Author: admin

What just one week ago seemed ludicrous – Trump picking his former arch nemesis Mitt Romney as Secretary of State – now appears imminent. According to a WSJ report, the President-elect is leaning toward asking former Massachusetts Gov. Mitt Romney to be his secretary of state.

In a less surprising pick, Trump is allegely also likely to name retired Marine Gen. James Mattis to serve as secretary of defense in his administration, and South Carolina Gov. Nikki Haley is the leading candidate to be the next ambassador to the United Nations, the people said.

However, one thing that is said to be delaying Trump’s decision (and announcement) about the secretary of state is an internal tug of war between supporters of Romney, and those urging the selection of former New York Mayor Rudy Giuliani. A third group is pressing the president-elect to keep searching for candidates. According to the WSJ, Trump views Romney “as the prototypical choice to be the nation’s top diplomat, and a group of advisers inside the transition are pushing him to select the 2012 Republican presidential nominee. Two people said Mr. Trump is inclined to select Mr. Romney.”

The history between Trump and Romney is familiar: the two were very critical of each other during the 2016 campaign, but both men are now said to be ready to put that behind them. Vice President-elect Mike Pence, also a former governor, greeted Mr. Romney personally outside the Bedminster, N.J., golf club where Mr. Trump was interviewing prospective appointees over the weekend, a rare courtesy shown to the guests. On Sunday, Mr. Pence said the session between Mr. Trump and Mr. Romney was “a very substantive meeting.”

Still, an internal faction within the Trump camp is still pushing for Rudy Giuliani, who was one of Mr. Trump’s earliest supporters and has openly campaigned for the job. Giuliani, after leaving the mayor’s office, created a security consulting firm that has contracts with some foreign governments, including Qatar and Colombia.

Former House Speaker Newt Gingrich, speaking to reporters after meeting with Mr. Trump on Monday, said “there are huge advantages to Rudy Giuliani frankly, I think that, if you want someone who is going to go out and be a very tough negotiator for America and represent American interest in the way that Trump campaigned, I think that probably Rudy is a better pick and has the right temperament.”

For now no decision has been made yet: Jason Miller, a spokesman for Trump, told the WSJ “absolutely no decision has been made” on secretary of state. However, one is likely imminent, and should Trump pick the definition of the establishment GOP, the president-elect may have to once again explain just which “swamp” he was referring to, when he said he would go ahead and drain it.

via http://ift.tt/2f3Z2TF Tyler Durden

Deutsche Bank's long-held analogy of "plate-spinning" central bankers acting like the old popular circus act where the performers would spin plates on numerous poles and run between them in order to re-spin before they came crashing down to the ground, has held perfectly for several years. Over the years more plates have been added and central bankers have had to run faster and faster between them to stop gravity taking over. 

But now Deutsche Bank is concerned:

Up to this year we’ve felt confident that they could continue this art for the foreseeable future and thus keep asset prices elevated as a result. We accepted that such policy wasn’t conducive for growth and prevented reform/creative destruction, but was positive in the short-term for most assets tied to monetary policy in some valuation form or another.

 

However 2016 has been a landmark year as we seem to have reached a point where the faster the plates are spun the more the unintended short-term consequences. The banking sector – especially in Europe and Japan – has been severely constrained by negative rates and flatter curves. If the sector was healthier they could withstand such an attack on their profitability but with inherent underlying weakness and with a need to build better regulatory defenses, monetary policy has started to be a sizeable negative. Given how important banks are to the wider economy then it’s no longer a win-win when central banks ease policy further. In fact in some cases the opposite outcome could materialise.

And assets are starting to misbehave…

Figure 9 shows the Stoxx 600 bank index against 10 year Bunds and then against bank loans to non-financial corporates (with the bank index lagged by 12m). 2016’s decline in Euro Stoxx bank equity (down –14% YTD, -36% at the YTD lows on 6 July 2016) does not bode well for 2017 bank lending on this measure. However the reversal seen since the lows is perhaps offering some hope and reflects a view that policy makers are appreciating that a change is needed. Since September 2016 we’ve seen the BoJ target the yield curve more than targeting a specific volume of QE, and more recently the US election result brings hopes of a shift in policy emphasis. The ECB is going to find it the hardest to shift policy but even here it’s becoming more evident that there is great resistance to cutting rates any further or expanding QE.

