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Authored by Mike Krieger via Liberty Blitzkrieg blog,

Most of you reading this are probably aware the U.S. auto market is a train wreck waiting to happen, but a recent report by Moody’s really puts the industry’s insane lending practices into perspective.

Reuters reports:

As U.S. auto sales have peaked, competition to finance car loans is set to intensify and drive increased credit risk for auto lenders, Moody’s Investors Service said in a report released on Monday.

 

“The combination of plateauing auto sales, growing negative equity from consumers and lenders’ willingness to offer flexible loan terms is a significant credit risk for lenders,” Jason Grohotolski, a senior credit officer at Moody’s and one of the report’s authors, told Reuters.

 

Motor vehicle sales have boomed in the years since the Great Recession. U.S. sales of new cars and trucks hit a record annual high of 17.55 million units in 2016.

 

Industry consultants J.D. Power and LMC Automotive on Friday reiterated their forecast for a 0.2 percent increase in sales in 2017 to 17.6 million vehicles.

 

But Moody’s says it expects U.S. new vehicle sales to decline slightly to 17.4 million units in 2017.

 

In the first nine months of 2016, around 32 percent of U.S. vehicle trade-ins carried outstanding loans larger than the worth of the cars, a record high, according to the specialized auto website Edmunds, as cited by Moody’s.

Wow.

Typically, car dealers tack on an amount equal to the negative equity to a loan for the consumers’ next vehicle. To keep the monthly payments stable, the new credit is for a greater length of time.

 

Over the course of multiple trade-ins, negative equity accumulates. Moody’s calls this the “trade-in treadmill,” the result of which is “increasing lender risk, with larger and larger loss-severity exposure.”

 

To ease consumers’ monthly payments, auto manufacturers could subsidize lenders or increase incentives to reduce purchase prices, though either action would reduce their profits, the report said.

Bad loans and reckless behavior generally seems to be already baked into the cake, so the real question is when will it all truly enter the market and create major problems? The cycle is already long in the tooth and a year of negative sales growth could turn out to be a tipping point.

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In many ways, the just concluded sale of $34 billion in 5Y paper was a carbon copy of yesterday’s 2Y auction.

Just like yesterday, the auction tailed modestly, and pricing at a yield of 1.95%, today’s auction was 0.5% bps wide of the 1.945% When Issued. This was the third consecutive tail in a row for this tenor, and while the high yield rose from last month’s 1.931% it was well below the 2.06% yield of the December 2016 auction.

However, like yesterday, the internals were stronger than the modest tail revealed. First, the bid to cover of 2.37 was higher than last month’s 2.29, if fractionally below the 6 previous auction average of 2.45. Then, looking at the bidding composition, we find that like yesterday, Indirect appetite rose again, with foreign bidders taking down 68.9% of the auction, more than 10% higher than in February, and above the 6 month average of 62.3%. With Directs taking down 4.8%, in line with the recent average of 5.2%, it means that Dealers were left holding 26.4% of the auction. 

Overall, another auction, which was either good or bad, depending on how one looks at it.

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With the reflation trade seemingly dead, the logical outcome is that the “disinflation” trade will soon follow. However, as that would undo most of the recent gains, central banks will fight tooth and nail to prevent that from happening, but can they? As RBC’s Charlie McElligott writes in his morning note, “some large players in the market believe that the Fed had indeed been incorporating anticipation of ‘fiscal policy”, Trump policy which may now not be coming until late 2017 or early 2018 (if at all). Additionally, after chasing the reflation trade, “many systematic ‘trend’ funds have even turned the other way—most-clearly, with some now shorting USD against long Euro / Yen, and some short-term models going long rates. “

As a result, “after a joyful 6 month stretch to end 2016 — the end of 1Q17 is nearing, and it’s been a bit of a crash-landing, with discretionary players and generalists ‘tapping’ on large swaths of the ‘reflation’ trade, and 2017 late-comers to the trade ‘under-water’ (negative returns YTD from ‘long USD’ / ‘long banks & cyclicals’ / ‘short rates’).”

