Category: zerohedge

Deutsche Bank’s Jim Reid is one of the few strategists on Wall Street to admit he was wrong (although he may still end up being right). Previewing his annual credit outlook titled “Volatility Ahead”, Reid confesses that “we’ve long felt that as we approached 2017 we would likely be at the turning point of the credit cycle. Indeed our forecasts are for wider spreads in our annual outlook for the first time since the Euro Sovereign crisis earlier this decade. However in the course of writing this outlook much has changed.” 

The strategist admits that, alongside virtually everyone else on Wall Street, he became bullish, almost as if overnight on one catalyst: the election of Donald Trump, which universally was panned by most experts (if not here), as a major selloff catalyst. “The forecasts are less bearish than they would have been when we started writing this publication in late October partly because spreads have widened notably since and also the probabilities of a US recession in 2017 have lessened given the possibility of aggressive fiscal spending from the new US administration.”

Naturally, this is the bullish assumption which in the past two weeks has been adopted by all, namely that Trump will unleash a trillion dollar (or more ) debt issuance spree, aka “massive” fiscal stimulus, an assumption which we explained yesterday will soon be challenged by Congressional Republicans. However, more than a simple political hurdle, a greater gating factor is what happens to interest rates, a traditional buffer to risk assets any time the economy is on the verge of overheating: should they rise too high, the entire stock market house of cards falls.

It is here that Reid points out something truly fascinating, namely the interplay between monetary and fiscal policy, however not at the national level, but at the international, where the US is injecting hundreds of billions in debt in the global system, which then is soaked up not by the tightening (for now) Federal Reserve, but courtesy of foreign central banks such as the ECB and BOJ.

This is how the Deutsche Bank strategist explains the “post-Trump” flow of funds:

The main driver of 2017 will again be policy and we’re left with an intriguing combination where the US will likely implement serious fiscal stimulus but without Fed QE supporting it whereas Europe will have no meaningful fiscal stimulus but lots of QE. Japan is a hybrid as it will have monetary policy that easily allows for more expansionary domestic fiscal policy but without clear evidence – at the moment at least – that we’ll deviate too far from the status quo. However there is some evidence to suggest that we’ll effectively have cross border helicopter money.

So there it is: helicopter money is here… and nobody is talking about it because it is not national helicopter money but cross-border, i.e., between central banks, something which makes perfect sense in a globally interconnected world of fungible money, and yet because it does not comply with conventional models, has flown right under the economists’ radar.

So how will the next stage in the global monetary-fiscal experiment look like, one in which cross-border helicopter money has now essentially arrived? Well, the answer will determine if Trump’s attempt to make the American economy great again with trillions in investments (funded by individual investors in Europe and Japan) will succeed or fail.

Assuming the ECB continues sizeable QE all year, and perhaps more importantly if Japan defends the zero 10 year JGB rate, then this could easily help cap UST yields at lower levels than they would naturally be at given President-Elect Trump’s aggressive fiscal plans.

Ultimately, it all goes back to Trump:

Given his protectionist leanings it’s perhaps ironic that the President-Elect’s biggest global allies might end up being the BoJ and the ECB. The biggest risk to his plans and to market stability might be if the BoJ decides to abandon the defense of zero and/or if the ECB signals a taper earlier than expected.

Ironic indeed, that Trump – who hopes to effectively isolated the US from the world – will be the one president more reliant on the rest of the world than any of his predecessors to bring his plan to fruition.

Finally, as to what all this means for the year ahead, Jim Reid is cautious. Here is his forecast.

We therefore think it’s a transitional year ahead with many contradictions. Transitional because with debt so high across the globe, expansionary fiscal policy without your own domestic central bank propping up yields is risky and only half way towards what still seems the inevitability of broader helicopter money. Much might depend on the ECB and BoJ continuing current large scale purchases of government bonds. For 2017 we think they will but the debate over the funding of increases in US (and perhaps UK) fiscal spending will increase over the next 12 months and is likely to lead to more volatility as the financial market swings from believing that fiscal spending will lead to higher growth, inflation and higher yields for a period of time to perhaps then believing that global central banks are likely to cap the rise in yields.

