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For the first time since 2007, the spread between 2Y and 10Y US treasury yields has to 100bps. While not inverted, which the status quo maintains means there cannot be a recession, the bond market is flashing ominous signs for both the economy and the US financial system…
The curve has collapsed since The Fed hiked rates…
And financials have begun to catch down to that reality…
Charts: Bloomberg
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There’s a meme going around highlighting the fact that Hillary Clinton actually walked away with more delegates from New Hampshire than Bernie Sanders despite her landslide loss. The reason for this relates to the fact that she already has hundreds of pledged “super delegates,” several of whom hail from NH.
For example, the Daily Caller is reporting the following:
Though Bernie Sanders won the New Hampshire primary in a landslide over Hillary Clinton, he will likely receive fewer delegates than she will.
Sanders won 60 percent of the vote, but thanks to the Democratic Party’s nominating system, he leaves the Granite State with at least 13 delegates while she leaves with at least 15 delegates.
New Hampshire has 24 “pledged” delegates, which are allotted based on the popular vote. Sanders has 13, and Clinton has 9, with 2 currently allotted to neither.
But under Democratic National Committee rules, New Hampshire also has 8 “superdelegates,” party officials who are free to commit to whomever they like, regardless of how their state votes. Their votes count the same as delegates won through the primary.
New Hampshire has 8 superdelegates, 6 of which are committed to Hillary Clinton, giving her a total of 15 delegates from New Hampshire as of Wednesday at 9 a.m.
Technically this is true, but while the super delegates are “pledged,” they aren’t actually awarded until the Democratic convention in July. So while at 15% of total delegates, the super delegates could potentially decide who is the nominee is, would they actually go against the popular vote at the convention?
I read a great article by Shane Ryan at Paste Magazine analyzing this entire process, which does an excellent job of explaining why everyone should stop talking about total delegates and focus on the individual primaries. Here are a few excerpts from the piece:
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Submitted by Axel Merk via Merk Investments,
"The Fed doesn't have a clue!" – I allege that not only because the Fed appears to admit as much (more on that in a bit), but also because my own analysis leads to no other conclusion. With Fed communication in what we believe is disarray, we expect the market to continue to cascade lower – think what happened in 2000. What are investors to do, and when will we reach bottom?
To understand what's unfolding we need to understand how the Fed is looking at the markets, and how the markets are looking at the Fed.
The Fed and the Markets
In our analysis, policies at the Federal Reserve Open Market Committee (FOMC) are driven by what the Fed Chair deems most important. At the risk of oversimplification, and to zoom in on what I believe is relevant in the context of this discussion, former Fed Chair Alan Greenspan put a heavy emphasis on the 'wealth effect;' in many speeches, both during and after his tenure at the Fed, he indicated that rising asset prices would be beneficial to investment and economic growth. His successor Ben Bernanke went as far as mentioning in FOMC Minutes rising equity prices as a beneficial side effect of quantitative easing (QE). Bernanke's framework, though, was indirect: he considered himself a student of the Great Depression, arguing that monetary accommodation shouldn't be removed too early when faced with a credit bust, as doing so might unleash deflationary forces once again. QE, of course, 'printed money' to buy Treasuries and Mortgage Backed Securities (MBS), i.e. intentionally sought to increase their prices (I take the liberty to call QE the printing of money because, amongst others, Bernanke himself has referred to QE as such; no physical money is printed, but it's created 'out of thin air' through accounting entries at the Fed).
This prelude is necessary to understand Janet Yellen, a labor economist. I am not aware of labor economists focusing on equity prices. Neither am I aware that labor economists use forward inflation expectations as a gauge to predict labor markets. Sure enough, any FOMC member is likely to look at various indicators of inflation in the course of their job, but for a labor economist, it may merely be yet another data point. The reason I say this is because, during Bernanke's tenure, when inflation expectations dipped towards the 2% threshold, he would talk about the need for QE (the chart shows a measure of longer term inflation expectations):
In contrast, Janet Yellen has been rather quiet about the chart, instead pointing to other surveys that show long term inflation expectations remain well anchored. Interestingly, Mr. Draghi at the European Central Bank (ECB) looks at a similar chart of the Eurozone inflation expectations and rings the alarm bell, suggesting policy action may be needed to get those inflation expectations higher once again.
A labor economist is, in my assessment, destined to look at stale data, as jobs data tend to be backward looking. With what I believe is a 'backward looking' framework, the Fed may well be clueless: in their latest FOMC statement, the Fed removed their view that risks are balanced in favor of saying that the balance to risks needs further assessment. That is, I allege the Fed no longer has a view of where we are in the economy; it looks like I am not the only one with that interpretation, even Vice Chair Stan Fischer has indicated they need to wait for more incoming data to assess the economy. It's one of the reasons the Fed may look ever more like a huge ocean tanker that's slow to move. The fact that the Fed may be slow to move and not be quite as activist is not a bad thing per se, but needs to be understood in the context of how the markets will behave.