 

 

The risk is that some damage to the European economy has already been done by the woes of the banking sector in 2016. The rightmost chart of Figure 9 perhaps backs this up by looking at the ECB’s Euro area bank lending survey for Q3 (published on 18 October 2016) which showed the first expectations of tighter standards for lending to corporates in nearly 3 years. At this stage it is a small subtle shift and to put things in perspective, the previous quarter saw 95% of reporting banks expecting to leave standards for lending to enterprises unchanged over the next 3 months, 3% to ease somewhat and only 2% to tighten somewhat. In Q3 2016, the corresponding numbers were 90%, 3% and 7%.

 

Is this another small sign that monetary policy is becoming counterproductive for the economy? Although standards are still expected to be net eased to households for both consumer credit and house purchases over the next quarter, the rate of easing was less than in Q2 and getting closer to zero.

The unintended consequences of central bank actions are starting to become clearer…

It is not clear that the ECB has any inclination to change direction regardless of the US election result but it feels increasingly unlikely that they can ease further without causing collateral damage. The path of monetary policy is becoming more and more complicated. So it seems highly unlikely that the ECB will increase QE or cut rates further in 2017. Although we think they’ll struggle to taper in numerical terms in 2017, we think that they will announce a ‘soft taper’ at their December 2016 meeting where they will remove the deposit rate floor and thus allow them to open up more shorter dated securities for purchase which would reduce the average duration of their portfolio.

 

Alongside recent events in the US, this may ensure that both yields and the yield curve have already hit their low/flattest levels for this cycle in Europe and thus provide some relief for banks and the economy. It could even be that we’ll never again see the lows in yield we saw in late September 2016. These were lows never previously seen through hundreds of years of history. Even with the respite, given the lag in the correlation seen in the middle chart of Figure 9, we have to be wary that some damage may have already been done to lending in 2017.

 

A proper taper will be difficult when the ECB have yet to meet their economic objectives but at the same time the removal of the depo floor may only give the ECB an extra 6 months of being able to buy German Bunds out to January 2018 before they run into constraints. So unless we see radical policy change in December 2016, this theme will continue to be a focus over the next 12 months with tapering speculation never far off the agenda especially with the potential change in policy mix in the US. It sounds like a recipe for increased volatility and higher risk premiums.

 

With regards to the BoJ, they have at first glance moved towards tapering as they have shifted away from a specific volume of monthly purchases and are instead targeting the yield curve and vowing to keep 10 year JGB yields close to zero. Our Japanese strategists estimate that this could reduce the annual purchases from 80 trillion to around 60 trillion Yen and Kuroda has also openly suggested that a reduction of purchases is likely. However following the outcome of the US elections, the BoJ’s policy could be tested if yields continue to rise on a global basis. Will they (i) defend the zero percent 10 year JGB yield and buy more bonds than they and the market expected when the new policy was announced or (ii) will they amend policy? Again the uncertainty is high and will likely have big implications for global bond yields and asset prices generally.

 

What’s more certain is that central banks will still be significant buyers of assets next year, just not as much as in 2016. This may be slightly more positive for bank related risk but might be slightly less positive for other assets previously propelled by asset purchases. For example our US rate strategists believe the new BoJ policy could be worth 20-25bps in terms of higher US yields and the anticipated changes from the ECB might add a further 10bps all other things being equal. President-Elect Trump’s spending plans add another 40bps according to their model. So since September the fair value level of yields have started to rise even though QE still remains at high levels around the world.

 

Figure 10 shows the YoY USD change in global central bank assets across nine major economies. 2016 will likely be seen as a local peak for aggressive monetary policy with the risks to this graph perhaps on the downside as the ECB is more likely to taper than add to QE.

 

 

2017 won’t represent a radical shift in central bank policy around the globe but the momentum and sentiment shift away from peak QE / negative rates may be greater than that simply implied by the numerical shift, especially with the new US political administration.