To be sure, this is a simplified model: one should also consider the risk of ongoing (and record as we showed) US Treasury liquidation by the likes of China and Saudi Arabia. Should they proceed to sell off US paper more aggressively, all bets are off. Which means that Trump will have to remain friendly with not only Japan and Europe, but also China and Saudi Arabia.

Can he do it? For now the market is happy to answer in the affirmative, although as Jim Reid concludes, “the days of one-way dovish monetary policy, with no fiscal spending and low volatility in asset prices and growth are likely over.”

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Submitted by Jeffrey Snider via Alhambra Investment Partners,

It is an apparent contradiction to where we can describe a desperate money supply situation yet stock prices, in particular, are at all-time highs or at least outwardly unconcerned about all of it. This isn’t anything new, however, as noted last week where we may be witnessing the third or fourth iteration of the same repeating cycle. It was, after all, the S&P 500 registering a brand-new high in October 2007 more than two months after liquidity (“dollar”) problems were discovered to be widespread and systemic.

There aren’t any perfect or perhaps even good analogies by which to explain these differences, these periods where, as I described them, risk markets in particular convince themselves that the low rumblings of trouble are exclusively overseas or trivial concerns. That was 2013 and into 2014, a period that on more reflection feels a very apt comparison to what we find now. Stocks absolutely surged throughout 2013 even though the conditions that eventually made the “rising dollar” were obvious and apparent at that time.

One analogy I can make is that of an engine with a single piston that is misfiring, mistimed or maybe not properly seated in its cylinder so that you hear an audible and distinct knocking sound as the engine is running. That problem piston is the localized “dollar” problem that registers a perhaps ambiguous warning, one that can be disregarded since an engine, and thus your car (as the economy), will continue to run even with a misfire – for a time. The longer the piston remains off, the greater the strain it puts on the rest of them in both mechanical and efficiency factors. If it goes on long enough, you will be forced to deal with it and not by choice and not in a favorable outcome.

The way that “inefficiency” propagates throughout the “dollar” system is also complex and takes time to figure. In mid-2013, that “massive dollar warning” as I called it at the time took a full year to become the “rising dollar” even though it had in between crept up and into various market problems including interest rate swaps and especially overseas currencies. CNY, for example, turned lower in January 2014 which was an especially significant development especially as to how far this disruption might have by then progressed. It was just written off as China being China, entirely unrelated to US circumstances. Even the shocking dropoff in growth was totally set aside as something completely related to snow and cold.

But even by July 2014 as these seemingly “overseas” problems started to crop up in domestic issues, they were still largely ignored in places such as stocks. The economic stats were ambiguous (without calibrating for “dollars”), meaning that there wasn’t a clear progression easily established from “dollars” to markets to economy. That wouldn’t happen, of course, until late 2014 and early 2015, and even at this relatively late stage stocks and economists were unimpressed; the S&P 500 hitting and being close to new highs, eerily reminiscent of October 2007, all the way to around late May that year.

Beside the complexities that require time to feed disruptions through to widespread function, stocks have their own distinct sources of liquidity and funding that aren’t always tied to interbank conditions and what we find in global money markets. Not only have the corporations themselves been huge, non-economic buyers, so, too, have global central banks and not just of their own local stocks but also in a great many jurisdictions that have added huge positions in US equities. The same has held for sovereign wealth funds, as well as personal savings distributions here and abroad.

In other words, it isn’t until these separate sources are directly forced to confront these contradictions that new highs turn into waves of selling and liquidations. Liquidations are, after all, the combination of illiquidity plus selling; without the latter there isn’t much that will occur of any interest. It was that way in October 2007 as well as throughout 2013 and then again in the first half of 2015.

