.” Smith continues:

The government is going hell-bent-for-leather to try to create a world-class domestic semiconductor industry, throwing huge amounts of money at even the most speculative startups. And it’s still spending heavily on A.I. It’s not technology that China is smashing—it’s the consumer-facing internet software companies that Americans tend to label “tech”.

Still, it’s astonishing that today’s antitrust crusaders in the West look somewhat positively at China’s blunt-force use of state power to cripple these companies. “China is doing what the U.S. can’t seem to: regulate its tech giants,” reads a Washington Post headline from Wednesday. Though “the government’s hard line has sent Chinese tech stocks plummeting and rippled across the financial world,” China’s “aggressive stance toward anticompetitive practices, speculative and carbon-intensive cryptocurrencies, and gig worker exploitation aren’t necessarily the destructive moves they might seem to U.S. observers and investors.” They may even “be laying the foundation for a more sustainable and vibrant Chinese Internet sector in the decades to come,” writes tech journalist Will Oremus.

But Dan Ikenson, director of policy research at ndp | analytics and economist who specializes in trade policy, tells Reason that “in the U.S., the motivation is at least rhetorically to advance consumer welfare. In China, it may be to reassert the values of the state. [The logic goes that] these technology companies need to know…who’s really in charge.”

Beijing is essentially saying “look, we’re going to inject a lot of uncertainty into the market unless you do what it is we want you to do,” says Ikenson, noting that what China probably “really wants is self-sufficiency or preeminence in semi-conductor, hardware stuff.”

“It seems antithetical to do things that could financially kneecap these firms and chase western investors away,” Ikenson notes.

Looking at how Ma’s business empire has been crushed in the wake of Beijing’s earlier crackdown, the economic ripple effects this exertion of state power may have could be enormous. Alibaba and Tencent stocks, among others, suffered earlier this week.

Consumers in China and the U.S. have good reason to object to antitrust crusaders and their media cheerleaders; it’s consumers who will most likely be hurt by aggressive use of state power to intervene in the market. And in China, unlike in the U.S., there doesn’t need to be much debate or broad political will behind the regulatory push—it can be imposed at any time from on high.

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China’s Big Tech Crackdown Shouldn’t Be Cheered by Antitrust Fans in the West


featurechinapix131209

“Among the richest men in China, few have good endings,” Jack Ma, who disappeared for three months this past winter after getting in trouble with his government, famously said.

The richest man in China and creator of online retail marketplace Alibaba was trying to take his finance giant Ant Group—which owns Alipay, a payment platform with over 80 million merchants and 1 billion users—public back in November. At the last minute, Chinese regulators cracked down on the initial public offering (IPO), sending a clear message to Ma that his purported bad behavior at the end of October, when he had thrown barbs at financial regulators and Chinese banks in a speech, had angered Beijing.

He was made into an example: If you act like Ma, the might of the government will crush you, and your little business empire too.

Ma went into hiding for three months after the sabotaged IPO, but the Chinese government’s tech crackdown was far from over.

This past week, Beijing kept teaching companies lessons about submission to the regime. An onslaught of antitrust and data-security crackdowns have threatened the country’s booming online tutoring software sector, plus ride-sharing tech like DiDi (China’s Uber equivalent) and chat/gaming platforms like Tencent. Cryptocurrency exchanges like Huobi and Okcoin shut down Chinese subsidiaries amid the crackdown. WeChat, which is China’s enormous messaging platform owned by Tencent, stopped registering new users, saying it needed to update the app’s security to comply with new regulations. Some companies, like DiDi, Tencent, and search engine Baidu, will be fined by regulators. All in all, two dozen of China’s top companies have come under heightened regulatory scrutiny that the government says will last for six months as they crack the whip.

Though much of this is under the guise of eliminating purported anticompetitive practices—some businesses have been ordered to end “malicious blocking of website links,” meaning companies like Alibaba will soon have to accept competitors’ payment systems—many theorize that this is really about Beijing using state power to double down on its industrial manufacturing sector, shifting manpower away from apps and platforms that benefit everyday consumers. “Beijing would strongly prefer more investment to flow into what it regards as real technology like microchips, batteries, robotics and advanced materials, rather than continuing to endure what it calls a ‘disorderly expansion of capital’ in areas such as internet software platforms,” writes Nathaniel Taplin in The Wall Street Journal. 

