iftttwall

After slamming Jeff Sessions in what was his lengthiest morning tweetstorm to date, Donald Trump spoke to the WSJ and once again expressed his disappointment in the Attorney General and questioned the importance of Sessions’s early endorsement of Mr. Trump’s candidacy, saying that Session – the only senator to endorse him in the primary – did so because of big crowds, not loyalty but declined to say whether he planned to fire him, although based on that statement it is most likely that Sessions’ days are numbered.

“When they say he endorsed me, I went to Alabama,” Mr. Trump said on Tuesday , recalling the endorsement . “I had 40,000 people. He was a senator from Alabama. I won the state by a lot, massive numbers. A lot of the states I won by massive numbers. But he was a senator, he looks at 40,000 people and he probably says, ’What do I have to lose?’ And he endorsed me. So it’s not like a great loyal thing about the endorsement. But I’m very disappointed in Jeff Sessions.”

He continuied piling on, adding that “it’s not like a great loyal thing about the endorsement.”

Asked if he would remove Mr. Sessions from office, Trump again said he was disappointed in the attorney general’s decision to recuse himself from the probe into Russia’s meddling in the 2016 presidential election.

“I’m just looking at it,” the president said when asked how long he could continue to criticize Mr. Sessions without firing him. “I’ll just see. It’s a very important thing.”

Trump also said he was “very happy” with the addition of Anthony Scaramucci, “dismissing Scaramucci’s decision during the presidential campaign to endorse two other Republican candidates before backing Mr. Trump. He said Scaramucci offered his support before he was ready to enter the race. “His first choice was Trump,” Mr. Trump said. “I think it’s important to say that.”

via http://ift.tt/2uUwy5S Tyler Durden

As we first showed last week, while the equity market has remained completely oblivious to what the upcoming debt ceiling fight, which Morgan Stanley admitted over the weekend “worries us most” of all upcoming catalysts, the same can not be said of the T-Bill market, where 3M-6M yields have inverted the most on record on concerns about a potential selloff (or worse) in 3M bills which mature just after the time the US Tsy is expected to run out of cash, should the debt ceiling debate fail to result in a satisfactory outcome.

And while it is a gamble to suggest that stocks will ever again respond to any negative news or still have any capacity to discount any future event or outcome, Bank of America dares to go there, and advises clients that between seasonality, and the already record low VIX, the debt ceiling is a sufficiently risky event to expect that equity volatility will finally wake up, and that “seasonality + catalysts suggest record low vol likely unsustainable through the fall.” Here’s the big picture from Nitin Saksena and team:

While VIX has been making headlines for the most consecutive closes in history below 10 (now 8 days), medium-term VIX futures have quietly fallen to ~10-year lows, breaking the previous record from summer 2014. However, we think volatility is unlikely to sustain these extreme lows in the fall and like selling Oct VIX puts as (i) seasonal patterns suggest the VIX troughs in Jul and peaks in Sep/Oct, (ii) the VIX has “settled” below 12 in only two of the past 27 Octobers, and (iii) fundamentally, the threat of debt ceiling brinkmanship in Sep/Oct, which has already spooked the T-bill market, should help support equity volatility. For example, we like selling the VIX Oct 12 put vs. the 14/19 call spread for zero-cost upfront (Oct futures ref 13.35).

Taking these one at a time, first we focus on the seasonal aspect. What is most interesting here, is that not once has the VIX settled below 10.5 in either September or October.

Statistically, seasonal trends in the VIX (Chart 10) suggest that July is the low point in the calendar year, with implied volatility subsequently rising and peaking in Sep or Oct depending on whether the 2008 crisis is excluded or included. Put slightly differently, as seen from Chart 11, VIX “settlement” in the months of Sep and Oct has exceeded 10.5 every time since 1990 and has been above 12 92% of the time (50 out of 54 instances). That said, three of these four “prints” below 12 occurred in Oct-93, Sep-06, and Oct-06, periods reminiscent of today’s record-setting low vol. Hence, understanding potential fundamental tailwinds to volatility this fall is also critical.

