Month: September 2022

After several weeks of unease, as stocks rampaged higher despite his bearish prognostications, on Monday Morgan Stanley’s permabear strategist, Michael Wilson, returned to his prime, forecasting doom and gloom and predicting that the current market swoon was just the start of the next leg lower. 

To be fair, it is hardly a surprise that one of Wall Street’s biggest bears would forecast that the June to August ramp was nothing but a bear market rally; the question is where (and how) does Wilson see the current slump ending.

To answer that question, Wilson spoke to “Bloomberg Markets” on Wednesday warning investors to brace for more pain as “US stock indexes haven’t yet hit bottom for the year.”

“The index usually is the last thing to fall,” Wilson, who correctly predicted this year’s equity selloff even as almost all of his peers expected the S&P to easily rise and hold above 5,000. “June probably was the low for the average stock, but the index, we think, still has to take out of those June lows.”

That is very notable, because as we explained several weeks ago, when the S&P retraced more than 50% of the drop from the Jan record high to the Jun bear-market lows, there has never been a “bear market rally” that bounce back above the 50% fib and then went on to make lower lows (although as Michael Burry noted last month, he clearly disagreed that this is anything more than a bear market rally. He was right). Indeed, as the table below from CFRA’s Sam Stovall shows, the S&P has never set a lower low in any of the 13 post-World War II bear markets after recovering 50% of its peak-to-trough decline.

In other words, by predicting fresh lows this year, Wilson expects the S&P to do something it has never done before.

“We view 3,400 for the growth recession or soft landing” scenario, Wilson noted, which ironically is even more bullish than Goldman, whose chief equity strategist David Kostin recently predicted the S&P would drop as low as 3,150 in case of a recession. And while Goldman has yet to make a recession its base case for the US economy, it is only a matter of time before the vampire squid is “forced” into admitting that its 5,100 year end target as recently as February was really just one big joke and “because markets”, said target is really 2000 points lower.

Going back to Wilson, the MS strategist echoes what he said earlier this week, namely that trends in operating margins were worse than forecast, while expecting this negative direction to continue.

“P/E multiple is wrong not because the Fed is going to be hawkish, but because the equity market is being too optimistic about the earnings outlook,” Wilson, said adding that “multiples will start to come down as earnings get cut and then somewhere in the middle of that earnings cut process the market will bottom and we think that’s probably between September and December.”

At the low in June, the S&P 500 was trading at 18 times earnings, a multiple that exceeded trough valuations seen in all previous 11 bear cycles since the 1950s. The current P/E for the index sits above 19.

Meanwhile, as the Fed remains laser-focused on economic data, Wilson thinks the central bank is “always going to be late by design” since it relies on two of the most backward looking data points: labor market data and inflation.

“By the time the labor market falls apart, it’s too late,” he said, since by then it will be evident that the US economy is in a recession. “The Fed is relevant but I think we priced most of the Fed pain after the first of the year,” he added.

Finally, while Wilson is rather doom and gloomish on most stock – he, like Zerohedge – has a soft spot for energy, and is why Wilson, whose firm is neutral on the sector, suggested looking at the S&P 500 excluding that industry.

“When energy is doing well it’s usually bad for everything else,” he said, adding the divergence will continue. “Energy is really the antithesis for everything else.”

Are we going to see XOM 200 before it’s all said and done?

Authored by Charles Hugh Smith via OfTwoMinds blog,

As the word suggests, cannibalism won’t end well for those consumed by the infinitely insatiable few.

Cannibalize is an interesting word. It is a remarkably graphic way to describe the self-inflicted destruction of a system by stripping previously functional subsystems to sustain the illusion of system functionality.

Here are some examples.

An Air Force which routinely posts photos of its impressive fleet of 100 aircraft has been cannibalizing parts from 80 aircraft to keep 20 flying. This maintains the useful illusion that all 100 aircraft are available for combat when only 20% are functional, and most of those only minimally so.

An enterprise maintains a substantial cash position even as it loses money every quarter by quietly selling off its most valuable assets. This maintains the illusion of financial strength even as the enterprise is being hollowed out.

The system–whatever you choose to call it–is busy cannibalizing itself to the point of collapse. Neoliberal State Capitalism is a pretty accurate description of every major global player’s system because all seek to benefit from the expansion of markets (Neoliberal Capitalism) and financial instruments (Finance Capitalism), and control these markets and instruments to benefit the few in power at the expense of everyone else (state Capitalism).

Turning transparent, open markets into controlled, exploitable “markets” is the ultimate cannibalization of equally-open-to-all market capitalism which is the foundation of the productive distribution of opportunity.