It is this repetition that gets overlooked because each time people want to believe that “it” cannot possibly continue any longer. People believe that either central banks will finally guess correctly given enough chances, or things will just improve because depressions have been banished by credentialed economists from the mainstream vernacular. And still the process repeats: overseas problems that are ignored in the almost-euphoria of central banks doing something “different” at least partly in response; the first triggers of doubt that those “overseas” problems might not be strictly overseas; more obvious data and prices that show festering problems becoming more widespread; further confirmation that economy as well as money and markets are being significantly affected; and finally more easily observed statistics or indications that leave no doubt. It is only close to the end of that evolution where the mainstream, including stocks, is finally confronted with its obliviousness.

In 2007, the process was greatly condensed by the speed at which “dollar” problems themselves progressed, as a matter of quick revulsion and then panic. In the “rising dollar”, it was spread out over a large period of time because the “dollar” itself was a function of banks slowly withdrawing resources not in a panic but in a series of calculated responses to the reverberations throughout “overseas” and back again. It wasn’t until early 2015 that it finally started to resemble a landslide.

The ability at which the “market”, largely stocks, as well as economists can rationalize these developments cannot be overstated. I had produced throughout 2015 an enlarging list of those excuses which proved to be a very good indication itself for this process going from strictly overseas “dollar” to blatant, global economic disruption:

1. Dollar doesn’t matter, indicates strong economy relative to the world
2. Dollar matters for oil, but lower oil prices mean stronger consumer
3. Manufacturing slump doesn’t matter, only temporary
4. Manufacturing declines are consumer spending, but only a small part
5. Manufacturing declines are becoming serious, but only from overseas
6. Maybe domestic manufacturing recession too, but the rest of the economy is strong
7. Rest of the economy might not be as strong as thought, but only an “earnings recession.”

By the time #8 appeared, which was growing acceptance that full-blown recession might be a very good possibility, it had been two years since the “dollar” first warned about the next global leg down. That difference, however, is important to keep in mind; 2014 was supposed to be the year that the global recovery was initiated, the long-awaited liftoff, but was instead beset by seemingly minor disturbances supposedly unrelated to the US as at least the “cleanest dirty shirt.” In truth, the US was just as dirty a piece of clothing as all others; the only actual difference was that by overlooking the grime the mainstream was able to wallow once more all over again in confirmation bias.

The fact that stocks are at record highs as the “dollar” disrupts still another time is as regular as the seasons. Stocks are fueled by hope which takes time for the “dollar” to disprove through first its own systems and then full economy; as it has time and again.

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India’s decision to ban Rupee notes above 500 has become the financial media’s topic du jour.

However, India is in fact just the latest in a series of countries to ban physical cash in higher denominations.

The war on cash has been going on since at least 2014 if not earlier.

To that end, France has banned any transaction over €1,000 Euros from using physical cash. Spain has banned transactions over €2,500. Uruguay has banned transactions over $5,000.

Outside of these countries Canada, Norway, Denmark, Australia, New Zealand, Ireland, Mexico and other nations are currently either proposing or rolling out programs that will ban cash from certain transactions if not completely.

And if you think this is impossible in the US, think again. A campaign is already underway to do precisely this.

Indeed, the number of high profile financial “experts” who have called to ban higher bill denominations if not banning cash altogether grows almost weekly.

As former Chief Economist for the IMF, Harvard’s Ken Rogoff is one of the most listened to economists in the US.

Rogoff’s current book is literally titled The Curse of Cash.

Then there’s former Secretary of the Treasury Larry Summers. Summers has called repeatedly to stop producing large denominations of cash in the US. Indeed, despite the chaos this policy has caused in India he coauthored a piece stating:

”…nothing in the Indian experience gives us pause in

 recommending that no more large notes be created

 in the United States, Europe, and around the world.”

Even current Fed Chair Janet Yellen, arguably the single most powerful financial insider in the world, stated during a Q & A session “cash is not a convenient store of value.”

Regardless of your personal views on Rogoff, Summers and Yellen, they are some of the most powerful and connected financial insiders in the world.

If they are calling to ban cash you better believe that discussions on how to do it are taking place behind closed doors at the highest levels. The fact that insiders at this level are openly stating this tells us that a campaign to ban cash in the US is already underway.

