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US Equity Futures Trade Near All Time High After ECB Goes All In

US Equity Futures Trade Near All Time High After ECB Goes All In

If it was Powell’s intention to have the S&P trade at an all time when he cuts rates by another 25bps next Wednesday, he achieved it.

S&P futures rose alongside Asian and European stocks as shares globally headed for a third weekly gain and a six week high as markets cheered signs of progress in US-China trade talks and the ECB’s just launched open-ended QE. Treasury yields climbed, with the US 10Y rising as high as 1.81%; the dollar slipped while the yuan rose and pound soared on easing no-deal Brexit fears.

 The resurgent risk appetite was largely the result of renewed trade war optimism after President Trump said on Thursday he was potentially open to an interim trade deal with China, although he stressed an “easy” agreement would not be possible.

Following a muted Asian session where many markets in the region were closed, we saw a groggy start in European trading after Bloomberg reported that most core European nations did not want to restart the ECB’s money printing program, the main bourses eventually traded well in the green, as basic resources and auto sectors outperformed, adding to what was already set to be a fourth straight week of gains.

“We have quite an interesting reaction to the ECB meeting with the sense of the pushback from the core countries, and that essentially that the ECB has now thrown its last cards in,” said John Hardy, head of FX strategy at Saxo bank. “It looks like we are also getting to some pretty interesting levels for yields. If the consolidation continues, at some point you have to question whether the easing (from the central banks) is actually there.”

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

8-Reasons To Hold Some Extra Cash

8-Reasons To Hold Some Extra Cash

Over the past few months, we have been writing a series of articles that highlight our concerns of increasing market risk.  Here is a sampling of some of our more recent newsletters on the issue. 

The common thread among these articles was to encourage our readers to use rallies to reduce risk as the “bull case” was being eroded by slower economic growth, weaker earnings, trade wars, and the end of the stimulus from tax cuts and natural disasters. To wit:

These “warning signs” are just that. None of them suggest the markets, or the economy, are immediately plunging into the next recession-driven market reversion.

However, The equity market stopped being a leading indicator, or an economic barometer, a long time ago. Central banks looked after that. This entire cycle saw the weakest economic growth of all time couple the mother of all bull markets.

There will be payback for that misalignment of funds.

As I noted on Tuesday, the divergences between large-caps and almost every other equity index strongly suggest that something is not quite right.  As shown in the chart below, that negative divergence is something we should not discount.

However, this is where it gets difficult for investors.

  • The “bulls” are hoping for a break to the upside which would logically lead to a retest of old highs.
  • The “bears” are concerned about a downside break which would likely lead to a retest of last December’s lows.
  • Which way will it break? Nobody really knows.

This is why we have been suggesting raising cash on rallies, and rebalancing risk until the path forward becomes clear. Importantly:

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

Why the Fed, Nor Any Central Bank, Can Ever Truly “Normalize”

Why the Fed, Nor Any Central Bank, Can Ever Truly “Normalize”

Last week, I highlighted that since ’00, when the Federal Reserve has ceased adding to its balance sheet or begun “normalizing” (via rolling off assets), equity markets have swooned (detailed HERE).
A simple idea today…that the end of population growth (where it matters) has long been upon us (detailed below).  Absent population growth among the nations that do nearly all the consuming, a debt based economic and financial system (to coerce ever higher levels of debt fueled consumption) can’t ultimately succeed.  That is, without population growth, assets generally don’t appreciate, homes are just shelter rather than “investments”, and debt is generally only a drag on future spending.  Likewise, without population growth, total global energy consumption is on the precipice of secular decline (detailed HERE).

In this reality, the only means of maintaining or lifting asset prices further is ever more central bank monetization (aka, centrally planned and executed counterfeiting).  Of course, this monetization scheme is doomed to fail but while it continues, the gains are privatized while the losses are socialized.  But ultimately markets (and economies, as a means of honest exchange), will get cleared.  So, without further ado, I detail the end of population growth (particularly where it matters):

1- Simply put, topline global population growth (births) ceased increasing almost 30 years ago!  Looking solely at the top-line (dashed black line, chart below), note that from 1950 to 1989, annual global births increased 73% (+57 million).  Conversely, from 1989 to 2018, annual global births have risen just 1% (+1 million).  Based on UN data and UN median (overly optimistic) future estimates.

