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Submitted by Mark St. Cyr

What’s The Frequency Janet?

Once again, in spectacular fashion, the financial “markets” have miraculously rebounded from the aptly moniker’d “Bullard Bottom” and without pause has traversed in a near vertical assent to recapture the levels where all the uncertainties began. In other words, after all the gyrations over the last 14+ months we are once again only back to the levels (as scored by the U.S. financial markets e.g., Dow, S&P, et al) where the Fed stood confidently in their economic policy acumen.

Remember those confident proclamations during that time? (paraphrasing) “The economy has recovered quite admirably as to allow the QE (quantitative easing) program to end.” That was a good one, no? Remember what happened next? Nothing, as in the “markets” basically went nowhere up, nor down for months on end.

Sure there were some great headlines made of this path to nowhere as the market screamed sideways in a pattern much like a cardiac reading with blips and spikes that allowed headlines such as “New Never Before Seen In The History Of Mankind Highs!” on a near weekly basis. Yet, although those headlines were true, all they did was mask the fragile, ever deteriorating economy those “meters” were hooked to.

The one thing that never changed during that whole period? The implied fortitude of resolve that the Fed would indeed strike the path towards normalization of monetary policy and begin raising interest rates away from the zero bound. After all, it was implied at near infinitum: The economy had shown great signs of improvement. e.g., employment at near “full” status and others.

So, with that “mission accomplished” narrative as the wind beneath their wings the table was surely set that in September of 2015 the Fed would indeed raise rates. Remember what happened next?

Ah yes: China. It seemed just like any prudent U.S. investor or market aficionado might infer; a rate hike here means trouble there. After all, did anyone not understand just how interconnected these “markets” are with currency funded carry trades and more? Oh yes, sorry, it seems the Fed either forgot or, never realized the obvious inherent risk and consequences. The result?

The U.S. financial markets fell is such a spectacular, as well as, cascading manner that for the first time in the history of the markets all three of the prominent futures markets were halted. Only after stick save inspired shenanigans as those delivered by CNBC™ fame Jim Cramer and his now infamous “Is that a pencil in your pocket or a note from Tim Cook?” reveal did the markets seemingly recover and stabilize.

Then, reality once again set in as the markets collectively held its breath near those lows as it awaited the Fed’s implied: “You’ve been warned we’re going to raise rates.” Then, as the markets reacted to this implied “fortitude” and drifted lower back towards that “bottom.” The Fed with all its proclamations for faith in forward guidance and clarity did the exact opposite and punted. The result?

Once again in a near vertical assent the markets screamed upwards with barely a respite to recapture the same levels where it all began – again.

Now nearly a year later the Fed stood poised to do what it said it would. i.e., raise rates. (Talk about mulligans!) So, with data points in hand which the Fed proclaimed proved their well placed guided hand of interventionism monetary policy had worked effectively, they once again reiterated that they indeed were going to raise rates – and this time they did. The result?

Once again in a near carbon copy of the previous selloff the markets lunged downward in a fashion resembling a luge sled on a one way course. And how and where did the “markets” once again seem to find a stopping point? You guessed it: the “Bullard Bottom.”

And why this level appears so aptly named is for the fact that once again it was non other than St. Louis Fed president James Bullard who took to the airwaves and threw a Fed narrative over the decline of prices in oil. Result? (Need I say for I think you are seeing the pattern here.) The decline halted precisely at the level that bears his moniker. But the similarities don’t stop there.

Just like in Aug/Sept of 2015 as the markets began to once again rollover there was an announcement on February 12th. But this time it was not by a Fed official. No, this announcement came from non-other than one of the Fed’s too big to fail recipient’s of the financial crisis J.P. Morgan Chase™ as its CEO Jamie Dimon announced he was buying 500,000 shares or some $26 million in stock of JPM. It seemed the market took that as “with confidence like that – we should be on board also!” and just like the prior the markets were off to the races skyward. After all, if a bank CEO is buying it surely must be a good time to buy also, right? And so they did.

So, one would garner such a display of “confidence” would give the Fed the necessary backbone as to follow through on what they’ve implied through their rate hike projections via the Dot Plots. After all, the economic measures they state over ,and over, and over again as their “touch stones” of economic health as well as measurement (i.e., jobs, inflation, etc., etc.) are all within the tolerant values that define “success.” Surely they would continue on their path to monetary normalization. Guess what? Hint: Nope.

Not only did the Fed punt once again. Both the metrics and language of the press release, as well as, the presser itself given by Fed Chair Janet Yellen was so convoluted, obtuse, as well as defensive even many of her staunchest defenders or cheerleaders couldn’t make heads or tails out of what should be easily and readily addressable answers.

Dot plot projections that implied 4 rate hikes now imply 2, which to even the most casual Fed observer now more likely means – zero. All that great data that was used for a “data dependent” Fed? Sorry, no data for you. Well; data that represents the U.S. that is.

You should now infer that all “data” is “international.” i.e., what’s happening elsewhere supersedes data the Fed keeps repeating its mandated to oversee and foster. (e.g., U.S. employment and inflation.) Again, even some of the most lenient critics of the Fed were themselves struck by the fact that the once stated goals which the Fed communicates ad nauseam as desired levels for policy normalization once again decided inaction – as action. When in fact these levels have been either hit or, are within meaningful “mission accomplished” parameters. And when it came to answering about the Fed’s credibility issue? Well, see here for yourself.

All I’ll state for those still confused about Fed policy is the following: When in doubt – just move the goal posts. Problem solved. In theory anyways. However, isn’t that all that all that economics truly is? e.g., Theory.

However, you know what is no longer theory nor a “data” point that’s fungible? What level the U.S. financial markets are currently trading at.

To now dismiss Fed policy causation as “correlation theory” is laughable. The markets are now so intertwined and Fed dependent the observation of whether correlation is causality has been rendered moot. Without the Fed – there is no market. That’s now a proven fact. Period.

Everything, Every market, every stock, every currency, is correlated and dependent of its very existence or viability as former Dallas Fed president Richard Fisher once implied: on a “diminutive woman” to play Atlas.

And exactly where are these markets once again? Hint: Right where it all began. Where the Fed declared “mission accomplished” twice before when they announced QE was over, and where rate hikes were warranted. So, what happens at this third rendition? Is three times a charm? Who knows. All we can do is wait, see, and hope everyone is on the same wavelength the Fed Chair states it’s on as well.