Which is why, the RBC cross-asset strategist believes that if nothing changes, the reflation is over, however there are two conditions under which it may come back:

This is why the only chance in my mind for true ‘reflation’ to come back alive is going to require either 1) a break higher crude oil (higher inflation expectations, maintain / extend ‘energy base effect’ to keep driving yields higher) or 2) movement on tax policy, most notably via incorporation of a revenue driver in the form of a BAT or VAT (more likely as per ‘watered down’ compromise IN ORDER FOR PASSAGE) which in turn would drive US Dollar appreciation and higher US yields.

McElligott’s conclusion: “this higher USD / higher rates / higher sentiment around a tax cut would be a game-changer for resetting the course of asset returns.  Without movement here, the market is looking increasingly binary, with momentum building again in the ‘disinflation’ camp the longer we stay ‘stuck’ in status quo, ESPECIALLY into the back-half of the year, with the Fed again hiking and the ECB transitioning towards ‘tightening’ as well.“

In other words, we need a sharp reversal to the upside or else all the momentum of the past year following the “Shanghai Accord” will soon be lost.

McElligott’s full note below.

THE REAL ROTATION(S), AND WHAT IS NEEDED TO REJIGGER REFLATION

NEAR-TERM: Early glimpse sees ‘risk reticence’ from real money to move into month- and quarter- end, although there are signs of ‘tactical mean reversion’ strategies being deployed into / take advantage of mechanical rebalancing trades from asset-allocators

LONG-TERM: The same way that market forces were indicating ‘reflation’ well-before Trump’s ‘fiscal policy kicker’ late last year, we have now seen months of thematic price information showing us that the ‘US domestic-led reflation’ trade is late-cycle (negative returns YTD from ‘long USD’ / ‘long banks & cyclicals’ / ‘short rates’)

• As such, now seeing greater investor interest in deploying risk AWAY FROM US and into rest-of-world to minimize ‘Trump policy implementation risk’ in addition to attractive relative valuations and earnings growth (vs US)—essentially better ‘risk / reward’ elsewhere
• Inside US, shift away from last year’s reflation leaders ‘cyclicals’ and ‘value’ painfully clear now YTD, with ‘growth’ (secular-kind—i.e. tech, biotech, consumer disc) and ‘anti-beta’ (defensives / low volatility) as the YTD performance leaders
• To see ‘animal spirits’ revived in thematic ‘US domestic-led reflation’ trades—it will likely require either 1) a break higher crude oil (higher inflation expectations, maintain / extend ‘energy base effect’ to keep driving yields higher) or 2) movement on tax policy, most notably via incorporation of a revenue driver in the form of a BAT or VAT (more likely as per ‘watered down’ compromise IN ORDER FOR PASSAGE) which in turn would drive US Dollar appreciation and higher US yields
• Without one of the two scenarios above occurring in coming-months, the market view is looking increasingly ‘binary,’ with crude ‘stuck,’ yields fading lower again and risk-sentiment fading—especially into back-half of year with potential for Fed hike and ECB shift towards ‘tightening’

* * *

 A lukewarm re-embrace of US stocks following the Sunday night / Monday ‘fiscal policy’ freak-out, as yesterday’s risk recovery tuckers-out.  Looking at the broad landscape, Yen strength is forcing carry-trade unwinds (DB G10 Carry Basket -2.9% MTD), the US Dollar is now -3.0% YTD as the market’s chief ‘reflation’ proxy, US equities cyclicals are being crushed (the US banks ETF is -10.2% in less than a month, S&P energy is the worst-performing sector YTD -9.7%) and S&P minis are currently -2.3% from their March 1st highs.  Clearly not an inspiring back-drop for many to deploy risk into month- and quarter- end, although it’s exactly the time when one should be putting on mean-reversion strategies for tactical alpha extraction from mechanical rebalancers (as such early today, we actually see leadership from MTD ‘laggards’ like WTI and ‘risky equities’ like ‘cyclicals vs defensives’ pairs / ‘high-beta’ / ‘inflation’).  To the ‘low risk appetite’ point made above, we currently see Spooz and US rates unable to move higher despite the highest ‘headline’ print in US Consumer Confidence since 2000, with labor differentials making new cycle highs (H/T Oubina).  The ball is in your court, Fed.

