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The kneejerk – USD up, stocks down, bonds down – reaction has faded and with The Fed statement pitching its dovish tent back in domestic concerns while keeping a hawkish eye on global developments. The Long bond is back in the green but it appears machines are busier running oil stops higher and dumping gold.
Rate hike odds rose but very modestly from 21% pre- to 23.5% post-FOMC.
USDJPY stops were run high and run low…
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Since Yellow-Yellen's March dovefest, stocks have rallied, China has stabilized, and while economic data has been weak in general – jobs and inflation (which is what The Fed claims to care about) have been positive. So how does The Fed make June a live meeting, tilt hawkish, and still protect the narrative of recovery and the sanctity of their equity market (which is all that really matters)…
So "risks" are "balanced" and The Fed is "data depedent" again – rate-hikes are back on the table, however here is a key change: instead of monitoring "inflation developments" the Fed is now "monitoring inflation indicators and global economic and financial developments" which is effectively the same as the struck language on "global economic and financial developments."
Pre-Fed: S&P Futs 2084, 10Y 1.888%, EUR 1.134, Oil $44.65, Gold $1249
Before today's statement, rate hike odds…
Since The Fed's Dovish-er than expected March meeting, Oil has been the big winner. Bonds & Bullion bounced off unchanged the last 2 days with stocks up 4%…
Let's hope they don't get too hawkish…
Additional headlines include:
* * *
Full Redline Below:
With 576 words, the statement was just fractionally longer than the March FOMC statement:
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In order to attract and retain small and big business alike, it has long been a tactic by states and local governments to offer tax breaks – just ask Elon Musk who has been a happy recipient of taxpayer generosity over the years. However, as times have got touch in Obama’s “recovery”, government subsidies of at least $50 million have plummeted by 70% Bloomberg reports.
As an example, tax breaks for companies such as Boeing, IBM, and Toyota were part of $17 billion from state and local governments in 2013. In 2014 that number dropped to $7 billion, and last year plummeted to just $4.8 billion.
The reasoning may be twofold.
The first, is that new accounting rules will force state and local budgets to account for tax incentives given to business as lost income in order to stay compliant with GAAP. This could upset the public, knowing just how much each business in their area didn’t have to pay in taxes, and thus potentially increasing property taxes.
Another reason could be the fact that it’s political season, and a lot of the rhetoric on the television and radio has been centered on everyone paying their “fair share” and reducing “crony capitalism.”
Those that are critical of the incentives say corporations have gotten away with not living up to their end of the bargain.
“Corporations have long gotten pretty much whatever they wanted under the guise that they are doing something wonderful for the community or society as a whole,” wrote Tim Noonan of West Bend, Wisconsin, in a November 2014 letter to the board, arguing for greater disclosure of corporate incentives.
“This is rarely ever the truth, they get what they want so a politician can make themselves look good for a reelection.”
While admittedly more transparency and accountability is always better, and tax incentives are certainly not a guarantee a lasting partnership between business and community, there are real consequences for those areas that won’t cut tax reduction deals with local businesses. There will always be a state or town willing to cut taxes in some way, shape, or form in order to lure new business in.
The St. Louis Rams moved their entire franchise to Los Angeles as a result of the inability of the local government to come to an agreement on incentives.
Those that are on the receiving end of a business packing up and leaving suffer greatly as jobs, net taxes, and any community investment leaves with it. As as was so eloquently put by Kenneth Thomas, a professor at the University of Missouri-St. Louis:
“There’s an ebb and flow to subsidies, but somewhere down the line there will be another recession, and we’ll see what state and local governments do.”
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Moments ago, former House Speaker Dennis Hastert was sentenced to 15 months in prison in his hush-money case by a judge who called him a “serial child molester” and ordered him to enroll in a sex-offender treatment program.
As NBC reports, Hastert, 74, was accused of abusing four boys between the ages of 14 and 17 when he was a coach at Yorkville High School decades ago. While he was not charged with any sexual crimes because of the statute of limitations, but he pleaded guilty to making illegal cash withdrawals to pay off one of his accusers.