However, the distribution of those births among the differing groupings of nations (by income) has dramatically changed from 1950 to present…and will shift further by 2050.

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

Weekly Commentary: Cracks

Weekly Commentary: Cracks

After posting an inter-week high of 25,800 on Tuesday, the DJIA then dropped 1,583 points (6.1%) at the week’s Friday morning low (24,218) – before closing the session at 24,538 (down 3.0% for the week). The VIX traded as low as 15.29 Tuesday. It then closed Wednesday at 19.85, jumped as high as 25.30 on Thursday and then rose to 26.22 in wild Friday trading, before reversing sharply to close the week out at 19.59.

Friday’s session was another wild one. The Nasdaq Composite rallied 2.6% off early-session lows to finish the day up 1.1%. The small caps were as volatile, with an almost 1% decline turning into a 1.7% gain. The Banks had a 2.8% intraday swing and the Broker/Dealers 2.4%. The Biotechs had a 3.7% swing, ending the session up 3.2%. The Semiconductors had a 3.3% swing, gaining 1.8% on the day.

Friday morning trading was of the ominous ilk. Stocks, Treasuries, commodities and dollar/yen were all sinking in tandem. The VIX was spiking. Japan’s Nikkei dropped 2.5% in Friday trading, with Germany’s DAX down 2.3% and France’s CAC losing 2.4%. The emerging markets (EEM) were down as much as 1.7%. For the week, the DAX sank 4.6% and the Nikkei fell 3.2%. Curiously, bank stocks outside of the U.S. came under notable pressure. European banks (STOXX) dropped 3.5%, Hong Kong’s Hang Seng Financial Index 4.5% and Japan’s TOPIX Bank index 3.4%.

There are cracks – cracks in the U.S. and cracks spread globally. This week’s market gyrations suggest these interconnected fissures will not prove transitory. VIX traders on edge. Risk parity and the CTA community on edge. ETF complex? Everything’s turned correlated. Hedges have become expensive, and the Treasury hedge isn’t working. The yen has taken on a life of its own. Central bankers playing coy. How long can all of this hold together?

This was never going to end well. It’s just that raging bull markets are willing to disregard so much. Fully inebriated by the bottomless libation of easy money, markets in speculative blow-off mode gleefully ignore about everything. President Trump had stated he wanted tariffs.

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

Carmot Capital: “The Next Crisis Won’t Be A Flash Crash; It Will Be A Flash Flood”



Lately, there has been talk of so-called “elevated” markets. Equity markets, real estate markets and bond markets are indeed reaching new highs regularly. But how long will this last? Can it last indefinitely? Or as is often said, “It’s different this time,”; is it really? We posit that it is not different this time. In fact, there are very real parallels that should concern every investor. What could catalyze the next global financial crisis (“GFC II”)? We suggest that it won’t be a “Flash Crash.” Instead it will be a flash flood that could be caused by very real systemic risk. In other words, the system will flush itself of the market detritus accumulated over the last 8-9 years. We are calling it The Straight Flush Crash. This paper will explain why.

For anyone that has studied the sequence of events leading up to the Global Financial Crisis (“GFC”) of 2008-09, it would not be hard to put together the shape of the new crisis. The first GFC began with the New Century Financial bankruptcy that caused the first market hiccup on February 27, 2007 (when the VIX indicator jumped a record 60% in one day) and escalated to Bear Stearns, to Lehman Brothers, then to the whole GFC debacle. In our opinion, the market blip on August 24, 2015 (affectionately known as the ETF Flash Crash) was the first indication of the shape of things to come. During each crisis, a flashpoint has ignited the existing structure, which then toppled and in turn caused enormous losses for investors. For example, in the GFC of 2008-09, subprime lending was a small fraction of lending which ignited the whole structured finance pyramid and caused the liquidity crisis that bankrupted multiple banks.

