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Having been one of the most bearish voices on Wall Street for a good part of 2018, with downgrades of small caps and tech stocks earlier this summer and one month ago going so far as to call the peak of both Treasurys (in September) and Stocks (this December)…

… in his latest Sunday Start note, Morgan Stanley’s chief US equity strategist Michael Wilson, takes what may end up being yet another premature victory lap following the latest equity selloff inspired initially by surging rates and the continued chaos over the Italian budget process and – overnight – the Chinese market crash, and writes that “the break higher in interest rates last week appears to be the tipping point, enabling the rolling bear market to complete its unfinished business in these last bastions of safety.”

Wilson also reminds us that based on the bank’s Equity Risk Premium framework, the S&P 500, as a whole, had become overvalued for the first time since January, and that “this overvaluation was apparent as yields on the 10-year broke through the 3% barrier. Small caps had already been underperforming for several months, but as rates moved above 3%, their underperformance accelerated. With last week’s surge toward 3.20%, weakness finally came to the high-flying growth stocks where valuation is the most stretched.”

In short: for Wilson, it’s all downhill from here, even though the stock peak appears to have come some 2 months earlier than he had predicted earlier.

We present his full note is below:

The Tipping Point

September bucked the normal seasonal pattern, proving to be a fairly calm month for financial markets. Global equities even started to broaden out a bit with international stocks doing better, led by Japan. Credit markets also displayed resilience with one of their better months this year, despite the fact that the rates market was suffering one of its worst.

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

“Waiting For The World To End” – Bond Rout Bodes Badly For Exuberant Equity Investors

October 7, 2018

“Waiting For The World To End” – Bond Rout Bodes Badly For Exuberant Equity Investors

It was a tough week for stock market investors but the primary driver of the chaotic crumble in small caps and tech stocks was not one of the usual suspects and even for those who consider themselves ‘hedged’ or balanced it was the worst week in 7 months.

The blame for this blight on Americans’ wealth was placed squarely on the shoulders of the bond market and its violent and high velocity lurch higher in yields.

Yields rose across the curve on the back of strong US economic data and hawkish comments from Federal Reserve Chairman Powell, forcing equity investors to reevaluate the higher rate environment.

To be sure, the absence of uncertainty has been bewildering given the fact that the US government’s budget deficit has swelled, contributing to the country’s debt load, now at $21.5 trillion. Meanwhile, corporate America has gone on a borrowing spree to take advantage of near-record low rates. In fact, according to Bloomberg, excluding financials, S&P 500 companies have more than doubled their borrowings to $5 trillion over the past decade.

“There are a lot of people waiting for the world to end because of this bond market,” said Brad McMillan, chief investment officer for Commonwealth Financial Network, which oversees $156 billion.

“Low rates will keep going forever — a lot of justification for high valuations is based on the assumption. That assumption is largely broken.”

And, as Bloomberg notes, prophesies of doom are everywhere.

There’s billionaire investor Stan Druckenmiller, who says our “massive debt problem” will ignite a crisis.

Oaktree Capital’s Howard Marks warns that public and private debt will be “ground zero when things next go wrong.”

And Citadel’s Ken Griffin sees a credit binge ending badly.

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

The “VaR Shock” Is Back: Global Bonds Lose $880 Billion In One Week

October 6, 2018

The “VaR Shock” Is Back: Global Bonds Lose $880 Billion In One Week

Markets were in turmoil, S&P futures were locked limit down as traders panicked, the establishment political system was in chaos and global bond portfolios were about to suffer a near record $1.2 trillion in losses in just a few days.

All this took place in the hours and days following Donald Trump’s November 8, 2016 election as a Value at Risk (or VaR) shockwave spread around the globe over fears Trump would ignite an inflationary conflagration that would undo years of unorthodox monetary policy, sending interest rates soaring and crashing stock markets.

In retrospect it didn’t happen, and as the initial shock from the political revolution in the US fizzled, bond buying resumed and the VaR shock of 2016 faded as an unpleasant memory.

Or rather, it didn’t happen then, because fast forward a little under two years, when the realization that something may is profoundly changing with the US economy has unleashed the latest global bond market Value at Risk, or VaR shock, when in just the span of three days as interest rates blew out both in the US and across the world…

… some $876 billion in aggregate bond market value was lost, the biggest weekly drop since the Trump election VaR shock, and wiping out one year’s worth of mark to market profits as the aggregate value of global bonds tumbled to $48.9 trillion, the lowest going back to October 2017.