It’s also quite possible we now have two new concrete “data” points or metrics far more impervious to movement which have supplanted the once Congressional mandated “data” points current Fed watchers once looked upon as “gospel.” Those data points?

Policy action or inaction is dependent on either a break of the “Bullard Bottom” (i.e. 1800ish SPX, 15,500ish Dow) or surge back to “fortitude central” (i.e. 2050ish SPX and 17,500ish Dow) where we once again stand, and await what monetary dictate the Fed will deliver next. The only issue now is…

Is the Fed still on the same page? Reading from the same playbook? Or, even on the same wavelength as the markets? And probably more importantly: with all the missteps and confusing commentary emanating from the Fed – will the “market” continue to respond as it always has? (Look to the EBC and BoJ decisions of late for clues)

Right now it’s anyone’s guess. And in my opinion, there’s no one guessing more about what to do next – than the Fed itself.

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

Two weeks ago, before first the ECB first and then, the Fed, unleashed two massive dovish surprises, we warned – citing JPMorgan – that the most painful part of the short squeeze “may be yet to come.”

As a reminder, this is what JPM said on March 5:

The covering of short equity positions continued over the past week. The short interest in US equity futures declined over the past week.  But its level remains very negative suggesting there is room for further short covering. The short interest on SPY, the biggest equity ETF, at 4.75% stands below its recent peak of 5.43% but it remains elevated vs. its level of 3.54% at the start of the year. Equity ETFs have not yet seen any significant inflows, suggesting that ETF investors have done little in actively reversing the almost $30bn of equity ETFs sold over the previous two months. CTAs, which have been partly responsible for this year’s selloff, are still short equities and they have only covered a third of the short position they opened in January. In contrast, Discretionary Macro hedge funds, Equity L/S, risk parity funds and balanced mutual funds, appear to be modestly long equities, so they are currently benefitting from the equity rally.

Actually, if one uses the latest Goldman Sachs data, this is not at all true because those long positions which benefited from the market surge were more than offset by pair-trade shorts which soared even more and wiped out all gains.

We won’t cry for hedge funds, however, and instead are much more interested in what current and future flows will look like.

According to the same JPM team which expected a continuation of the short squeeze half a month ago, as a result of central banks once again pandering to stock markets with the Fed shocking even the “Liesmans” of the world by going full dove even as the Fed has already met its labor and inflation mandates, the move has led to a significant “impact on investors’ sentiment and behavior is evident in flows. ETFs, a universe almost equally shared between retail and institutional investors in terms of ownership, saw another big inflow this week meaning that three quarters of the previous selling of equity ETFs during January and February has been reversed over the past three weeks.”

What is more notable from JPM’s note, is that CTAs – one of the most important marginal price setter on the way down when only CTAs were profitable at the expense of all other hedge funds, continued to cover their loss-making short equity exposures. By JPM’s equity beta measure, CTAs appear to have fully covered their shorts as shown below.

But while CTAs may be out, the short base in US equity futures remained elevated as of last Tuesday, March 15th, a day before the FOMC meeting,  perhaps held by money managers outside CTAs.

JPM also suggests that there was even more short covering in the post-FOMC period not covered by the chart above, which certainly has collapsed the net short exposure but JPM believes that “given the size of the shorts as of last Tuesday, we doubt that the negative net spec position on US equity futures has been fully covered by this week. In total, by looking at Figure 1 and Chart A16 together, we conclude that the short covering phase that started a month ago is very advanced” but, as JPM hedges “it is not yet fully completed.”

That may be, but a far bigger catalyst for fund flows in the coming days is the end of corporate buybacks for the next 6 weeks as DB warned on Saturday morning:

… a warning which is especially poignant when one considers that BofA’s “smart money” clients have now been selling stocks for 7 consecutive weeks, leading Bank of America to admit the bitter truth that “clients don’t believe the rally, continue to sell US stocks.”

So why would anyone else, unless pressured by a short squeeze, buy… especially when as the central banks explicitly admitted, absent more liquidity support the market is set to tumble. A short squeeze, which as JPM admits, is almost over.

Finally, a major driver of market upside this past week was Quad Witching, the S&P rebal and OpEx, which as JPM’s head quant Marko Kolanovic warned last week, may now catalyze near-term weakness: “in the next week, we could see some downward pressure as the impact of option hedging is reversed. Historically, we have found that the market develops positive momentum during the 3rd week of the month (when there is a call imbalance), and this often reverses during the 4th week of the month.”

But what may ultimately determine the direction of market may also be the most boring one of all: Q1 earnings, which begin in earnest on Momdah, and are expected to be the worst since the financial crisis.

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

To say that the last seven days have been tumultuous in Brazil would be a laughable understatement.

The country – which is on the fast track to “banana republic” status – plunged into chaos this week after a Sao Paulo state judge said a decision on the arrest of former President Luiz Inácio Lula da Silva should fall to federal judge Sergio Moro, the firebrand “rockstar” leading the prolonged car wash probe into corruption tied to Petrobras.

Sensing that Lula’s detention was imminent, embattled President Dilma Rousseff sought to save her mentor by offering him a ministerial position which would effectively make him immune from prosecution – at least in the near term. Lula still has legions of supporters in the country, but the millions upon millions who want to see the Rousseff government ousted saw through the President’s gambit immediately. And so did Moro, who tapped the President’s phone and subsequently released several dozen recordings, at least one of which appears to prove that she did indeed offer Lula the cabinet position to shield him from legal trouble. Cue the street protests.

Lula was sworn in during a farce of a ceremony which not even the PMDB bothered to attend and meanwhile, a committee was assembled to push forward with impeachment proceedings for Rousseff. A series of legal maneuvers from both sides set off a kind of “will he be minister or will he not” seesaw until finally, on Friday evening, Supreme Court judge Gilmar Mendes blocked Lula’s Lula’s appointment.

“Tensions also grew between the government and the federal police after Eugênio Aragão, justice minister, threatened to remove federal police teams from investigations, including the task force investigating corruption at Petrobras,” FT wrote on Sunday. “If there is even a hint that information has been leaked from one of our agents, the whole team will be changed and I don’t need proof — the federal police is under our supervision,” Mr Aragão told Folha over the weekend.