Hastert pleaded guilty to illegally structuring bank transactions between 2010 and 2014 to avoid having them reported to regulators. Prosecutors say he was using the money to pay off a man known only as Individual A, who says Hastert molested him on a wrestling camp trip. Individual A is not testifying at the hearing and sued Hastert this week to collect the remainder of the $3.5 million he says he was promised after he confronted Hastert.
The ex-politician, who arrived in a wheelchair, had no reaction as U.S. District Judge Thomas Durkin handed down the sentence, which includes a $250,000 fine and two years supervised release, in a Chicago courtroom.
Earlier, Hastert listened as one of his accusers broke a lifelong silence and testified about being molested in a locker room in 1979 and as the sister of another accuser demanded he “tell the truth.” Before he learned his fate, Hastert apologized “to the boys I mistreated when I was their coach” but pointedly did not use word abuse. “What I did was wrong and I regret it,” the onetime Republican power broker testified. “They looked up to me and I took advantage of them.”
One of the ex-students, Scott Cross, told the court that when he was a senior in high school in 1979, Hastert took off his shorts and sexually fondled him during a massage after a workout. “As a 17-year-old boy I was devastated. I tried to figure out why Coach Hastert had singled me out. I felt terribly alone,” Cross, who is called Individual D in court papers, testified. “Today I understand I did nothing to bring this on, but at age 17, I could not understand what happened or why.”
“I’ve always felt that what Coach Hastert had done to me was my darkest secret,” the father of two told the judge, adding that he was not sure until he took the stand that he could bring himself to talk about the incident.
“I wanted you to know the pain and suffering he caused me then and still causes me today. Most importantly, I want my children and anyone else who was ever treated the way I was that there is an alternative to staying in silence.
The sister of another accuser, who died of AIDS in 1995, took the stand to tell Hastert he stole her brother’s innocence.
“Don’t be a coward,” Jolene Burdge, sister of Steven Reinboldt, told him. “Tell the truth. You were supposed to keep him safe, not violate him,” she added. “I always wonder if you’re sorry for what you did or if you’re sorry you got caught.”
The answer should be obvious.
Asked by the judge if he had sexually abused Cross, Hastert said he did not remember doing it but would “accept his statement.”
He was more defensive about Burdge’s molestation claim. “It was a different situation, sir,” he said when the judge asked he had abused Reinboldt. When the judge pressed him, Hastert added, “I will accept Ms. Burdge’s statement.”
Hastert, who had a stroke several months ago, has cited his health problems as a reason he should be sentenced to probation. Prosecutors recommended a six-month sentence in accordance with the sentencing guidelines.
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Submitted by Axel Merk via Merk Investments,
Is gold, often scoffed at as being an unproductive asset, more productive than cash? If so, what does it mean for asset allocation?
There are investors that stay away from investing in gold because it is an 'unproductive' asset: the argument points out gold doesn't have an intrinsic return, it doesn't pay a dividend. Some go as far as arguing investing in gold isn't patriotic because it suggests an investor prefers to buy something unproductive rather than investing into a real business. In many ways, it is intriguing that a shiny piece of precious metal raises emotions; today, we explore why that is the case.
Each investor has their own preference in determining asset and sector allocations. Some investors prefer to stay away from the tobacco, defense or fossil fuel industry. During times of war, countries have issued bonds calling upon the patriotism of citizens to support the cause. At its core, however, investing, in our assessment, boils down to returns; more specifically, risk-adjusted returns. The "best" company in the world may not be worth investing in if its price is too high. Similarly, there may be lots of value in a beaten down company leading to statements suggesting profitable investments may be found "when there's blood on the street."
Gold is not only unproductive, but has a storage cost and is expensive to insure. So what could possibly be attractive about gold?