So while hopeful that we’re starting to break free from the previous policy regime, Deutsche Bank reminds readers that…

…the global financial system remains broken and extremely fragile. Secular stagnation trends are everywhere. The world has too big a debt burden for the current growth environment.

 

We would feel far more comfortable if the world went through a huge creative destruction period where zombie, inefficient debt was allowed to default – thus ‘right-sizing’ the ratio between debt and GDP. However we’ve long accepted that this is highly unlikely to happen outside of perhaps a future break-up of the Euro.

 

The debt is too systemic for policymakers to be able to let it default without a big negative feedback loop on growth that could easily lead to a depression. The problem with current policy – which at a global level has become more and more extreme on the monetary side – is that it simply props up the failed system without offering much in terms of nominal growth stimulus.

 

So you actually prolong the ‘zombie economy’ with the added problem of the weaker banking systems (e.g. European) starting to buckle under the weight of negative yields and QE in extremis. So monetary only policy was starting to risk the health of the system it was trying to prop up. Not a positive development for growth.
 

via http://ift.tt/2g0lQkm Tyler Durden

Via NorthmanTrader.com,

Markets have been on a tear since election night. The principle reason: The perceived notion of another set of stimulus packages hitting markets during the next presidency. Specifically the notions of corporate tax cuts and increased infrastructure and military spending have sent financial and industrial stocks flying higher resulting in new highs on many indices.

The global central bank inspired multiple expansion that has transpired in 2016 as a result of over $2.2 trillion in annual QE programs and continued low rates found another boost in the new found belief that more easing is coming in form of a Trump presidency. The result: Both stocks and yields have risen dramatically in just a couple of weeks on an expected reflation trade.

The main themes that have emerged: 1. Lower taxes are good for earnings and will stimulate the economy. 2. A large infrastructure bill and increased military spending is good for corporations that supply such services and hence are good for employment. Ergo buy stocks. Inflation is coming and that’s good for banks and hence good for stocks.

This all sounds good on paper and this is all it is at the moment as nothing of the sort will come to fruition until at least 2017, but these items are clearly being priced into markets.

But there is a big problem with all of this: None of the policies priced in actually look to address the promises made.

Let’s start with the budget. And note the current budget is already running at a deficit of $616B for the current year.

Firstly one has to recognize the difference between the discretionary budget and the mandatory budget. The mandatory budget is made of obligations that can’t really be touched. Social security and medicare chiefly among them. These outlays look like this:

The Trump campaign ran heavy on helping the middle class and making America great again. While the definition of the latter statement seems open to interpretation cutting social security and medicare seem somewhat incompatible with helping the middle class. So consider the mandatory budget fixed.

You then have the discretionary budget. This is where Congress and the president can actually make adjustments in practical terms and guess what? More than half of the discretionary budget is traditionally already allocated to the military:

That’s right. So if Donald Trump wants to increase military spending and introduce a major infrastructure bill he has only 2 choices: Cut existing programs and/or raise the debt further.

What will be cut? More specifically what will be cut to offset the increases in military spending?

The answer is you can’t cut enough to increase military spending, introduce a $1 trillion infrastructure spending bill AND cut taxes on top of that.

So you must raise debt.

Here’s the problem and it’s twofold.

First, the debt is already scheduled to increase going forward. According to the CBO it’s only a matter of time before we hit $30 trillion in debt and that’s with current spending plans. Deficits as far as the eye can see.

And much of these deficits are driven by pension gaps that keep eating holes into the federal budget. But of course discretionary budget items do their bidding as well. As do interest payments on the debt.

And this is all before the new team comes in and wants to introduce the items it has talked about. So the future is clear: Massive additional debt required.

Which brings us to the second part of the problem: Markets want it both ways: Increased deficit, excuse me, stimulus spending, and higher inflation as well.

This will cramp everybody’s style because higher rates require higher financing costs of debt which already run at a clip of $432B annually with close to record low rates. These payment obligations will rise as rates increase.

And so here we are now:

As should be obvious: Record levels of debt have only been sustainable because of artificially low rates.