“Justice Gilmar Mendes’s ruling bars Mr. da Silva, who was sworn in Thursday as Ms. Rousseff’s chief of staff, from serving in the cabinet until a panel of Supreme Court justices makes a final ruling following an appeal by the government,” WSJ wrote, adding that “As a private citizen, Mr. da Silva, who is under investigation in the corruption case, can be tried in any court.”

In other words, Moro is now free to arrest him.

“Formally, Judge Moro could issue the arrest warrant,” Ivar Hartmann, a law professor at Getúlio Vargas Foundation in Rio de Janeiro told The Journal. “I don’t know if he will, but he could.”

Yes “he could” and if he does, you’ll likely see more BRL strength. As we’ve documented extensively this month, the BRL is now trading pretty much exclusively on Lula, as his fate is seen as a proxy for whether Rousseff will ultimately be forced from office. The market apparently believes that anything would be better than the current political arrangement when it comes to shoring up the country’s flagging economy which last year plunged into what might as well be a depression. Here’s a look at how the currency is trading Lula news flow:

Of course Brazil’s problems aren’t going to be fixed if Lula and Rousseff are kicked to the curb. On the political front, 26% of Congress faces active criminal investigations. On the economic front, we could rattle off any number of data points but really, this is all you need to know:

So while the market may be forward looking, the BRL rallies that invariably accompany any and all bad news for Lula are not just premature, they’re ludicrous. In fact, in order for the country’s structural problems to dissipate, the currency needs to shoulder some of the burden. Goldman has more on why “the last thing Brazil needs now is to go back to BRL over-valuation.”

*  *  *

From Goldman

Brazilian asset prices repriced significantly since late February on the back of a number of developments in the political and judicial spheres that were perceived as having significantly increased the probability of a near-term political transition.

Due to a combination of external factors and a number of domestic events the BRL was the best-performing currency across the EM universe in the year through March 17. In the process, the BRL moved back into over-valuation territory, something that in our assessment is at odds with the current extremely debilitated macroeconomic picture and highly uncertain political backdrop.

Part of the asset price rally observed during the first two weeks of March reversed on March 14-16, with Brazilian asset prices selling off with the appointment of former president Lula da Silva as Chief of Staff of the Rousseff administration (Exhibit 1). This was perceived by the market as having reduced the probability of a near-term political transition, and as having increased the probability of a shift back to heterodox policies. However, new “car-wash” investigation developments, spontaneous mid-week street protests, and a dovish FOMC surprise, were met by rallying markets towards the end of the week (March 17-18).

Due to a combination of external factors and a number of domestic events related to the car-wash judicial probe into corruption, sentiment towards the BRL improved significantly despite still-high implied and realized volatility.

We have long argued that given the very weak domestic macro fundamentals, namely, high domestic inflation, very deep and prolonged recession (Exhibits 7 and 8), and lingering political risk and uncertainty, the economy would benefit from a currency that is noticeably cheap to fair-value for a while.

Hence, we are of the view that the central bank could and should be more assertive in reducing the still very large US$108bn stock of Dollar-swaps, in order to prevent further currency appreciation. That is, leaning against the wind of currency appreciation would be fully justified by the current weak macro fundamentals (2-year-long, deep economic contraction).

In summary, to increase the efficiency of the macro adjustment and lessen the output/employment loss of the required rebalancing, the authorities should restrain BRL/USD appreciation below 3.70, in order not to short-circuit the ongoing expenditure switch, and to cement the current account adjustment.

via Zero Hedge http://ift.tt/1R8dS6O Tyler Durden

Submitted by Michael Krieger of Liberty Blitzkgrieg

 

All government, in its essence, is a conspiracy against the superior man: its one permanent object is to oppress him and cripple him…The most dangerous man to any government is the man who is able to think things out for himself, without regard to the prevailing superstitions and taboos. Almost inevitably he comes to the conclusion that the government he lives under is dishonest, insane and intolerable, and so, if he is romantic, he tries to change it. And even if he is not romantic personally he is very apt to spread discontent among those who are.

     – H.L. Mencken

It does not take a majority to prevail but rather an irate, tireless minority, keen on setting brushfires of freedom in the minds of men.

      – Samuel Adams

 

Fiat justitia ruat caelum
“Let justice be done though the heavens fall.”

I believe it is the duty of every single American citizen to sit down and watch the following mini-documentary. In just 45 minutes, you will learn more about the state of the union and the the world around you than decades of schooling and mainstream media could ever provide. Ignorance is not bliss, and if it weren’t for the blinding levels of ignorance pervasive in modern society, we wouldn’t find ourselves in this current deplorable state we’re in — on a knife’s edge between manageable serfdom and total tyranny.

No one in American society is supposed to be immune from criminal prosecution, yet the Justice Department in the Obama administration took it upon themselves to grant such immunity to the mega banks and their employees. This is a tale of the traitors operating within the highest levels of the U.S. government, and it is a saga of how the rule of law was openly torched in front of our very eyes.

Readers often ask me “what can I do to help.” Here’s what you can do. You can watch this video, then send it to every single person you know and plead with them to watch it. If necessary, make it a point to to sit with them and watch it. That’s how important this is.

Until justice is served, this nation will never heal. Economically, culturally or spiritually.

Now without further ado.

via Zero Hedge http://ift.tt/1T3IZ4S Tyler Durden

On Friday, the EU and Turkey came to an agreement on a set of proposals to stem the flow of Mid-East asylum seekers into Western Europe.

The focus of the discussions in Brussels was cutting off the sea route to Greece. On the front lines is the Greek island Lesbos where at least half of the 144,000 refugees who have entered Greece in 2016 have landed. More than a million people crossed the Aegean to Greece last year.

The new deal between the EU and Turkey calls for Ankara to take back all refugees arriving in Greece by sea after their asylum claims are processed. For every refugee that is sent back, Europe will take refugees directly from Turkey in a kind of one-for-one swap. The point is to discourage people smugglers by effectively making the sea trip pointless. “If returns begin migrants won’t want to pay $1,000-2,000 to a smuggler,” Antonis Sofiadelis, head of the coastguard operations on Lesbos explains.