Turning small-scale, localized finance into centralized / globalized hyper-financialization cannibalizes finance to benefit the few with unlimited access to credit, leverage and monopoly. First you borrow vast sums at low rates of interest that are inaccessible to mere mortals, take a corporation private, indebt the company and use the funds to accumulate mountains of derivatives that leverage the debt 10-fold or even 100-fold, then take the corporation public again, goose the stock and then cash out all the leveraged gains.

The newly public company has been stripmined of core assets and burdened by debt. The financiers cannibalized the corporation to benefit themselves at the expense of everyone else with a stake in the business and the future viability of the enterprise.

This cannibalization is not restricted to the financial realm. True virtue–honesty, trustworthiness, the willingness to accept self-sacrifice for the greater good–has been reduced to ashes behind a glossy, fraudulent facade of virtue-signaling, a facade that masks the cannibalization of the system to benefit the self-congratulatory, hypocritical few at the expense of the many.

Health has also been cannibalized to maximize the private gains of the few at the expense of the many. If we define food as natural products high in nutritional content then very little of what’s being presented as “food” actually qualifies as food because its nutritional content is somewhere between abysmally low and non-existent.

Highly processed products are simulacra of food that hijack our hardwired pleasure responses to heavy concentrations of salt, sweets, fat and spice and crunchy/chewy mouthfeel. The nutritional content of these products is so low and the fat-salt-sugar content so high that they are severely damaging to health on multiple levels.

The unwary consumer who stuffs themselves with these simulacra of food (shall we call it “fud”?) feels full even as their body and brain are starved for real nutritional content and real-food fiber.

Everywhere we look, we find a massive cannibalization effort behind every phony facade, a cannibalization that hollows out the functionality and adaptability of core systems to benefit the few at the expense of the many.

Virtue-signaling isn’t virtue, cannibalized aircraft can’t fly, cannibalized enterprises are zombies awaiting incineration and those cannibalized by the “fud” and healthcare industries cannot become healthy because garbage in, garbage out.

As the word suggests, cannibalism won’t end well for those consumed by the infinitely insatiable few. It won’t even end well for the infinitely insatiable few because they’re consuming the last of their prey so voraciously.

In the meantime, enjoy the self-destructive charms of cannibalized functionality and value.

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Cathie Wood’s ARKK is once again taking on water. 

After a tough end to 2021 and an even worse start to 2022, the active manager’s flagship “innovation” fund had been treading water for the better part of the last month or two while the market rallied on hopes of lower inflation and/or a Fed pivot.

But now, with the market once again looking volatile after Fed commentary dispelled the myth that the Central Bankers are targeting a ‘soft landing’, the fund has seen its largest monthly outflows in a year.

According to Bloomberg today, ARKK saw $803 million in outflows in August and “saw daily inflows in only six days last month”. The report rightly notes that it marks a shift in sentiment surrounding Cathie Wood, as the fund still saw steady inflows despite its plunge late last year and early this year. 

Nate Geraci, president of The ETF Store, commented to Bloomberg: “Ultimately, performance is king. No matter how much conviction a manager has and how closely they stick to their beliefs, if the performance isn’t there, ultimately the outflows will follow.”

He said that some investors have seen the last month of steadying performance from the fund as a goof reason to get out. Meanwhile, the ARKK inverse ETF, the AXS Short Innovation Daily ETF (SARK), has seen its biggest monthly inflow since January. 

One 38 year old investor told Bloomberg that he was drawn into Wood’s fund by her discussion of “future innovations and how disruptive they would be and that these would be enormous profit-making opportunities”. He said he has since lost faith in her vision: “When I entered it, I strongly believed in the vision. Currently, not so much, and since my initial reason for it did not still apply, I realized I should just let it go.”

Recall, we profiled earlier this month that Cathie Wood had sold 1.4 million shares of Coinbase prior to its tie up with Blackrock, which sent shares soaring. 

Another 34 year old investor who has stayed with Wood’s fund lamented: “I did expect her stock selection and management to have been better than if I was buying single stocks. But at this point, I don’t know that that’s actually true.”

Authored by Steve Watson via Summit news,

Border Patrol agents have described White House Press Secretary Karine Jean-Pierre as “extremely dumb” following her claims earlier this week that migrants are not “walking across” the southern border.

As we highlighted, Jean-Pierre sparred with Fox News reporter Peter Doocy who asked her “Somebody unvaccinated comes over on a plane, you say that’s not okay. Somebody walks into Texas or Arizona unvaccinated, they’re allowed to stay?”

