Category: zerohedge

Narayana Kocherlakota is a funny guy.

Before abdicating his post at the Minneapolis Fed to former Goldmanite/TARP architect Neel Kashkari, Kocherlakota was the voice of Keynesian “reason” for the FOMC.

Although his pronouncements never measured up to the power of the Bullard, Kocherlakota did call on a number of occasions for MOAR dovishness, noting that if the US economy were to decelerate (which it has), more asset purchases may be warranted.

He’s also suggested on a number of occasions that if the government wants to help the Fed out, it will issue more monetizable debt, thus giving Janet Yellen more paper to buy in a world where central bankers are increasingly bumping up against the limits of Keynesian insanity. 

In October, following the Fed’s “clean relent”, Kocherlakota suggested that the time has come for NIRP in the US. As a reminder, here are the bullets: 

• KOCHERLAKOTA SAYS FED SHOULD CONSIDER NEGATIVE RATES
• KOCHERLAKOTA: TAPERING ASSET PURCHASES LED TO SLOWER JOB GAINS
• KOCHERLAKOTA SAYS JOBS SLOWDOWN ‘NOT SURPRISING’ GIVEN POLICY
• KOCHERLAKOTA: TAPERING ASSET PURCHASES LED TO SLOWER JOB GAINS

On Tuesday, Kocherlakota is back at it, calling for the FOMC to be “daring” and take the NIRP plunge. “Going negative is daring, but appropriate monetary policy,” he wrote Tuesday on his website. However, it’s necessary because fiscal policy makers have made “a terrible policy failure.”

Right. It’s all the fault of an inept Congress, the universal central banker scapegoat for all that ails the global economy. If only they’d issue more debt (because $19 trillion clearly isn’t enough), the FOMC would be free to buy still more bonds, but because lawmakers are recalcitrant, the Fed apparently needs to go negative in order to put the faltering US economy back on the right track and point inflation back to a “healthy” 2%. 

Very worrisome signal for Fed credibility as 5 yr 5 yr forward breakevens plumb new lows … http://pic.twitter.com/OxavyW2cTD

— NRKocherlakota (@kocherlakota009) January 13, 2016

It’s too bad Narayana’s opinion no loger officially matters, because as we’ve seen in Europe and Japan, NIRP is exceptionally effective at banishing the deflationary impulse, boosting wage growth, and restoring growth. 

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Full post from Kocherlakota’s website

Negative Rates: A Gigantic Fiscal Policy Failure

Since October 2015, I’ve argued that the Federal Open Market Committee (FOMC) should reduce the target range for the fed funds rate below zero.   Such a move would be appropriate for three reasons:

1. It would facilitate a more rapid return of inflation to target.
2. It would help reduce labor market slack more rapidly.
3. It would slow and hopefully reverse the ongoing and dangerous slide in inflation expectations. 

So, going negative is daring but appropriate monetary policy. But it is a sign of a terrible policy failure by fiscal policymakers.

The reason that the FOMC has to go negative is because the natural real rate of interest r* (defined to be the real interest rate consistent with the FOMC’s mandated inflation and employment goals) is so low.   The low natural real interest rate is a signal that households and businesses around the world desperately want to buy and hold debt issued by the US government.   (Yes, there is already a lot of that debt out there – but its high price is a clear signal that still more should be issued.)  The US government should be issuing that debt that the public wants so desperately and using the proceeds to undertake investments of social value.

But maybe there are no such investments?  That’s a tough argument to sustain quantitatively.  The current market real interest rate – which I would argue is actually above the natural real rate r* – is about 1% out to thirty years.  This low natural real rate represents an incredible opportunity for the US. We can afford to do more to ensure that all of our cities have safe water for our children to drink. We can afford to do more to ensure that our nuclear power plants won’t spring leaks.  We can afford to do more to ensure that our bridges won’t collapse under commuters.

These opportunities barely scratch the surface.  With a 30-year r* below 1%, our government can afford to make progress on a myriad of social problems.  It is choosing not to. 

If the government issued more debt and undertook these opportunities, it would push up r*.  That would make life easier for monetary policymakers, because they could achieve their mandated objectives with higher nominal interest rates. But, more importantly, the change in fiscal policy would make life a lot better for all of us. 

I don’t think that Chair Yellen will say the above in her Humphrey-Hawkins testimony tomorrow – but I also think that it would be great if she did.  