As part of the deal, Turkey will also get as much as €6 billion in aid and will have its EU membership application fast-tracked. Here are the specifics (on which the deal is notably short) for those who might have missed it:

• Sending Migrants Back to Turkey From Greece
  • All migrants who travel to Greece from Turkey using irregular means after an agreement is reached will be returned to Turkey, in what the agreement calls “a temporary and extraordinary measure, which is necessary to end the human suffering and restore public order.”
• A One-for-One Swap of Syrians
  • For each Syrian migrant returned to Turkey, the European Union will directly resettle another Syrian from Turkey, with priority given to Syrians who have not previously entered, or tried to enter, the European Union, up to a total of 72,000.
  • If that number is reached — as it almost certainly will be — a new round of negotiations will be held.
• Stricter Controls of Turkey’s Borders
  • Turkey will take “all necessary measures” to prevent migrants from opening new sea or land routes to the European Union from Turkey in a measure aimed at assuaging concerns in Bulgaria that migrants will stream into the country.
• Concessions for Turkey
  • The European Union will speed up the disbursement of the €3 billion it pledged in November, and provide another €3 billion by the end of 2018, once Turkey meets its commitments.
  • The European Union will waive most visa requirements for Turkish citizens by the end of June, provided that Turkey meets certain requirements.

But while the deal is effectively in place now, sending refugees back to Turkey from Greece won’t be possible until April, the deadline for setting up the administrative infrastructure that will allow for the swift processing of asylum applications.

In the meantime, the flow continues. “They waved, cheered and smiled, elated to have made it to Europe at dawn on Sunday in a packed blue rubber motor boat,” Reuters writes, recounting the scene on Lesbos as dawn broke on Sunday. Here’s more:

The 50 or so refugees and migrants were among the first to arrive on the Greek island of Lesbos on day one of an EU deal with Turkey designed to close the route by which a million people crossed the Aegean Sea to Greece in 2015.

 

Exhausted but relieved, the new arrivals wrapped their wet feet in thermal blankets as volunteers handed out dry clothes and supplies.

 

Reuters witnesses saw three boats arrive within an hour in darkness in the early hours of Sunday. Two men were pulled out unconscious from one of the boats amid the screams of fellow passengers and were later pronounced dead.

 

Twelve boats had arrived on the shoreline near the airport by 6 a.m, a police official said. A government account put the number of arrivals across Greece in the past 24 hours at 875 people.

 

Among the early morning arrivals on the seaweed strewn beach on the south of Lesbos was Syrian Hussein Ali Muhammad, whose studies were interrupted after the war began. He said he wanted to go to Denmark to continue university. Asked if he was aware of the European decision, he said:

 

“I know that. I hope to cross these borders. I hope I complete my studies here (in Europe), just this. I don’t want money, I just want to complete my studies. This is my message.”

 

Doubts remain about whether the deal is legal or workable. It was not clear what would happen to the tens of thousands of migrants and refugees already in Greece.

No, it’s not clear. And as we’ve seen over the past several weeks, there’s now a crisis in Idomeni where more than 15,000 refugees are stranded in makeshift camps now that Macedonia has closed its borders. 

On Friday, Greek Interior Minister Panagiotis Kouroumplis compared the camps to Dachau. “I wouldn’t hesitate to say that this is a modern Dachau,” he said, lamenting what he called “the awakening of a kind of nationalism against persecuted people.” This should give you an idea of what life is like in Idomeni:

Those arriving on Lesbos Sunday said they were aware of the deal between Brussels and Ankara, and you can bet they’re also acutely aware that the Macedonian border is closed. But they don’t care. “I know the decision,” a 30-year old computer engineer from Syria told Reuters. “I hope to (meet with) my wife and children [who are in Germany].”

As we’ve said repeatedly, the scope of the “problem” simply defies any attempt on Europe’s part to cope – especially when Brussels is dependent upon Erdogan to be the first line of defense. Refugees didn’t leave Syria to be blown up or persecuted in Turkey. They left to get to Europe. Threatening them with expulsion if they decide to use the sea route to reach Greece isn’t going to deter anyone. They already know they can be expelled. They likely also know that the new plan will be virtually impossible to implement. 

And so, as we look on while the Schengen dream dies amid a nationalistic furor not seen in Europe for more than seven decades, we bring you the following images from Reuters which depict the scene just this morning on the Greek island of Lesbos.

via Zero Hedge http://ift.tt/1RtmQ0l Tyler Durden

Submitted by Michael Lebowitz of 720Global

Hail Mary

Over the past 30 years, many central banks have tried to re-order the natural drivers of economies. As opposed to savings and investment driving production and consumption, they moved consumption to the front of the line, meaning it came at the expense of savings and investment. These efforts disrupt the natural order of activities in a healthy economy and encourages an economic cycle fueled by debt. Central banks’ model, as shown below, illustrates how ever-lower interest rates are used to encourage additional borrowing to drive consumption and lift asset prices; all in the hope of ultimately achieving economic growth. 

Currently economic growth in most of the largest nations is deteriorating, and once again the central bankers are grasping for remedies. However today is different than the past. Unlike prior instances of stalled growth, the central bankers’ main policy tool, interest rates, has reached a supposed limit of zero percent. To combat the situation, some central banks are employing a new tool to preserve the cycle shown above. The method to their madness is a negative interest rate policy (NIRP). This article describes a NIRP and related matters every investor should be considering. It also discusses a link between NIRP and a recent appeal of some leading economists to fight crime by eliminating large currency denominations.

A better understanding of negative rates may lead you to our opinion that the concept of a NIRP is sheer desperation akin to a last second Hail Mary pass in football, but with even lower probability of success.

Negative Interest Rates

A negative interest rate is a simple concept, yet those promoting such an economic remedy make the matter sound like a PhD dissertation and appear to be confusing the public. Before explaining what negative interest rates are, and why a central bank might promote them, we share a few headlines to highlight their developing global popularity: 

When making a deposit in a bank, one is electing to forego consumption today and save money for the future. A deposit is effectively a loan to the bank that can be withdrawn at a future date without notice or penalty. Traditionally, banks pay interest on deposits to compensate for the time value of money as well as the potential default risk associated with the bank. As importantly, they also pay interest on deposits to incent people to forego consumption and allow the bank to leverage the deposit into higher yielding loans to other borrowers. This arrangement has defined banking since its earliest roots in ancient Greece nearly 4000 years ago. 

