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Archegos Implosion is a Sign of Massive Stock Market Leverage that Stays Hidden until it Blows Up and Hits the Banks

March 29, 2021

Archegos Implosion is a Sign of Massive Stock Market Leverage that Stays Hidden until it Blows Up and Hits the Banks

Banks, as prime brokers and counterparties to the hedge fund, are eating multi-billion-dollar losses as they try to get out of these secretive stock derivative positions.

The implosion of an undisclosed hedge fund, now widely reported to be Archegos Capital Management, is hitting the stocks of banks that served as prime brokers to the fund. The highly leveraged derivative positions, based on stocks, had blown up spectacularly. Banks get into these risky leveraged deals because they generate enormous amounts of profit – until they blow up and banks get hit as counterparties.

Credit Suisse [CS] is down 13% at the moment in US trading after it warned this morning that “a significant US-based hedge fund defaulted on margin calls made last week by Credit Suisse and certain other banks,” and that it and “a number of other banks are in the process of exiting these positions,” and that the loss resulting from this exit “could be highly significant and material to our first quarter results.” The bank deemed it “premature to quantify” the loss.

Nomura Holdings [NMR] is down 14% at the moment in US trading after it warned this morning that “an event occurred that could subject one of its US subsidiaries to a significant loss arising from transactions with a US client.” It estimated the loss from this one client at “approximately $2 billion, based on market prices as of March 26.”

As Credit Suisse pointed out, “a number of other banks” are also involved as counterparties to that one unnamed hedge fund, and have been trying to get out of these positions since last week.

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

financial markets, archegos, wolf richter, wolfstreet, stock market leverage, credit suisse, banks, nomura

What’s Behind the Stunning Spike in Used Vehicle Auction Prices? That Consumers Aren’t on Buyers Strike Shows Something Big about Inflation Has Changed

March 29, 2021

What’s Behind the Stunning Spike in Used Vehicle Auction Prices? That Consumers Aren’t on Buyers Strike Shows Something Big about Inflation Has Changed

Need a used pickup truck? Forget it, or pay out of your nose for it. But even spurned mid-sized cars are seeing stunning price increases.

Prices of used cars and trucks of up to eight years old that were sold at wholesale auctions during the week ended March 21 jumped by 3.1% from the prior week, according to data by J.D. Power on Friday. Over the past four weeks, prices have spiked by 8.3%. Compared to early March 2020, just before the end of the Good Times, prices have spiked by 19.5%:

When you talk to dealers that came back from auctions to buy vehicles to replenish their inventories, they tell you with an exasperated voice about prices being bid up to ridiculous levels, particularly on trucks. But they’re in the business of buying and selling vehicles, and they have to replenish their inventory, and so they’re buying, and in order to buy, they have to bid up prices, and they’re planning to pass those ridiculous prices plus adequate profits on to their customers.

And in a big change with past practice, the astute American consumer that haggled and shopped to get the best deal has not been resisting the price increases that started last year — but has been paying them.

Manheim, the largest wholesale auto auction operator and a unit of Cox Automotive, reported in its mid-month update that wholesale vehicle prices mid-March had jumped by 3.75% from February, based on its Used Vehicle Value Index (adjusted for mix, mileage, and seasonal factors).

The index is now 22.3% higher than in February 2020, before all heck broke loose, the largest 13-month increase in the data going back to 1998, beating the 13-month surge of 20% in 2010, following the cash-for-clunkers program that had taken a whole generation of serviceable older used vehicles off the market:

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

wolf richter, used vehicle prices, inflation, wolfstreet,

Blocked Suez Canal Adding to Container Shortages, Supply Chain Snarls, Component Shortages for Manufacturers

March 27, 2021

Blocked Suez Canal Adding to Container Shortages, Supply Chain Snarls, Component Shortages for Manufacturers

Exactly at the worst possible time. Ripple effects to be felt for months.

Today is Thursday, and the Suez Canal is still blocked by one of the largest container carriers in the world. The last thing the tangled up and strained supply chains needed amid a historic surge in demand for durable goods, and component shortages that have led to numerous shutdowns of assembly plants, was a traffic jam at both ends of one of the world’s most important shipping choke points. But that’s what manufacturers were served up when the Ever Given got stuck in a narrow part of the Suez Canal where about 30% of the world’s ocean container volume transits. Image by Airbus Space, this morning:

The Ever Given in all its beauty. Owned by Japan’s Shoei Kisen, operated by Taiwan-based Evergreen Group, and registered in Panama, it has a capacity of 20,000 TEU or Twenty-foot Equivalent Units.