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

Weekly Commentary: “Money” on the Move

Weekly Commentary: “Money” on the Move

It’s been awhile since I’ve used this terminology. But global markets this week recalled the old “Bubble in Search of a Pin.” It’s too early of course to call an end to the great global financial Bubble. But suddenly, right when everything looked so wonderful, there are indication of “Money” on the Move. And the issues appears to go beyond delays in implementing U.S. corporate tax cuts.

The S&P500 declined only 0.2%, ending eight consecutive weekly gains. But the more dramatic moves were elsewhere. Big European equities rallies reversed abruptly. Germany’s DAX index traded up to an all-time high 13,526 in early Tuesday trading before reversing course and sinking 2.9% to end the week at 13,127. France’s CAC40 index opened Tuesday at the high since January 2008, only to reverse and close the week down 2.5%. Italy’s MIB Index traded as high as 23,133 Tuesday before sinking 2.5% to end the week at 22,561. Similarly, Spain’s IBEX index rose to 10,376 and then dropped 2.7% to close Friday’s session at 10,093.

Having risen better than 20% since early September, Japanese equities have been in speculative blow-off mode. After trading to a 26-year high of 23,382 inter-day on Thursday, Japan’s Nikkei 225 index sank as much as 859 points, or 3.6%, in afternoon trading. The dollar/yen rose to an eight-month high 114.73 Monday and then ended the week lower at 113.53.  From Tokyo to New York, banks were hammered this week.

Perhaps the more important developments of the week unfolded in fixed-income. Despite the selloff in the region’s equities markets, European sovereign debt experienced no safe haven bid. German bund yields traded at 0.31% on Wednesday, before a backup in rates saw yields close the week at 0.41%. Italian bond yields traded as low as 1.69% on Wednesday before closing the week at 1.84%. Spain’s yields ended the week up 10 bps to 1.56%.
…click on the above link to read the rest of the article…

“The End Of The QE Trade”: Why Bank of America Expects An Imminent Market Correction

“The End Of The QE Trade”: Why Bank of America Expects An Imminent Market Correction

Last Friday, when looking at the historic, record lows in September volatility and the daily highs in US and global equity markets, BofA’s chief investment strategist Michael Hartnett said that the “best reason to be bearish in Q4 is there is no reason to be bearish.

That prompted quite a few responses from traders, some snyde, a handful delighted (some bears still do exist), but most confused: after all what does investors (or algo) sentiment have to do with a “market” in which as Hartnett himself admits over $2 trillion in central bank liquidity has been injected in recent years to prop up risk assets.

To explain what he meant, overnight Hartnett followed up with an explainer note looking at the “Great Rotation vs the Great DIsruption”, in which he first reverted to his favorite topic, the blow-off market top he dubbed the “Icarus Rally”, which he defined initially nearly a year ago, and in which he notes that “big asset returns in 2017 have been driven by big global QE & big global EPS.

But mostly “big global QE.”

As a result, Hartnett’s “blow off top”, or Icarus, targets for Q4 are: S&P 2630, Nasdaq 6666, 10-year Treasury 2.85%, EUR 1.15. At this rate, the S&P could hit BofA’s target in about 3-4 weeks, and thus Hartnett lays out the following 11th hour trade recos for Q4

  • long US$ vs EM FX,
  • long oil,
  • long barbell of uber-growth (IBOTZ, DJECOM) & uber-value (BKX) = Icarus trade;
  • further unwind of extended “long disruptor, short disrupted” trade likely (i.e. death of old Retail, Media, Autos, Advertising by Tech Disruptors);
  • rotational outperformance of oil>credit, EAFE>EM,
  • value/growth

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

The SPV Loophole: Draghi Just Unleashed “QE For The Entire World”… And May Have Bailed Out US Shale

The SPV Loophole: Draghi Just Unleashed “QE For The Entire World”… And May Have Bailed Out US Shale

Almost exactly one year ago, we wrote “Mario Draghi, Collateral Scarcity, And Why The ECB Will Soon Buy Corporate Bonds.” 11 months later, the ECB confirmed this when for the first time ever, Mario Draghi said he would do purchase corporate bonds when he launched the ECB’s Corporate Sector Purchase Programme (CSPP), confirming that with government bond collateral evaporating and the liquidity situation getting precariously dangerous and forcing moments of historic volatility (as in the April/May 2015 Bund fiasco), he had run out of other options.