Negative interest rates, however, are quite a different arrangement. They essentially ignore or negate the time value of money and any default risk associated with the entity charging negative interest rates. For example, imagine depositing $100 into your bank account only to find out that you have $98 left when you go to withdraw it in a year or two. Not only were you not compensated for the time value of money and the default risk assumed, you actually paid the bank while still assuming these risks. Equally confounding, assume you approached your mortgage banker to take out a mortgage to purchase a house and were told that you would be compensated monthly for taking such action. Welcome to the world of negative interest rates. It really is that simple; and that bizarre.

Why a negative interest rate policy?

To consider why central banks are promoting a NIRP we need to understand their goals and the tools at their disposal to achieve them. Most central banks are entrusted with the important role of managing their nation’s monetary policy to enable strong economic growth, full employment and moderate inflation. To accomplish this feat, many central banks adjust short term interest rates to influence borrowing, investing and ultimately consumption.
Over the last 30+ years many central banks have become increasingly dependent upon lower interest rates to meet their economic goals. Think of this strategy as continually pulling forward tomorrow’s consumption to today. At some point you run out of tomorrows. The following graph shows the rise in total credit outstanding, GDP and the Federal Funds rate (the rate the Federal Reserve adjusts to influence borrowing and lending) in the United States. 

Total Credit Outstanding, GDP and Federal Funds Rate

Data Courtesy Bloomberg

The sharp increase in total credit outstanding or “debt”, relative to the increase in GDP, is a reflection of the rising leverage driving economic activity. In the 1980’s it took roughly $1.50 of debt to generate $1.00 of output. Today the economy needs almost $5.00 of debt to generate the same $1.00 of output. Borrowing for long periods of time in amounts greater than your ability to service the debt with economic output, as shown above, is only possible with low interest rates and/or very gullible lenders.

Since 1995, U.S. Treasury debt outstanding quadrupled, however the total annual interest expense paid by the Treasury remains roughly the same. Declining interest rates make refinancing existing debt with new debt cheaper, and prolongs the borrower’s ability to service that debt, but there is a limit to how effective such a policy can be.  It seems plausible that as debt levels expand and most nations approach zero or even negative rates, that limit is being reached. 

Cash 

The investment asset class most affected by negative interest rates is cash. Cash is a term investors’ use synonymously with money invested in the money markets. The term also applies to bank deposits, but for purposes of this article, we focus on funds invested in money market mutual funds. Money market investments are considered “money good” by many investors. In other words they are as “risk free” an investment security as one can find as there is the belief is that there is little to no risk of loss of principal. Money market mutual funds typically invest in short term fixed income products, such as U.S. Treasury Bills, collateralized lending agreements, certificates of deposit and high quality commercial paper. Many U.S. money market funds are governed by the U.S. Securities and Exchange Commission (SEC- 1940 Act -Rule 2a-7) which imposes very conservative limits on the assets these funds can hold and the way they manage their investment portfolio to ensure minimal risk of loss.

In todays near-zero interest rate environment, money market funds are struggling to earn enough interest to pay a return to shareholders and cover their expenses. Many funds have cut their expense entirely. This situation is exacerbated when worsens fund holdings incur negative yields. In this scenario money market funds are forced to either pay to manage clients’ money or devise other strategies to pass the costs of negative-yielding investments onto fund holders.

Such a negative interest rate situation is currently playing out in Europe as the ECB adopted a NIRP, which drove yields on many money market instruments in Europe to below zero. Europe’s largest money market funds are taking action. One mechanism to pass on the costs to fund holders allows the funds to reduce the number of shares its investors hold but leave the net asset value constant. For shareholders this is similar to the previous example where you deposit $100 in your bank and see your deposit shrink to $98 over time. We suspect other legal, but deceiving, approaches will be employed to enable money market funds to keep their net asset values constant despite negative returns. Money market funds are not a charity. They will find a way to pass on the costs of negative yields on.

A NIRP, per the central bankers’ plans, will force some investors from the security of money market mutual funds into riskier assets.  Short term commercial paper, municipal bonds and longer term Treasury notes may likely be in greater demand by such investors. Other investors may look to hard assets such as gold, silver and other commodities to help preserve their purchasing power. In both scenarios, cash investors aiming to avoid paying for safety will have to accept more risk.

Can more debt solve a debt problem?

In our article “The First Rule of Holes” we mentioned how monetary policy has increasingly encouraged more debt with little regard for the ability to service the accumulating debt on an individual, national and global level. If the intention of negative interest rates is to incur even more debt, one must question whether a continuation of the monetary policies that created the problem in the first place can actually solve the problem. We impart the wisdom of Will Rogers to help guide the central bankers: “When you find yourself in a hole, quit digging”

Furthermore, we should also consider if there is clarity among policy-makers around the extent to which the global debt burden is causing weak and stagnant economic growth. Productivity growth in the long run drives economic growth.  Unfortunately, productivity growth has been steadily declining globally, a likely symptom of the buildup of unproductive debt. Consider the chart below showing negative trends in productivity growth for the world’s 10 largest economies. Note as well that 7 of the 10 economies are currently witnessing declines in productivity. The U.S. is leading the world’s largest economies with a paltry .33% productivity growth over the last 2 years and is on trend to follow most major economies into negative territory.

Global Productivity Trends

Data Courtesy: The Conference Board

Financial Discipline

Governments and their central banks should encourage and reward financial discipline. Avoiding bankruptcy and the evils that accompany it are lessons everyone should heed. Strangely though, the idea of saving money appears to be a sin in the eyes of central bankers. Those exercising fiscal discretion are being punished by what amounts to a tax on their savings in the form of a negative interest rate. Is this a prudent message and does it seed societal problems as an unintended consequence?

As children we were properly taught by our parents to save money for a rainy day. The actions and policies of the central banks are now telling us that we should teach our children to disregard prudence and spend money like there is no tomorrow.

What does banning large denomination currency have to do with NIRP?

It is at this time when a NIRP is gaining popularity globally that we take notice that some of its loudest supporters including Larry Summers, former Treasury Secretary, and Mario Draghi, the current President of the European Central Bank (ECB) are advising an end to the issue of large currency denominations. They claim removing these bills will make criminal activities harder to commit. To their point, forcing a criminal to transact with two suitcases full of $50 bills instead of one suitcase full of $100 bills will complicate mischievous endeavors.