We wonder where all these patriotic investors are hiding. That's because if we look at long-term yields, they are near historic lows throughout the developed world, with many countries showing near zero or even negative yields on governments bonds. Differently said, many investors rather get a negative yield on the safest investments available to local investors (disclaimer: U.S. regulatory point of view, foreign government bonds aren't considered "safe") than invest in so-called productive assets: a corporate bond may qualify as a 'productive asset' if a company uses the proceeds to invest in future ventures; yet, in today's environment, corporations frequently issue bonds to buy back shares. Why do investors prefer "nothing" – as in no or negative returns – over investing in productive assets? And if investors really like negative returns, is gold – that doesn't have an intrinsic return – suddenly attractive?
On April 7, Fed Chair Yellen joined an "International House" panel with all living former Fed Chairs: Bernanke, Greenspan and Volcker. When Bernanke was asked whether we need more fiscal stimulus as monetary policy may have reached its limits, we interpreted Bernanke's long-winded answer as agreeing to the basic notion that it would be helpful to ramp up fiscal spending. Little coverage was given to Greenspan's response: "No!" Focusing on the U.S., he said unemployment is close to what's historically considered full employment: if fiscal spending were to be ramped up, we might get a short-term bump in growth due to the induced government spending, but we would foremost get wage inflation and increased deficits that will come back to haunt us. Instead, he argued, we need policies that increase productivity: when you are near full employment, the way you grow an economy is to increase the output per worker. He suggested the best way to increase productivity is to encourage investments.
While we acknowledge that not everyone agrees with Greenspan's policies over the years, we believe he is dead right on this one. So why the heck aren't investors investing? Why are they buying bonds yielding just about nothing?
There may be many reasons why investors are on strike. Current low inflation, in our view, is a symptom, not a cause of that. At its core, we believe investors don't think they get rewarded for their risky investments. Our analysis shows that investors in recent decades have – on average – focused on ever more short-term projects. That is, projects that require massive investments with an expected return in twenty years rarely happen these days.
In his book "Civilization: The West and the Rest," economic historian Niall Ferguson makes the point that what differentiates the West from 'the Rest' is the rule of law. When there's certainty over the future rules and regulations, i.e. when the rules of the game are clear, investors are more likely to invest. We believe that rule of law has been deteriorating, but not necessarily in the most apparent way:
Neither government deficits nor regulations are new phenomena, of course. But we believe it's concerns over trends like these that are key to holding back investments. It's often argued that the U.S. can print its own money and, as a result, will never default. Possibly, but that doesn't mean the U.S. won't induce inflation or find other ways to tax investors. And while there are solutions to any problem, investors must be convinced that those that benefit risk takers will be embraced. Eurogroup chief Dijsselbloem, at the peak of the Eurozone debt crisis phrased it well, arguing that we cannot expect long-term investments if we don't tell people where we want to be in ten years from now. While a crisis is apparent when Greek government bonds rattle global financial markets, the global strike by investors to invest in productive assets may be just as alarming.
But aren't demographics at least partially to blame for the low rates? It cannot be entirely a view about fiscal deficits and regulations? Sure enough, we agree that demographics put downward pressure on real rates of return. Yet, we see this as part of the same issue: we could introduce policies that encourage workers to be productive longer rather than retire at age 65. Instead, we have policies in place that have enabled many to go into early retirement by claiming disability benefits. With increased life expectancies throughout the world, we feel retirement at age 65 has become a major fiscal burden.
As we have pointed out many times in the past, it's not gold that's good or bad. Gold doesn't change – it's the world around it that does. We believe an investment in gold should be looked at in the context of an overall portfolio construction. There, one should look at the expected risk and expected return of any asset one considers including in a portfolio. Please read our Gold Reports for more in-depth analysis of gold's low correlation to other assets that might make it a valuable diversifier; you may also want to read our recent analysis Gold Now as to why we think gold might be good value for investors. For purposes of this discussion, however, we like to put gold in the context of productive assets. Our interpretation of the bond market suggests investors are shunning productive assets these days. Part of that may be concerns by investors that they will not be rewarded, with part of that due to what may be excessive government debt and regulations; another attribute may well be valuations, as we believe monetary policy has pushed many so-called productive assets into what may be bubble territory. Following this line of reasoning, reasons to hold gold in a portfolio may include:
In contrast, reasons to reduce gold holdings in a portfolio may include, with respect to the above bullet points:
Phrasing it this way, it's not a surprise that an investment in gold often has a political dimension. We caution, however, that gold is anything but political. As such, it may be hazardous to one's wealth to make investment decisions based one's political conviction. Instead, investors may want to take a step back and acknowledge that investors in the aggregate give a thumbs down to investments as evidenced by the low to negative long-term yields in the U.S. and other countries.