The Press Secretary asserted that “That’s not how it works. It’s not like someone walks over,” to which Doocy shot back “That’s exactly what is happening! Thousands of people are walking in a day.”

Colleague @pdoocy is 100% correct. That is exactly what is happening at the border.
Not sure how many more videos we have to show, multiple times a day, to get this point across. And that doesn’t even account for the more than half a million gotaways who slipped thru since 10/1. https://t.co/2f63fXQvzn

— Bill Melugin (@BillFOXLA) August 29, 2022

The back and forth between the two continued Wednesday as Doocy pointed out that there is a Fentanyl epidemic being fuelled by illegal border crossings:

KARINE JEAN-PIERRE: “I just want to talk about how you’re saying that there, you know there just, the border right and how the border, whatever you just stated.”

“People are coming in, fentanyl is coming in, people are dying”

JEAN-PIERRE: “Hold on.” pic.twitter.com/UKnsawzn4u

— RNC Research (@RNCResearch) August 31, 2022

MSNBC: “U.S. drug overdose deaths reached an all-time high in 2021”

“One special FBI agent from San Diego described it this way, saying ‘there is no doubt we are in the middle of a fentanyl crisis at the hands of criminal enterprises transcending our borders’” pic.twitter.com/lB80KDQSiI

— RNC Research (@RNCResearch) August 31, 2022

Fox News reports that Border Patrol agents responded to Jean-Pierre’s comments with disbelief.

“How out of touch can this administration possibly be?” one agent said adding, “Well, I guess this is a new level.”

“There’s only two reasons she said that, and that is either she is extremely dumb or she is flat-out lying and hopes America is so stupid we would believe her,” another agent commented.

The agent continued, “18 USC 1001 says it is a federal crime to knowingly make false statements to the U.S. government. Too bad the government is not held to the same standard as the citizenry, and that is assuming [Jean-Pierre] is not dumb but just a liar.”

Another agent told the network “She is absolutely ignorant to the reality of all the documented footage or just continuing [Homeland Security Secretary Alejandro] Mayorkas’ delusional lie,” adding that “This administration must believe that the American people are fools like their mainstream media comrades.”

“Has [Jean-Pierre] ever visited the actual border to see for herself what is happening? Nope,” another agent proclaimed.

National Border Patrol Council president Brandon Judd urged that “I watch these people walk across the border every single day. We see it. It’s disgusting what we’re seeing. And she knows exactly what’s happening. But she’s deflecting. She’s lying. She knows that the mainstream media isn’t going to cover this issue.”

Judd continued, “They don’t care that hundreds of thousands of people are dying because of drug overdoses because of these illegal immigrants that are coming across the borders illegally, that the cartels then create the opportunities. They don’t care what is currently happening. They know that it’s not hurting them. So, they’re going to continue to lie to the American public.”

The Border Patrol are being told to literally unlock gates for illegal immigrants to walk into the country and get bussed to cities like New York.

According to data from Customs and Border Protection, more than two million people have attempted to cross the border in the 2022 fiscal year so far.

That figure equates to a 22 year high.

Raul Ortiz, The Head of The U.S. Border Patrol has also testified under oath that he believes the Biden administration’s policy of “no consequences” for illegal immigrants trying to enter the country has made the border less safe, caused an exponential increase in people attempting to cross, and has directly caused what he believes constitutes a “crisis”.

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Ravil Maganov, the vice president and chair of the board of directors of Russian oil giant Lukoil, died after falling out of a sixth floor hospital window in Moscow on Thursday, state-controlled media reported. 

Maganov was in Moscow’s Central Clinical Hospital – reportedly a top-notch medical facility that serves senior Russian officials and other elite clients – when he “fell out of the window” and died from his injuries, an unnamed “informed source” told Russian news agency Interfax.

The state news agency RIA Novosti followed up with confirmation from a representative of the presidential administration, which manages the hospital campus. A law enforcement source told the outlet that the death was likely a suicide. 

Maganov’s death comes hours after the US Justice Department announced a warrant to seize a $45 million Boeing aircraft belonging to Lukoil. 

Perhaps most notably, Maganov’s death comes almost six months to the day after Lukoil released a statement expressing “deepest concerns” about Putin’s war in Ukraine. 

Falling short of naming it as an invasion – which is outlawed in Russia – the statement was nonetheless a striking departure from the Kremlin’s messaging. 

Lukoil confirmed Maganov’s death, stating that it came “after a lengthy serious illness,” and there is speculation that the 67-year-old may have taken his own life after receiving bad news about his condition.

