iftttwall

Inflation outlook, rate differentials, projected growth, positioning, quants… there are countless explanations provided daily to explain why bonds trade the way they do. And yet, as Bank of America shows today, as of this moment just over 50% of the global bond market returns can be explained with just one thing: central bank balance sheet changes.

BofA explains:

Central bank assets, most of which are held in fixed income assets, are now equivalent to 31% of the $49tn fixed income universe tracked by the BofA Merrill Lynch Global Fixed Income Markets Index (GFIM); and the percentage of global bond market monthly returns explained by the monthly change in central bank balance sheets has dramatically increased in recent years.

And with more than half of bond returns now driven by central banks, BofA goes so far as to say that “Central banks have become the bond market.”

BOfA’s evidence:

Note how in the past year, the months in which central bank asset purchases have either declined or been very small have coincided with months of weak performance from global bonds (Table 2). This was particularly the case in the fourth quarter of last year and a similar pattern is emerging this summer.

* * *

Of course, this is a problem because with central bank balance sheet projected to decline for the foreseeable future as Citi showed last month, at least until global stocks tumble and/or the next recession hits, it would suggest that yields have just one direction to go.

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It was fun while it lasted. For a few brief months, The Fed appeared to 'hawkish, no matter what' as data-dependent morphed into data-ignorant. Markets relished the confidence-inpiring message from the ivory tower academics… but, as former FX trader Rich Breslow notes, none of that occurred in reality and now, "no one really believes even their own forecasts," adding that, as markets wake up to this reality, "it's going to be a long summer."

Via Bloomberg,

It’s hard to keep a good conspiracy theory in play if you don’t make sure all the main actors are following the story line. Clearly, the two principal Fed speakers this week, Governor Brainard and Chair Yellen decided the game had gone on long enough. Or, more probably, opted for a pause to assess how the latest experiment in message manipulation had gone.

It was interesting, indeed encouraging, to believe that central bankers around the globe saw enough distance between current economic conditions and the financial crisis to orchestrate a move toward higher rates.

 

But they seem to cling to the notion that they must do so without any knock-on effects to the broader category of assets. They do so love the calming sounds from the trickle-down effect.

So what have we really learned beyond the fact that no one really believes even their own forecasts?

The Canadians are team players willing to take a hit for the greater good. That everyone would indeed like to see rates rise but only at no cost. Expect, therefore, a swift return to good cop, bad cop for steering expectations. The Bank of England is already reprising that role. But the most immediately useful issue to consider is whether this dissembling puts paid to the newfound and seemingly universal love affair for the euro.

The rally in the euro didn’t really kick off when the numbers started to come in stronger. Modern theory maintains that economic results are irrelevant until officially and publicly designated as data dependent worthy. Rather, things got motoring when the ECB hinted at the notion of tapering their quantitative easing. And it did so with a vengeance. At least in analyst forecasts. What a great example of half empty becoming half full in a trice, fully vindicating the notion of animal spirits.

Therefore, either the euro is going to look even better compared to a more hesitant Fed or it’s come too far, too fast and presents a wonderful opportunity to play for the mean reversion. And the Fed does matter more broadly because euro doesn’t zoom against the dollar without making major headway against most other currencies in sympathy.

We have to consider one other point. It’s going to be a long summer. Central banks don’t want to, nor need to, put it on the line again until September and are loath to box themselves in. It’s important to make the distinction between enjoying the luxury of time versus a crisis of confidence. But that doesn’t help right now for settling on the next trade.

Which brings us to the upcoming ECB meeting. Are they going to announce tapering? Probably not, beyond acknowledging the fact that the balance of risks has improved. So that would be euro negative. On the other hand, we just got word that President Draghi will be addressing the Jackson Hole Conference in August. Definitely a euro positive. Keep ’em guessing is more in their comfort zone than speak plainly and look straight into the camera.

It’s not surprising given the cracks in the story line that the euro has retreated back to levels it broke higher from against a slew of other currencies. Fell back but hasn’t broken. Retesting break-outs and holding can be a powerful signal.

For some clues as to where we go from here watch what EUR/GBP does with the .88 level, how EUR/CHF fares here at 1.10 and, of course, 1.1350 against the dollar. It will probably sink or swim against all three in tandem.

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One day after a mediocre, tailing 10Y reopening, the Treasury held its last Treasury auction for the week, selling $12 billion in 30Y bonds at a yield of 2.936%, above May’s 2.87% and the highest since 3.050% in May, tailing the When Issued of 2.926% by 1 basis point. This was the 4th tailing 30Y auction in the past 5.

