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Investment Grade Junk

All is now bustle and hubbub in the late months of the year. This goes for the stock market too. If you recall, on September 22nd the S&P 500 hit an all-time high of 2,940. This was nearly 100 points above the prior high of 2,847, which was notched on January 26th. For a brief moment, it appeared the stock market had resumed its near decade long upward trend.

We actually did not believe in the validity of the September breakout attempt: the extremely large divergence between the broad market and the narrow big cap leadership was one of many signs that an internal breakdown in the stock market was well underway. It is probably legitimate to refer to the January 2018 high as the “orthodox” stock market peak – the point at which most stocks topped out. [PT]

Chartists witnessed the take out of the January high and affirmed all was clear for the S&P 500 to continue its ascent. They called it a text book confirmation that the bull market was still intact. Now, just two months later, a great breakdown may be transpiring.

Obviously, this certain fate will be revealed in good time. Still, as we wait for confirmation, one very important fact is clear. The Federal Reserve is currently executing the rug yank phase of its monetary policy. As the Fed simultaneously raises the federal funds rate and reduces its balance sheet, credit markets are slipping and tripping all over themselves.

This week, for example, seven-year investment grade bonds issued by GE Capital International traded with a spread of 2.47 percent. For perspective, this is equivalent to the spread of BB rated junk bonds. In other words, the credit market doesn’t consider GE bonds to be investment grade, regardless of whether compromised credit rating agencies say they are.

…click on the above link to read the rest of the article…

When Fake Money Becomes Scarce

November 10, 2018

When Fake Money Becomes Scarce

Remaining Focused

A rousing display of diversions this week assured the American populace was looking every which way but right under its collective nose. Midterm elections. White House spats with purveyors of fake news. The forced resignation of Attorney General Sessions…

Old drug warrior (otherwise recused) on his way home to Alabama…

Sideshows like these, and many more, offered near limitless opportunities to focus on matters of insignificance. Why stop to really understand what’s behind a headline when hundreds of new headlines pop up by the minute? Why bother to try and figure things out when real thinking is such an inconvenience?

What’s more, the S&P 500 jumped nearly 3 percent between market open Monday and market close Thursday. Clearly, the October mini-panic is now a distant memory. At this rate, we’ll all be rich off stocks by the New Year.

Yet while the mob stampeded from one distraction to the next, we remained focused on the real story: The outright pilfering of the nation’s time, talent, and treasure. This isn’t the story that’s readily presented by the headlines. But it is readily evident for those willing to open their eyes and look around at the world before them.

You see, the real story, the story that’s being largely ignored, is three fold. Rising borrowing costs, a debt crisis, and price inflation are converging with unbearable consequences. You can’t miss it.The “thank God it’s over” election celebration in the stock market. This rally is not likely to last. In fact, it could quite easily morph right back into a panic cycle. [PT]

Fake Money

The U.S. Treasury, if you didn’t know, will issue $1.3 trillion in new debt in 2018. This represents a 146 percent increase in new federal government debt issuance from 2017. By our rough estimation, this number will significantly increase in 2019 and again in 2020.

…click on the above link to read the rest of the article…

Revisiting the Halloween Effect

November 9, 2018

Revisiting the Halloween Effect

From Crash Danger to End-of-the-Year Ramp

Knock, knock… it’s Jack, from Wall Street

After the last day of October, the month that has investors in fear of the next big stock market crash follows Halloween – and while this is a spooky day, it actually marks the start of a period that typically tends to yield promising returns for investors.

What is commonly referred to as Halloween Effect or Halloween Strategy is the fact that stock market returns on average turn noticeably positive from late October onward.

This phenomenon has been widely discussed well beyond the confines of experts on seasonality like ourselves and was inter alia subject of several academic studies, with a number of well-known scholars providing valuable contributions (Jacobsen & Visaltanachoti; Haggard & Witte; Maberly & Pierce and many others)*.

We are revisiting the topic in this edition of Seasonal Insights.