On Tuesday at around 7:45 a.m. local time (Monday night in the US), the Ever Given got stuck in high winds, sailing northbound through the Suez Canal on its way from China to Rotterdam. And it is still stuck, despite all-out efforts to refloat the ship, blocking traffic in both directions. The estimates as when it could be moved out of the way range all over the place, from days to weeks, and might have to include partially unloading the ship.

About 19,300 vessels passed through the Suez Canal in the fiscal year 2020, or roughly 52 per day, according to the Suez Canal Authority. And they’re now piling up at both ends of the canal, and are stuck in the Great Bitter Lake in the middle.

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

Bank of Canada Announces Balance Sheet Reduction, Suddenly Worried about “Moral Hazard”

March 24, 2021

Bank of Canada Announces Balance Sheet Reduction, Suddenly Worried about “Moral Hazard”

“Once crisis tools have served their purpose, central banks should scale them back.”

The Bank of Canada will unwind its crisis liquidity facilities, will further reduce its purchases of Government of Canada bonds, which it already started tapering in October, will let short-term assets “roll off” the balance sheet when they mature, and will as a result reduce its total assets from C$575 billion now to $C475 billion by the end of April, announced Bank of Canada Deputy Governor Toni Gravelle in a speech today.

Most of the speech was focused on the reasons for the QE and liquidity programs that the Bank of Canada unleashed starting in mid-March last year, in a two-fold role: In its role as “lender of last resort,” to deal with the “extreme stress” in the markets, as liquidity dried up and markets weren’t functioning or had “seized completely” as everyone was trying to sell everything in a mad “dash for cash.” And in its role as provider of stimulus as the economy that was spiraling down.

But these actions ballooned the balance sheet fourfold, to C$575 billion, and it created the possibility of “moral hazard.”

“Moral hazard emerges whenever market participants or other economic actors feel that they can engage in risky behavior without bearing consequences if things go wrong,” Gravelle said, a year after moral hazard became forever the guiding principle of the markets.

But moral hazard can be limited “by ensuring that such actions have a predetermined expiry date or are unwound when they’re no longer needed,” he said.

“Once crisis tools have served their purpose, central banks should scale them back to show that they are emergency measures and don’t reflect business as usual,” he said.

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

wolf richter, central banks, bank of canada, wolfstreet, canada, housing bubble, mortgage bubble, interest rates, qe, quantitative easing

First Signs that Surging Mortgage Rates Are Dialling Down the Heat under the Housing Market

March 22, 2021

First Signs that Surging Mortgage Rates Are Dialling Down the Heat under the Housing Market

The Fed smiles upon rising long-term Treasury yields as sign of economic growth and rising inflation expectations.

Long-term US Treasury yields have continued to march higher despite the Fed’s purchases of about $120 billion a month in Treasury securities and MBS, whose purpose it is to push down long-term rates. And the Fed governors continue to voice unanimous support for those higher yields as a sign of a growing economy and rising inflation expectations. Just about every day, they come out shrugging and expressing their support for those higher yields. On Friday, it was Richmond Fed President Thomas Barkin’s job to spread the gospel.

“There’s a lot of momentum in the economy right now,” he told CNBC. “I think we are going to have a very strong summer, a very strong fall, as pent-up demand comes back in the economy, as vaccines roll out, and I think the economy is going to be strong enough to take somewhat higher rates.”

This comes on top of Jerome Powell’s insistence earlier in the week that the Fed will consider the rise in inflation as temporary, and that the Fed won’t do anything about it, and that the resulting rise in long-term yields, as long as it doesn’t create “disorderly conditions” in markets, are a welcome sign of economic growth and rising inflation expectations. This Fed is looking forward to a surge in inflation, and is promoting it, and so on Friday, the 10-year yield closed at 1.74%, the highest since January 2020:

The 30-year yield closed at 2.45% on Friday, the highest since July 2019. When yields rise, bond prices fall. The price of the iShares 20 Plus Year Treasury Bond ETF [TLT], which tracks Treasury securities with maturities of 20 years or more, has dropped 21.5% since August 4.

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

Stock Market Leverage Spikes in Historic Manner: Another WTF Chart of a Zoo that Has Gone Nuts

March 18, 2021

Stock Market Leverage Spikes in Historic Manner: Another WTF Chart of a Zoo that Has Gone Nuts

In an investment environment where nothing matters anymore – until it suddenly does.

In the current craze that encompasses everything from sneakers and NFTs to stocks, where valuations don’t matter because of widespread certainty that valuations will be even greater in a few days, and where folks are chasing lottery-type returns, supported by the Fed’s interest rate repression and $3 trillion in asset purchases, and by the government’s trillions of dollars of handouts and bailouts – well, in this perfect world, there is a fly in the ointment: Vast amounts of leverage, including stock market leverage.