And then there are the event catalysts, of which the debt ceiling is by far the biggest:

Fundamentally, a number of catalysts are on the calendar from late Aug through Oct this year (see Table 2), including (i) the potential for Jackson Hole and Sep/Oct central bank policy meetings to rekindle the “policy tightening into a slowing backdrop” narrative, (ii) the potential for brinkmanship around US tax reform, and (iii) following the end of FY2017 on 30-Sep, the potential for a debt ceiling crisis and US government default.

 

 

Rates strategist Mark Cabana notes that the Treasury bill curve has inverted dramatically recently on debt limit concerns (Chart 12) and is pricing in stress much earlier than in prior episodes. This is important for equity investors to watch as T-bills are much closer to the potential source of risk, hence could be a leading indicator for equities. Although the spike in US equity vol was much more pronounced in the 2011 debt ceiling crisis compared with 2013 (Chart 13), in both cases the relevant VIX futures remained supported leading up to the potential default dates.

 

So for those who agree that – finally – VIX is about to jump, whether due to the debt ceiling debate turning ugly, or because any of the other listed catalysts turn out less than favorably, yet want to express a more convex bet than merely shorting Bills, here is how to do it, again from BofA:

Trade idea: VIX Oct 12/14/19 call spread collar for zero-cost upfront

 

To be clear, we are not calling here for a structural shift from low to high US equity vol this fall. Such a regime shift would require some combination of higher rates, more inflation, a weakened Fed put, and less aggressive equity dip-buying. Rather, we are suggesting that the above combination of statistical and fundamental factors make it highly unlikely that today’s extreme lows in VIX can persist through the fall.

 

As such, we are comfortable selling VIX puts to leverage a likely floor in volatility, particularly ahead of the debt ceiling, and using the premium collected to the cheapen the cost of portfolio protection. For example, investors may consider selling the VIX Oct 12 put vs. the 14/19 call spread, indicatively zero-cost upfront with a net delta of +54 (Oct fut ref 13.35).

 

The trade leverages the facts that (i) VIX 3M ATMf implied volatility, while low, is not necessarily cheap compared to the level of the VIX 3M future (Chart 14), and (ii) VIX 3M call skew is currently very steep, in the 92nd percentile since Sep-09 (Chart 15).

 

 

More critically, while VIX call spread collars have been challenged by recent sub-11 VIX settlement values, they can be successful, low-cost hedges when there are defined macro catalysts on the calendar to provide support to volatility, as seen from the US election and more recently the first round of the French election. Lastly, we are comfortable capping upside via the call spread as the VIX 1M and 2M futures have not closed above 20 since Brexit over one year ago.

 

As one estimate of potential carry costs for the structure, we note that the same structure in September currently costs $0.40 to initiate (ref 12.55) and in August costs $1.15 to initiate (ref 11.25). The former may be a reasonable estimate for decay over the next month should markets remain quiet during the summer. However, the latter ($1.15 over two months, or $0.575 per month) is likely too high, in our view, as it assumes the Oct future will fully roll down the curve to 11.25 roughly 3-4 weeks ahead of Oct expiry, when debt limit issues may well be taking centre stage.

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

Authored by Charles Hugh Smith via OfTwoMinds blog,

Any nation-state that meets these four requirements is fully exposed to a global loss of faith in its economy, debt, balance of payments and currency.

There's an entire sub-industry in journalism devoted to the idea that China is poised to replace the U.S. as the "global empire" / hegemon. This notion of global empire being something like a baton that gets passed from nation-state to nation-state is seriously misleading, in my view, for this reason:

There is only one global empire: finance. China and the U.S. both exist within the Empire of Finance. Virtually every mercantile nation with access to global markets lives, works and thrives/dies within the Empire of Finance. Every nation that allows capital to flow into its economy is subservient to the Empire of Finance. Every nation with capital and debt markets exposed to (or dependent on) global financial flows is just another fiefdom in the Empire of Finance.