N. Kocherlakota

Rochester, NY, February 9, 2016

via Zero Hedge http://ift.tt/1PMbFgK Tyler Durden

“Bob, I got a bad feeling on this one.
All right?
I mean I got a bad feeling!
I don’t think I’m gonna make it outta here!
D’ya understand
what I’m sayin’ to you?”

The global markets are clearly in turmoil…again.  I thought I would start a quasi-open thread here on ZH, where we can ask questions and share concerns or strategies with one another. 

So, like my asteroid article from last year, let’s have a little more fun, and use this as a test of our financial-armageddon preparedness. 

First, a definition or two…

The normalcy bias, or normality bias, is a mental state people enter when facing a disaster. It causes people to underestimate both the possibility of a disaster and its possible effects. This may result in situations where people fail to adequately prepare and, on a larger scale, the failure of governments to include the populace in its disaster preparations.

 

The assumption that is made in the case of the normalcy bias is that since a disaster never has occurred, it never will occur. It can result in the inability of people to cope with a disaster once it occurs. People with a normalcy bias have difficulties reacting to something they have not experienced before. People also tend to interpret warnings in the most optimistic way possible, seizing on any ambiguities to infer a less serious situation.

 

The opposite of normalcy bias would be overreaction, or “worst-case thinking” bias,in which small deviations from normality are dealt with as signaling an impending catastrophe.

 

Our “worst-case thinking” test scenario is that we have a repeat of 2008, only an order of magnitude worse, and this time it is truly global, with no markets or fiat currency unaffected.  The trigger is that at 4:00 pm Eastern, today, a coordinated revolutionary attack destroys the FRBNY, BIS, BofJ, and the BofE.   The banks and markets simply do not re-open.

Let’s start by having everyone answer four questions:

1) Are you at all prepared to survive even one month without ANY financial intermediaries?
2) What is one immediate action you would take, NOW, to improve your chances?
3) Are you going to stay put, or likely need to go somewhere?
4) What is your single biggest knowledge gap?

As a reminder…

Acknowledge that nobody really knows if, what, when, or how anything in the future is going to happen…it is all just speculation.  Finally, always remember that, “on a long enough timeline the survival rate for everyone drops to zero,” so don’t get too worked up, or go into debt, just because of this little exercise in paranoia.

BONUS: If you answered no to question one, have you considered that you may be betting your life on a bunch of bankers?

via Zero Hedge http://ift.tt/1LeuovS hedgeless_horseman

While the following summary of key recent headlines suggests a broad array of issues leading to the worst start of the year since 2008…

 

… in broad terms, the biggest worries challenging that bull case in January were twofold: China and commodities, mostly oil. However, over the past week, two new big concerns appear to have emerged. Here, ironically, is Deutsche Bank explaining what these are (for those confused, “tightening in financial conditions in European financial credit” is a euphemism for plunging DB stock among others):

The year continues to be bruising for risk assets and recent attempts at stabilisation have been unsuccessful. After a mild rebound, equities and US credit spreads are again close to their year’s worst levels.

 

In addition to the initial concerns about China and energy, two new issues further weigh on risk sentiment: the slowdown in US growth momentum and the tightening of financial conditions especially in European financial credit.

 

Macro data in the US have been weaker than expected and have raised questions about the sustainability of the recovery. Consumer spending and the services sector, which had been the drivers of growth, have decelerated. Fundamentals there still look sound, but weakness may persist and we have revised our below consensus growth forecasts further down. The Fed turned more dovish in response to the slower momentum and market volatility, and we no longer expect a rate rise in March. Indeed, at this stage it is difficult to see the Fed hiking more than once this year.

 

The Fed was not alone in this dovish turn. The Bank of Japan surprised markets by cutting rates into negative territory, and we actually expect a further cut later this year. As for the ECB, more easing should be forthcoming in March. A deposit rate cut seemed like the best course of action in response to purely external risks, but if the tightening of financial conditions does not subside an increase in the size of the QE purchase programme may be necessary.

 

Our macro outlook for 2016 is broadly unchanged so far, uninspiring but not a disaster – but downside risks have risen both in the US and in Europe. Meanwhile, the absence of new news has moved attention away from China, but the underlying problem remains unresolved. As for oil, volatility is becoming less relevant for macro and markets.

 

Despite this monetary policy support, until US growth, European financial conditions, China and oil concerns are put aside, markets will remain volatile and a sustained change in risk appetite is difficult. Fundamentally, we see 15-20% upside to equities, US credit spreads fairly priced and still believe in the stronger dollar story – but risks remain for all these views. Expectations for a drift higher in rates have not materialised, and dovish central banks and lingering macro concerns will continue to delay this normalisation.