Margin debt – the amount that individuals and institutions borrow against their stock holdings as tracked by FINRA at its member brokerage firms – is just one indication of stock market leverage. But FINRA reports it monthly. Other types of stock market leverage are not reported at all, or are disclosed only piecemeal in SEC filings by brokers and banks that lend to their clients against their portfolios, such as Securities-Based Loans (SBLs). No one knows how much total stock market leverage there is. But margin debt shows the trend.

In February, margin debt jumped by another $15 billion to $813 billion, according to FINRA. Over the past four months, margin debt has soared by $154 billion, a historic surge to historic highs. Compared to February last year, margin debt has skyrocketed by $269 billion, or by nearly 50%, for another WTF sign that the zoo has gone nuts:

But margin debt is not cheap, especially smaller amounts. For example, Fidelity charges 8.325% on margin balances of less than $25,000 – in an environment where banks, money market accounts, and Treasury bills pay near 0%. Margin debt gets cheaper for larger balances, an encouragement to borrow more. For margin debt of $1 million or more, the interest rate at Fidelity drops to 4.0%

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

THE WOLF STREET REPORT: Market Manias Galore, But Long-Term Interest Rates Smell a Rat

March 15, 2021

THE WOLF STREET REPORT: Market Manias Galore, But Long-Term Interest Rates Smell a Rat

These manias and the rising long-term yields are on collision course. (You can also download THE WOLF STREET REPORT wherever you get your podcasts).

wolfstreet, wolf street report, wolf richter, long-term interest rates, interest rates, financial markets

New Normal: High Unemployment, Near-Zero Interest Rates and Out of Control Inflation

March 14, 2021

New Normal: High Unemployment, Near-Zero Interest Rates and Out of Control Inflation

Since the pandemic began a year ago, the term “new normal” has become part of the American lexicon. Not “new” as in better or improved. But rather “new” as in contrast to the way things used to be.

Much of the mainstream discussion argues that returning to the “old” normal isn’t likely to happen. Things like pre-pandemic employment, closer-to-normal price inflation, and less economic uncertainty just aren’t on the map.

The Street summed it up generously as: “Numerous chain reaction ripple impacts will delay the economic recovery.” Some of these “ripple effects” were in motion long before the pandemic hit.

For example, the Fed was already in a state of panic thanks to an out-of-control repo rate fiasco from 2019, mounting debt, and potential ineffectiveness of its main tools.

During the “old normal” the Fed would have been able to deploy its tools to control rates and keep unemployment under control — but that might not be possible now or in the future.

Under the post-pandemic “new normal,” the potential exists for the “ripple effects” from the state closure of small businesses, developing automation, and fractures in the food supply chain to be felt more permanently.

Is the U.S. Heading for Permanently High Unemployment?

In a way, thanks to the pandemic, yes it is. But it depends on many factors.

Wolf Richter laid out why he thinks the sudden economic shifts that happened in 2020 will take years to sort out:

Now the Pandemic has forced businesses to change. There is no going back to the old normal. And these technologies impact employment in both directions.

If the pandemic has forced businesses to adopt technologies that automate certain functions, then the employees that performed those functions will no longer be necessary.

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

House Price Inflation in CPI is of Course Complete Baloney, but it Accounts for 1/4 of Total CPI

March 13, 2021

House Price Inflation in CPI is of Course Complete Baloney, but it Accounts for 1/4 of Total CPI

With actual house price inflation based on market data, overall CPI would have jumped by 3.7%. Lifting the cover on the deception to keep CPI low.

For most Americans, housing costs are the largest item in their budget, ranging from 30% to 60% of their total monthly spending. In its Consumer Price Index (CPI) for February, released yesterday, the Bureau of Labor Statistics reported that the costs of homeownership (which the BLS calls “Owner’s equivalent rent of residence”) have increased by just 2.0% from a year ago, and that rents (“rent of primary residence”) have increased by 2.0%. They’re the biggest items among the 211 items in the CPI basket and together account for about one-third of overall CPI. They play a huge role in CPI. So…

Rent inflation of 2.0% year-over-year on average across the US might be roughly on target, from what I can see in other rental data. But homeowner’s inflation of just 2.0%, given the skyrocketing home prices? Ludicrous. In its latest release, the Case-Shiller National Home Price index jumped by 10.4%.

This discrepancy between home price increases and the CPI for homeowners – which has for years contributed to understating the overall CPI – is depicted in the chart of the Case-Shiller National Home Price Index (red line) and the CPI for “owner’s equivalent rent of residence” (black line). I set the homeowners CPI at 100 for January 2000 to match the Case-Shiller index, which is set by default at 100 for January 2000. This allows you to see the progression of both indices on the same axis.