China has thrived within the Empire of Finance by creating more debt and at a faster rate of expansion than any other fiefdom. China has brought 20 years of future growth and income forward, and eventually that vein of "wealth" runs out as time advances into the stripmined future.

The same can be said of all nations that have borrowed heavily from future growth and income to fund consumption/GDP "growth" today.

The Empire of Finance has few requirements for hegemony in its realm, but they are big ones.

1. If you want your national currency to act as a global reserve currency (or the global reserve currency), you must run permanent large trade deficits to export your currency in size to the rest of the world. This is the essence of Triffin's Paradox, which I have covered many times.

Understanding the "Exorbitant Privilege" of the U.S. Dollar (November 19, 2012)

Triffin's Paradox Revisited: Crunch-Time for the U.S. Dollar and the Global Economy (April 5, 2016)

2. Your national currency must float freely in the global marketplace and be liquid enough to trade $1 to 2 trillion per day in global foreign exchange (FX) markets.

3. Your sovereign debt/bonds must float freely in the global credit/debt marketplace and be liquid enough to trade in size (tens of billions of dollars) daily.

4. Global capital must be free to flow in and out of your currency, debt, assets and economy without restriction. (Ease of capital flow is the core of liquidity, risk management, and profitability.)

Any nation-state that meets these four requirements is fully exposed to a global loss of faith in its economy, debt, balance of payments and currency. The Empire of Finance is a harsh master; any nation-state that wants to secure the privileges of hegemony must first be willing to accept the risk of full exposure to skittish global markets and capital flows.

Nothing wipes out "wealth" quite as quickly or effectively as a currency meltdown resulting from a sudden loss of faith / risk-averse capital exodus. Such a loss of faith or fear of loss quickly kills a nation's ability to float more debt on the global marketplace.

There's an irony in all this talk of empire: only nation-states that operate within the unforgiving global Empire of Finance can establish hegemony in that Empire, but only nations that become autonomous autarkies (i.e. self-sufficient and independent of global markets, resources, credit, capital, etc.) can thrive outside the global Empire of Finance.

There's only one global empire, that of Finance. If you want global hegemony, you must accept the dominance of global finance and pay tribute. If you don't want to submit to the empire, then you cannot be a global hegemon.

When the Empire of Finance collapses under the weight of its debt, perverse incentives, exploitation and inequality, the financial system of every nation-state within the Empire of Finance will collapse, too. Being the hegemon within the collapsing system won't protect the hegemon from collapse. Every nation-state that has submitted to the Empire of Finance will collapse.

These charts are snapshots of an unsustainable global financial system.

Debt is outracing "growth" everywhere, including China:

To the moon, baby! There's no upper limit on debt–until there is.

There's no limit on the sale of claims on future energy, income and "wealth"–i.e. bonds:

The global economy, by one (flawed) measure (GDP):

As for hegemony and empire – be careful what you wish for. Life outside the financial bubble is much more contingent and risky than life inside the bubbl – until it pops.

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

 

So what Jefferson was saying was,
“Hey! You know, we left this England place because it was bogus.
So if we don’t get some cool rules ourselves, pronto,
we’ll just be bogus too.” 

 -Jeff Spicoli, Fast Times at Ridgemont High

 

I was recently asked by a person in the UK government to list the steps I would like to see the US government take in order to actually Make America Great Again.

Here are my first ten actions, in no particular order:

 

1) Re-institute The Glass-Steagall Act and require FASB to re-institute Mark-To-Market

2) Require an independent audit of all of the Federal Reserve Banks, every year

3) Pass and enforce a Balanced Budget Amendment

4) Pass a Flat Tax Amendment, not to exceed 10%, with an equivalent rate for income and capital gains

5) Enforce The War Powers Act and repeal The Patriot Act

6) Close all 800 or so overseas military bases and cancel all foreign aid

7) Pass a law that only people eligible to vote for a candidate may contribute to that candidate

8) Pass a law that limits US Senators and Congressmen to two terms

9) Protect privacy; enforce The 4th Amendment; and prosecute government employees when they spy and collect data on American citizens 

10) Move all spent nuclear fuel to Yucca Mountain

 

I can dream.