“If you wanted to, you might see the Chinese tech crackdown as simply a Neo-Brandeisian movement on steroids,” writes Noah Smith in his Substack. “But the breadth of the Chinese crackdown suggests a major difference.” Smith continues:

The government is going hell-bent-for-leather to try to create a world-class domestic semiconductor industry, throwing huge amounts of money at even the most speculative startups. And it’s still spending heavily on A.I. It’s not technology that China is smashing—it’s the consumer-facing internet software companies that Americans tend to label “tech”.

Still, it’s astonishing that today’s antitrust crusaders in the West look somewhat positively at China’s blunt-force use of state power to cripple these companies. “China is doing what the U.S. can’t seem to: regulate its tech giants,” reads a Washington Post headline from Wednesday. Though “the government’s hard line has sent Chinese tech stocks plummeting and rippled across the financial world,” China’s “aggressive stance toward anticompetitive practices, speculative and carbon-intensive cryptocurrencies, and gig worker exploitation aren’t necessarily the destructive moves they might seem to U.S. observers and investors.” They may even “be laying the foundation for a more sustainable and vibrant Chinese Internet sector in the decades to come,” writes tech journalist Will Oremus.

But Dan Ikenson, director of policy research at ndp | analytics and economist who specializes in trade policy, tells Reason that “in the U.S., the motivation is at least rhetorically to advance consumer welfare. In China, it may be to reassert the values of the state. [The logic goes that] these technology companies need to know…who’s really in charge.”

Beijing is essentially saying “look, we’re going to inject a lot of uncertainty into the market unless you do what it is we want you to do,” says Ikenson, noting that what China probably “really wants is self-sufficiency or preeminence in semi-conductor, hardware stuff.”

“It seems antithetical to do things that could financially kneecap these firms and chase western investors away,” Ikenson notes.

Looking at how Ma’s business empire has been crushed in the wake of Beijing’s earlier crackdown, the economic ripple effects this exertion of state power may have could be enormous. Alibaba and Tencent stocks, among others, suffered earlier this week.

Consumers in China and the U.S. have good reason to object to antitrust crusaders and their media cheerleaders; it’s consumers who will most likely be hurt by aggressive use of state power to intervene in the market. And in China, unlike in the U.S., there doesn’t need to be much debate or broad political will behind the regulatory push—it can be imposed at any time from on high.

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Watch: Biden Loses It With Reporter Who Dares Question Mask Mandate Flip-Flop

Watch: Biden Loses It With Reporter Who Dares Question Mask Mandate Flip-Flop

Authored by Steve Watson via Summit News,

After decreeing that anyone who works in government or with government will be mandated to get vaccinated, Joe Biden began to walk away from the lecturn without a mask, prompting Fox News reporter Peter Doocy to ask why the flip flop on mandating masks, even for the vaccinated. The question triggered Biden who exploded at the reporter.

“You said if you were fully vaccinated, you no longer need to wear a mask,” Doocy told Biden

“No! I didn’t say that,” Biden snapped at Doocy, blatantly lying.

When Doocy fired back “In May, you made it sound like the vaccine was the ticket to losing the mask forever,” Biden suddenly switched to blaming unvaccinated people for his mask flip-flop.

“That was true at the time!” Biden shouted back, adding “the new variant came along and they didn’t get vaccinated.”

Watch:

He didn’t say it huh?

SHUT UP, IT’S SCIENCE.

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Tyler Durden
Fri, 07/30/2021 – 12:50

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Prof. Nadine Strossen (Former ACLU President) on “Threat of Big Tech and Big Gov Collusion Against the First Amendment”

A substantial interview by Sam Husseini on Substack; an excerpt, quoting Strossen:

[E]ven private sector actors are directly bound by constitutional norms, including the First Amendment free speech guarantee, if you can show that there is in the legal term to describe this is called entanglement, sufficient entanglement between the government officials and the nominally private sector actors, that if they are essentially conspiring with the government doing the government’s bidding, the government can’t do an end run around his own constitutional obligations that way….

I was really shocked at how cavalier and how dismissive the so-called mainstream media was in sneering at Trump’s lawsuit, because it really has to be taken seriously….