The thus corrected CPI increases by 3.7%.

The “owner’s equivalent rent of residence” accounts for 24.2% of CPI. If it had increased by 10.4%, in line with the Case-Shiller index, instead of 2.0%, the overall CPI would have increased by 2.03 percentage points more…

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

wolfstreet, wolf richter, cpi, consumer price inflation, house prices, inflation, statistical manipulation, statistics,

Electricity Sales to End Users Dropped Below 2008 Level: What it Says about the Pandemic Economy, Households, Commercial & Industrial Activity, and Public Transportation

March 10, 2021

Electricity Sales to End Users Dropped Below 2008 Level: What it Says about the Pandemic Economy, Households, Commercial & Industrial Activity, and Public Transportation

In 2020, by source, coal collapsed to record low, natural gas dominated, wind and solar surged, while hydro and nuclear remained roughly flat.

Electricity sales to all end users in the US – households, office buildings, industrial buildings, and the like – have been on a dreary trajectory since 2008 for electric utilities overall in the US, despite economic and population growth, as these customers have invested in more efficient electrical equipment such as LED light bulbs and new air conditioners, and better thermal insulation, while at the same time, more manufacturing has been offshored.

And then came the Pandemic. By customer type, electricity sales show the shifts in the economy as millions of jobs evaporated, and as other jobs were switched from desk farms in office towers to working from home, while many retailers and restaurants closed, industrial plants reduced activity, and usage of commuter rail collapsed.

In 2020, total electricity sales to ultimate customers dropped by 3.9% to 3.66 million gigawatt hours, after having already dropped 1.2% in 2019, according to new data by the Energy Department’s EIA. These two drops brought electricity sales below the 2008 level:

Electricity sales to residential customers ticked up 1.5% from 2019 to 1.46 million gigawatt hours, though they remained a tad below the record sales of 2018. Households who switched to work-from-home and learning-from-home saw the rising number of kilowatt hours they were paying for as they ran their air conditioners, heaters, computer equipment, lights, and other stuff all day long.

And heat played a role, with a number of states reporting a record hot July, followed by the third hottest August on record in the US overall…

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

What Happens to the Markets If Long-Term Interest Rates Double from Here? Did Low Interest Rates Boost Auto Sales? Do These Covid Markets Make Any Sense?

February 21, 2021

What Happens to the Markets If Long-Term Interest Rates Double from Here? Did Low Interest Rates Boost Auto Sales? Do These Covid Markets Make Any Sense?

Wolf Richter on This Week in Money, by HoweStreet.com:

Shipping Costs, Trucking Rates Soar Despite Demand Below Prior Years. Now Add Diesel Price Surge to the Mix

February 20, 2021

Shipping Costs, Trucking Rates Soar Despite Demand Below Prior Years. Now Add Diesel Price Surge to the Mix

One more manifestation of the inflation pressures working through various levels of the economy despite suboptimal demand.

January, in terms of freight volume, is usually a slow month of the year, after the shipping season before the holidays, and freight rates tend to back off. But not this January.

The amount that shippers, such as retailers and manufacturers, spent in January on shipping goods to their customers soared by 19.5% compared to January last year, the steepest year-over-year increase since 2011, and surpassing the surge in September 2018, according to the Cass Freight Index of Expenditures. This was driven by a mix of increasing freight volume and soaring freight rates. The amount spent on freight was roughly on par with December which had set a huge record:

The higher freight rates in January include trucking spot rates and contract rates. According to DAT Freight & Analysis, the average national contract rate for van-type trailers in January jumped by 26% from a year ago to $2.40 a mile.

Spot rates declined over the course of January from high levels in December before picking up again in February. But the average rate in January, at $2.36 was still up 11% from a year earlier.

The freight rates embedded in the Cass Freight Index jumped by 10.1% year-over-year in January, up from an increase of 6.0% in December.

The Cass Freight Index covers all modes of transportation, but truckload represents over half of the dollar amounts, followed by rail, less-than-truckload (LTL), parcel services, etc. It does not cover bulk commodities.

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

Who Bought the $4.5 Trillion Added in One Year to the Incredibly Spiking US National Debt, Now at $27.9 Trillion?

February 19, 2021

Who Bought the $4.5 Trillion Added in One Year to the Incredibly Spiking US National Debt, Now at $27.9 Trillion?

Someone had to buy every dollar of this monstrous debt. Here’s Who. The Fed isn’t the only one. But China continues to unwind its holdings.