The immediate catalysts have been extensively discussed here in recent days: a record non-manufacturing ISM, a surprisingly hawkish speech by Fed Chair Powell in which he warned that rates “may go past neutral” and, topping it off, another strong nonfarm payrolls report. Meanwhile, European bonds have tumbled on renewed fears about Italian politics while Emerging Markets have been routed as a result of the strong dollar which in turn has squashed local bonds.

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

Peter Schiff: The “Trump Tariff Put” on the Stock Market Is Worthless

September 25, 2018

Peter Schiff: The “Trump Tariff Put” on the Stock Market Is Worthless

Just because you’re a Republican, you don’t have to claim that anything that’s done by another Republican is great in order to make the Democrats look bad. Because ultimately that comes back and bites you because you lose all credibility when the economy turns down and you’ve been gushing over how great it is and how successful the Republican president is. And when it turns out it was just a bubble, it was just an illusion and when the bubble bursts and the illusion is replaced with a harsh reality, well you’ve got nothing and it makes it easier for the other side to scapegoat capitalism for the problems and hold out more government as the solution.”

Nevertheless, the markets are going up. One of the reasons is the so-called “Trump tariff put.” The idea is that Trump will keep an eye on the stock market and the economy, and if the tariffs actually start to have a negative impact, he can just soften his stance and perhaps even lower the tariffs. That will rescue the stock market and everything will be fine.

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

Ten Years After the Crash, We Have Survived, But Have You Prospered?

September 22, 2018

Ten Years After the Crash, We Have Survived, But Have You Prospered?

The year is 2018 and we have survived.

Despite all the fear-mongering, all the pessimism, all the chaos, the markets are still here, and they are thriving.

This has blown away many, as their are countless experts in the precious metals community and the financial world at large, who believed that this house of cards would of long ago come crashing down long ago.

Sparks have flown through the air on an almost daily basis, threatening to set blaze to this bone dry kindling that we call a financial system. Yet, time and time again, the hose is turned on and the small embers are blasted out of existence through a torrent of fiat currency.

The financial “elites” have done what many thought would be impossible, and for that, you have to give them credit, well, at least in the short term.

Endless amounts of money printing may have helped paper over the problem, and arguably, it has, as ten years after the financial crisis of 2008, we are still standing, we are still here and the modern world is still ticking by with each passing day, regardless of how dysfunctional our current political system may be.

So why do people not feel it? Why do so many people still feel like there has been no recovery, and that they are still living through the 2008 crash that is now ten years in our past?

A recent report by Betterment highlights this point and showcases, that despite the market being up a stunning 200% since the market bottom, the majority of Americans are not aware of this, and in fact believe that the market is either flat, or has moved even lower than the 2008 crash.

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

The Global Financial System Is Unraveling, And No, the U.S. Is Not immune

September 4, 2018

The Global Financial System Is Unraveling, And No, the U.S. Is Not immune

Currencies don’t melt down randomly. This is only the first stage of a complete re-ordering of the global financial system.

Take a look at the Shanghai Stock Market (China) and tell me what you see:

A complete meltdown, right? More specifically, a four-month battle to cling to the key technical support of the 200-week moving average (the red line). Once the support finally broke, the index crashed.

Now take a look at the U.S. S&P 500 stock market (SPX):

SPX is soaring to new highs, not just climbing a wall of worry but leaping over it. So the engine of global growth–China–is exhibiting signs of serious disorder, and the world’s consumerist paradise–the U.S.– is on a euphoric high (Ibogaine in the water supply?)

This divergence is worth pondering. How can the two economies that have powered a 28-year Bull Market in just about everything (setting aside that spot of bother in 2008-09) be responding so differently to the global economy and global financial system’s woes?

There’s a rule of thumb that’s also worth pondering. While the stock market attracts all the media attention–every news cast reports the daily closing the the Dow Jones Industrial Average, the SPX and the Nasdaq stock index–the bond market is larger and more consequential. And larger still is the currency market–foreign exchange (FX).

As the chart below illustrates, a great many currencies around the world are in complete meltdown. This is not normal. Nations that over-borrow, over-spend and print too much of their currency to generate an illusion of solvency eventually experience a currency crisis as investors and traders lose faith in the currency as a store of value, i.e. the faith that it will have the same (or more) purchasing power in a month that it has today.