Having to resort to negative interest rates is not normal, despite efforts to sell it otherwise. In our opinion it is a desperate effort aimed at maintaining a faulty economic model amidst crumbling support as witnessed by perennially weakening economic growth and soaring debt levels. Drawing a link between NIRP and the sudden interest in eliminating the $100 bill in the U.S. and the €500 in Europe is not a stretch.

We believe the proposals to eliminate large bills are being conducted under the guise of thwarting criminal and terrorist activities. The reality is that eliminating large bills gives the government and financial system more control over the financial activities of the population. Making cash withdrawals more difficult, lessens the likelihood that individuals avoid the penalty of negative interest rates by storing cash outside of the banking system. Hoarding of cash reduces the ability of a NIRP to push savings into consumption or speculation. 

At the end of the day these proposals have little to do with stopping crime and much more to do with extending the power of the banking sector and financial authorities to socially engineering an outcome they want to occur (i.e. individuals spend every dollar they have).

Summary

Negative interest rates are a tax! Not a traditional tax paid to the government, but an expense paid, on savings. Years of policy designed to encourage spending and discourage savings is likely reaching the end game; the point where those exhibiting prudence must be punished to keep the game going.

At some point, and likely soon, central bankers will be forced to realize the efficacy of lowering interest rates is vanishing and is hindering achievement of their goals. When this occurs a paradigm shift in the way monetary policy is conducted will likely occur. Investors that understand this dynamic, and what it portends, will be in a much better position to protect and profit from the asset price adjustments that lie ahead.

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

As reported last night, something surreal happened at Trump’s Saturday rally in Arizona: a man who, as part of a group that had donned KKK attire and was occasionally giving out Nazi salutes in attempts to mock and provoke Trump supporters, did just that when he was punched and kicked by none other than a black man while being escorted out of the building. The moment was captured on the photo below which will surely become part of the 2016 presidential race archive.

 

Who is the protester?

According to a profile by the Arizona Daily Star, his name is Bryan Sanders who describes himself as an indepedent “I’m not a republican, I’m not a democrat”, and in a video interview after he left the rally he said the crowd was like an angry mob. What he ignored to note is that it was him and his fellow protesters who were doing everything all they could to rile up this “angry mob” and provoke them, ostensibly in hope of being attacked – which is precisely what happened. In other words, this group of Trump protesters which seem to follow him from state to state may be nothing more than a group of provocateurs, who do their best to get beaten up in order to stem up anti-Trump sentiment, something Sanders implicitly admits.

This is what he said: “I was protesting Trump’s facism, his racism, his lies, his women-hating,” Bryan Sanders said in an interview with the Arizona Daily Star.  Sanders said he was holding a sign that said “Trump is bad for America.” 

“A guy grabbed the sign out of my hand as I was being escorted out of the building and sucker punched me,” he said.  Sanders, who as noted above identified himself as an independent, said he also attended a Bernie Sanders rally the night before.

‘We’re gonna stop this; this is not going to continue,” he said. “If it takes somebody getting punched in the face, that’s what it takes, no problem.” And Sanders will make sure it is  no problem by continuing to provoke the “angry mob” at Trump rallies with everything he’s got.

 

Meanwhile, Trump himself said earlier today that protesters who’ve dogged his recent presidential campaign appearances should bear some responsibility for violence committed against them by his supporters.

“These are professional agitators,” the Republican front-runner said Sunday on ABC’s “This Week With George Stephanopoulos.” “There should be blame there, too.”

As Bloomberg reports, “violence flared again on Saturday when a protester wearing a Confederate flag imprinted with the candidate’s face was struck by a black Trump supporter at a rally in Tucson, Arizona. The Trump partisan was angered by another demonstrator wearing a white sheet over her head in an imitation of a Ku Klux Klan hood. As local authorities attempted to remove the protesters, the supporter kicked the man with the sign three times and punched him once.”

At the time, Trump termed the protester wearing the hood “really disgusting,” saying that agitators at his events were “taking away our First Amendment rights.”

“They’re going to get a little television so their mom can say, ‘Hello,”’ Trump said at the rally. He criticized the demonstrators outside the event “making it so it’s a very narrow passageway” for people to enter. “What’s the purpose?” he said. “I apologize for the people that are coming in.”

The incidents have flared ahead of the March 22 winner-takes-all Arizona Republican primary, which polls show Trump is leading by by more than 10 percentage points over Texas Senator Ted Cruz. Utah also holds its Republican nominating contest that day.

In Sunday’s interview, Trump said he doesn’t “condone violence” but also didn’t condemn the man who kicked and punched the protester. Trump also praised his campaign manager, Corey Lewandowski, who appeared — in a video of a separate incident on Saturday — to have yanked a protester to the ground.

“I give him credit for having spirit,” Trump said of Lewandowski. “He wanted them to take down those horrible profanity-laced signs.” Video of the incident showed the man in the incident was not holding a sign.

Expect increasingly more comparable provocations, either by paid “professional agitators” or otherwise, at Trump rallies, until one day someone gets seriously hurt or dies.

Finally, this is what Trump himself tweeted moments ago:

Why is it that the horrendous protesters, who scream, curse punch, shut down roads/doors during my RALLIES, are never blamed by media? SAD!

— Donald J. Trump (@realDonaldTrump) March 20, 2016

He does have a valid point.

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As Evercore ISI (correctly) puts it, “no one can remember more than 7 bullets on anything.” So for those eager to catch up on all the latest news out of China, here are just 7 bullet points:

• Incoming Jan-Feb data still choppy.  Our view; no immediate hard landing, but no economic takeoff either.  Data review below.   
• Our Synthetic Growth Index (SGI) likely down for Jan and Feb, after up Sep-Dec.  Looking overseas and in China, we see more downside risk than upside surprise. 
• As China slows, no problem is too small for a new policy fix.  Here, four key items the NPC addressed.  Sadly, Beijing’s actions all look like patches, not like fixes.     
• Housing: too many vacant units, in the wrong places, wrong size and wrong price.  Some cities big speculation, others still dead.  SOEs buying doesn’t help.    
• SOEs:  excess capacity, old, inefficient in most key China industries.  How to fix?  Who would hire a 30-year veteran steel worker?   
• Equities:  recent rally welcome but markets still broken just when more equity financing is needed.  Beijing focus – just avoiding a new price collapse.  
• NPLs: from past bad decisions, rising sharply.  NPLs converted into ABS won’t help much.  NPLs converted into equities, even less.  No winners here. 