The Markets and the Fed
Let's look at the flip side: the market. For years, asset prices were rising on the backdrop of low volatility. That low volatility was, in my assessment, induced by highly accommodative monetary policy. I like to refer to it as an era of 'compressed risk premia.' In that environment, I allege investors got over-exposed to risky assets; that's a rational reaction to a world that is perceived to be less risky. But, of course, I would argue the world is still a risky place; it's only that the risk has been suppressed. As such, whenever the Fed started to contemplate an exit, I would say the market threw a 'taper tantrum,' then, last August, the Fed suggested it really meant business, although it got cold feet yet again, at least for a few weeks. It was too late, though: I visualize it as the Fed opening the lid to the pressure cooker it had left on the hot plate for too long.
As a result, investors may be waking up to the notion that markets are risky after all and that they must sell risky assets (equities, junk bonds, amongst others) to rebalance their portfolios. As a result, investors may be increasingly interested in capital preservation, i.e. 'sell the rallies' rather than 'buy the dips.'
The Yellen Fed, looking at this, may shrug it off for two reasons: first, they may realize they made a mistake when they caved in to the markets, postponing the September rate hike. After all, if they blink because of a hiccup in the markets, they become slaves to the markets. That's a fair point, but in my opinion, the reason the Fed is a slave of the markets is because they've made themselves a slave of the markets with their emphasis on 'data dependency.' It's not that relying on data is a bad idea per se, but if the Fed is not clear on how it interprets what, with the only certainty that there's a heavy emphasis on backward looking employment data, one does not need to be surprised that the market is imposing its own views on the Fed rather than the other way around.
What does it mean for investors?
For investors, I believe it means that market forces are taking the upper hand – for now. That may be a good thing if you are short 'risk assets' (notably equities): as the steam is released from the pressure cooker, asset prices may deflate once again. It's the sort of scenario Bernanke might be terrified about, as the 'progress' of QE may be undone. A Yellen Fed may rightfully say that it's not their job to keep equity prices high, and that she is more concerned about the labor market. That's all well and good, except that the recovery was, in our assessment, largely based on asset price inflation. As such, when asset prices plunge, it also provides a headwind to the real economy.
Mr. Draghi at the ECB and Mr. Kuroda at the Bank of Japan (BoJ) may well see that and try to counter what they may perceive as an alarming development. Yet, we feel it's the Fed that's the biggest elephant in the room (it's the issuer of the worlds reserve currency and given the amount of global dollar credit that's been raised since 2008, it may effectively be the emerging markets' central bank); in that context, the bazookas of the ECB and BoJ may appear as mere water pistols.
Yellen, if we are not mistaken, may only react in earnest once the effect is felt on the real economy. It also means that what we believe is a bear market will be able to play out in full. Keep in mind also that some of the necessary adjustments in the marketplace will take some time to play out: low interest rates may allow many otherwise unsustainable businesses to stick around until they need to refinance their debt. As such, the adjustment in the oil sector, for example, may take much longer; and it's not just on the corporate side, as the International Monetary Fund (IMF) may be extending loans to governments of oil producing countries, thus also contributing to elevated global oil production.
In practice, the selling may end when most investors have shifted towards a capital preservation mode. This won't be a straight line, as bear markets can have violent rallies. And not only will the BoJ and ECB not sit idle on the sidelines, but ripple effects may go through the markets as the Fed is gradually coming to grips with reality.
How to get out of this mess?
Some have suggested that my assessment equates to an endorsement of more QE or negative rates. Absolutely not. To get out of this mess, I say the same thing I said in 2008: the best short-term policy is a good long-term policy. What's a good long-term policy when governments around the world have, as I believe, too much debt and low growth? Based on my analysis, the answer must be in monetary or fiscal policy to make debt sustainable as a percentage of Gross Domestic Product (GDP). The successful investor should be able to navigate how different countries address these challenges. In that context, it matters little what I think should happen, given my framework. It may matter more what will happen given the policymaker's framework.
But since you asked, I believe the answer is not in monetary policy. You cannot print your way to prosperity. That path risks destroying purchasing power and a destruction of the middle class. The result may be public resentment, the rise of populist politicians and reduced political stability, even war.
When it comes to fiscal policy, there are more choices than are commonly discussed. First, the extension of 'printing money' on the fiscal side would be a form of default. We've already heard some say that the Bank of Japan should simply wipe out the debt it has purchased in the markets. As a central bank, writing off such debt is a mere accounting entry, as central banks can live on with negative equity. Some debt will need to be restructured, and indeed, I believe much of the work in the Eurozone has been to get the financial system strong enough to stomach a sovereign default.