I wish we could hear our so-called elected representatives argue against these ten simple items, but that will never happen.

Who are they really working for?

Please share what you see as the pros and cons of each step, or suggestions for other steps, in the comments below.

Peace, prosperity, and liberty,

h_h

via http://ift.tt/2vGfT3E hedgeless_horseman

Earlier this year, before then President-elect Trump even moved into the White House, he picked several very public fights with auto manufacturers over their increasing reliance on Mexico for incremental production volumes. 

In a January 3rd tweet, the President-elect said “General Motors is sending Mexican made model of Chevy Cruze to U.S. car dealers-tax free across border. Make in U.S.A.or pay big border tax!”

General Motors is sending Mexican made model of Chevy Cruze to U.S. car dealers-tax free across border. Make in U.S.A.or pay big border tax!

— Donald J. Trump (@realDonaldTrump) January 3, 2017

 

Then, on the same day, Trump took a victory lap after apparently convincing Ford to walk away from a new $1.6 billion production facility in Mexico.  Of course, we’ve since noted that the production volume intended for that abandoned Mexico facility has instead been shifted to China…but who can keep track (see: Remember When Ford ‘Cancelled’ That Plant In Mexico? Well, They’ve Just Moved It To China).

“@DanScavino: Ford to scrap Mexico plant, invest in Michigan due to Trump policies”https://t.co/137nUo03Gl

— Donald J. Trump (@realDonaldTrump) January 3, 2017

 

Meanwhile, it wasn’t just the domestic manufacturers that were targeted by the incoming administration as Toyota’s stock also took a tumble on the following tweet:

Toyota Motor said will build a new plant in Baja, Mexico, to build Corolla cars for U.S. NO WAY! Build plant in U.S. or pay big border tax.

— Donald J. Trump (@realDonaldTrump) January 5, 2017

 

Ironically, despite all the grandstanding and victory laps designed to appease the United Auto Workers that showed up ‘bigly’ to support Trump’s campaign, light auto production in Mexico has surged so far in 2017.  Per the chart below from Wards, Mexico’s share of NAFTA auto production has surged to 21.5% so far in 2017, up from 19.5% in 2016 and a recent low of 18.1% in 2013.  Per the Wall Street Journal:

A move by auto makers to produce some popular sport-utility models in Mexican factories helped spur a 16% increase in production of light vehicles in Mexico during the first six months of the year compared with the same period in 2016. At the same time, tepid sales of sedans held down production in the U.S. and Canada, according to new data posted by WardsAuto.com.

 

The data indicates one in five cars built in the North American Free Trade Agreement zone comes from Mexico, including hot new products from General Motors Co. and Fiat Chrysler Automobiles NV. That is up from the industry’s reliance on Mexico during the financial crisis, when the U.S. car business received billions of dollars in bailouts aimed at preserving jobs and keeping domestic players afloat.

 

Separate U.S. trade data shows that the value of light-vehicle imports from Mexico to the U.S. ballooned 40% through May.

 

Of course, in the end, Mexico is simply capturing a higher share of overall shrinking production volumes…not terribly surprising given their position as the lowest cost producer in North America. The latest data from WardsAuto shows that U.S. light-vehicle manufacturing fell 5% during the first six months of this year from a year earlier, as auto makers shed workers or scheduled significant downtime to counter a slowdown in demand for sedans. A substantial chunk of America’s automotive manufacturing footprint is devoted to production of family cars or compact cars, which aren’t faring well as gasoline prices remain low and sport-utility vehicles grow in popularity.

All of which just proves once again that while rhetoric and hype can be fun to observe, math, as we like to say, always wins in the end.