Before we settle the discussion on gold being 'unproductive,' let's clarify that cash isn't productive either: the twenty-dollar bill in your pocket won't earn you any interest either. To make cash productive, you need to put it at risk, if only to deposit it at a bank. With FDIC insurance or similar, such risk might be mitigated for smaller deposits. Gold is no different in that regard: to earn interest on gold, one needs to lend it to someone. Many jewelers are only leasing the gold until they find a buyer for the finished product; to make this happen, someone else is earning interest providing a loan in gold. Many of today's investors don't like to loan their gold, concerned about the counter-party risk it creates. The price such investors pay is that they don't earn interest on their gold, a price those investors think is well worth paying.
The reason we started this discussion wondering whether gold may be more productive than cash also relates to the fact that real rates of return on cash, i.e. those net of inflation, may be negative in parts of the world. There are many measures of inflation and some argue that government statistics under-represent actual inflation. As such, each investor might have his or her own assessment where inflation may be. However, when real rates of return on cash are negative, it may be appropriate to say gold is more productive than cash.
In summary, anyone who thinks that we are heading back to what might be considered a 'normal' economy, might be less inclined to hold gold, except if such a person believes that the transition to such a normal economy might be a bumpy ride for investors (due to the low correlation of the price of gold to equities and other assets, it may still be a good diversifier in such a scenario).
However, anyone who thinks history repeats itself in the sense that governments over time spend too much money or over-regulate, might want to have a closer look at gold. There may well be a reason why gold is the constant while governments come and go.
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Forget DOE data, it’s time to buy ahead of The Fed!!
We suspect this won’t last as the algos are struggling to catch the high stops.
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And the hits just keep on coming. One day after AAPL reported its most disappointing earnings in years, and the first ever decline in iPhone sales in history, the Santa Clara County Sheriff’s Office is reportedly investigating a body found at Apple’s Cupertino headquarters according to NBC.
Acting spokesperson Sgt. Andrea Urina said she has no other other information at this time. Sheriff’s investigators are on scene. The Santa Clara County Fire Department said crews were called to the scene but were then waved off and never went on campus.
As BMO adds, deputies were called to the company’s corporate headquarters on Wednesday morning after a person was found dead, but only few details were immediately available. Multiple police vehicles could be seen at the campus.
Authorities have declined to provide further details, and it is unclear whether the person is an employee of Apple. The cause of death was also not immediately known and is under investigation by the Santa Clara County Sheriff’s Office.
The Apple Campus is the corporate headquarters of Apple Inc., located at 1 Infinite Loop in Cupertino, California, United States. Its design resembles that of a university, with the buildings arranged around green spaces, similar to a suburban business park.
Developing story
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Earlier this month we reported that the move higher from the February lows was not only the result of the biggest squeeze ever – something that had been known before – but that something surprising had emerged: according to JPM’s Prime Broker desk, it was only ETF covering that was driving the squeeze as recently as of the end of March.
To follow up on this, a massive short squeeze continues to prop up the market with yet another move higher throughout April.
Courtesy of the latest report by JPM’s Prime Brokerage, we now know two reasons why there was such a large move in April. Hedge funds accelerated the pace of ETF covering, only this time single stock names have also joined the party. In other words, ETF covering is removing hedges, and single stock covering is getting HF’s into a net long position.