And here is the matrix breaking down all the recent conditions weighing on risk. We wish we could be as optimistic as DB that monetary support from central banks which are now running on fumes in terms of credibility, and that oil, which continues to gyrate with grotesque daily volatility, are “supportive.”

In fact, we are confused that DB is optimistic on central bank support: after all it was, drumroll, Deutsche Bank, which over the weekend warned against any more “easing” from central banks whose NIRP is now weighing on the German bank’s profitability, something the market has clearly realized judging by the price of its public securities.

 

via Zero Hedge http://ift.tt/1PMbFgE Tyler Durden

Submitted by Lance Roberts via RealInvestmentAdvice.com,

Last week, I gave a presentation discussing the current market environment and the economy. As I was preparing the slide presentation, I noted some concerning similarities to a presentation that I gave in 2007. At that time, I was regularly discussing the potential onset of an economic recession, and then like now, I was dismissed as being a “perma-bear.” There was no inverted yield curve, the vast majority of the media saw no recession in sight, and the Federal Reserve continued to tout a “Goldilocks” economy. Yet, a year later, it was quite evident. 

Currently, there is a plethora of commentary strongly suggesting that the U.S. economy is nowhere near recession currently. That may very well be the case, however, by the time the data is revised to reveal the recession it will be far too late for investors to do anything about it. The market, a coincident indicator of economic recessions historically, may already be revealing future economic data revisions will eventually disclose.

With the economy now more than 6-years into an expansion, which is long by historical standards, the question for you to answer by looking at the charts below is:

“Are we closer to an economic recession or a continued expansion?”

How you answer that question should have a significant impact on your investment outlook as financial markets tend to lose roughly 30% on average during recessionary periods.  However, with margin debt at record levels, earnings deteriorating and junk bond yields rising, this is hardly a normal market environment within which we are currently invested.

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Leading Economic Indicators

Durable Goods

Investment

ISM Composite Index

Employment & Industrial Production

Retail Sales

PCE & Imports

Corporate Profits As % Of GDP

The Broad View

If you are expecting an economic recovery, and a continuation of the bull market, then the economic data must begin to improve markedly in the months ahead. The problem has been that each bounce in the economic data has failed within the context of a declining trend. This is not a good thing and is why we continue to witness an erosion  in the growth rates of corporate earnings and profitability.  Eventually, that erosion combined, with excessive valuations, will weigh on the financial markets.

For the Federal Reserve, these charts make the case that continued monetary interventions are not healing the economy, but rather just keeping it afloat by dragging forward future consumption.  The problem now is the Fed has opted, by tightening monetary policy, to not “refill the punchbowl.” Eventually, when the drinks run out, the party comes to an end.

With the Fed hiking interest rates, and talking a tough game of continued economic strength, the risk of a “policy error” has risen markedly in recent months. The markets, falling inflation indicators, and plunging interest rates are all suggesting the same.

via Zero Hedge http://ift.tt/1SdWvmH Tyler Durden

Yesterday it was the irony of “sexist” Sanders’ claims. Today, Hillary’s husband is at it again – making headlines for all the wrong reasons…

As NBCNews reports, in his last appearance before the primary here on Tuesday, former President Bill Clinton said he wishes “sometimes” that he wasn’t married to Hillary Clinton because then he could speak more freely.

“Sometimes when I am on a stage like this, I wish that we weren’t married, then I could say what I really think,” Bill Clinton said before introducing his wife at a rally.

 

He quickly ‘saved’ himself but adding – just a week ahead of Valentine’s Day that – “I don’t mean that in a negative way. I am happy.”

 

At a rally earlier Monday in Manchester, in an apparent response to the attention his comments received, Bill Clinton admitted he had to be more cautious with his words.

 

“The hotter this election gets, the more I wish I were just a former president and, just for a few months, not the spouse of the next one because, you know, I have to be careful what I say.”

With the latest polls showing Hillary Clinton trailing Sanders by 10 or more points in the Granite State, some might argue Bill is doing more harm than good.

via Zero Hedge http://ift.tt/1mpSiOD Tyler Durden

Submitted by Leonard Brecken via OilPrice.com,

Recently, I dedicated some time studying in much further depth the explosion in volatility in the broader market as well as in underlying stocks. We have witnessed unprecedented volatility in E&P stocks in recent months. But the commodity crash is spreading to Biotechs and even the broader technology sector with the implosion of Linkedin stock last week.