Fiscal policy can also be the pursuit of austerity. It works for Germany, but not for Greece. In Greece and many other countries, it causes popular backlash that can destabilize a country.
Then there is a pursuit of growth, typically associated with massive fiscal spending programs. Bond king Bill Gross has indicated we need to have fiscal expansion as monetary policy has reached its limits. So has the head of the world's largest hedge fund, Ray Dalio.
Unfortunately, the only 'fiscal stimulus' that I know that can break the deflationary cycle is war. That's what we got after the Great Depression, and I don't look forward to a repeat.
Instead, I believe there must be a better way. That better way, in my view, is an expansionary fiscal policy that is sustainable. Fiscally sustainable policies are long-term pro-growth strategies that don't themselves blow up the debt. On the cost cutting side, it includes entitlement reform to make deficits sustainable; such a policy is pro-growth because investors are more likely going to allocate money when they see fiscal policy is sustainable. On the revenue side, rather than plow huge amounts into fiscal expansion by the government, the cutting of red tape can go a long way towards unleashing growth. Over the past 15 years, I believe red tape has increased rather dramatically in many sectors, inhibiting growth.
But, alas, since it seems policy makers are unlikely to pursue what I believe is necessary, we need to think about how to invest with the cards we are dealt.
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I knew we were in the middle of a craft beer revolution, but I didn’t realize just how big it had become: Dominic Lynch reports in The Federalist that the number of commercial brewing operations in America has just “surpassed the historical high-water mark of 4,131 active breweries, which was set in 1873.” As of 2016, he writes, “75 percent of American adults over 21 live within 10 miles of a local brewery. In hard numbers, that’s 231.6 million Americans who have a brewery nearby.”
Lynch’s article explores both the art and the economics of microbrewing; he writes about once-small brands that have partnered with big companies, and he writes about enterprises that don’t care about operating on the Budweiser level “because the only market they’re interested in dominating is the one in their backyard.” If you’re interested at all in the subject, you should read the whole thing.
Bonus links: Small brewers still have to contend with the heavy hand of the corporate state, and Reason has been covering their regulatory struggles for years. For some samples, go here, here, and here. And to read about Jimmy Carter’s role in liberating American beermakers—no, I don’t mean Billy—go here.
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After yesterday’s mediocre 3 Year auction, there were concerns whether the Treasury would find willing buyers to soak up today’s $23 billion in benchmark 10Year Paper. Those concerns were promptly relieved moments ago when not only did the 10Y auction price stopping through the When Issued by a whopping 1.3 bps, but it was also the lowest yield since December 2012.
Yes, there were some ugly spots, such as the dropping Bid to Cover which at 2.56 was the lowest since August, but the overall take down showed little problem when parking paper with Direct investors, who ended up with 15.3% of the issue, the highest since May of last year, and while Indirects maybe did not end up with the near-record 71% from January, still were allotted a very respectable 62.3%, leaving just 22.3% for Dealers, one of the lowest takedown for the group in years.
In summary, if the Fed was hoping that its rate hike cycle would prompt a great rotation of demand out of Treasurys into stocks, it has clearly failed, and this very strong 10 Year auction was the latest confirmation of just that.
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America’s pollsters can breathe a sigh of relief: The outcome of last night’s New Hampshire primary largely mirrored the trend their polls had been finding in the state. Donald Trump won big, while the remaining support was badly splintered among the four main “establishment lane” candidates in John Kasich, Marco Rubio, Jeb Bush, and Ted Cruz.
But make no mistake: This salutary result from a survey researcher’s perspective was mostly a matter of good luck.
The big problem with horse-race pulse taking, especially during primary season, is found in the very form of the question being asked: If the election were held today, for whom would you vote? But of course, polls are taken days, weeks, and months before people actually cast their ballots.
As any honest survey researcher will tell you, polls are not supposed to be predictive, though we’ve collectively come to treat them like they are. The best a poll can do is to accurately measure attitudes right now. But even a methodologically flawless survey that perfectly captures current voter sentiment runs the substantial risk that people could change their minds before Election Day.
That’s exactly what went wrong in Iowa last week. Trump had been enjoying a solid advantage in the polls. But as the cliché goes, the only poll that truly matters is the one that happens at the ballot box, and among those who made up their minds at the last second regarding who they would support, more than 85 percent went for someone other than the real-estate mogul. That late shift (paired with the fact that an estimated 80,000 people turned out to caucus for the first time this year) proved to be enough to erase his lead completely.
Interestingly, more than half of New Hampshire Republicans also waited until the final days to decide who they’d support, according to the exits. But unlike in Iowa, where people broke away from how they had been telling interviewers they were planning to vote, here they came down in proportions closer to what pollsters had been gauging.