The Halloween Effect is a Global Phenomenon

We begin by looking at the first part of the Halloween Effect with the help of the Seasonax Web App (note: details on the web app can be found here; readers of Acting Man qualify for a special discount)

We have analyzed three of the most important stock indexes from around the world to find out whether they exhibit a common pattern. In all three cases the time period from October 31^st to January 3^rd was reviewed.

Please note that these indexes have been examined with the aim of showing a general trend. One can filter out individual stocks that exhibit the same seasonal patterns, but generate much higher returns.

The first index is the DAX, a composite of the 30 largest German companies. It shows a distinct seasonal pattern in the respective time-period with 77.78% winning trades of and an average annualized return of 34.05%.

…click on the above link to read the rest of the article…

The Myth of Capitalism – A Book by Jonathan Tepper

November 7, 2018

The Myth of Capitalism – A Book by Jonathan Tepper

Crony Capitalism vs. Free Markets

Many of our readers are probably aware of the excellent work our friend Jonathan Tepper does for Variant Perception (VP)*****, a financial research boutique that really does bring a unique perspective to the table*. Jonathan (with co-author Denise Hearn) has just added a new book to his résumé, which is going to be released on 12 November: The Myth of Capitalism (MoC) – Monopolies and the Death of Competition** (a link to the official site is at the end of this post).

Jonathan Tepper and Denise Hearn: The Myth of Capitalism, an excellent plea for more competition and free markets.

MoC deals with a subject that has increasingly captured the attention of political and economic observers in recent years: the growing quasi-monopolistic powers of a small (and shrinking) number of large corporations that have seemingly succeeded in exempting themselves from competition.

They are often aided and abetted by government imposing regulations certain to suppress competition from less well-funded upstarts and smaller firms. At the same time governments are creating loopholes which only the biggest established firms with international operations are able to take advantage of.

Don’t get us wrong – we have no problem with loopholes as such: to paraphrase Mises, they allow capitalism to breathe. Problematic is only that the benefits granted to the most powerful players are denied to their potential competitors; we wouldn’t want to see these loopholes closed, we would like to see them extended far and wide.

Restoring Consumer Sovereignty

MoC is not focused on questions of monopoly theory***. The book is actually quite a page turner, at the same time informative, entertaining and infuriating. It is primarily concerned with practical problems and discusses what might be done to overcome them.

…click on the above link to read the rest of the article…

Measures of Value – Precious Metals Supply and Demand

October 25, 2018

Measures of Value – Precious Metals Supply and Demand

Aiming for Knowledge and Better Decision-Making

The price of yellow metal went up nine bucks last week. And the price of silver three rose cents, which is back to where it was two weeks earlier. We need to rant, and promise to tie it back to the prices of the metals. We have written these past several weeks about the fact that the franc has been rendered useless. Owning a franc does nothing for you, other than to trade to the next person at hopefully a higher price.

When the money of the realm becomes literally useless as money – the charts and data example above shows excerpts of what happened in Germany from WW1 to the hyperinflation blow-out of 1923. In the end, one simply could no longer use the Reichsmark as a medium of exchange. [PT]

This is the state into which gold has been forced, by a series of actions by the US and other governments.

Indeed, so useless has gold become, that we measure its value in terms of the irredeemable fiat dollar. We all love to hate the dollar, we all think the dollar will collapse at some point in the future. Yet so ubiquitous — and useful — is it that we measure even money in terms of dollars!

And “we” does not refer to Keynesians and their close cousins the Monetarists. “We” refers to many Monetary Metals clients and prospective clients. Yes, truly, the folks that are keen to earn interest on their money paid in money — gold — ask constantly our opinion on the price of money in terms of irredeemable Fed credit notes!

…click on the above link to read the rest of the article…

Why You Should Expect the Unexpected

October 20, 2018

Why You Should Expect the Unexpected

End of the Road

The confluence of factors that influence market prices are vast and variable. One moment patterns and relationships are so pronounced you can set a cornerstone by them. The next moment they vanish like smoke in the wind. One thing that makes trading stocks so confounding is that the buy and sell points appear so obvious in hindsight. When examining a stock’s price chart over a multi-year duration the wave movements appear to be almost predictable.