The whole thing is much worth reading. For more from Genevieve Lakier, see here; for a quick summary of some of the leading caselaw on the subject, see this post of mine.

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Prof. Nadine Strossen (Former ACLU President) on “Threat of Big Tech and Big Gov Collusion Against the First Amendment”

A substantial interview by Sam Husseini on Substack; an excerpt, quoting Strossen:

[E]ven private sector actors are directly bound by constitutional norms, including the First Amendment free speech guarantee, if you can show that there is in the legal term to describe this is called entanglement, sufficient entanglement between the government officials and the nominally private sector actors, that if they are essentially conspiring with the government doing the government’s bidding, the government can’t do an end run around his own constitutional obligations that way….

I was really shocked at how cavalier and how dismissive the so-called mainstream media was in sneering at Trump’s lawsuit, because it really has to be taken seriously….

The whole thing is much worth reading. For more from Genevieve Lakier, see here; for a quick summary of some of the leading caselaw on the subject, see this post of mine.

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JPMorgan Finds That Fed Has Broken The Most Fundamental Market Correlation

JPMorgan Finds That Fed Has Broken The Most Fundamental Market Correlation

A few months ago investors – especially those working for risk 60/40 balanced and parity funds – freaked out when the traditional correlation between stocks and yields (or inverse correlation between stocks and Treasury prices) flipped, sliding to the lowest on record, as any hope for diversification of equity risk by hiding into government bonds disappeared. And while the correlation has since recovered some of its normal historical pattern as the following chart from Goldman shows…

… a new and just as ominous decoupling has now emerged: that between stocks and investment grade and junk bonds.

In other words, while the low – or inverse – correlation between stocks and bonds has been one of the core anchors of modern finance, allowing cross-asset traders to diversify excess equity risk into bonds, this “basic premise” of modern portfolio consutrction theory no longer works. The culprit? Who else: the Federal Reserve.

As JPMorgan credit strategist Eric Beinstein writes in his latest Credit Market Outlook note, “in recent months, there have been two interesting trends in total return correlations: HG credit has become more correlated with stocks and thereby also more correlated with the HY bond market.”

What’s behind this rising correlation? According to the JPM strategist, there are several drivers:

  • First, the unusual dynamic that stocks are doing very well at the same time that UST yields have declined. This, in JPM’s view, “is the result of so much QE-driven liquidity in the market that investors are buying everything: stocks and bonds.”
  • The second, less likely, driver of persistently elevated correlations according to Beinstein, is exceptionally strong corporate earnings which have driven further total return gains this year alongside higher equities.

To JPM, this stands in contrast to what has traditionally been a key investment consideration for HG credit – its diversifying characteristic versus Equities, in the context of a balanced asset allocation portfolio (similar to the inverse correlation between stocks and treasurys). As Beinstein explains for those who have not taken finance 101, “when equities have risen, yields have often as well, leading to losses on the HG side and vice versa.” But not anymore, and here’s why:

The latest ongoing round of Fed QE appears to have broken this basic premise, with total return correlations between HG and Equities reaching their highest since 2008 on a 3yr trailing basis and since 1997 on a 12m trailing basis (of monthly returns in both cases).

The charts below shows these correlation time series over a very long period of time. They show that over time there have been various correlation regimes. Low to negative correlation has prevailed for most of the past two decades, but there have been several long periods of positive correlation in the past, with the most recent from 2009 to 2011, also following a market crisis.

Both charts above show that while there has been a wide range of return correlation regimes over the past 20 years “the increase in the Fed’s balance sheet (shaded area on the charts below) potentially argues for an extended period of higher correlations.”

Some more observations on how this heightened correlation has played out in the past: HG returned -7.1% in March ’20, before the Fed Covid programs fully took effect, while equity markets weakened sharply as well. To JPM, with UST yields so low “there is a risk that this lack of correlation repeats, with spreads widening more than UST yields may be able to fall.” Another takeaway is that the strong correlation between HG and HY returns argues for owning HY for the greater carry; HG and HY have been 75% correlated over the past 12 months, the highest since 2017. To be sure, it is always dangerous to extrapolate trends in correlation too far.