The internals were unremarkable: the bid-to-cover of 2.31 was virtually unchanged from last month’s 2.32, but above the 6 month average of 2.27%. Total bids of $27.9b for $12.3b in bonds sold vs $27.8b in bids for $12.0b in bonds sold at the previous auction

The buyside demand was stable with indirect bidders awarded 61.7% vs previous auction’s 63.7%, and modestly below the MMA of 63.6%. Direct bidders were awarded 6.4% vs 6.7% in June, leaving Primary Dealers with 31.9% of the final aware, just higher than last auction’s 29.6%.

In retrospect, considering the recent volatility in the TSY market coupled with today’s surprise Jackson Hole, end-of-QE “trial balloon” by the ECB, it is perhaps more notable that this week’s three auctions were not more disappointing.

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Authored by Yves Smith via Naked Capitalism blog,

The war on cash is escalating. A big driver isn’t central banks who want to be able to inflict negative interest rates on savers, or Treasuries who see cash transactions as hiding revenues from their tax collectors, but the payment networks that want to kill cash (and checks!) as competitors to their oh so terrific (and fee-gouging) credit and debit cards.

However, one bit of good news is there doesn’t appear to be much enthusiasm on the buyer, as in merchant, end.

First, the overview from the Wall Street Journal:

Visa Inc. has a new offer for small merchants: take thousands of dollars from the card giant to upgrade their payment technology. In return, the businesses must stop accepting cash.

 

The company unveiled the initiative on Wednesday as part of a broader effort to steer Americans away from using old-fashioned paper money. Visa says it is planning to give $10,000 apiece to up to 50 restaurants and food vendors to pay for their technology and marketing costs, as long as the businesses pledge to start what Visa executive Jack Forestell calls a “journey to cashless.”

There are good reasons to think this initiative won’t get far.

Customer resistance. Food vendors, and in particular restaurants, are low margin businesses with fickle customers who have little to no loyalty. Why risk driving business away?

Aside from the fact that some customers prefer cash, a related issue is that using cards and smartphones often seem to be a tax on time. I really hate using chip cards. Mag cards were often faster than cash, since you swiped and could stuff the card back in your wallet while the transaction was being approved. Chip cards, by contrast, require you to keep the card in the machine while it is being approved, so one is very much aware of the wait. And when I’ve seen people using phones (often to buy small stuff like coffee, which really amazes me), I find that they are slower with it that they would probably be with cash, in that they seem to have to fumble with the phone to get the right app readied and then the payment doesn’t always go right through either.

And that’s before you get to the fact that ApplePay and other smartphone payments time stamp exactly when you paid, adding to the information the surveillance state is gathering about you. By contrast, even if you use a credit card at a store, Clive informs us that the card network typically retains only the date of transaction.

Higher merchant charges. I take credit and debit cards through PayPal, and also checks. And even though I am often slow to deposit checks because I find it hard to get to the bank, I’d still rather have checks despite the somewhat greater hassle because I save the 3% cut the card networks take. Visa makes the argument that handling cash has costs too, but they are the ones that have ginned up the numbers, and in my case, they don’t wash. As the Journal points out:

Indeed, many merchants prefer cash because they don’t have to share the revenue with card companies. Credit-card interchange fees, which networks like Visa set and that merchants pay to the banks that issue their cards, are on average around 2% of the transaction amount, according to the National Retail Federation, the largest trade group that represents merchants in the U.S.

“The idea that merchants don’t want to accept cash is a myth,” said Mallory Duncan, senior vice president and general counsel at the National Retail Federation.

Negative impact on employees who get tips. As one of my tax attorney buddies drily remarks, “Some people have this odd idea that cash payments aren’t taxable.” Restaurant workers who have tips as the major source of their income almost assuredly prefer getting them in cash, rather than facing the delay of having their employer receive them through the payment network which creates delay as well as the not-trivial odds that the boss might cheat them either informally or declare that he’s entitled to a processing cut. And that’s before getting to the fact that restaurant pay levels probably pre-suppose a fair bit of tax evasion, so the business owner might risk losing his better employees to competitors who hadn’t gone the no-cash route.

Enforcement. How is Visa going to police establishments that say they aren’t going to take cash? Will Visa have spies? Will Visa have audit rights?

Risk of legal challenge. As a surprisingly large number of Wall Street Journal readers pointed out, cash is a legally sanctioned means of payment. For instance:

Richard Tavis

Merchants who will no longer accept cash won’t get my business, period. Call me a Luddite, but U.S. currency pretty clearly states that “THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE”. It seems to me this will go to court eventually. Merchants must accept notes issued by the Fed. Sorry, that’s the way it is.

Richard Tauchar

@Richard Tavis
That’s my take as well.
And, as someone else mentioned, what happens if you refuse to pay with a Visa, or don’t have one, after having completed the meal? Will they take cash then, or is the meal free?

So I’d be surprised if Visa had a legal leg to stand on, when trying to make these deals.