Curious for more: here are the details:

Overview.  The last two weeks of NPC announcements and positive talk just don’t fit with what we see.  Jan and Fed data are not sparkling.  We still pick up mostly negative anecdotes.  Our Jan and Feb SGI likely will be lower. 

Beijing has been on the protect growth track for a year.  But the rest of the world is not cooperating.  Global growth numbers are not improving.  Every added monetary easing move (real or promised) in the developed world makes us more nervous, not more comfortable.   

China has big structural problems that are weighing it down.  The understandable reaction is another Beijing fix.  Every governmental minister got a hearing at the NPC – conditions, prospects, policy ideas – plus the obligatory cheerleading – this will happen; that bad won’t happen.’  It’s the next steps that leave us cold. 
Here, briefly, four big problem areas that Beijing is trying to address.  (Note.  Ask us for more detail).   

First problem, Housing.  Housing is just out of equilibrium.  Too many units have been built (in order to create demand and jobs), in the wrong places and available at too-high prices.   There is renewed speculation in Tier 1 cities.  Some buyers borrow to borrow — borrowing money for the down payment, in order to get a mortgage.  Not healthy.  Excess supply dominates in Tiers 3 and 4.  One fix — having SOEs buy these surplus units.  This does not fill them up, it just changes the owner.  A mortgage interest deduction launch would only benefit the top sliver of the income distribution.  New construction won’t rise until the supply surplus has been resolved, no earlier than 2017.  Someone is going to get hurt here.   

Second problem, SOEs.  The industrial SOEs are out of equilibrium.  Capacity is widely excessive.  If these SOEs keep producing where there is no demand, nothing changes.  Stopping production while supporting these excess workers or finding them new jobs is the start.  Announced capacity cuts (by MIIT, for years) have not materialized.  Beijing is talking of cutting 1.3 mln workers out in Coal and 0.5 mln in Steel.  Coal and steel are just a start.  (Lay off and find a new job is called ‘resettlement’).   No time period given.  There need to be probably 20% job cuts in a wide range of China industry (from mining to mfg).  It’s going to take a long time with a lot of adjustments.  Retraining these workers will be beyond hard.  And expensive.  There is no pain-free fix.   

Third problem, Equities.  Equities are out of equilibrium.  And the new CSRC has promised they would intervene “decisively” if prices fell sharply again, as in June 2015.  So this is a promise of ongoing (or at least recurring) disequilibrium and intervention – state buying when market forces are pushing prices down more than Beijing can stomach.  A well functioning equity market is part of the solution in China, especially as debt mounts.  And as China counts on “innovation” as a new growth driver, but with the heavy hand of Beijing.  Be skeptical.   The IPO system does not work.  The structural fixes are absent. 

Fourth problem, NPLs.  Banking in China is out of equilibrium.  The NPLs are mounting.  (Note.  Ask us about our stress tests).  Loans to failing companies won’t evaporate.  They can’t be freely packaged into an ABS that looks good because there is safety in numbers (remember 2007-08).  Converting these loans that are failing into equity is not a realistic option.  Who wants this equity?  We’ve heard no details.  The officials could make rule and law changes to facilitate this, but what’s the use if it makes no sense.  Total (public and private) debt in China rose about 10% in 2015 (our estimate), and another 10+% in 2016 is coming.  The machinery just is not yet in place to make market forces dominate in China finance.  What’s the hurry.            

    
Quick Comments.

• Tobin Tax.  Briefly discussed, we think it goes nowhere (in this case, on forex transactions).  Even going thru the exercise and setting at a zero rate we believe is unlikely, and would be unwise.   
• Shenzhen-Hong Kong Stock Connect.  Beijing says yes in 2016; we think likely unless new equity turmoil erupts.  Yes a plus to SZ (northbound trading) as HK investors have not had access to SZ to date.  Note, essentially all SZ investors already had HK (southbound) access.   
• Shanghai SEB (Strategic Emerging Board).  China has said, this shelved for at least 2016.  Would have created a new competitor (for listing ‘growthy’ stocks) to ChiNext (part of SZ). 
• CSRC priorities.  New head, Mr. LI Shiyu, most recently from Ag Bank.  We believe 2016 focus will be on trying to find and punish violators (‘malicious shorting’ – whatever that is) and avoiding another market collapse as in Jun 2015).
• New margin lending.  After close Friday, China Securities Finance will resume loans to brokers for margin lending, and cut interest rates.  Was halted in 2015 in market upheaval.  Margin lending last year fell about 60% from its peak. 
• President Xi’s ‘Four Comprehensives.’  New slogan – every Party leader seems to want a slogan.  They are 1) promoting prosperity, 2) deepening reform, 3) strengthening the rule of law, and 4) stressing Party discipline.  You be the judge. 
• Outbound M & A.  Latest, Anbang Insurance-Starwood.  We do not think CFIUS will block it.  Only grounds are “national security” -defined by POTUS.  Blocking it would send a ‘the US is not open for business’ signal.  Also, Zoomlion-Terex, will not be blocked in our view. 
• Oscar’s China Sales Survey.  (Oscar.sloterbeck@evercoreisi.com).  Most recently at 34, weaker than in 2009 at 36.  Survey has a heavy ‘old China’ weighting.  Easy to conclude that ‘old China’ is weaker now than it was in the 2008-09 global meltdown. 
• Currency basket.  Most market participants continue to talk yuan ‘up’ or ‘down’ with reference to the USD.  That mindset needs to change.  Beijing has been explicit that they are thinking (and behaving) currency ‘basket.’  In the basket China is thinking about (not mechanical), the USD is #1.  EUR and JPY runners-up.  Make your own call on these cross-rates, but we would not bet against this ranking for overall economic health in the coming years. 
• Macau.   Rounding error at the NPC, but rules are being relaxed to allow more individual visitors (tour group not required) from added mainland cities.  This is a gaming industry plus.  Mass market is becoming more important versus high-end. 
• 315 Consumer.  New practice, every March 15, a CCTV channel devotes an evening to exposes of unfair practices in the consumer sector (so called ‘Name and Shame’).  This year it was much less focused on bad behavior by foreign brands. 
• PBoC cut.  PBoC cut rates 25 bps on MLF (Medium Term Lending Facility) loans to member banks for 3m, 3m and 12 m loans.  This is a small item, but it is an item. 