And while we have been covering this key development closely since its announcement more than a month ago, we were surprised by how little attention most of the sellside was paying to what is clearly a watershed moment in capital markets as a central banks now openly backstops corporate bond issuance (among other things pointing out a month ago Why The ECB Will Be Forced To Buy Junk Bonds Next). Ironically, the market was fully aware of what the ECB’s action meant as we showed in the “The ECB Effect: European Telecom Issues Largest Ever Junk Bond After More Than 100% Upsizing.”

Now, following the release of the full details of its corporate bond buying program, analysts are once again keenly focused on hits program who impact will be dramatic over the coming years.

First, as a reminder, here are the big picture details:

  • May buy in primary and secondary markets
  • Issue share limit of 70% per ISIN
  • Inclusion of bonds issued by insurance companies
  • Can buy bonds of companies incorporated in the euro area whose ultimate parent is not based in the euro area
  • Remaining maturity of 6 months and maximum of 30Y

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

‘They’ Have Decided “We Can’t Handle The Truth”

‘They’ Have Decided “We Can’t Handle The Truth”

It’s a fun conceit of science fiction to contemplate the existence of alternative universes.

As Bloomberg’s Richard Breslow points out, when you think they exist in the same time and place, it leaves the realm of the paperback section of the airport newsstand and is better discussed in the Diagnostic and Statistical Manual of Mental Disorders.

This is his full lament:

If you need yet another stark example of the fantasy storytelling we amuse ourselves with, juxtapose today’s Monetary Authority of Singapore policy statement with the storyline that the Asian stock market rally intensified on renewed optimism over the global economy. Singapore is a proxy for trade and “economic growth ground to a halt last quarter.”
We all know why equity markets are zooming. The Bernanke put is standard operating procedure: globally. Whatever is out there’s got central bankers spooked. To use the cliche, they’ve decided we can’t handle the truth. But it’s impossible to fight a manticore you can’t see.

The IMF just portrayed the global economy in decidedly downbeat fashion. Things really are looking much better in Canada, but Governor Poloz took the glass half-empty approach. For G-20 watchers, he also bemoaned the strengthening currency.

Back at the ranch, Fed speakers keep talking about the rate hike pipeline. It’s easy to talk tough when you’re standing behind your mother. And they wonder why futures traders just can’t believe them.

A 10-year Treasury bond yielding 1.76% is not normal. Should you take advice from bond bears or the blowout auction?  

Appreciating currencies of negative interest rate economies that are threatening to do more, may be explained by the unintended consequence factor, but represent policy failure. 

I’m the optimist. I think we can find a way to solve our problems. But it’ll never happen while we continue to dissemble and implement policies that aren’t working.

Source: Bloomberg

SocGen: “Now We Know Why The Fed Desperately Wants To Avoid A Drop In Equity Markets”

SocGen: “Now We Know Why The Fed Desperately Wants To Avoid A Drop In Equity Markets”

With the ECB now unabashedly unleashing a bond bubble in Europe of which it has promised to be a buyer of last resort with the stronly implied hint that European IG companies should issue bonds and buy back shares, and promptly leading to the biggest junk bond issue in history courtesy of Numericable, it will come as no surprise that the world once again has a debt problem.

For the best description of just how bad said problem is we go to SocGen’s Andrew Lapthorne, one of last few sane analyzers of actual data, a person who first reveaked the stunning fact that every dollar in incremental debt in the 21st century has gone to fund stock buybacks, and who in a note today asks whether “central bank policies going to bankrupt corporate America?”

His answer is, unless something changes, a resounding yes.

Here are the key excerpts:

Sensationalist headlines such as the one above are there to grab the reader’s attention, but the question is nonetheless a serious one. Aggressive monetary policy in the form of QE and zero or negative interest rates is all about encouraging (forcing?) borrowers to take on more and more debt in an attempt to boost economic activity, effectively mortgaging future growth to compensate for the lack of demand today. These central bank policies are having some serious unintended consequences, particular on mid cap and smaller cap stocks.