The Treasury does support the position that private business can refuse to take cash as payment for goods and services, as opposed to settlement of debts.

However, as writers following David Graeber’s Debt: The First 5000 Years, like to point out, we incur and settle debts all the time. And a bar tab or restaurant bill is a debt. The vendor provides the service<strong> without being paid, then expects you to settle the debt you incurred.

Thus the market segment Visa is targeting for this move (the Wall Street Journal headline says, Visa Takes War on Cash to Restaurants) would seem to be one where Visa is on a particularly weak legal footing. I can easily see someone with a penchant for mixing things up go to a restaurant, either not have a card or bring a card he knows will be declined (just to look like he didn’t intend to stage a stunt) and then video putting down more than enough cash to settle the bill and leave. The merchant will have no legal out. He’s been paid. And at least in any decent-sized city, no way will the cops intervene. They’ll regard this as a private dispute not worth their time. If the restaurant staff try to restrain the exiting customer, they could wind up with a very costly suit on their hands.

Taking cash may be the real point of the merchant. A savvy New York City colleague regularly points out how many New York City businesses, like pizzerias and cheap jewelry stories that never seem busy, or nail salons that have economics that don’t seem to make sense, are probably partly if not mainly in the money laundering business.

Visa has even bigger ambitions:

Visa is trying to turn those numbers more in its favor. In the U.S., it is going after spending categories, such as parking and rent, that have been entrenched in cash and check payments for decades. Abroad, it is partnering with governments to move more payments onto its network, including an agreement that it recently signed with the Polish government to move the country to a cashless system.

For what it’s worth, my landlord (more accurately, his in-house management operation), who has an office building that takes up a full block on Park Avenue in the upper 40s, plus has seven residential buildings, takes only checks for rent. One factor may be that in NYC, if a landlord accepts a rental payment from a party, that party obtains a legal interest in the lease. That in turn means the landlord would lose one of his main axes for controlling who lives in the apartment (or worse, a corporation could pay make a rental payment and in theory let anyone it authorized stay in the apartment). It’s easy to see on a check who is making the payment. On a bank transfer, the landlord may regard it as too much hassle to verify the source of a bank auto-debit to be worth any potential labor-savings on other fronts. I’d be curious to learn from any readers who rent what types of payments their landlord accepts.

In the meantime, those of you who like cash should not just make a point of paying in cash, but also tell the employees and in particularly, anyone who appears to be a manager that they will lose your business if they stop taking cash. Vocal customers may be the best way to head off Visa’s profiteering.

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US equity markets are ramping higher (aside from Small Caps) this morning as it appears the word “uncertain” – uttered ubiquitously by Fed Chair Yellen in the last two days – has a different meaning in stock-land…

VIX hammered to a 9-handle, sending stocks soaring…

Oh, and decliners are outpacing advancers…

Headlines: Everything is awesome. http://pic.twitter.com/XH4Vg3V3D1

— Sven Henrich (@NorthmanTrader) July 13, 2017

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In what could very well end up being just another exercise in futility, Senate Majority Leader Mitch McConnell has just released a new version of a healthcare plan which, among other things, incorporates demands from Senator Ted Cruz (R-TX) and Senator Mike Lee (R-UT) to allow insurers to sell low-cost, skimpier plans all in an effort to draw conservative support for the new bill.

Called the “Consumer Freedom Amendment,” we highlighted the main points of the Cruz/Lee proposal last month:

The “Consumer Freedom Amendment” would leave existing ObamaCare plans on the individual market, while also allowing insurers to sell plans that don’t comply with requirements of the Affordable Care Act.

 

“What that does — it leaves existing plans on the market but it gives new options so that people can purchase far more affordable health insurance. It will enable a lot more people to be able to afford buying health insurance,” Cruz told The Hill on Thursday afternoon.

 

Cruz’s amendment would allow insurers to continue offering plans that follow ObamaCare’s “Title One” requirements, including essential health benefits, which mandates 10 services insurers must cover with no cost-sharing.

 

But insurers could also sell skimpier, cheaper plans that don’t cover those 10 services or meet other ObamaCare requirements.

 

“If a health insurer offers a plan consistent with the Title One mandates, insurers can also sell in that same state any other plans that consumers desire,” Cruz said.

Of course, with precious little votes to spare, McConnell’s new bill has plenty of handouts for moderate Republicans as well. The rewritten package would add $70 billion to the $112 billion McConnell originally sought that states could use to help insurers curb the growth of premiums and consumers’ other out-of-pocket costs.  It also has $45 billion for states to combat the misuse of drugs like opioids. That’s a big boost from the $2 billion in the initial bill and an addition demanded by Republicans from states in the Midwest and Northeast that have been ravaged by the drugs.