Driven by stimulus and bailouts, and fired up by the tax cuts and by grease and pork, the Incredibly Spiking US National Debt has skyrocketed by $4.55 trillion in 12 months, to $27.86 trillion, after having already spiked by $1.4 trillion in the prior 12 months, which had been the Good Times. These trillions are all Treasury securities that form the US national debt, and someone had to buy every single one of these securities:

So we’ll piece together who bought those trillions of dollars in Treasury Securities that have whooshed by over the past 12 months.

Tuesday afternoon, the Treasury Department released the Treasury International Capital data through December 31 which shows the foreign holders of the US debt. From the Fed’s balance sheet, we can see what the Fed bought. From the Federal Reserve Board of Governors bank balance-sheet data, we can see what the banks bought. And from the Treasury Department’s data on Treasury securities, we can see what US government entities bought.

Share of foreign holders falls to 25% for first time since 2007:

In the fourth quarter, foreign central banks, foreign government entities, and foreign private-sector entities such as companies, banks, bond funds, and individuals, reduced their holdings by $35 billion from the third quarter, to $7.04 trillion. This was still up from a year ago by $192 billion (blue line, right scale in the chart below). But their share of the Incredibly Spiking US National Debt fell to 25.4%, the lowest since 2007 (red line, right scale):

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

Demand for Gasoline, Jet Fuel, and Diesel: Checking on the Recovery

February 13, 2021

Demand for Gasoline, Jet Fuel, and Diesel: Checking on the Recovery

Watching for the EV drag on gasoline demand requires a lot of patience.

Gasoline consumption in the US during the four-week period through February 5 was down by 10.1% from a year ago to 7.89 million barrels per day (mb/d), according to EIA data. Gasoline consumption has been down in the range between 9% and 13% since mid-July, following the initial bounce-back from the collapse in March and April:

That Pandemic level of gasoline consumption below 8 mb/d was something that last occurred during the 1990s.

The effects of the pandemic – massive unemployment and working from home, partially balanced by driving instead of taking mass-transit and flying – are short-term factors that have hit gasoline demand, though they too may entail long-term shifts.

But there are also long-term structural demand issues: Peak consumption just before the Pandemic was just barely above the peak before the Financial Crisis 12 years earlier, with a big trough in between:

The EIA tracks consumption of fuel in terms of product supplied by refineries, blenders, etc., and not by retail sales at gas stations.

The structural demand issues become clearer when gasoline consumption is seen in light of population growth. On a per-capita basis, gasoline consumption peaked in 2004 at 477 gallons per person during the year, using Census Bureau population data. This includes gasoline consumption by commercial vehicles, such as delivery fleets, and by taxi and rideshare operations. By 2019, it had dropped by 8.8% to 435 gallons per person. Then in 2020, it plunged by another 13% due to the effects of the Pandemic, to 378 gallons per person, down 21% from the peak:

Watching for the EV drag on gasoline demand. Not yet visible.

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

wolf richter, wolfstreet, gasoline demand, jet fuel, diesel

The Foundation for Potential Price Hyperinflation is Being Laid

February 13, 2021

The Foundation for Potential Price Hyperinflation is Being Laid

The Federal Reserve sure seems to have a tough time finding and reporting signs of rising inflation — especially when it’s hidden in other sectors like a lack of demand for energy.

A recent example of the Fed’s “inflation blindness” comes from a speech Chairman Jerome Powell gave to the Economic Club of New York. According to a MarketWatch piece that reported on that speech:

Powell said he doesn’t expect “a large nor sustained” increase in inflation right now. Price rises from the “burst of spending” as the economy reopens are not likely to be sustained.

It’s odd that Powell would say he doesn’t expect a sustained increase in inflation, because food price inflation has consistently run 3.5 to 4.5 percent since April last year. That sure seems like a sustained increase in food prices.

What Powell seems to have “forgotten” is that some of the overall inflation includes negative energy price inflation (as low as negative 9 percent at one point). But now that the demand for fuel is returning, the official gasoline index rose 7.4 percent in January.

It will be much more challenging for Powell to keep downplaying the risk of hyperinflation once energy price inflation rises back to “pre-pandemic” levels.

In fact, Robert Wenzel thinks the main inflation event is “just about to hit.” If it does, and inflation does rise past Powell’s two percent target, it isn’t likely to stop there. Jim Rickards thinks that’s when hyperinflation can gain momentum:

If inflation does hit 3%, it is more likely to go to 6% or higher, rather than back down to 2%. The process will feed on itself and be difficult to stop. Sadly, there are no Volckers or Reagans on the horizon today. There are only weak political leaders and misguided central bankers.

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

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