Indeed, we've uncovered a secret document outlining how the Fed plans to incinerate savings in the coming months.

We detail this paper and outline three investment strategies you can implement

right now to protect your capital from the Fed's sinister plan in our Special Report

Survive the Fed's War on Cash.

We are making 1,000 copies available for FREE the general public.

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http://ift.tt/1eaWvC8

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

 

 

 

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After a day of frenetic OPEC headlines being all that matters, oil traders may briefly focus on fundamentals as API reports an unexpectedly large build in gasoline inventories ( +2.68mm vs 900k exp). Overall crude, cushing, and distillates saw inventory draws which left wti slightly lower post-data.

 

API

• Crude -1.28mm (+1mm exp)
• Cushing -140k (-100k exp)
• Gasoline +2.68mm (+900k exp)
• Distillates -350k

After last week's across the complex builds, it was ony gasoline that saw a build this week (which fits seasonally)

 

A rollercoaster day in WTI thanks to OPEC headlines

 

Rather notably, as Bloomberg points out, the prompt WTI M1-M2 spread widened to -90c today, the biggest discount since April. "There’s plenty of supply around,” Zahir say, adding that a deepening contango encouraging more oil to go into storage.

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We're hearing lots of after-the-fact explanations for why Trump won the election. The most common interpretation of events is that many citizens had a view of the country that pundits, pollsters, and the Clinton campaign missed. But somehow Trump accurately identified the mood of the people – especially in the Great Lakes region – and crafted a message to fit their emotions.

That explanation of events fits the observed data. Trump’s priorities do seem to match what polls tell us people are thinking and feeling. Or at least enough people feel that way to give Trump the Electoral College win. In this view of the world, Trump is a populist who has good instincts about what people want to hear.

But as Dilbert Creator Scott Adams has been detailing for the past year, people can be living in different movies while physically inhabiting the same spacetime…

Trump’s priorities do seem to match what polls tell us people are thinking and feeling. Or at least enough people feel that way to give Trump the Electoral College win. In this view of the world, Trump is a populist who has good instincts about what people want to hear.

 

But as I have been teaching you for the past year, people can be living in different movies while physically inhabiting the same spacetime. In your movie, Trump might be a populist as the experts are saying. But in my movie, Trump is a Master Persuader. And the script for my movie fits the observed facts just as well as yours. Maybe better.

 

The Master Persuader filter says Trump didn’t identify and match the preferences of the people so much as cause them to think the way they are thinking. My filter on the election says that Trump’s skill for persuasion could have given him the victory with DIFFERENT policies than the ones he championed – such as Bernie Sanders policies. And Trump would look like a populist in that case too.

 

Keep in mind that most voters are handcuffed to their party’s candidate. That guarantees that most elections will be close, no matter who runs. The winner is the candidate who can move perhaps 5% of voters from column A to B. And the Master Persuader had a year-long election cycle and total media exposure to get that minor task accomplished. This is why I predicted Trump’s win a year before it happened.

 

I don’t believe reality is something the human brain can understand. We didn’t evolve with the ability to see reality for what it is. Evolution only cares if we survive and procreate. In this case, people who think Trump is a populist can have babies, and so can the people who think we elected Hitler, and so can the people who think Trump is a well-meaning Master Persuader. That’s three different movies. Evolution doesn’t care which worldview is right, if any. It only cares that we can make more babies. And we can.

 

Still, it might matter who has the most “useful” movie among us. The Master Persuader movie did a good job in predicting Trump’s success. It also predicts Trump moving to the middle, persuading Pence to be more LGBTQ-friendly, and good relations with other countries. That’s the movie plot I see coming.

 

But some of you are in a movie that is dark and dangerous.

 

Perhaps you see a world in which the next Hitler just came to power. Some of you see a clown with no skill coming to power because his populist message was effective. Those are scary movies compared to my feel-good film. If you could switch to my movie, and lose nothing but your anxiety for the future, wouldn’t you want to do it? In my movie, we have lots of Trump success ahead and none of the dark possibilities will come to pass.