The fascinating obviousness of hindsight – it is now perfectly clear when one should have bought AMZN. Unfortunately it wasn’t quite as clear in real time. [PT]

Trend lines matching interim highs and lows, and bounded price movements within this range, display what, in retrospect, are the precise moments to buy and sell. In practice, the stock market dishes out hefty doses of humility with impartial judgment. What’s more, being right does not always translate to success. Sometimes it is more costly to be right at the wrong time than wrong at the right time.

One fallacy that has gained popularity over the last decade is the zealot belief that the Fed disappears risk from markets. That by expanding and moderating the money supply by just the right amount, and at just the right time, markets can grow within a pleasant setting of near nonexistent volatility. Some even trust that when there is a major stock market crash, the Fed, having the courage to act, will soften the landing and quickly put things back upon a path of righteous growth.

Believers in the all-powerful controls of the Fed have a 30 year track record they can point to with conviction. Over this period, the Fed has put a lamp unto the feet and a light unto the path of the stock and bond market.

…click on the above link to read the rest of the article…

Choking On the Salt of Debt

October 15, 2018

Choking On the Salt of Debt

Life After ZIRP

Roughly three years ago, after traversing between Los Angeles and San Francisco via the expansive San Joaquin Valley, we penned the article, Salting the Economy to Death. At the time, the monetary order was approach peak ZIRP.

Our boy ZIRP has passed away. Mr. 2.2% effective has taken his place in the meantime. [PT]

We found the absurdity of zero bound interest rates to have parallels to the absurdity of hundreds upon hundreds of miles of blooming crop fields within the setting of an arid desert wasteland.

Given today’s changing financial conditions, namely the prospect of a sustained period of rising interest rates, we have taken the opportunity to refine our analysis. What follows is an attempt to bring clarity to disorder.

The natural starting point for the topic at hand is from a place of delusion. That is, the popular delusion that central planners can stimulate robust economic growth by setting interest rates artificially low. The general theory is that cheap credit compels individuals and businesses to borrow loads of cash – and consume.

Over a sample size of five to ten years, say the growth half of the business cycle, central bankers can falsely take credit for engineering a productive economy. Profits increase. Jobs are created. Wages rise. A cycle of expansion takes root. These are the theoretical benefits to an economy that central bankers claim they impart with just a little extra liquidity. In practice, however, this policy antidote is a disaster.

Without question, cheap credit can have a stimulative influence on an economy with moderate debt levels. But once an economy has reached total debt saturation, where new debt fails to produce new growth, the cheap credit trick no longer works to stimulate the economy. In fact, the additional credit, and its flip-side debt, distorts prices and strangles future growth.

…click on the above link to read the rest of the article…

The Gold Standard: Protector of Individual Liberty and Economic Prosperity

October 11, 2018

The Gold Standard: Protector of Individual Liberty and Economic Prosperity

A Piece of Paper Alone Cannot Secure Liberty

The idea of a constitution and/or written legislation to secure individual rights so beloved by conservatives and among many libertarians has proven to be a myth. The US Constitution and all those that have been written and ratified in its wake throughout the world have done little to protect individual liberties or keep a check on State largesse.

Sound money vs. a piece of paper – which is the better guarantor of liberty? [PT]

Instead, in the American case, the Constitution created a powerful central government which eliminated much of the sovereignty and independence that the individual states possessed under the Articles of Confederation.

While the US Constitution contains a “Bill of Rights,” the interpreter of those rights and the protections thereof is the very entity which has enumerated them. It is only natural that decisions on whether, or if such rights have been violated will be in favor of the State.

Moreover, nearly every amendment which has come in the wake of the Bill of Rights, has augmented federal power at the expense of the individual states and that of property owners.