As Beinstein (somewhat sarcastically)concludes, “the potential implications of these developments are interesting” and explains: “traditionally portfolio theory says that bonds are a diversifier for equity market investments. This has not been the case recently, with the risk that it also remains not the case if/when there is an equity market selloff.“

Translation: in the next crash, everything will go down at the same time and there will be nowhere left to hide… Which is also why the Fed can never again allow a market crash.

Tyler Durden
Fri, 07/30/2021 – 12:30

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“It’s Probably Time To Sell!” – Guggenheim’s Minerd Warns Of Delta’s Looming Threat To Risk Assets

“It’s Probably Time To Sell!” – Guggenheim’s Minerd Warns Of Delta’s Looming Threat To Risk Assets

Authored by Scott Minerd via GuiggenheimPartners.com,

Things Couldn’t Be Better

The COVID Delta Variant’s Looming Threat to Risk Assets.

When asked why Guggenheim frequently comes up with out-of-consensus and sometimes seemingly crazy views, I remind people that our process is driven by data and not opinion which can be affected by emotion or pressures to conform to opinions of others. The consensus is often a warm and fuzzy place where others join, providing the comfort associated with agreement and a sense of community and safety. And if the consensus is wrong at least you have company with whom to lament and console. Nevertheless, none of this pays the bills.

Having opinions outside of the consensus can be a lonely and isolated place without comfort from others while exposing oneself to harsh criticism and moments of self-doubt.  No one can ever be right 100 percent of the time, and there is always some probability that you can misinterpret the data. 

Having just come through the worst pandemic in more than a century, I hesitate to focus on it again. But at the risk of sounding like Chicken Little (as I did in my commentaries from February and March 2020), the evolving data on the Delta variant are extremely disturbing, and dare I add similar to the data we saw last year.

Many of us are unfamiliar with the concept of the Basic Reproduction Number, or R0 (pronounced R naught) as referred to by epidemiologists. R0 is the expression of disease transmissibility that measures how many people will be infected as a result of another infected person’s human interaction. If R0 of an infectious disease is less than 1, the disease will eventually peter out, but if R0 is greater than 1 it will spread.

The R0 for the initial strain of the Coronavirus back in early 2020 was somewhere between two and three, meaning that if someone were exposed to the virus, they would, on average, infect two to three more people. Given that the incubation period for COVID once a person is exposed is about two weeks, multiplying the number of current cases by R0 projects the number of new cases to be expected at the end of the gestation period. For instance, if there were 50,000 new cases of the initial strain of COVID in a population that had never been inoculated, in two weeks one would expect  100,000 to 150,000 new cases. This is exactly the transmission pattern that the pandemic followed last year.

As I have been following the data over the past few weeks, a disturbing pattern has seemed to emerge. The increase in the absolute number of cases on a weekly basis appears to be similar to what we witnessed last summer when COVID infections began to spike going into the autumn. 

How could this be happening when approximately half of all Americans have been vaccinated? If we are experiencing a resurgence shouldn’t the absolute number of new cases be cut in half?  Concerned about what I was seeing, I began researching further by calling various experts in this field.  That is when I discovered the Delta variant had a R0 of six, which is two to three times more transmissible than the initial COVID strain. This means that  in two weeks we should expect the number of new cases for the unvaccinated will be six times that which was observed in the current week. Since 50 percent of the population is not vaccinated, then the Delta variant’s R0 of six is effectively halved and we will have approximately the same number of new cases over the course of the coming months that we would have expected with the original variant if there is no intervention to slow its progression.

Given average daily new cases today of about 60,000, a level that is consistent with what we saw last October when we were deep into lockdown, the number of new cases is projected to be remarkably similar to last autumn. The data are telling us that within six to eight weeks we should see new cases higher than 200,000, consistent with the peak of last December. 

Déjà Vu in the Trajectory of COVID Cases

Source: Guggenheim Investments, Bloomberg. Data as of 7.26.2021.

Today, of course, we have circumstances that many believe will mitigate this outcome. The breakthrough rate of infection is quite low for those who have been vaccinated and those who have the antibodies from having already caught the virus. But we would need to increase the vaccination rate in order to gain further benefits from this condition.