Aggressive central bank monetary policies have created artificial demand for corporate debt which we think companies are exploiting by issuing debt they do not actually need. The proceeds of this debt raising are then largely reinvested back into the equity market via M&A or share buybacks in an attempt to boost share prices in the absence of actual demand.

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

The “Terrifying Prospect” Of A Triumph Of Politics Over Economics

The “Terrifying Prospect” Of A Triumph Of Politics Over Economics

The Triumph of Politics

 All of life’s odds aren’t 3:2, but that’s how you’re supposed to bet, or so they say. They are not saying that so much anymore, or saying that history rhymes, or that nothing’s new under the sun. More and more theys seem to be figuring out that past economic and market experiences can’t be extrapolated forward – a terrifying prospect for the social and political order.

 Consider today’s realities:

Global economies have grown to their current scale thanks to a glorious secular expansion of worldwide credit – credit unreserved with bank assets and deposits; credit extended to brand new capitalists; credit that can never be extinguished without significant debt deflation or hyper monetary inflation

Economies no longer form sufficient capital to sustain their scales or to justify broad asset values in real terms

Markets cannot price assets fairly in real terms without risking significant declines in collateral values supporting them and their underlying economies

Politicians that used to anguish (rhetorically) over the right mix of potential fiscal policies, ostensibly to get things back on track (as if somehow finding the right path would have actually been legislated into existence), have come to realize the limits of their power to have a meaningful impact

Monetary authorities have become the only game in town,assassinating all economic logic so they may juggle public expectations in the hope – so far successfully executed – that neither man nor nature will be the wiser.

The good news for policy makers is that man remains collectively unaware and vacuous; the bad news is that nature abhors a vacuum. The massive scale of economies relative to necessary production (not to mention already embedded systemic leverage) suggests this time is truly different.

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

HSBC Looks At “Life Below Zero,” Says “Helicopter Money” May Be The Only Savior

HSBC Looks At “Life Below Zero,” Says “Helicopter Money” May Be The Only Savior

In many ways, 2016 has been the year that the world woke up to how far down Krugman’s rabbit hole (trademark) DM central bankers have plunged in a largely futile effort to resuscitate global growth.

For whatever reason, Haruhiko Kuroda’s move into NIRP seemed to spark a heretofore unseen level of public debate about the drawbacks of negative rates. Indeed, NIRP became so prevalent in the public consciousness that celebrities began to discuss central bank policy on Twitter.

When we say “for whatever reason” we don’t mean that the public shouldn’t be concerned about NIRP. In fact, we mean the exact opposite. The ECB, the Nationalbank, the SNB, and the Riksbank have all been mired in ineffectual NIRP for quite sometime and the public seemed almost completely oblivious. Indeed, even the financial media treated this lunacy as though it were some kind of cute Keynesian experiment that could be safely confined to Europe which would serve as a testing ground for whether policies that fly in the face of the financial market equivalent of Newtonian physics could be implemented without the world suddenly imploding.

We imagine the fact that equity markets got off to such a volatile start to the year, combined with the fact that crude continued to plunge and at one point looked as though it might sink into the teens, led quite a few people to look towards the monetary Mount Olympus (where “gods” like Draghi, Yellen, and Kuroda intervene in human affairs when necessary to secure “desirable” economic outcomes) only to discover that not only has all the counter-cyclical maneuverability been exhausted, we’ve actually moved beyond the point where the ammo is gone into a realm where the negative rate mortgage is a reality.

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

Why Markets Are Crashing: “Faith In Central Banks Fails”

Why Markets Are Crashing: “Faith In Central Banks Fails”

While Citigroup’s Eric Lee thinks its “ridiculous” to talk fo a US recession, it appears the macro data and markets would strongly disagree: as Bloomberg reports:

Signals by central banks from Europe to Japan that additional stimulus is at the ready are failing to ease investor concern that global growth will keep slowing.

Citigroup’s Economic Surprise Index already indicates data in Group of 10 economies are falling short of estimates by the most since April 2013, and a selloff in crude oil and weakening credit markets are exacerbating the malaise. Yellen suggested that the central bank might delay, but not abandon, planned interest-rate increases in response to recent turmoil in financial markets.

“Over the last few years when we got bad news, equity markets would rally because they would interpret this as potential for central banks to go more dovish,” said Mohit Kumar, head of rates strategy at Credit Agricole SA’s corporate and investment bank unit in London.