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

Iran Sanctions, Emerging Markets And The End Of Dollar Dominance

August 30, 2018

Iran Sanctions, Emerging Markets And The End Of Dollar Dominance

trade war cover up for fed and dollar

The trade war is a rather strange and bewildering affair if you do not understand the underlying goal behind it. If you think that the goal is to balance the trade deficit and provide a more amicable deal for U.S. producers on the global market, then you are probably finding yourself either confused, or operating on blind faith that the details will work themselves out.

Case in point, the latest reports that the U.S. trade deficit is now on track to hit 10-year highs, after a 7% increase in June. This is the exact opposite of what was supposed to happen when tariffs were initiated. In fact, I recall much talk in alternative media circles claiming that the mere threat of tariffs would frighten foreign exporters into balancing trade on their own. Obviously this has not been the case.

Rumors of China committing to trade talks or “folding” under the pressure have been repeatedly proven false. Though stock markets seem to enjoy such headlines, tangible positive results are non-existent. While the world is mostly focused on China’s reactions, sanctions against other nations are continuing for reasons that are difficult to comprehend.

Sanctions against Russia have been tightened in the wake of the poisoning of Sergei and Yulia Skripal in the UK, even though we still have yet to see any concrete evidence that Russia had anything to do with the attack.

And, sanctions against Iran have been reintroduced on the accusation that the Iranian government is engaged in secret nuclear weapons development. And again, we still haven’t seen any hard evidence that this is true.

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

Central Banks Are Using The Trade War To Hide Their Direct Influence On Stocks

July 20, 2018

Central Banks Are Using The Trade War To Hide Their Direct Influence On Stocks

There has been a lot of confusion lately in the mainstream economic media as well as in independent media circles as to the behavior of stock markets in the wake of the recently initiated global trade war. In particular, stocks suffered one of the longest runs of negative days in their history in June, only to then spike just after Donald Trump “officially” began trade war tariffs in July. The expectation by many was that the headlines would cause an immediate and continued downturn in equities markets, but this was not the case. Many analysts have been left bewildered.

This is an issue I have touched on multiple times since the beginning of this year, and it is something I predicted long before Trump’s election in 2016. But it is obvious that the schizophrenic nature of stocks needs to be addressed in a very concise, no-holds-barred fashion, because there are still far too many people who are looking at all the wrong causes and correlations.

First, let’s be clear: stock markets are NOT tracking the news headlines. The past month should have proved this if there was any previous doubt.

It is hard for investors and some analysts to grasp this fact, primarily because for at least the past few years it appeared as though stock markets were utterly dictated by headlines out of Bloomberg, Reuters and other mainstream media outlets. Once investors and analysts became used to this narrative it was difficult for them to adapt when the dynamic changed. They are still living in the past based on an assumption that was never quite correct to begin with.

In reality, headlines never actually dictated stock prices; it was always the Federal Reserve among other central banks.

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

The Market Gods Are Laughing

July 15, 2018

The Market Gods Are Laughing

POITOU, FRANCE – President Trump escalated the trade war yesterday, making a kamikaze attack on a vast armada of Chinese imports – $200 billion in total – headed for California.

The Chinese say they will retaliate.

Phony Wars

Last month, we opined that the trade war wouldn’t go any better than Vietnam… or Iraq… or any of the feds’ other phony wars – against drugs, poverty, or terrorists.

It will be expensive, futile… and perhaps disastrous.

But that doesn’t mean it won’t be popular. Wars give the spectators something to live for – us versus them… good guys against bad guys… winners versus losers.

Their hat size swells as their champion wallops the Chinese. Their girth shrinks as he challenges and taunts the Canadians. Their manhood grows when the enemy gives in and admits defeat.

But while this puerile entertainment is taking place in the arena, the real action is going on in the expensive skyboxes, where the elite collude against the fans.

Wars shift resources from the boring and productive win-win deals in the private sector to the magnificently absurd win-lose deals of the feds and their cronies. The only real winner is the Deep State.

Weatherman David

We saw our colleague, former U.S. budget chief under President Reagan, David Stockman, on TV yesterday. The interview was painful to watch.

He was bravely trying to explain the trade deficit and why it was caused by monetary policy, not by trade ramparts that were too low.

But the young, know-it-all newscasters were such numbskulls – so lacking in any experience, theory, or historical perspective – he might as well have been instructing a walrus on how to chew gum. The lesson was in vain.

The three TV experts saw no problem with the trade deficit… and no danger approaching from Trump’s war on it.

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

‘The Markets Peaked’ – This Historical Indicator Signals Potentially Huge Losses Ahead

July 11, 2018

‘The Markets Peaked’ – This Historical Indicator Signals Potentially Huge Losses Ahead

Understanding cycle theory is still one of the most important things an investor can do.