We also know a lot more today about containment measures than we did in early 2020, and we are seeing mask mandates being re-imposed. The Centers for Disease Control and Prevention (CDC) recommended on July 27 that Americans wear masks indoors again, particularly in areas where virus transmission is high, such as in the South and in Southwest states like Arizona, Nevada, Utah, and Wyoming. Cities like Los Angeles and St. Louis are also bringing back mask mandates. Unfortunately, these new mandates are recommended in areas that are probably least likely to follow them.

Given uneven distribution of vaccination rates across the country, the path of the Delta variant will differ by region. The low vax regions, which tend to be areas that make smaller contributions to economic output, like Arkansas and other parts of the South, are seeing a faster rise in cases than high vax regions.

No Matter Where You Live, the Trend Is Not Your Friend

U.S. Daily New Cases Per Million People, 7-Day Moving Average

Source: Guggenheim Investments, Bloomberg. Data as of 7.26.2021.

But even the regions that make larger contributions to economic output, like California, Florida, and Texas, have vaccination rates that are approximately the national average of 50 percent, and they are already sounding the alarm about the rise in cases. For instance, new cases in the state of Florida are at record highs, exceeding the peak of the past year despite having a 50 percent vaccination rate.

COVID Cases Spike in Florida

Florida Daily Hospital Admissions Among 18–39 Year-Olds 7-day average

Source: U.S. Department of Health & Human Services. Data as of 7.24.2021.

There are a few other things that are different this go-around. Policymakers are scared to death that introducing more aggressive containment measures could lead to a full-blown bear market like last March, when risk assets collapsed and credit markets seized up. Therefore investors should expect more support out of Washington, including fiscal stimulus if necessary and a delay in tapering or any monetary tightening on the part of the Federal Reserve. Additionally, the $2.6 trillion increase in savings since the pandemic started should provide a buffer to consumption, as well as help support equity prices even as the Delta variant data turn more negative.

Thinking back to February 2020, when I first started to study the transmissibility of coronavirus, the data scared me. But just as frightening was the cognitive dissonance that prevailed in the markets. People just could not believe that something as bad as a pandemic could possibly happen. Credit spreads were tight and risk assets were priced to perfection, but everywhere you looked there were red flags. Even as I was sounding an alarm on CNBC, the S&P 500 was making a new high.

The cognitive dissonance that we were living with in the winter of 2020 is similar to that of today. Now the risk is that with another surge in new COVID cases, policymakers will either react to it quickly and lock down the economy, or they will not react to it and lock down the economy after the situation is more dire. For the time being, hope appears to be the operative strategy. In all likelihood the reaction function that would keep the Delta variant breakout from turning into something that could become a serious economic problem is not good.

I could be wrong about the outcome, but  if people start to move beyond cognitive dissonance and transition to panic or even simply risk reduction, at current extreme valuations risk assets are in trouble.

The potential resurgence of the pandemic is happening during  a seasonally weak period for risk assets. This increases the probability of downside risk.

Traditionally, August through October are  the worst months for stock market performance, jobless claims are somewhat higher than we were expecting, economic activity like the services PMI is generally slightly lower than we were expecting, and second quarter Gross Domestic Product (GDP) came in below consensus. Normally these data points would not be something that would cause a great deal of concern in terms of the strength and durability of the expansion, but in light of the other data, this could actually be the slow erosion that begins the process of economic deceleration.

At this incipient stage of the spread of the Delta variant and slowing of economic growth, there are enough red flags that prudent investors have to start considering de-risking. Even if the outcome is not as severe as last year, we still can expect significant volatility in the weeks and months ahead as the market prices in a rising level of uncertainty. With the likelihood that COVID will once again adversely affect economic activity, risk assets look extremely vulnerable against this economic backdrop.

The potentially good news is that August traditionally is associated with declines in long-term rates. Our longstanding view that 10-year Treasury rates could continue to decline to 65 basis points or even lower, may prove more prescient than is commonly believed.

Once again we find ourselves outside of the consensus opinion. I fully expect to hear the cat calls and criticism in the coming days, but we have a higher duty to our clients than the fear of public opinion and that is honesty. 
All in all, as far as markets and the economy are concerned, “Things couldn’t be better.” If that’s the case, I guess it’s probably time to sell! 

Tyler Durden
Fri, 07/30/2021 – 12:10

via ZeroHedge News https://ift.tt/3fduEDk Tyler Durden