Stepping-back, we are again seeing increased risk appetite outside of US, most notably Asia (ex Japan), Emerging Markets and EU (S&P -1.3% over past 11 sessions vs MSCI Asia ex Japan +4.2%, SXXP +0.5% / DAX +0.7%  and MSCI EM +4.3%).  This ‘rotation to R.O.W.’ has become increasingly evident over the past few weeks, and makes bunches of sense–both with relation to relative valuations and ‘earnings growth’ trajectory—but also in light of the current US fiscal policy wobble, which is driving a ‘thematic shakeout’ under the hood of US equities.

There has been an evolving fact-pattern showing that investors in US equities were becoming increasingly wary of last year’s ‘reflation high flyers’ for nearly four months now–most notably in the form of ‘cyclical vs defensive pairs’ and ‘value market-neutral’ (long ‘value’ factor, short ‘growth’ factor) both peaking back at the beginning of December (alongside US Dollar).  Then in January we saw ‘leveraged beta’ (high risk credit / equity plays) peak, as we began to see a move ‘up in quality’ begin to develop.  In February, ‘inflation longs’ and ‘cyclical beta’ peaked, alongside WTI crude and US high yield credit, all of which have since traded markedly-lower.  And on March 1st, we saw ‘US banks,’ ‘small caps,’ ‘high-beta,’ ‘value factor longs,’ ‘domestic US exposure,’ ‘Trump tax beneficiaries’ and ‘high Sharpe Ratio’ all peak and fade ever-since. 

Conversely, emerging markets equitites (EEM) made lows in December, alongside ‘growth factor longs,’ ‘defensive equities’ and gold as US ‘real yields’ (as measured by 5Y TIPS) hit their highs; ‘quality factor’ and ‘low-risk equities’ made lows in January; ‘anti-beta market-neutral’ made lows in February etc.  Now, most of these are holding at or near highs.  Again, the point-being that we have seen a multi-month rotation AWAY FROM ‘high-beta cyclicals,’ ‘value’ and ‘high beta / risk’ which were the face of ‘reflation 2016’ and now INTO either low-beta bond-proxies (benefitting from the rates short squeeze) or ‘secular growers’ like US tech / biotech / consumer discretionary. 

Recall last year at this time, when I began noting ‘price is news’ indications that we were seeing signs of an ‘inflation impulse’ namely in thematic equities and factor-behavior (via the Yellen “weak Dollar policy” pivot coming out of the G20 in Shanghai) to highlight risks with the ‘low growth, low inflation’ narrative and the scale for a massive reversal with  the ‘long duration’ trade in fixed-income?  And how over the ensuing months, we saw signs of this accelerating inflation input into CPI / PPI prints off the building ‘energy base effect’ as crude turned much higher, while too we saw global PMIs rotating meaningfully higher?  Point-being, before ANY of the ‘fiscal policy upside kicker’ following the Trump election, the “Big Picture” was one of first pieces on the Street to highlight the turn in global growth, and thus, substantiate the tremendous risk in consensual ‘lazy long’ fixed income positioning and the upside in equities ‘cyclical’ sectors which had been left for dead (thus, ‘value’) for years.

Well, after a joyful 6 month stretch to end 2016—the end of 1Q17 is nearing, and it’s been a bit of a crash-landing, with discretionary players and generalists ‘tapping’ on large swaths of the ‘reflation’ trade, and 2017 late-comers to the trade ‘under-water’ (negative returns YTD from ‘long USD’ / ‘long banks & cyclicals’ / ‘short rates’).  Now many systematic ‘trend’ funds have even turned the other way—most-clearly, with some now shorting USD against long Euro / Yen, and some short-term models going long rates.