JPM also notes that HF net long exposure is now above the 12 month average, and although the “smart money” is typically in the know on such things, it remains to be seen just what the catalyst will be that pushes markets higher, especially in the face of a dismal earnings season, especially when considering that the very same smart money is, according to Bank of America, selling stocks for a record 13 consecutive weeks..
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Having abandoned its equity and credit bubbles, China recently opened the spigots on an unprecedented commodity bubble, as we explained in “Beware The Bubble In China’s Domestic Commodity Market” and “The Stunning Chart Showing Where All The Commodity Gains Have Come From.”
None of that however does justice to what is really taking place. So for an extended view we skimmed a piece by Citi released overnight, titled “Hold onto Your Hats – Explosion in Chinese Commodities Futures Brings Unprecedented Liquidity, Untested Volatility” in which we read the following stunning finding: “trading volumes in Chinese exchanges further spiked, with SHFE rebar and DCE iron ore futures becoming the No.1 and No.3 most-traded contracts around the world, and 11 of the top 20 traded futures contracts are on Chinese exchanges. On 21 April, a major contract of SHFE rebar “RB1610″ reached daily trading volume of US$93 billion, exceeding the total volumes of the Shanghai and Shenzhen stock exchanges combined.”
Putting this in context:
The fact that iron ore, responsible for a small fraction of daily trade in oil and far less important for the global economy than oil, has attracted massive fund inflows in China is an indication of the excesses of Chinese futures exchanges and the dangers that wanton trading on Chinese exchanges may destabilize global markets. Trading in Chinese futures on some irrelevant commodities including bitumen, polypropylene, and PVC have also soared during the past weeks.
The chart below shows this unprecedented explosion in volume in context:
Citi adds that “exploding trading volumes have created large price volatility on Chinese commodity exchanges, a sign of market overheating as perceived by regulators. All three exchanges have therefore attempted to cool down the market by shifting up daily upper and lower limits, raising margins and transaction fees, sending out risk alerts, and banning activities by high-frequency trading accounts.”
So aside from the generic explanation that this is merely the latest Chinese bubble, what has prompted this epic inflow in commodity trading. According to Citi, Chinese commodity futures volumes spiked since 2015 thanks to three factors: 1) domestic liquidity easing; 2) fund inflow from other asset classes, in particular from trading activities in stock index futures; 3) rise of producer hedging in the face of falling commodity prices and volatile RMB.
In other words all the things that prompted the credit bubble in late 2015 and the equity bubble last summer.
One other key factor was a massive short squeeze. “Short positions on iron ore, steel and base metals began to accumulate at the end of last year, accelerating in January as equity investors were prevented from shorting equities during the big China sell-off, partly due to a government crackdown on short-selling equities, and moved to short commodities as a way to profit from a slowing Chinese economy. Roughly after Chinese New Year, they went suddenly long, apparently showing more confidence in the Chinese economy but it was designed as well to lock in lower prices under the assumption that the RMB was weakening over the course of 2016, with higher-priced dollars implying significantly higher RMB prices for commodities in China.”
Citi adds that while the big picture of financialization in Chinese futures market still holds, the most recent rapid movements in Chinese futures market have been triggered by a few more specific factors. For industrial commodities, particularly steel, iron ore, coke and coking coal, an improvement of sentiments on real estate and infrastructure activities since early 2016 has boosted physical purchases of these commodities, leading to a tight physical market with low inventories and rapid surge of prices. More recently, positive sentiment was proved by better-than-expected real estate starts in March, prompting further speculative long positions, a decent proportion of which likely to be short-covering.
The euphoria has been broad based but mostly driven by institutions this time, not retail:
Agricultural products, most notably corn and cotton, also saw a surge of prices thanks primarily to higher-than-expected corn reserve purchase and a delayed schedule of cotton reserve sales.
A simultaneous surge of industrial and agricultural product prices has encouraged massive speculative longs in the futures market. Retail investors have also reported increased participation in futures markets, although we believe institutions are the major driver of the recent rally. However, it is worth noting that open interests in domestic futures market have surged to a much lesser extent than trading volumes for the past few months, indicating that most speculative trades have been conducted through high-frequency transactions, with average tenure of each contract reportedly lower than four hours.