History has shown the steady erosion of individual rights and the creation of “new rights” and entitlements (education, health care, employment, etc.) which have occurred under constitutional rule. Instead of being a limitation on government power, constitutions have given cover for a vast expansion of taxation, regulation, debt, and money creation.

As Murray Rothbard notes in Anatomy of the State: “All Americans are familiar with the process by which the construction of limits in the Constitution has been inexorably broadened over the last century.

…click on the above link to read the rest of the article…

Fed Credit and the US Money Supply – The Liquidity Drain Accelerates

October 10, 2018

Fed Credit and the US Money Supply – The Liquidity Drain Accelerates

Federal Reserve Credit Contracts Further

We last wrote in July about the beginning contraction in outstanding Fed credit, repatriation inflows, reverse repos, and commercial and industrial lending growth, and how the interplay between these drivers has affected the growth rate of the true broad US money supply TMS-2 (the details can be seen here: “The Liquidity Drain Becomes Serious” and “A Scramble for Capital”).

The Fed has clearly changed course under Jerome Powell – for now, anyway.

Our friend Michael Pollaro* recently provided us with an update on outstanding Fed credit. As there are no longer any outstanding reverse repos with domestic banks, the liquidity drain is accelerating of late, with growth in net Fed credit contracting at fairly rapid rate of 3.4% year-on-year in September, the fourth consecutive month of decline:

The year-on-year contraction in net Fed credit accelerates. Since there are no longer any outstanding reverse repos with domestic financial institutions, the only force counteracting the negative effect on money supply growth is inflationary bank lending.

Michael also sent us a chart comparing the monthly trend in total net Fed credit in the course of 2017 with the trend in 2018 to date. When “QT” started in September of 2017, outstanding Fed credit initially kept growing well into 2018, largely because reverse repos with US banks ran off faster than securities held by the Fed decreased – but that has changed quite noticeably in the meantime:

Fed credit in 2017 (blue bars) vs. 2018 (red bars). The downtrend becomes more pronounced.

Keep in mind that the reverse repos mainly served to alleviate growing delivery fails due to a shortage in certain off-the run treasury securities which banks needed as collateral. As the Fed has stopped reinvesting all proceeds from maturing treasuries and MBS, banks no longer need to borrow securities from its portfolio.

…click on the above link to read the rest of the article…

How Dangerous is the Month of October?

October 8, 2018

How Dangerous is the Month of October?

A Month with a Bad Reputation

A certain degree of nervousness tends to suffuse global financial markets when the month of October approaches. The memories of sharp slumps that happened in this month in the past – often wiping out the profits of an entire year in a single day – are apt to induce fear. However, if one disregards outliers such as 1987 or 2008, October generally delivers an acceptable performance.

The road to October… not much happens at first – until it does. [PT]

Nevertheless, the prospect of such an extremely strong decline is scary: what use is it to anyone if markets typically perform well in October most of the time, when the phenomenon of the gains of an entire year evaporating in the blink of an eye is repeated? What about intermittent losses? We will apply seasonal analysis to the issue in order to shed light on whether one should adopt a risk-averse stance in October.

The Biggest Crashes Tend to Happen in October

Let us take a look at the largest declines in recent history. The following chart shows the twenty largest one-day declines in the Dow Jones Industrial Average. Crashes that occurred in October are highlighted in red.

The largest one-day declines in the DJIA in history – almost half of the crash waves occurred in October, including the two largest ever recorded on 19 Oct. 1987 and 28 Oct. 1929. The fourth largest decline happened on 29 Oct. 1929 hence these two days of consecutive declines were actually worse than the record one-day plunge in 1987 (similar to 1987, the market had already fallen sharply in the week immediately preceding the crash). [PT]

9 of the 20 strongest one-day declines happened in October. That is an extremely disproportionate frequency. In other words, October has a strong tendency to deliver negative surprises to stock market investors in the form of sudden crashes. What does this mean for us as investors?

…click on the above link to read the rest of the article…

Fed President Kashkari Hears Voices – Are They Lying?

October 6, 2018

Fed President Kashkari Hears Voices – Are They Lying?