However, as Insider notes, Maganov’s death is the latest in a string of unexplained or untimely deaths of Russian magnates connected to the energy industry in the last months.  

Via Global Macro Monitor,

For the past 25 years, markets have depended on central banks to bail them out because of the delusion that “inflation had been vanquished to the dustbin of history.”

Even after the Jay Powell smackdown, we still hear talk of a “pivot,” “close to neutral,” “imminent recession,”  “the lows are in,” blah, blah, blah. 

It is getting close to bonus conversation time, ya’ know.

Inflation is still and will continue to run several laps ahead of the Fed for some time.

There is way too much money – loosely undefined – in the global monetary system.

We are still not confident the Fed has the backbone to back up its tough talk, and may God help the ECB.

Steven Roach gets it. 

The real Fed Funds rate needs to move “10 percent higher from its lows,” which would be through a combination of lower inflation and higher nominal rates.

Go to 1:50 into the video to get the upshot. 

30 years ago, George Soros made $1 billion on a FX trade that many said then smacked of manipulation and the Hungarian was lucky to avoid arrest. Today, his protege was not so lucky.

Neil Phillips, the co-founder and CIO of UK-based hedge fund Glen Point Capital was charged with scheming to manipulate the FX market, the DOJ revealed in an unsealed indictment this morning. The 52-year-old was arrested in Spain on a request from the US earlier this week; he was charged with conspiring to manipulate the US dollar-South African rand (USD/ZAR) exchange rate during thin volume trading on Christmas Day 2017 to trigger a $20 million payment under a barrier options contract.

Glen Point had about $1.5 billion in capital at the start of the year and was originally started by former BlueBay fund managers Jonathan Fayman and Phillips, who ran a $1.4 billion macro hedge fund at BlueBay from 2009 to 2014. The fund was seeking to sell itself to hedge fund Eisler Capital – run by former co-head of Goldman’s global securities unit Ed Eisler – as recently as March, but the deal fell apart “due to disagreement over the level of risk Glen Point’s fund could take“.  The two London-based firms started in 2015 and trace their roots back to macro trading. Eisler has been expanding into other strategies in a bid to compete with industry giants such as Millennium Management and Citadel for capital and talent.

Glen Point received its seed capital from billionaire George Soros, an famous FX and macro trader himself, who is one of the fund’s original backers.

According to prosecutors, Phillips bought a digital option for the USD/ZAR currency pair in late October 2017 that was set to expire on Jan. 2, 2018. The option had a notional value of $20 million and a barrier rate of 12.50 ZAR to USD, and entitled the fund to a $20 million payment if the rate went below 12.50 before the expiration date.

With the option set to expire, Phillips began making spot trades in an effort to push the exchange rate lower late on Christmas Day, while directing a Singapore-based employee of an unidentified bank to sell $725 million in exchange for more than 9 million in South African rand, according to prosecutors. That pushed the exchange rate below the trigger, allowing Phillips to collect more than $15.6 million from the deal, according to the statement.

More details from the DOJ statement:

Damian Williams, the United States Attorney for the Southern District of New York, and Michael J. Driscoll, the Assistant Director-in-Charge of the New York Field Office of the Federal Bureau of Investigation (“FBI”), announced the unsealing of an Indictment charging NEIL PHILLIPS, the co-founder and chief investment officer of a hedge fund based in the United Kingdom, with conspiracy to commit commodities fraud, conspiracy to commit wire fraud, commodities fraud, and wire fraud in connection with a scheme to artificially manipulate the United States dollar (“USD”) / South African rand (“ZAR”) exchange rate to fraudulently trigger a $20 million payment under a barrier options contract.  PHILLIPS was arrested in Spain earlier this week at the request of the United States.

U.S. Attorney Damian Williams said:  “As alleged, Neil Phillips – the co-founder and chief investment officer of a prominent U.K. hedge fund – manipulated the FX market in order to unlawfully obtain millions of dollars in payments for his hedge fund under an options contract.  Market manipulation is pernicious in all of its forms and today’s charges are a reminder that the Southern District of New York will steadfastly investigate and prosecute such activity whether it occurs in the equity market, the FX market, or elsewhere in the financial system.”

FBI Assistant Director Michael J. Driscoll said:  “As alleged, Mr. Phillips maliciously manipulated global markets in order to defraud financial institutions for illicit profit.  The FBI is determined to root out these types of frauds so financial markets remain a level playing field.  As shown today, the FBI will find fraudulent actors no matter where in the world they are located and seek to bring them back to the United States to face the consequences of their actions in our federal criminal justice system.”

The full indictment is here.