So, Adams asks rhetorically, how can you tell whether or not you are in the wrong movie?

I’ll give you a few clues. Consider…

If Trump didn’t win because of his persuasion skills, which other Republican candidate can you imagine beating Clinton?

 

You might be thinking that Clinton’s email problems and the Comey announcements made her an unusually weak candidate, and that means any sane Republican could have beaten her. But you’d be wrong. The reason that the emails, the Comey decisions, and Wikileaks were so effective is that Trump had been labelling Clinton “Crooked Hillary” for months. That created the confirmation bias trap that made everything Clinton ever did sound suspicious. None of the other candidates would have crafted such a perfect persuasion trap.

 

I also have a hard time imagining any other candidate going after Bill Clinton so hard that it took him out of the game. Was Jeb going to do that?

 

If you believe Trump’s skill for persuasion wasn’t the key variable in his win, you have to imagine some other candidate beating Clinton with the same set of policies as Trump. Personally, I can’t imagine it.

 

If you think Trump is the next Hitler, or a clown who got lucky with his populist message, you have to ask yourself why the stock market and the dollar are both up following the election. The smartest money-managers in the world have already abandoned their old movies and jumped over to movies they see as more useful for making money, apparently.

 

If you think Trump is the next Hitler, you have to ask yourself why every major world power has already said they think they can work with him, no problem.

 

If you think Trump is a lucky incompetent who inherited money from his father, you have to explain why he has succeeded in real estate, reality TV, and now politics. Can incompetent people win that bigly in three different arenas while everyone is watching?

 

If you think Trump has anti-semite advisors, you have to wonder why his son-in-law Jared Kushner hasn’t noticed any of that and is working hard for Trump.

 

If you think Trump is a racist, you have to wonder how he learned to act so well that he could be in this picture looking as non-racist as a person can look.

 

 

And if you think Trump is any or all of the things you heard from the mainstream media, you have to wonder why they were so thoroughly wrong about the one thing that can be measured objectively – the election results.

 

 

You might also wonder why the anti-Trump protests are petering out. If a real Hitler came to power, would people get tired of walking around outside to protest?

 

The biggest demographic group opposing Trump – including the ones on the street – are young people. Objectively speaking, young people are the dumbest people within every demographic group. I was dumber when I was younger. So were you. So is everyone else. Ask yourself if it is a coincidence that the dumbest people within every demographic group lean in the same direction.

 

The Master Persuader filter says that young people have not yet experienced multiple situations in which the media scares the public over nothing. To them, the fear of Trump is real because the Internet and the media says it is real. To people my age, we have seen one fake media scare after another. We don’t believe in fake scares the same way that that young people do because we’ve been through it so many times.

As the election season fog begins to clear, most people will start to see Trump as an unconventional president whose policies conform to the preferences of the governed. But that simple movie is boring. I invite you to join my movie, in which each of us has a small role in making America Great Again. You just have to find your part.

It’s a good movie. I think you’ll like it.

Read more here…

*  *  *

You might like reading Adams' book because evolution.

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"Most Shorted" stocks have now risen for 12 of the last 13 days – the biggest short squeeze since the March 2009 lows…

 

While The Dow is doing great post-election, we note that Goldman Sachs alone accounts for 27% of all the gains…

 

Small Caps don't seem to care that their cost of funding has surged…

 

HYG (HY Bond ETF) rallied to a crucial intersection of 50- and 100-DMA…

 

The long-end continues to outperform…

 

The Treasury Curve steepened modestly today after plunging for 10 days…

 

Not flashing the same bullish signal that bank stocks believe in…

 

US Financials credit risk pushed on to one-month highs… desite the exuberance of shareholders…

 

The Dollar Index declined for the 2nd day in a row…

 

Gold, Silver, Copper, and Crude are all higher on the week…

 

The crude complex was complete chaos today as OPEC headlines were all that mattered ahead of tonight's API data…

 

 

 

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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.

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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.
 

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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.

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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.

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