Source: Evercore ISI

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Anyone having listened, and traded according to the recommendations of Goldman chief FX strategist Robin Brooks in the past 4 months, is most likely broke.  First it was his call to go very short the EURUSD ahead of the December ECB meeting, which however led to the biggest EURUSD surge since the announcement of QE1.  Then, two weeks ago, ahead of the ECB meeting he “doubled down” on calls to short the EUR ahead of the ECB, the result again was a EUR super surge, the biggest since December. And then, as we previously reported, ahead of the FOMC’s uber-dovish meeting, Brooks released a note titled the “The Dollar Rally Is Far From Over” in which he said the following: “today brings the latest FOMC meeting. We expect the Fed to signal that it wants to continue normalizing policy, which means three hikes this year and four in 2017, with the statement referring to the risks as “nearly balanced,” reverting to phraseology used in October, just before December lift-off. Overall, our sense is that the outcome will be more hawkish than market pricing, in particular given that the FOMC may leave open the option of tightening at the April meeting.”

He couldn’t have been more wrong, and the result was the biigest two-day crash in the US Dollar.

 

In sum, just his latest three calls have resulted in nearly 1000 pips worth of losses. Add 50x leverage and…well, we know why hedge funds are getting obliterated.

 

One thing we didn’t know is  whether after being spectacularly wrong for three consecutive times, Brooks would finally thrown in the towel and stop crucifying muppets. We got the answer this morning, when not only has Goldman’s chief FX strategist quadrupled down on his wrong-way bets, saying it’s not Goldman that is wrong, but the central banks (as he puts it, “an unfortunate series of misfires from central banks, most notably the ECB”), and perhaps more importantly, quashes speculation that there is a central bank conspiracy to move the dollar lower, to wit. “we see no conspiracy to stabilize exchange rates”, which is all the confirmation we needed that the Shanghai G-20 summit was indeed just a mini Plaza Accord “conspiracy” (in Goldman’s words) to force the dollar lower, if only for the time being until the impact of the soaring Yen and Euro slams Japanese and European stocks low enough, and we go back to square one at which point Goldman will finally be right, and the USD will soar 15% higher in very short notice.

Here is Brooks’ full note:

Going up is hard to do

 

Over the past year, the Fed has repeatedly arrested the Dollar rise (Exhibit 1) and this week’s FOMC, with the shift in rhetoric towards caution over external risks, marked another iteration. We have sympathy for the Fed’s dilemma. After all, BoJ and ECB easing led the Dollar to rise sharply in H2 2014, before US monetary policy normalization could even begin. For the Fed, this is a major headache because – if our expectation for Fed hikes is correct – USD could rise another 15 percent (Exhibit 2), i.e. underlying appreciation pressure is large. This might be why the Fed is modulating its message, for fear that sounding upbeat could trigger another sharp rise in the Dollar. In this FX Views, we make three points: (i) dovish shifts from the Fed over the past year have only been able to put the Dollar into a holding pattern, they have not reversed the 2014 rise; (ii) data will ultimately force the Fed’s hand, which is why our US economists have stuck with their call for three hikes this year; and (iii) the underlying case for the divergence trade is stronger, not weaker, given that a dovish Fed will spur US outperformance versus the Euro zone and Japan. Going up is hard to do, but the Dollar will go up.

 

 

There is no doubt that Wednesday’s FOMC was a dovish surprise. But it is important to distinguish between what this week may signal (delayed tightening) and what it does not (a return to easing). This distinction matters because – as we have learned over the past year – delay only arrests Dollar strength, it does not reverse it. In the big picture, our first commandment for 2016 FX still stands, which is that – following the large rise of the Dollar in H2 2014 – the growth and inflation picture looks robust, which means that underlying momentum in the US is stronger than it appears. This is one reason why our US team has stuck to its call for three hikes in 2016 and why we believe data will ultimately force the Fed’s hand. In the interim, there are obviously questions around the Fed’s reaction function. The one thing that stands out to us is that recent Fed statements have become more volatile: dovish in September over global risks, hawkish in October with the signal for imminent lift-off, dovish in January with the suspended risks balance, and dovish again this past week (Exhibit 3). This argues against taking this latest surprise too seriously. If we are right about data, the Fed could quickly reverse course, in line with our US team’s call.

 

 

There is mounting concern – after the recent run of unhelpful central bank meetings – that the divergence trade is over. But from a fundamental perspective, this week’s dovish shift from the Fed will only spur US outperformance versus the G10, which is pronounced even with the Dollar substantially stronger over the last two years (Exhibit 4). For the US in such a setting to loosen its financial conditions at the expense of its G10 peers makes no sense (Exhibit 5), something that has only been compounded by the ECB’s pivot to credit easing (Exhibit 6), given that Euro strength in the wake of that decision has been undoing some of the positives from tighter credit spreads. Overall, the fundamental case for the divergence trade is stronger, not weaker, after the latest Fed meeting.

 

 

Pessimism over the divergence trade is compounded by worries that the February G20 meeting may have seen a behind-the-scenes agreement for the ECB and BoJ to desist from policies that could push the Dollar stronger. Comparing the February communique with that from September, there are two notable changes. First, the February communique contains language that countries should refrain from “disorderly moves” in their exchange rates, a reference to China and in line with our view that a large, one-off devaluation of the RMB is unlikely. Second, the September communique contained language that “monetary policy tightening is more likely in some advanced countries,” a reference to US monetary policy normalization. That language is missing from the February communique, which we think reflects US officials’ concern over market moves at the time. With the rebound in risk since then, we think that omission is dated, much as the past week’s dovish shift from the FOMC may turn out to be. We see no conspiracy to stabilize exchange rates, just an unfortunate string of misfires from central banks (most notably the ECB), which will ultimately reinforce the divergence theme.

Goldman’s determination to see the USD higher probably means that the dollar has quite a bit downside left. Recall from our post yesterday, that the best trade to take advantage of this is to sell the USD during US hours offset by a dollar long during the rest of the trading day.

Only once Brooks is Gartmaned, will it be safe to go long the USD again, a move which will also unleash the next leg lower in crude, and thanks to China’s promptly response, global stock markets too.

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