The revised bill also restores some of the original Obamacare taxes on investment income and the payroll tax in an effort to help fund Medicare. Axios had more highlights:

An additional $70 billion to help states stabilize their markets and offset the costs of covering expensive patients — on top of more than $100 billion that was already there.

 

$45 billion to fight the opioid epidemic.

 

A provision allowing people to use tax-preferred health savings accounts to pay their premiums

 

Changes to the ACA that would let more consumers use tax subsidies to buy plans that only offer catastrophic coverage.

 

The bill would no longer repeal two of the ACA’s tax increases on wealthy families, and it won’t include a new tax break for health-care executives.

In other words, more provisions that simply make the bill look and feel an awful lot like Obamacare…a fact that Senator Rand Paul pointed out in an op-ed just yesterday in which he blasted McConnell’s new bill as more or less a capitulation by Republicans to simply “keep Obamacare.”

I miss the old days, when Republicans stood for repealing Obamacare. Republicans across the country and every member of my caucus campaigned on repeal – often declaring they would tear out Obamacare “root and branch!”

 

What happened?

 

The Senate Obamacare bill does not repeal Obamacare. I want to repeat that so everyone realizes why I’ll vote “no” as it stands now:

 

The Senate Obamacare bill does not repeal Obamacare. Not even close.

Seems that McConnell is trying to ‘have his cake and eat it too’ with efforts to appeal to both conservative and moderate elements of the Republican party. 

Will he be successful?  John Cornyn seems to think so:

US SENATOR CORNYN, NO. 2 REPUBLICAN, SAYS WILL HAVE ENOUGH SUPPORT TO PASS HEALTHCARE BILL BY THE TIME IT IS PUT TO A VOTE

Of course, it seems like we’ve heard that somewhere before…

Senate Majority Whip John Cornyn tells @marykbruce: “I expect to have the votes to get this done and yes we will vote this week.”

— Mariam Khan (@MKhan47) June 27, 2017

The full text of the new bill can be read here:

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Remember the 2007 Bubble?

Remember how everyone said that it really wasn’t that big of a bubble because stocks weren’t as expensive as they had been during the previous bubble (the Tech Bubble).

We all remember how that turned out: the bubble burst leading to the greatest financial crisis in 80 years.

Well, today’s bubble is WAY larger than that of 2007. And arguing that stocks are cheaper than they were during the Tech Bubble doesn’t hold water anymore either.

Below is a chart showing the S&P 500’s Price to Sales ratio (also called the P/S ratio). As you can see, based on this metric, the 2007 Bubble is a mere blip. We’re now in territory not seen since the 1999-2000 Bubble.

H/T Jeroen Blokland

Why does this matter?

Earnings, cash flow, and book value are all financial data points that can be massaged via a variety of gimmicks. As a result of this, valuing stocks based on Price to Earnings, Price to Cash Flow, and Price to Book Value can often lead to inaccurate valuations.

Sales on the other hand are all but impossible to gimmick. Either money came in the door, or it didn’t And, if a company is caught faking its sales numbers, someone is going to jail.

So the fact that stocks are now trading at a P/S ratio that matches the Tech Bubble (the single largest stock bubble in history) tells us that we’re truly trading at astronomical levels: levels associated with staggering levels of excess.

What does that mean for stocks?

We're going to have the 3rd and worst crisis in 20 years.

A Crash is coming…

And smart investors will use it to make literal fortunes.

We offer a FREE investment report outlining when the market will collapse as well as what investments will pay out massive returns to investors when this happens. It's called Stock Market Crash Survival Guide.

We made 1,000 copies to the general public.

Today is the last day this report will be made available to the public.

To pick up one of the last remaining copies…

CLICK HERE!

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

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Coffee has been rather cold the past few years, as Coffee ETF (JO) has declined from $80 back in 2011 to $15 of late. This decline has created a interesting Power of the Pattern setup and drove away most bullish investors in Coffee.

Below looks at Coffee ETF JO and the pattern it has been making the past few years-

CLICK ON CHART TO ENLARGE

No doubt the trend in Coffee is down at this time. As mentioned above, JO looks to have hit support of a bullish falling wedge at (1), where it created a rather large bullish wick (reversal pattern) a couple of weeks ago. A small counter trend rally has taken place the past couple of weeks and now JO is testing resistance of the bullish falling wedge at (2).

If Coffee would happen to breakout, it could create a short covering rally as traders have amassed the most lopsided/crowed trade in the history of Coffee futures.

We have been sharing this pattern with Premium and Sector members over the past 6-weeks. If you would like to receive charts like this on a daily or weekly basis, we would be honored if you were a member.

This information is coming to you from Kimble Charting Solutions.  We strive to produce concise, timely and actionable chart pattern analysis to save people time, improve your decion-making and results

Send us an email if you would like to see sample reports or a trial period to test drive our Premium or Weekly Research

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