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

After months of debate and wasted time on efforts to draft an Obamacare ‘repeal and replace’ bill, moments from now the Senate will vote on a procedural motion that could result in a “skinny repeal” of Obama’s most controversial piece of legislation, without the replacement part, later this week. 

While Republicans still don’t know exactly what they’ll be voting on, The Hill noted that a ‘skinny repeal’ would likely include a repeal of the individual and employer mandates as well as the medical device tax as a way to bridge to a conference committee with the House. 

Senate Republicans are considering passing a dramatically scaled-down version of their ObamaCare repeal bill as a way to pass something and set up negotiations with the House, according to GOP aides.

 

The measure, known as a “skinny bill,” is intended to be something all Republicans can agree on, so they can pass a bill and move to a conference committee with the House.

 

Aides say the scaled-down bill would likely just repeal ObamaCare’s individual and employer mandates and the medical device tax.

 

That would be a far narrower measure than the most recent Senate replacement bill, which also scaled down ObamaCare’s subsidies and cut Medicaid.

Senator Rand Paul, who was a vocal critic of the Senate’s last ‘repeal and replace’ bill (see: New Op-Ed From Senator Rand Paul Blasts GOP Decision To “Keep Obamacare”), has confirmed that he will vote in favor of “whatever version of CLEAN repeal” can be passed with just 50 votes.

Paul tweeted that Senate Majority Leader Mitch McConnell (R-Ky.) told him the upper chamber would take up the 2015 ObamaCare repeal bill previously passed by Congress.

 

“If this is indeed the plan, I will vote to proceed and I will vote for any all measures that are clean repeal,” Paul said

 

Paul has pushed for a vote on the 2015 bill, which repeals large parts of ObamaCare’s requirements and regulations, instead of the GOP repeal-and-replace plan that Republicans have been working on this year.

 

If that measure can’t get the 60 votes it needs, which is unlikely, Paul said he would support “whatever version of CLEAN repeal we can pass.”

And, in a stunning series of last minute reversals, Senator Dean Heller (R-NV) and Senator Shelley Moore Capito (R-WV) have also confirmed they’ll support the motion to proceed.

Meanwhile, adding to the dramatics of today’s critical vote, Senator John McCain has returned from Arizona, after being diagnosed with brain cancer, specifically to participate in the process.

Tune in below for a live feed of the vote:

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

Authored by Lance Roberts via RealInvestmentAdvice.com,

Last week, I discussed the issue of debt and why “people buy payments.” This article generated much discussion and several emails including the following.

“You argue that rising debt levels lead to slower economic growth, but what if it is slower growth leading to rising debt levels?”

This is essentially the “causation” or “correlation” argument which has been a point of contentious debate over the last several years as debt levels in the U.S. have soared higher.

One of the primary problems, not only in the U.S., but globally, is that government spending has shifted away from productive investments that create jobs (infrastructure and development) to primarily social welfare and debt service which has a negative rate of return. According to the Center On Budget & Policy Priorities, nearly 75% of every tax dollar goes to non-productive spending. 

Here is the real kicker, though. In the first quarter of 2017, the Federal Government spent $4.27 Trillion which was equivalent to 22.45% of the nation’s entire GDP. Of that total spending, $3.61 Trillion was financed by Federal revenues and $660 billion was financed through debt. In other words, it took almost all of the revenue received by the Government just to cover social welfare and service interest on the debt. 

Debt Is The Cause, Not The Cure

Debt, if used for productive investments, can be a solution to stimulating economic growth in the short-term. However, in the U.S., debt has been squandered on increases in social welfare programs and debt service which has an effective negative return on investment. Therefore, the larger the balance of debt becomes, the more economically destructive it is by diverting an ever growing amount of dollars away from productive investments to service payments.

The relevance of debt growth versus economic growth is all too evident as shown below. Since 1980, the overall increase in debt has surged to levels that currently usurp the entirety of economic growth. With economic growth rates now at the lowest levels on record, the growth in debt continues to divert more tax dollars away from productive investments into the service of debt and social welfare.