Buying at the peak is a surefire way to increase your downside risk – even if your investment is sound. And buying at the bottom gives you a thick margin of safety – downside protection.

That’s why the best investors pay so much attention to where they are in the cycle.

The value-investing contrarian who runs Oak Tree Capital – Howard Marks – has written about the importance of cycles.

In fact – in his book, The Most Important Thing Illuminated, he writes two key rules. . .

“Rule number one: most things will prove to be cyclical… Rule number two: some of the greatest opportunities for gains and loss come when other people forget rule number one…”

And I fully agree with him. . .

There’s a powerful indicator that shows global economic expansion and contraction – it’s known as the ‘Global Wave’ (GW).

And going back the last 30 years – within a year of when things peak (top), there’s either a recession or some market crisis. And when there’s a trough (bottom), it’s followed by growth and gains.

Today – the Global Wave indicator’s signaling economic growth has peaked for this cycle. And both markets and economies are going to underperform for at least the next 12 months.

To be fair – some post-market peak downturns were brief and didn’t result in huge market sell offs. But the ones that did – like the 2001 and 2009 recessions – were brutal.

That’s why we need to ask ourselves a very important question: what’s most likely to happen over the next 12 months – is the Global Wave Indicator just noise(useless) or is it a signal(useful)?

If we look at the history of the GW, it’s not hard to see that things are most likely going to go down from here. . .

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

Eric Peters: “People Assume That Stocks Always Rise Over Time. They’re Wrong”

July 6, 2018

Eric Peters: “People Assume That Stocks Always Rise Over Time. They’re Wrong”

This week on the MacroVoices podcast, host Erik Townsend welcomed Eric Peters, the CEO and CIO of One River Asset Management, for a discussion about the long-term future of the US economy, and how demographics, the expanding US debt, and the waning influence of central banks will impact growth, inflation and – most importantly – markets.

After a brief discussion about the future of USD hegemony, and the factors that could lead to the dethroning – so to speak – of the dollar, the two plunged into a discussion about one of the most vexing issues of the modern US economy: Why sub-4% unemployment hasn’t driven a runup in inflation back toward levels witnessed before the financial crisis.

We’ve all looked at the stats, and we’re now at an unemployment rate in the US of sub-4% – 3.8%–3.7%. I think what a lot of people focus on is if the participation rate were back where it was pre-2008 you’d end up with an unemployment rate that had an 8 handle or something like that. So that’s what people are referring to. But making comparisons like that is difficult because a lot of things are changing. The US labor force is shrinking because people are getting older. There is the opioid issue. And this disability issue. Which are difficult to really handicap in terms of how big an impact that’s having on the US labor force.

Up until recently, the actions of central bankers have been much more important to markets in a general sense than the behavior of politicians. But that’s about to change…

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

Stock markets look ever more like Ponzi schemes

July 4, 2018

Stock markets look ever more like Ponzi schemes

The FT has reported this morning that:

Debt at UK listed companies has soared to hit a record high of £390bn as companies have scrambled to maintain dividend payouts in response to shareholder demand despite weak profitability.

They added:

UK plc’s net debt has surpassed pre-crisis levels to reach £390.7bn in the 2017-18 financial year, according to analysis from Link Asset Services, which assessed balance sheet data from 440 UK listed companies.

So what, you might ask? Does it matter that companies are making sense of low-interest rates to raise money when I am saying that government could and should be doing the same thing?

Actually, yes it does. And that’s because of what the cash is being used for. Borrowing for investment makes sense. Borrowing to fund revenue investment (that is training, for example, which cannot go on the balance sheet but still adds value to the business) makes sense. But borrowing to pay a dividend when current profits and cash flow would not support it? No, that makes no sense at all.

Unless, of course, you are CEO on a large share price linked bonus package and your aim is to manipulate the market price of the company. It is that manipulation that is going on here, I suggest. These loans are being used to artificially inflate share prices.

The problem is systemic. In the US the problem is share buybacks, which I read recently have exceeded $5 trillion in the last decade, meaning that US companies are now by far the biggest buyers of their own shares. That is, once again, market manipulation.

And this manipulation does matter.

People think their savings and pensions are safe because of rising share prices. They do not realise it is all a con-trick.