“Now that correlation is shifting to bad news is actually bad news. Investors are concerned over central banks’ policy options given the market is driven by factors over which they have little or no control over.”

And so the headline of the day from Bloomberg seems very appropriate:

Some further clarifications from Bloomberg:

Some further clarifications from Bloomberg:

Financial markets are signaling that investors have lost faith in central banks’ ability to support the global economy.

And some more:

“The markets are wondering, well, we’ve had these non-conventional monetary policy experiments for the last six or seven years and they haven’t caused a sustainable boost to global growth, so what will the latest moves do,” said Shane Oliver, head of investment strategy at Sydney-based AMP Capital Investors Ltd. “It’s a reasonable question to ask given the events of the last few weeks.”

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




Deutsche Bank Is Scared: “What Needs To Be Done” In Its Own Words

Deutsche Bank Is Scared: “What Needs To Be Done” In Its Own Words

It all started in mid/late 2014, when the first whispers of a Fed rate hike emerged, which in turn led to relentless increase in the value of the US dollar and the plunge in the price of oil and all commodities, unleashing the worst commodity bear market in history.

The immediate implication of these two concurrent events was missed by most, although we wrote about it and previewed the implications in November of that year in “How The Petrodollar Quietly Died, And Nobody Noticed.”

The conclusion was simple: Fed tightening and the resulting plunge in commodity prices, would lead (as it did) to the collapse of the great petrodollar cycle which had worked efficiently for 18 years and which led to petrodollar nations serving as a source of demand for $10 trillion in US assets, and when finished, would result in the Quantitative Tightening which has offset all central bank attempts to inject liquidity in the markets, a tightening which has since been unleashed by not only most emerging markets and petro-exporters but most notably China, and whose impact has been to not only pressure stocks lower but bring economic growth across the entire world to a grinding halt.

The second, and just as important development, was observed in early 2015: 11 months ago we wrote that “The Global Dollar Funding Shortage Is Back With A Vengeance And “This Time It’s Different” and followed up on it later in the year in “Global Dollar Funding Shortage Intensifies To Worst Level Since 2012” a problem which has manifested itself most notably in Africa where as we wrote recently, virtually every petroleum exporting nation has run out of actual physical dollars.

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

What If There Is No “Fed Put” – Paul Brodsky Thinks Yellen Will Not Bailout Markets This Time

What If There Is No “Fed Put” – Paul Brodsky Thinks Yellen Will Not Bailout Markets This Time

Earlier today, Art Cashin summarized most (very desperate) traders’ thoughts when he said that as a result of today’s market crash, “the Fed will try anything” to prop up the wealth effect it had so carefully engineered with seven years of central planning in the aftermath of the financial crisis.  Perhaps the only question left is “where is the put”, or where on the S&P 500 is the Fed’s breaking point beyond which Yellen will have no choice but to make a statement, or take action, in support of the market.

Yet one person who is far less sanguine abou the latest in a long series of central bank bailouts of the stock market is Macro-Allocation’s Paul Brodsky, who believes that instead of the Fed Put, the time of the Fed Call has come.

Here’s why:

The Fed Put Call

Investors are blaming Fed rate hikes, and hence a strong dollar, for weakening global output, commodity prices, and global equity prices so far in 2016.

The Fed knows exactly what it’s doing.

Equity returns are certainly dismal thus far in 2016. Through January 14 at 14:00PM EST, the MSCI World Index had declined by 8.6%. Accordingly, “the markets” had begun to doubt the Fed’s resolve to hike rates four times in 2016. Fed funds futures implied the December Fed Funds rate at 0.70%, up only 34 basis points from the current rate (0.36%). This implies the market is betting the Fed will hike once or twice more.

Clearly, investors see the equity markets as the leading indicator of Fed policy. We disagree. The Fed no longer works implicitly for equity investors (i.e., “the Fed Put”); it is primarily working for the U.S. banking system by stabilizing and increasing its deposit base, and for the state by providing an incentive across the world to invest in Treasury debt. 

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

Olduvai IV: Courage
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Olduvai II: Exodus
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