* * *

We are now at a critical juncture as we transition into 2Q17 where funds will choose to stay ‘parked’ in the ‘hiding places’ where they already sit very heavily-allocated (for equities, say long ‘secular growth’ sectors), while many scale-back their ‘higher rates’ bets (and likely, banks positioning) and some even begin to short crude oil again.  Basically, many are downshifting away from ‘reflation.’ 

Why?  It looks increasingly clear to me that some large players in the market believe that the Fed had indeed been incorporating anticipation of ‘fiscal policy,’ despite their statements otherwise.  So now, the market reassesses rate hike probabilities, as evidenced by current implied probabilities of a third hike this year coming at just 40%.

The importance of oil is still very significant here.  If OPEC’s likely ‘extension of production cuts’ story can’t overcome the ramping of US production, the drag on yields could be very difficult to overcome for risk assets, especially with the role that inflation expectations play in HY credit spreads and equities.

And if data such as the aforementioned mega Consumer Confidence print this a.m. can’t drive higher yields (‘soft vs hard data’ issue), it does seem that the reflation / higher rates trade is in real jeopardy.

This is why the only chance in my mind for true ‘reflation’ to come back alive is going to require either 1) a break higher crude oil (higher inflation expectations, maintain / extend ‘energy base effect’ to keep driving yields higher) or 2) movement on tax policy, most notably via incorporation of a revenue driver in the form of a BAT or VAT (more likely as per ‘watered down’ compromise IN ORDER FOR PASSAGE) which in turn would drive US Dollar appreciation and higher US yields.

The second point on incorporation of a BAT or VAT (more likely now) into the tax plan is a triple-whammy too, because it increases the likely of a re-engaging on a deeper corporate tax cut; its passage reinvigorates ‘animal spirits’ with regards to market sentiment behind the Trump administration’s ‘pro-growth’ policies; and it would drive meaningful USD (and thus too, rate) appreciation…but not the kind that frightens the market, i.e. the 20% theoretically appreciation via a BAT which I’ve said in the past could act as a ‘margin call’ on global trade.

This higher USD / higher rates / higher sentiment around a tax cut would be a game-changer for resetting the course of asset returns.  Without movement here, the market is looking increasingly binary, with momentum building again in the ‘disinflation’ camp the longer we stay ‘stuck’ in status quo, ESPECIALLY into the back-half of the year, with the Fed again hiking and the ECB transitioning towards ‘tightening’ as well.

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Authored by Simon Black via SovereignMan.com,

I’ll start today with a confession: I’m an unabashed optimist.

I believe that this is one of the most exciting times in all of human history to be alive. And with good reason.

Think about it– compared to thousands of years of violent warfare that ravaged most of the world’s major cities, we live in an era of relative peace.

Pockets of conflict will always exist. But right now there’s no major world war… no persistent threat of nuclear annihilation.

We also live in a time when more than 1 billion people in developing countries are rapidly rising into the Middle Class.

Their standards of living are improving like never before seen, and this creates an abundance of compelling opportunity.

Also, we humans now have the capacity to live longer, healthier lives… and to stay productive for longer than ever before.

Just a few weeks ago, a Texas physicist named John Goodenough invented revolutionary new battery technology.

He’s 94, and he insists that he has plenty of great ideas left to invent.

Most of all we live in a time of astonishing technological transformation.

Entrepreneurs can start businesses in minutes and reach customers on the other side of the planet.

Consumers can find products from around the world and seek funding online through Peer-to-Peer websites instead of traditional banks.

It’s amazing what we’re able to do and achieve now thanks to modern technology, jus compared to even 10 or 20 years ago.

I count myself among the countless individuals who have been able to benefit from these exciting trends.

I’ve been able to travel to more than 120 countries, start (or acquire) successful businesses around the world in industries as diverse as agriculture (Chile), manufacturing (Australia), banking (Caribbean), and media (Asia).

Very little of this would have even been possible at the time of my birth 38-years ago.