The pre-election RealClearPolitics average had Trump getting about 31 percent of the vote. Among those who made up their minds “just today” or withing “the last few days,” 24 percent and 21 percent respectively went to Trump. In other words, yes, last-minute deciders fell off somewhat from the frontrunner, but not at nearly the same level they had in the Hawkeye State. Meanwhile, Kasich overperformed among late-breakers, boosting him unexpectedly (but not exactly shockingly) into second.
One lesson is this: The last few days of a campaign can matter quite a lot, as they did in Iowa, where Trump made the fatal mistake of “snubbing” voters by skipping the last debate. Had things played out otherwise this week in New Hampshire, we could be looking at a totally different set of results. But it’s only in hindsight that you can really discern whether the polls in a state are wrong or right.
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It’s already well established that the lies of “Jackie”—the false accuser at the center of Rolling Stone’s gang rape hoax—grew out of her efforts to catfish Ryan Duffin, a boy she had a crush on. Recently released text messages between the two don’t add much new information, but they continue to confirm the almost unfathomable level of deliberate deception to which Jackie resorted.
The texts were released by a local news station, CBS 6. They comprise messages exchanged between Duffin and “Haven Monahan,” a presumed alias of Jackie’s. Haven pretended to have a romantic interest in Jackie as a means of gauging Duffin’s level of interest. Duffin, for his part, at first pretended to be a girl in Haven’s class—he was on orders from Jackie to find out whether Haven liked her. Eventually, Duffin admitted to Haven that he was the male friend whom Jackie likes—something Haven, who is actually Jackie, already knows—and Haven pretends to be furious.
There are 22 pages of texts spanning from September 5, 2012 until October 7, 2012.
Some other interesting highlights:
The texts have emerged as part of UVA Dean of Students Nicole Eramo’s lawsuit against Rolling Stone.
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Rand Paul is out. Donald Trump just schlonged the Grand Old Party in New Hampshire. And Bernie Sanders is setting dumpster fires in the hearts and minds of America’s youth.
Borrowing the sage words of moral philosopher (and round robin bowler)Walter Sobchak, I have to ask: Has the whole world gone crazy?
Matt Kibbe hopes to convince you that the answer is no. Despite ominous signs that the End Times near, everything’s going to be all right.
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Back in March 2013, when nat gas, and pretty much everything else, was trading far higher than where it is today, investors who believed in the vision of Chesapeake’snow long gone CEO Audrey McClendon had no problem writing a check for $500 million of other people’s money to the Oklahoma gas giant, hoping to generate a “whopping” 3.25% return by the time the bonds matured on March 15, 2016.
Sadly, since then things changed.
Chesapeake – as we previously reported – is now on the verge of bankruptcy having hired K&E as a restructuring advisor, and the bonds are currently trading at 80.5 cents on the dollar. As the chart below shows, this results in a yield that is about 100 times where it was at issue, or just shy of 300%!
Which brings up an interesting trade opportunity: yes, Chesapeake will default, but the question is when. For those who think the company will somehow survive for a more than a month without filing Chapter 11 or arranging some prepackaged bankruptcy, and actually repays the $500 million issue, this could be the trade that makes someone’s full year, because with a yield of 299%, and a cash on cash return of 25% (being paid par on March 15 for a bond that can be purchased today for 80 cents), it does look somewhat attractive, especially if hedged with a short on CHK stock, which at last check was trading at an implied market cap of $1.3 billion.
Will anyone break from the revulsion herd now that FOMO has been frozen in carbonite, and put this 299% yielding trade on now, when nobody wants to touch CHK with a ten foot pole (unlike 2 years ago when the bond was oversubscribed at a 3.25% yield) or will the yield keep grinding higher? And more importantly, if not, will Chesapeake be the biggest energy bankruptcy in the US energy sector to start 2016?
The answer to all, in just over one month.
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Submitted by Daniel Drew via Dark-Bid.com,
Breaking the zero bound has become a rite of passage in the post-2008 world. As Mark Jeftovic noted, "Once a financial market hits the zero bound in interest rates, it's like crossing the event horizon of a black hole – there is no going back." Indeed, the number of government bonds trading at negative yields increases every day.
In the new bizarro world where you pay banks for the privilege of giving them your money, one has to wonder what will be the next thing to break the zero bound. When one of the largest corporations in America has over $100 billion in revenue but can't even make $1 billion in profits, it's easy to imagine a few possibilities.
American corporations have been playing a musical chairs game where the loser gets taken out back and shot. During the last 40 years, the life expectancy of firms in the Fortune 500 has declined from 75 years to less than 15 years. In what Forbes called "the most important business study ever," Deloitte released The Shift Index, which compiles the ROI of 20,000 US firms from 1965-2009. The chart shows an 80% collapse in the average ROI of American businesses.
With negative interest rates around the corner, how long will it be until the Fed props up the zombie economy and pushes average profit margins below the zero bound?
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