First, it is important to note what is driving the incremental volume as overall investor participation in day-to-day trading wanes. Every investor has witnessed a huge decline in overall liquidity, in part due to an investor class disenfranchised by 7 to 8 years of central bank easing and resulting asset price distortions. If an investor can’t rationalize valuation then they simply won’t invest. That has exacerbated price movements by those who are left: shorts and algo-trades (i.e., computers). On the former, it’s clear that the unprecedented level of short positions in the E&P space and in futures market illustrate the drivers of this volatility.

 

 

But more importantly, the price surges on certain short-term headlines – such as a potential OPEC meeting on output changes – leads to spiking prices one day, only to have them revert lower in the days that follow. These are classic tells to short covering. Broadly speaking the advent of computer driven trading that "captures headlines" and trades off it is part of this. But also the computerization of portfolio management through low-cost ETFs has become an even greater force. And as a result, money flows are becoming increasing disconnected from fundamental price movements.

This is occurring institutionally and through retail-based wealth management adoption of new technology. It is why you see individual stocks rise and fall by double digits in a single day when fundamental events like an earnings report are released, like LinkedIn. Simply put, institutions play macro factors, such as central bank policy moves, pulling moneys in and out of ETFs irrespective of underlying stock fundamentals or valuations. It is why large-cap tech stocks have risen to ridiculous valuations, such as with AMZN, only to fall some 30 percent in weeks – again, largely tied to macro money flows.

On the wealth management front it is getting even more ridiculous. The use of robo-advisors, via Schwab and Wealthfront, use asset relocation computer algorithms, which are not based on what’s occurring day-to-day or month-to-month as earning miss expectations. Instead it does so based on historical returns and individual preferences like risk appetite. The problem is that the vehicles of choice are low-cost ETFs that are not actively managed funds by investment professionals who allocate monies based on fundamentals.

What’s more scary is that these robo- or computer-based advisors can’t mitigate short- to medium-term market risk by recommending to raise cash. Many investors probably are just now realizing this as their "advisor" (probably a computer) maintains an allocation based on long-term goals, not on whether we are in a secular bear market, which would suggest de-risking. All of these factors open the door to more volatility and even severe market crashes. We already saw some of that occur last year.

One last point. I wonder if a computer is sophisticated enough to determine the normalized price of a commodity in order to support production growth so as to prevent a price spike in 2017? Somehow I doubt it. More likely would be the tendency to instead weigh the swings in the dollar or Fed policy as important price determinants. For that matter, I’m certain they failed to foresee the bear market we are now in. We are certainly in an era of extreme asset price distortion, driven by central banks and new methods of computerized investing. It isn’t clear that this is a good thing.

via Zero Hedge http://ift.tt/1SdRVEV Tyler Durden

Too much mal-invested, Fed-fueled, hope-driven "if we build it, they will buy it" inventory… and not enough actual demand. This has never, ever, ended well in the past – so why is this time different?

At 1.32x, the December inventories/sales ratio is drasticallyhigher than at year-end 2014 and is back at levels that have always coincided with recessions…

 

And just in case you needed more convincing that all is not well – the current spread between sales and inventories is now at a record absolute high…

 

As Sales tumble and inventories continue to rise…

 

And all because The Fed (ZIRP) and Government (Subsidies) are breathing life into Zombies when they should be dead and gone.

via Zero Hedge http://ift.tt/23ULnPm Tyler Durden

Back in November, for the convenience of those “who can’t wait to take the other side of Goldman’s clients, and thus the same side of Goldman’s prop desk” we previewed Goldman’s “Top 6 Trades” for 2016. Naturally, we explicitly stated that the “the best trades for 2016 will be to… do the opposite of the Top 6 trade recos.“

It’s time for an update, because just 40 full days into 2016, not only has Goldman been closed out on its Top Trade for 2016, namely being long the USD vs both the Yen and the Euro, but virtually all of its other trades: according to a just released update, Goldman has just been stopped out – with a loss – on 5 of its 6 top trades for 2016.