And I marvel that so many of my employees are from former republics of the Soviet Union… something else what would have been impossible just 26-years ago.

Yet despite so much progress and extraordinary opportunity, it’s also important to stay realistic: the world has gotten itself into a twist.

Nearly every major western government is bankrupt with woefully unsustainable finances.

The United States leads the way with $20 trillion in debt and a total negative net worth of MINUS $76.7 trillion, according to its own annual financial report.

The US government loses money each year with no end in sight, posting a staggering loss of $1.05 trillion in 2016.

And relative to the sizes of their own economies, Japan, Greece, Italy, Spain, France, and the United Kingdom are not far off.

Moreover, pension funds across the world are in dire condition.

In the United States, Social Security and Medicare report each year that their programs are rapidly running out of money and have even calculated the date of their own insolvencies.

This isn’t some wild conspiracy theory, these are public reports signed by the Treasury Secretary of the United States.

We also see major risks with global central banks.

As I wrote to you just three days ago, the Federal Reserve is nearly insolvent.

And as they continue to increase interest rates throughout this year, they will effectively engineer their own bankruptcy.

In addition, major financial markets are extraordinarily overvalued.

Stocks in the United States trade at valuations only seen just prior to major crashes.

And as the Wall Street Journal reported just -this morning-, “insiders”, i.e. key shareholders and managers who have inside knowledge of their businesses, are actively selling their stocks.

Economic growth in most of the developed world has also fallen flat– just 1.6% in the United States in 2016, 1.4% in Canada, and 1.9% in Germany.

These are hardly inspiring numbers, especially given that inflation is rising around the world.

According to the US Labor Department, inflation reached 2.7% last month, which was higher than 2.5% in January, which was higher than 2.1% in December, which was higher than 1.7% in November.

Do you notice a trend?

On top of everything else, we also happen to be living through a period of rapidly deteriorating personal freedom.

Spy agencies are engaging in brazen surveillance on… everyone. Citizens. Allies. Everyone.

Civil Asset Forfeiture also continues to reach new heights; according to Justice Department data, total “financing sources”, i.e. money that the government stole from its citizens, more than doubled from 2015 to 2016.

And countless laws, rules, and regulations have turned the Land of the Free into a place where children can be arrested for eating French Fries on the metro.

These risks are already looming, and the potential consequences are severe.

We likely all remember what happened the last time a stock market bubble burst.

When central banks go bust, the impact can be even more substantial.

It happened in Iceland in 2008, and the country had to suffer through 8 years of capital controls as a result.

And we can see the impact of governments going bankrupt each day in the news headlines, primarily with Greece.

These risks are real. But they’re no cause for panic.

A rational, successful person merely needs to acknowledge the risks, and take some sensible steps to ensure that you’re not a victim.

If your stock market is massively overvalued, for example, consider rebalancing your investments into safer assets in markets that are deeply undervalued.

If your government is totally bankrupt, don’t keep 100% of your assets within its reach.

These are simple but effective concepts.

Join me in today’s podcast in which we outline even more of these common sense steps.

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Below looks at the performance of Silver, Gold and the S&P 500 year to date. Metals and miners are off to a good start in 2017. Even though the stock market has received a good deal of attention this year, metals have done even better. Is the performance in 2017 the start of something even bigger for Silver & Gold?

CLICK ON CHART TO ENLARGE

It’s been a long time since buy and holders have experienced a bull market in Silver. How long has it been? Silver has created a series of lower highs since 2011. The trend for Silver remains down and now it is being presented with a chance to break this important down trend.

Below looks at the Silver/Gold ratio over the past 10-years. Last summer the ratio hit the top of falling channel (A) and failed to breakout. When this ratio failed to breakout, Gold, Silver and Miners turned weak.

CLICK ON CHART TO ENLARGE

Over the past 9-months, the ratio has created a series of lower high and higher lows, creating a narrowing pennant pattern, that is nearing completion at (1). The end of this pennant pattern is taking place, with the top of the pattern being the top of the 6-year falling channel.