However, while everyone enjoys the leg higher, the question is what happens when the inevitable rush for the exits begins: “When prices start to fall, investors may find it hard to speculate on the futures market by taking short positions, partly as Chinese exchanges require physical settlement for all commodity contracts.“
Others are already looking forward to the inevitable leg lower: quoted by the FT, analysts at London’s Liberium said that “We’ve seen this kind of speculative frenzy before in China in both the real estate and equity markets and the heard mentality has now driven fast money to commodity speculation. Once the upward momentum inevitably runs out, and potentially already has done, the same speculative market forces will drive prices down.” they added. “The situation feels very similar to what played out last year after the Shanghai composite gained 61 per cent in the first half.“
Citi’s conclusion – there are some pros in the recent unprecedented commodity action out of China…
“We believe potential opportunities should rise from the introduction of new contracts, growth of ETFs, and increasing producer hedging activities. We also identified risks to sustainable growth of Chinese futures markets, including physical settlement requirements in domestic futures markets, dangers in an expansion of commodity ETFs, uncertainties in futures market regulations, and limited opportunities for foreign participation.”
But one very large con – once the selling begging, not only are all bets off, but the collapse in commodity prices will reverberate across the entire world:
“all of this growth poses multiple dangers to global commodity pricing stability given how less regulated and therefore less protective the Chinese regimes are for investors, who are perhaps the most speculative in the world.“
Which is why Cit’s warning is simple enough: “hold on to your hats.” In fact hold on tight because now that even Beijing is getting nervous and as reported before, has moved to not only increase trading costs – the Dalian exchange just doubled trading fees and hiked margins – but also reduced night time trading to try and deter some of the more speculative investors, prices have started to tumble.
Then again, a collapse in the commodity complex may be all the excuse that central banks need to try the direct “monetization” of commodities as a last ditch measure before that unleashing the final monetary assault also known as helicopter money.
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In what will be a closely watched and even more closely scrutinized speech, today at noon Donald J. Trump will hold a speech on foreign policy at the Mayflower Hotel in Washington, DC. In the speech Trump is poised to demonstrate just how “presidential” he can be, because as Reuters writes, “he is expected to set aside his bad-boy antics and, with the help of a teleprompter to keep him on message, outline what his foreign policies would be if he is elected U.S. president.”
Reuters also adds that “governments alarmed at the prospect of a Trump presidency will be paying close attention.” The reason for their concern is Trump’s desire to make a U-turn on years of traditional US foreign policy, among which tone down the US role in NATO. “Many foreign policy and defense advisers say his views are worrying, mingling isolationism and protectionism, with calls to force U.S. allies to pay more for their defense and proposals to impose punitive tariffs on some imported goods.”
“Part of what I’m saying is we love our country and we love our allies, but our allies can no longer be taking advantage of this country,” Trump told reporters on Tuesday night in a speech preview.
Trump said he would focus on nuclear weapons as the single biggest threat in the world today. “I’m probably the last on the trigger,” Trump told ABC’s “Good Morning America” on Wednesday, citing his opposition to the Iraq war.
Trump, 69, said he agreed with President Barack Obama’s decision to send an additional 250 U.S. Special Forces into Syria but would not have made the decision public. “I would send them in quietly because right now they have a target on their back,” he told CNN. He also said his speech would focus on the economics of foreign policy “because we’re getting killed on economics.”
The billionaire businessman promises to temporarily ban Muslims from entering the United States and to build a wall to block off Mexico. His policies are popular with many voters who want change, but foreign policy elites are concerned.
“It’s a perfect storm of isolationism, muscular nationalism, with a dash of pragmatism and realism,” said Aaron David Miller, a foreign policy scholar who has worked in Republican and Democratic administrations.
The speech at a Washington hotel will address issues including global trade, economic and national security policies as well as building up the U.S. military, his campaign said.
Watch it live below at 12PM.
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