And it’s not only a government issue. Corporations, thanks to low rates, have also loaded up massively on debt. In fact, net debt to EBITDA is near record highs:

Yet the impact of higher rates may reveal the hidden weakness on balance sheets. From Barron’s:

“Corporations also face their own rate reckoning, with $2 trillion in debt coming due in the next two years. “The increase in borrowing costs will reveal the fallacy that balance sheets are strong and companies are awash in cash,” Steph says. The cash, she points out, is concentrated among the top 25 companies in the S&P 500. The bottom 250 have only $90 billion of the index members’ $1.6 trillion.”

But don’t worry they say. Lower corporate taxes will make everything wonderful. More earnings for companies is good for the economy and will spur growth. Really?

Let’s test that thinking a bit. First of all let’s please all recognize that effective corporate tax rates are at their lowest levels ever. Ever is a long time. And the fact is they have been on the decline for decades:

Note the inverse relationship between ever lower effective tax rates and ever increasing government debt. Corporations have legally, with creative accounting teams, lawyers, tax shelters and decades long lobbying efforts gained favorable tax treatments that individuals can only dream about. In fact, many corporate giants pay little to no effective corporate taxes whatsoever. Some indeed pay none. And some of these companies are some of the most profitable companies in America.

So who will benefit from even lower corporate taxes?

First of all it’s not that clear cut to assume that companies will benefit on day one from sudden tax cuts:

Citigroup CFO says cut in US tax rate could bring $4 billion charge

Still it is the markets’ expectation that US corporations can repatriate cash and see benefits to the bottom line.

Will this help the economy? Will it expand hiring? Increase CAPEX and investment in the future? Don’t assume so. Goldman Sachs already has the growth market pegged: More buybacks baby.

“A significant portion of returning funds will be directed to buybacks based on the pattern of the tax holiday in 2004,” the team, led by Chief U.S. Equity Strategist David Kostin, write. They estimate that $150 billion (or 20 percent of total buybacks) will be driven by repatriated overseas cash. They predict buybacks 30 percent higher than last year, compared to just 5 percent higher without the repatriation impact.”

This chart highlights the emerging proportions:

So who benefits? Well, the same folks that always benefit. The top 1%. In fact, this is also what an analysis of the proposed tax cuts suggests:

“If you look at the most wealthy, the top 1 percent would get about half of the benefits of his tax cuts, and a millionaire, for example, would get an average tax cut of $317,000,” she says.

 

But a family earning between $40,000 and $50,000 a year would get a tax cut of only $560, she says, and millions of middle-class working families will see their tax bills rise under Trump’s plan — especially single-parent families.

 

“A single parent who’s earning $75,000 and has two school-age children, they would face a tax increase of over $2,400,” Batchelder says. That’s if they had no child-care deductions; the increase in taxes comes partly because the Trump plan eliminates the $4,000 exemption for each person in a household.”

I don’t know what “drain the swamp” means. But so far the beneficiaries of an anticipated Trump presidency are the same people that have benefited from all previous presidencies: The rich. And based on the stock market’s reaction that is exactly who is anticipating to benefit the most:

Specifically the banks which have epitomized “the swamp” to many Americans, having been convicted of consumer fraud with billions of penalty judgements for years on end as a result of taking advantage on unsuspecting American consumers, these same banks have benefited the most from this recent rally. Indeed just this year Wells Fargo got into trouble for running a deceptive program and the CEO was forced to resign just a few weeks ago. And Republicans want to deregulate the banks again? The answer is a giddy yes:

“There is a joke going around here that if I’d have known how good Trump was going to be for Wall Street, I’d have campaigned for him,” one Goldman Sachs executive told the outlet. “What people are reacting to is this incredible cultural shift. People thought it might be 10 or 15 years until regulators stopped demanding heads and now all of a sudden you can envision it happening overnight.”

The irony should not escape anyone. Nor should the fact that everything that is being proposed does one thing primarily: Add to the national debt for the benefit of the 1%. Sound familiar?

Worried about all that new debt? Don’t. After all our new president is the king of debt:

“I’m the king of debt. I’m great with debt. Nobody knows debt better than me,” Trump told Norah O’Donnell in an interview that aired on “CBS This Morning.” “I’ve made a fortune by using debt, and if things don’t work out I renegotiate the debt. I mean, that’s a smart thing, not a stupid thing.”