Orchestrated Larceny

The government continues its approach towards full meltdown. The stock market does too. But when it comes down to it, these are mere distractions from the bigger breakdown that is bearing down upon us.

Prosperity imbalance illustrated. The hoi-polloi may be getting restless. [PT]

Average working stiffs have little time or inclination to contemplate gibberish from the Fed. They are too worn out from running in place all day to make much of it. This fact accounts for the limited inkling the populace has for why there is a great prosperity imbalance between wage earners and the creams.

If there was a better understanding of the scope and scale of the orchestrated larceny being conducted, practitioners of mass money debasement would be tarred, feathered and paraded down Main Street.

This seems a small penalty for turning markets into casinos and debasing the rewards of an honest day’s work. Instead, they preserve their misplaced stature through the backwards process of taking the absurdly simple and twisting it up into the inordinately complex.

Several months ago, roughly in mid-May, the yield on the 10-Year Treasury note briefly eclipsed 3 percent. This prompted numerous articles – including one of our own – on the possible end of the great Treasury bond bubble. But then, just as quickly as a pickpocket disappears into a crowded street, the yield on the 10-Year Treasury note slipped back below 3 percent.

Now, as the days grow shorter, the yield on the 10-Year Treasury note is again pushing above 3 percent, at roughly 3.22 percent. The yield on the 30-Year Treasury note – the long bond – is about 16 basis points higher.

10-year yields are trying to get above the 3% level again – and this time it looks like they may actually mean it. [PT]

…click on the above link to read the rest of the article…

Oil Mania Redux

September 30, 2018

Oil Mania Redux

Positive Energy

By now, late September of 2018, it has become increasingly evident that something big is about to happen. What exactly that may be is anyone’s guess. But, whatever it is, we suggest you prepare for it now… before it is too late.

Art auction energizer: Norman Rockwell’s portrait of John Wayne. You can’t go wrong shelling out top dollar for me, pilgrim, can you? [PT]

Several weeks ago, if you haven’t heard, an undisclosed rich guy enthusiastically bid up and then bought Norman Rockwell’s portrait of John Wayne for a cool $1.49 million at the 12th Annual Jackson Hole Art Auction. According to auction coordinator Madison Webb, “There was a really positive energy in the room.”

Indeed, it takes a lot of really positive energy – and a healthy bank account – to shell out that sum of money for a painting of “The Duke.” Still, positive energy, like good weather, can quickly turn negative. Soon enough, we suppose, the purchaser’s excitement will transform into a serious case of buyer’s remorse.

Of course, we could be wrong. The buyer could have a special liking for old John Wayne movies. Perhaps he’s a collector of Norman Rockwell paintings. Or maybe he won the lottery and is compelled to burn through his winnings in odd and outlandish ways.

What this has to do with anything is a bit of a stretch. But art, if this qualifies as such, offers a rough barometer of social mood (see: The Bubble in Modern Art). Moreover, when the price for a painting of a 20^th century actor pretending to be a 19^th century character of American nostalgia sells at nearly a million and a half bucks, we suspect something more is at work.

…click on the above link to read the rest of the article…

Honest Work for Dishonest Pay

September 16, 2018

Honest Work for Dishonest Pay

Misadventures and Mishaps

Over the past decade, in the wake of the 2008-09 debt crisis, the impossible has happened. The sickness of too much debt has been seemingly cured with massive dosages of even more debt. This, no doubt, is evidence that there are wonders and miracles above and beyond 24-hour home deliveries of Taco Bell via Door Dash.

The global debtberg: at the end of 2017, it had grown to USD 237 trillion. Obviously this is by now a slightly dated figure, as debt issuance has continued with gay abandon this year. [PT]

But how can dosages of more debt be the cure for too much debt? Can more Cutty Sark be the cure for a dipsomaniac? Certainly, in both instances, and after some interim relief, the cure always proves to be much worse than the disease.