If the bear market is to end for Silver, keep a very close eye on what takes place at (1). Premium & Metals members have played miners to the long side since 12/27/16. Even though Gold & Silver have done well, miners have done even better.

 

GDX is nearing falling resistance, similar to the ratio above. Members are pulling up stops on our miners positions, as the ratio above is testing one of the most important resistance/breakout tests in years. If the Silver/Gold ratio would do something it has failed to do for 6-years (breakout), it would send a bullish message to Silver, Gold and Miners.

 

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A day ahead of UK PM Theresa May's timeline for submitting Article 50 and beginning formal Brexiut procedures, Scottish parliament just voted 69 to 59 in facor of a second Scottish independence referendum. While somewhat expected, cable is lagging on the news…

As AP reports, Scottish lawmakers have voted to seek a new referendum on independence, to be held within the next two years.

The Scottish parliament voted 69-59 to back First Minister Nicola Sturgeon's call to ask the British government for an independence vote.

Sturgeon says Scots must be given the chance to vote on their future before Britain leaves the European Union. British Prime Minister Theresa May plans to launch the U.K's two-year process to exit the EU on Wednesday by triggering Article 50 of the bloc's key treaty.

"Scotland's future should be in Scotland's hands," Sturgeon told lawmakers in the Edinburgh-based parliament.

Scottish voters rejected independence in a 2014 referendum that Sturgeon's Scottish National Party called a once-in-a-generation vote. But Sturgeon says Brexit has changed the situation dramatically.

She says there should be a new vote on independence between fall 2018 and spring 2019, when details of Britain's divorce terms with the bloc are clear.

Notably, May, whose government must approve the referendum for it to be legally binding, says the time is not right. She says all parts of the U.K. — England, Scotland, Wales and Northern Ireland — must pull together to get the best-possible deal with the EU.

Scottish Conservative leader Ruth Davidson agreed, saying Tuesday that Scots do not want "the division and rancor of another referendum campaign." It's unclear what could break the stalemate between Edinburgh and London.

Nicola Sturgeon's full statement following the passage of the vote is below.

 

Full @NicolaSturgeon statement following Holyrood vote http://pic.twitter.com/nyNELIXWJb

— Nick Eardley (@nickeardleybbc) March 28, 2017

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In its latest, January, update of US home prices, Case-Shiller reported that the unadjusted 20 city composite index, rose at a 5.9% annual rate, up from 5.7% last month and setting a 31-month high. Perhaps even more notable is that in 17 of 20 metro areas, the pace of home appreciation over the past year was 5% or higher, or more than double the pace of core inflation. And with rents continuing to soar across the country, in many cases at a double digit clip, not to mention exploding healthcare costs, one wonders just what the BLS “measures” with its monthly CPI update.

In any case, for those lucky Americans who can afford to own a house instead of being stuck renting the New Normal American dream where they are prohibited from peddling fiction as their annual rent increases by 10% or more each year, here is the breakdown of the best and worst cities for home price appreciation in the U.S.

At the top, with annual price increases of 10% or more, we find the usual west coast (and thus closest to China) suspects: Seattle and Portland, followed close behind by Denver and Dallas, which appears to be enjoying the recent revival in shale. What is more surprising is that on the other end we find Cleveland, Washington and – of all places – New York, which was dead last with only 3.2% annual price appreciation.

 

Here are some more observations from Case Shiller on the top 3 cities:  Seattle, Portland, and Denver reported the highest year-over-year gains among the 20 cities over each of the last 12 months. In January, Seattle led the way with an 11.3% year-over-year price increase, followed by Portland with 9.7%, and Denver with a 9.2% increase. Twelve cities reported greater price increases in the year ending January 2017 versus the year ending December 2016. 

The below charts compare year-over-year returns for Seattle and Portland with different ranges of housing prices (tiers). Tier level analysis from 2011 to present for both Seattle and Portland’s year-over-year returns show housing prices in the high tier to be the most stable, while housing prices in the low tier are the most volatile

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