 

“How do you renegotiate the debt?” O’Donnell followed up.

 

“You go back and you say, hey guess what, the economy crashed,” Trump replied. “I’m going to give you back half.”

In plain speak that’s called default. That is of course the track record of Donald Trump the business man. How Donald Trump as president will deal with the reality of government remains to be seen. It may require some reading up on the issues. But then that’s self admittedly not his strong suit and don’t expect this to change. His priority appears to be, well, himself:

“He has no time to read, he said: “I never have. I’m always busy doing a lot. Now I’m more busy, I guess, than ever before.”

 

Trump’s desk is piled high with magazines, nearly all of them with himself on their covers, and each morning, he reviews a pile of printouts of news articles about himself that his secretary delivers to his desk. But there are no shelves of books in his office, no computer on his desk.”

Before you think I’m a disgruntled Hillary supporter: I am not. I did not think she was the right person to handle the big structural issues our country is facing. She was too much ingrained within the establishment and had voiced no agenda to tackle them. I’m just a citizen that sees major trouble brewing based on my ongoing assessment of the math and the structural issues that plague the global economy and I see no practical answers coming from either political party, nor do I see an earnest desire to even have a conversation about it.

In fact, I do think the country needs a wake up call to get serious about tackling the big issues. The early assessment here seems to suggest that Donald Trump is not interested in tackling the big issues, but rather will be exacerbating them under the guise of wanting to fix them. In that sense he may end up bringing about the wake-up call that is needed.

For now the stock market is celebrating with anticipation of all the perceived good things to come. But every honeymoon ends. And so far there is no evidence to suggest that the middle class will benefit. Indeed the evidence so far suggests that Donald Trump’s election promises will end up being what voters are used to getting whenever they are promised change and better times ahead: Empty promises:

But hey it’s early in the process and we have plenty of time to see what they will actually do. But do we have the time?

One has to wonder. But there are signs that reality is already making itself noticed:

“It was supposed to be a big, beautiful infrastructure bill. But President-elect Donald Trump’s pitch for a $1 trillion upgrade of the nation’s roads, bridges, tunnels and airports is already running into potholes as it meets reality in Washington.

 

The overwhelming sticking point, as always, is how to pay for it.

So it’s back to hope. Ok. For now stocks have priced in a nirvana and perfection where debt doesn’t matter. I suspect they will not put up well with empty promises. But who knows, maybe magic will happen. After all if the 2016 political season has proven anything it is this: Anything is possible.

But buyers here at $SPX near 2200 seem to think that’s a 100% guarantee. Best of luck.

via http://ift.tt/2geDPX6 Tyler Durden

One can argue that few industries have “suffered” more under central planning than billionaire hedge fund managers, and as 2016 goes on, so does the suffering continued.

It is no secret to regular readers that over the past decade, hedge funds have not only underperformed the market, but have failed to generate “alpha” since 2011.

As we have shown year after year, the centrally-planned “New Paranormal” has been a disaster for traditional alpha generation, since with all traditional fundamental relationships flipped upside down thanks to the Fed, the only way to generate outsized returns for one’s investors (and one’s offshore bank account) was to be massively levered beta, or merely wrong.

Sadly for the 2 and 20 crowd, in the third quarter this troubling trend continued, with Goldman’s latest Hedge Fund Trend Monitor reporting that in te first 9 months of 2016, the hedge fund industry generated a mere 4% return, underperforming the broader market’s 9% YTD return and as Goldman notes, “on pace to lag the S&P 500 for the eighth straight year”

Compared to last quarter’s update, when we showed hedge funds returning only 3%, implies that in Q3 the Hedge Fund industry added a grand total of 1% in P&L.

 

Worse, the average macro fund returned a negative 1% YTD, and just as curious, the index of 50 most shorted companies continues to outperform the 50 most popular names YTD, +8% vs +7%, suggesting many hedge funds continue to be squeezed on popular bearish bets.

Another observation: “hedge funds and mutual funds both entered 4Q 2016 with large overweights in Info Tech stocks, which outperformed S&P 500 by 650 bp through October, but have lagged by 300 bp  in the past week as funds reallocated post-election.” Which likely explains the recent underperformance of tech names, which were offloaded by hedge funds as a result of a dramatic sector rotation by the “smart money” into industrial and bank shares.