From Goldman:

• Close long USD against an equally weighted basket of EUR and JPY on 9 February 2016, opened on 19 November 2015 at 100, with a potential loss of around 5%.
• Close long 10-year US break-even inflation (USGGBE10 Index) on January 18, opened on 10 November 2015 at 1.60%, with a target 2.0% and a stop on a close below 1.40%, with a potential loss of 21bp.
• Close long an equally-weighted basket of MXN and RUB versus short an equally-weighted basket of ZAR and CLP on 21 January 2016, opened on 19 November 2015 an entry level of 100, with a potential loss of 6.6% including carry.
• Close long 5-year 5-year forward Italian sovereign yields vs short 5-year 5-year forward German yields on 9 February 2016, opened on 19 November 2015 with an entry level of 160bp and a stop loss of 190bp. The spread is currently at 219bp. The potential loss is 49bp.
• Close long large cap US banks through the BKX Index relative to the S&P500 on 11 January 2016, opened on 19 November 2015 at 100, with a potential loss of 5.4%.
• Stay long a basket of 48 non-commodity exporters (GSEMEXTD Index) and short a basket of 50 EM banks stocks (GSEMBNKS Index), opened on 19 November 2015 at 1.12. We will monitor this trade as the ratio between the two indices, with a target of 1.30 and a stop-loss of 1.04, currently at 1.17.

And just like that anyone who followed our suggestion to do the opposite of Goldman’s trade recommendations can take the rest of the year ago.

via Zero Hedge http://ift.tt/1WaQMwa Tyler Durden

Manic.. or Panic?

 

 

We suspect this won’t end well.

via Zero Hedge http://ift.tt/1SdLrG0 Tyler Durden

Via Dana Lyons' Tumblr,

The relatively few leaders (aka, “generals”) that had been propping up the indexes are being systematically taken out.

“The way we see it is that the 6-year bull market is running out of steam, the steam being the number of stocks contributing to its advance. This occurs at the end of cyclical bull markets, ala 1999 and 2007. Once the relatively few stocks that are still propping up the market roll over, there is no foundation of support left to prevent a significant decline. This isn’t doom and gloom propaganda. It’s just part of the market cycle and should be something to monitor closely as we enter 2016.” – Conclusion from our final 2015 post (and perhaps a dozen other posts).

The point of our statement above – and all of the warnings we issued regarding the deterioration of the market’s internals over the past year – was that eventually the few stocks that were propping up the major indexes were going to collapse under the weight of that burden. And at that point, there will be no foundation left across the broad market to continue to buoy the averages. Well, since the start of the year, and in particular over the past week, that inevitable reckoning has been unfolding. Those few leaders left standing at the end of 2016, aka the “generals”, have finally succumbed to the selling pressure that preceded them in the rest of the market.

This includes one of the last men standing: the internet sector. The unraveling of the internet stocks is a relatively recent development – and a swift one at that. This is what happens when there are very few areas attracting almost all of the money flow. Once that avenue too is shut off, the reversal can be powerful as all of the inflows attempt to exit at once. Such has been the case with the internet sector. Just 4 days ago, we posted an chart intraday of the Dow Jones U.S. Internet Index, noting the fact that the index was hitting an all-time high. Well, the index gave up its gains of early that day and has been plunging ever since as the selling has finally reached this sector as well.

 

 

Coupled with that selloff has been the decline – and loss of key support – by one of the popular internet ETF’s, the First Trust Dow Jones Internet Index ETF (ticker, FDN). On Friday, FDN closed below what we determined to be quintuple support around the $62 level, as represented by the following:

• The 23.6% Fibonacci Retracement of the 2009-2015 rally
• The 38.2% Fibonacci Retracement of the 2012-2015 rally
• The 61.8% Fibonacci Retracement of the 2014-2015 rally
• The post-2012 Up trendline
• The 500-day simple moving average

 

 

In our view, this development sticks a fork in the leadership of the internet stocks, at least as it involves propping up the major averages. It very well may be that it is curtains for the internet bull market as well, but that remains to be seen. The next level of importance on the FDN comes in around $52 (see below) and mirrors the support listed above at $62. Failure to hold there would almost cinch the end of the post-2009 bull market for this fund.

• The 38.2% Fibonacci Retracement of the 2009-2015 rally
• The 61.8% Fibonacci Retracement of the 2012-2015 rally
• The 2015 breakout level
• The post-2009 Up trendline
• The 1000-day simple moving average

For now, the evidence is pretty clear. We have been offering warning after warning regarding the deteriorating breadth trend and how it was leading to vulnerability to a serious decline in the stock market. The major averages could only resist the selling pressure for so long on the backs of the mega-cap generals. Eventually, the generals would be taken out as well. They are now being taken out.

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More from Dana Lyons, JLFMI and My401kPro.

 

via Zero Hedge http://ift.tt/1WaQJAd Tyler Durden