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

BLINKING RED BUBBLE LIGHT: Stock Market Investor Margin Debt Reaches New High

July 3, 2018

BLINKING RED BUBBLE LIGHT: Stock Market Investor Margin Debt Reaches New High

The world is standing at the edge of the financial abyss while most investors are entirely in the dark. However, specific indicators suggest the market is one giant RED BLINKING LIGHT. One of these indicators is the amount of margin debt held by investors. What is quite surprising about the level of investor margin debt is that it has hit a new record high even though the market has sold off 2,500 points from its peak in February.

It seems as if investors no longer believe in market cycles or fundamentals. Instead, the Wall Street saying that “This time is different” has become permanently ingrained in the market psychology. For example, it doesn’t seem to matter to the market that Amazon makes no money on its massive online retail business. The only segment of Amazon’s business that made a decent profit last quarter was from its Cloud hosting services.

So, the new Amazon way of doing business in the United States is to destroy the retail industry so it can break even. I gather once many of the retail chains have gone out of business; Amazon might then increase its prices and shipping costs. But for now, the mighty online retail chain is firmly entrenched in the U.S. RETAIL CANNIBALIZATION mode.

Unfortunately, if Amazon is successful in destroying a significant portion of the brick and mortar retail industry, it will spell bad news for Americans when the next financial collapse takes place. Why? Well, the simple answer is that we can’t go backward. Think about this for a moment.

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

Italian Politics: The Calm Before the Next Storm

June 11, 2018

ITALIAN POLITICS: THE CALM BEFORE THE NEXT STORM

Europe remains a potential source of angst for financial markets in the form of another existential crisis for the Eurozone. True, stock markets have relaxed over the past week in part because of relief that another Italian election has been avoided for now and in part because US dollar upward momentum has stalled (see following chart).US DOLLAR INDEX

Source: Bloomberg

CONFLICT IN ITALY — WHEN WILL IT COME TO A BOIL?

The coalition government’s economic policies will likely conflict with the fiscal rules set by Brussels.

On Italy this is likely just the calm before the next storm given the Five Star and League coalition government’s economic policies are almost inevitably going to be in conflict with the fiscal rules set by Brussels — though the confrontation may take longer to come to a boil because of the presence of technocrats in the new government, a compromise required by Italian president Sergio Mattarella for the government to be formed on June 1.

There will also doubtless be hopes on the part of the political establishment that the differences in ideologies between the left of centre Five Star and the right-wing League will become evident in the everyday practice of trying to run a government resulting in due course in both ‘populist’ parties being discredited in the eyes of the electorate.

ITALIAN 10-YEAR GOVERNMENT BOND YIELD AND SPREAD OVER 10Y GERMAN BUND YIELD

Source: Bloomberg

THE ECB AND THE EUROSYSTEM — ITALY’S GREATEST CREDITOR

The other point to consider with an Italian populist government now in place is how the ECB will react in terms of the signals sent given that the ECB and the Eurosystem is the single largest holder of Italian government debt.

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

Markets Better Prepare for Stagflation

April 25, 2018

Markets Better Prepare for Stagflation

By all metrics, prices are heating up. But the same can’t be said for economic activity.

Pray for Jerome Powell. Photographer: Andrew Harrer/Bloomberg

Investors better wake up to the growing risk of stagflation. The coming weeks promise to deliver the verdict on how they should be positioned.

By all metrics, inflation is heating up. But it’s not clear the same can said for underlying economic activity.

According to producers, input costs have risen for six of the past eight months. And it’s not just big companies that are feeling pressure. One in four small businesses say they plan to raise prices, a 10-year high, according to the National Federation of Independent Business. Inflation’s persistence will finally begin to trickle through to consumers.

David Rosenberg, chief economist at the wealth management company Gluskin Sheff, recently quipped that investors “better say a prayer for Jay Powell,” the Federal Reserve chair. The deniers will dismiss the suggestion. But Rosenberg is serious, citing the core consumer price index’s March leap to 2.1 percent, a level that breaches the Fed’s 2 percent inflation target.

“There is going to be a price to be paid for last year’s string of wireless-induced 0.1 percent prints which are falling out of the year-over-year math,” Rosenberg explained, referring to the collapse in wireless services that skewed inflation lower in 2017. “I see 50/50 odds of a 3 percent core inflation by year end.”

That would certainly grab the Fed’s attention and — critically for investors — keep the central bank in a tightening mode through the end of the year and into 2019. Notably, no single Federal Open Market Committee member voiced concern about the risk of inflation that is too low, the first time this has occurred since the Fed began making public the views of participants in 2011.

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

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