Based on 13F filings, at the start of 4Q 2016, hedge funds held a net weight of 24% in the Info Tech sector, their largest net allocation to the sector in over a decade. Tech stocks similarly make up 30% of our Hedge Fund VIP basket. After outperforming the S&P 500 by nearly 11 percentage points from July through October (+13% vs. +2%), Tech stocks have lagged by more than 300 bp this month as investors rotated to other opportunities post-election, suggesting that many hedge funds were again slammed in the violent rotation out of tech names. This, according to Goldman, means that “the latest hedge fund and mutual fund filings highlight Info Tech stocks as particularly vulnerable in terms of positioning.”

Sure enough, as the WSJ observes, “tech stocks — the biggest winners from July through September — have run out steam over the past two weeks. The group had gained just 0.7% from the election through Monday, compared with 2.7% for the S&P 500. Financial stocks have climbed 11%, led by banks, and industrial ones are up 5.6%.”

What was the catalyst for the dramatic sector rotations? Why Donald Trump, who caught a record number of hedge funds on the wrong foot, and who were forced to scramble out of tech (and duration/dividend) into anything inflation-related: “tech stocks have lagged by more than 300 bp this month as investors rotated to other opportunities post-election. At the same time, large allocations to the Health Care and Financials sectors, particularly among their largest and most popular positions, have helped offset the damage from lagging Tech stocks. The Health Care and Financials sectors rank as the third and fourth largest net weights in the aggregate hedge fund equity portfolio (17% and 11%). Together the sectors account for 28% of the VIP basket. The combination of rising rates and improved regulatory outlooks has boosted the sectors post-election.“

Another driver of potential outperformance: repatriated cash which would be used to buyback shares:

Although their foreign exposure has been a headwind to recent performance, an opportunity to repatriate overseas cash at a low tax rate could benefit some of the most popular hedge fund long positions. Nine of the basket’s constituents rank among the top 50 S&P 500 companies based on dollar value of earnings permanently reinvested overseas (ticker: GSTHSEAS), including two of the top three companies (MSFT and AAPL). A tax on previously untaxed foreign earnings has been proposed by both House Republicans and President-elect Trump and, if passed, could affect the performance of stocks with large overseas cash balances – as would potential changes in tax treatment of future foreign revenues that House Republicans and President-elect Trump have also proposed.

Still, in light of the post-election repositioning fireworks, what we find remarkable is that despite these unprecedented moves in what so many have called a “stock-pickers’ market”, hedge funds are picking stocks at the slowest pace on record. According to Goldman, hedge fund position turnover fell to 27% during 3Q 2016, a new record low. Turnover of the largest quartile of hedge fund positions, which account for two-thirds of hedge fund long holdings, fell to 14% (Exhibit 9). Turnover declined most in the Health Care, Consumer Discretionary, and Information Technology sectors.

We would expect this number to jump in coming quarters as the entire investment playbook is rewritten under an inflationary regime.

Finally, for all those curious, here is the latest GS VIP list, i.e., the Top 50 most popular longs…

 

… and the list of 50 stocks representing the most important short positions.

Traditionally, being long the most shorted hedge fund names and shorting the most favored ones has been a source of double digit alpha ever since 2011, but of course this time may be different.

via http://ift.tt/2f3I5ZD Tyler Durden

This is just becoming farce now…

1154ET – *OPEC COMMITTEE SAID TO DEFER ISSUE OF IRAN, IRAQ CUTS TO NOV 30

1436ET – *OPEC TECHNICAL MEETING ENDS, WAS SUCCESSFUL: OPEC STATEMENT

1436ET – *IRAQ GOV. SAYS `WE ARE AGREED AND HAPPY’ AFTER OPEC CMTE MTG

Having earlier seen half of OPEC say “no deal” or “unfair”, OPEC sources now say that the meeting has ended “successfully”… Whatever that means…

via http://ift.tt/2gey2AQ Tyler Durden

Submitted by Adam Taggart via PeakProsperity.com,

via http://ift.tt/2f3Njo5 Tyler Durden