Without question, a moment of clarity is approaching that will bisect the world of today from the world of tomorrow, like the Patriot Act bisects the present world from its prior state of bliss. Thus, what follows is a rudimentary preview of what’s in store. But first, some context is in order…

The fake money system – a system centered on debt based legal tender and centrally fabricated interest rates – produces booms and busts of greater extremes with each progression of the business cycle. This century alone we’ve experienced two iterations of these boom and bust scenarios. First the dotcom bubble and bust. Then the housing boom and crash.

The “well-contained” end of the housing boom… [PT]

Make no mistake, these booms and busts were anything but garden variety gyrations of the business cycle. In fact, the Federal Reserve’s finger prints are all over them. The booms originated from Fed monetary policy misadventures. The busts were triggered by Fed monetary policy mishaps.

…click on the above link to read the rest of the article…

Corporate Credit – A Chasm Between Risk Perceptions and Actual Risk

September 14, 2018

Corporate Credit – A Chasm Between Risk Perceptions and Actual Risk

Shifts in Credit-Land: Repatriation Hurts Small Corporate Borrowers

A recent Bloomberg article informs us that US companies with large cash hoards (such as AAPL and ORCL) were sizable players in corporate debt markets, supplying plenty of funds to borrowers in need of US dollars. Ever since US tax cuts have prompted repatriation flows, a “$300 billion-per-year hole” has been left in the market, as Bloomberg puts it. The chart below depicts the situation as of the end of August (not much has changed since then).

Short term (1-3 year) yields have risen strongly as a handful of cash-rich tech companies have begun to repatriate funds to the US.

Now these borrowers find it harder to get hold of funding. This in turn is putting additional pressure on their borrowing costs. At the same time, the cash-rich companies no longer need to fund share buybacks and dividends by issuing bonds themselves.

The upshot is that the financially strongest companies no longer issue new short term debt, while smaller and financially weaker companies are scrambling for funding and are faced with soaring interest rate expenses – which makes them even weaker.

As Bloomberg writes:

What is really noteworthy about this is that as these corporate middlemen are getting out, the quality of fixed-rate securities available to the rest of the investoriat continues to deteriorate in the aggregate.

Risk Perceptions vs. Risk

Meanwhile, despite the fact that euro-denominated corporate debt is reportedly still selling like hot cakes, both spreads and absolute yields have increased markedly in euro as well since late 2017 (as yields on German government debt are used as sovereign benchmarks for the euro area and remain stubbornly low, credit spreads on corporate and financial debt have increased almost in tandem with nominal yields).

…click on the above link to read the rest of the article…

Thirteen Reckonings Hanging in the Balance

September 8, 2018

Thirteen Reckonings Hanging in the Balance

A Fake Money World

The NASDAQ slipped below 8,000 this week. But you can table your reservations. The record bull market in U.S. stocks is still on. With a little imagination, and the assistance of crude chart projections, DOW 40,000 could be eclipsed by the end of the decade. Remember, anything and everything’s possible with enough fake money.

Driven by a handful of big cap tech companies, the Nasdaq Composite has made new highs – but the broad market (here shown in the form of the NYSE Index) has not even made it back to the January blow-off peak. It is a good bet the return of the average investor’s portfolio mirrors that of the latter. Such divergences are typically a sign of steadily weakening market internals which are seen near major trend changes. When such a glaring divergence in performance persistently fails to be invalidated and keeps dragging on for many months, it tends to be particularly concerning for the longer term outlook, Note that even more glaring divergences exist now between US stocks vs. European and EM stocks. Despite the fact that US economic indicators remain strong and no obvious recession warnings are evident, we have yet to see such large divergences resolve without a hiccup. Usually the hiccup turns out to be quite a doozy. [PT]

Still, we consider DOW 40,000 to be about as probable as having a dinosaur step on our car as we drive to work today. More than likely, a return to DOW 10,000 will first grace the front page of the Wall Street Journal.

In the interim, while still in the delight of this “permanently high plateau,” we’ll turn our attention to another equally suspect record that’s presently unfolding with imperfect precision.

…click on the above link to read the rest of the article…

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