(Note: I have not included the beginning of the Trump Presidency yet because the debt ceiling remains frozen. When the debt ceiling is lifted and the current ACTUAL debt is reflected, I will revise accordingly.)

It now requires nearly $3.00 of debt to create $1 of economic growth.

In fact, the economic deficit has never been greater. For the 30-year period from 1952 to 1982, the economic surplus fostered a rising economic growth rate which averaged roughly 8% during that period. Today, with the economy growing at an average rate of just 2%, the economic deficit has never been greater.

But again, it isn’t just Federal debt that is the problem. It is all debt.

As discussed last week, when it comes to households, which are responsible for roughly 2/3rds of economic growth through personal consumption expenditures, debt was used to sustain a standard of living well beyond what income and wage growth could support. This worked out as long as the ability to leverage indebtedness was an option. The problem is that eventually, the debt reaches a level where the level of debt service erodes the ability to consume at levels great enough to foster stronger economic growth.

In reality, the economic growth of the U.S. has been declining rapidly over the past 35 years supported only by a massive push into deficit spending by households.

What was the difference between pre-1980 and post-1980?

From 1950-1980, the economy grew at an annualized rate of 7.70%. This was accomplished with a total credit market debt to GDP ratio of less 150%. The CRITICAL factor to note is that economic growth was trending higher during this span going from roughly 5% to a peak of nearly 15%. There were a couple of reasons for this. First, lower levels of debt allowed for personal savings to remain robust which fueled productive investment in the economy. Secondly, the economy was focused primarily on production and manufacturing which has a high multiplier effect on the economy. This feat of growth also occurred in the face of steadily rising interest rates which peaked with economic expansion in 1980.

The obvious problem is the ongoing decline in economic growth over the past 35 years has kept the average American struggling to maintain their standard of living. As wage growth stagnates or declines, consumers are forced to turn to credit to fill the gap in maintaining their current standard of living. However, as more leverage is taken on, the more dollars are diverted from consumption to debt service thereby weighing on stronger rates of economic growth.

How Big Of A Deleveraging Are We Talking About?

The massive indulgence in debt, or a “credit induced boom”, has now begun to reach its inevitable conclusion. The debt driven expansion, which leads to artificially stimulated borrowing, seeks out diminishing investment opportunities. Ultimately these diminished investment opportunities lead to widespread malinvestments. Not surprisingly, we clearly saw it play out in “real-time” in 2005-2007 in everything from sub-prime mortgages to derivative instruments. Today, we see it again in mortgages, subprime auto loans, student loan debt and debt driven stock buybacks and acquisitions.

When credit creation can no longer be sustained the markets will begin to “clear” the excesses. It is only then, and must be allowed to happen, can resources be reallocated back towards more efficient uses. This is why all the efforts of Keynesian policies to stimulate growth in the economy have ultimately failed. Those fiscal and monetary policies, from TARP and QE to tax cuts, only delay the clearing process. Ultimately, that delay only potentially worsens the inevitable clearing process.

That clearing process is going to be very substantial. With the economy currently requiring roughly $3 of debt to create $1 of real, inflation-adjusted, economic growth, a reversion to a structurally manageable level of debt would involve a nearly $35 Trillion reduction of total credit market debt from current levels. 

A $35 Trillion deleveraging process is impossible. Such an event could never happen?

Really?

The last time such a reversion occurred the period was known as the “Great Depression.”

This is one of the primary reasons why economic growth (along with lower interest rates) will continue to run at lower levels going into the future. There is ultimately a limit to which indebtedness can supplant actual organic economic growth. The question is whether we have already reached that limit, which brings us to a final question.

“If the economy is doing as well as Central Banks suggest, then why, after 9-years, are the ’emergency measures’ being applied to global economies still in place?” 

More importantly, what happens when they are forced to stop.

Of course, this is why Central Banks globally are terrified of such an outcome.

Correlation or causation? You decide.

via http://ift.tt/2uTYE1k Tyler Durden