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We originally posted the following in October 2018 after President Trump threw Montenegro, then the newest member of NATO under the bus a few months earlier.

We suspected POTUS’ loose lips would someday sink ships, at least metaphorically, if not literally.

The flapping of his jaws back in July 2018, we believe, triggered the geopolitical dynamics, sending a signal to Moscow and Beijing that the U.S. was not committed to its allies and we now find ourselves on the verge of a geopolitical hurricane.

As if the market didn’t have enough on its plate dealing with its extreme overvaluation and the current American political shit show.

The Taiwan Strait Getting Hot, Hot, Hot…

Posted on October 21, 2018 by macromon

We posted the following in July after President Trump threw Montenegro under the bus.

Taiwan may be about to get hot, hot, hot in the next year after last night’s Commander in Chief’s ambiguous message on defense treaties. – GMM

One of GMM‘s most excellent followers, who we very much like and respect, responded with this:

This whole article is a science-fiction of oh, this could happen, and oh that could happen…. And we could be hit with an asteroid tomorrow. Just sit back and watch the hands that are dealt and how they are played. This article is either Sci-fi or false news. Your choice!

We still like and respect the reader, by the way.

Montenegro

By the way, in case your wondering about Montenegro? It didn’t take a Ph.D. in international relations to figure out Trump’s interview with Fox would lather up Putin and wasn’t difficult to anticipate the outcome.

In an interview with Fox’s Tucker Carlson last night, President Trump seemed to question the raison d’être of NATO and foreign alliances in general.

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

US Facing Mounting Debt Amid Global Pandemic – ABC

July 25, 2020

US Facing Mounting Debt Amid Global Pandemic – ABC

Good interview with Professor Barry Eichengreen of UC Berkeley, a good friend of GMM, and odds on favorite to be a Nobel laureate one day. We agree with him that now is not the time to worry about the public debt as we are already down this rabbit hole and the economy is on the verge of complete implosion, risking plunging our society into anarchy without another rescue package.

We also hate what we see: large well-capitalized corporations and entities getting PPP loans, which will be forgiven, some dead beats using their PPP loans to buy Teslas, trade stocks, and gamble in Las Vegas, not to mention the lack of planning and total incompetence of the policymakers. He quotes Voltaire’s famous exhortation, used many times here at the Global Macro Monitor, “do not let the perfect be the enemy of the good.”

No MMT Discussion?

Did you also notice not one peep about the Fed buying up all the Treasury debt and effectively monetizing the deficit…err MMT…and supporting other debt markets?

We heard some bozo on CNBC today saying the Treasury is having no problem floating its debt to the market. Are. You. Fricking. Kidding. Me? What market?

Nobody really knows for certain, but our priors are if the U.S. Treasury was completely dependent on the markets to finance itself – that is no central bank (Fed and foreign) buying of its marketable debt — the 10-year yield would be well north of 6 percent, and that is very generous, in our opinion.

Do Your Homework

Folks, do your homework. Granted, it’s impossible to completely grasp all the intricacies of the global economy and markets with their infinite feedback loops, and futile to even try, but at least try and grasp the basics.

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

The Bubble In A Fairy Tale World

July 12, 2020

The Bubble In A Fairy Tale World

Great interview with Michael Novogratz, Galaxy Digital founder, CEO, and chairman. He sounds exactly like the global macro heads at GMM. His money quotes from the July 8th CNBC interview should sound very familiar to our readers.

Money Quotes

Macro set-up is so perfect for something like gold…central banks around the world keep printing money…more money, more money, more money
Gold is going to take old highs and keep going…we are just starting this move
We are in the irrational exuberance zone in the market but it’s hard to figure out where that stops
Get on the airplane just make sure you are in a seat closest to the exit.
We are in a bubble
I think Biden is going to win by a landslide
He [Biden] is going to jack up capital gains taxes to ordinary income….that won’t be good for the stock market…but they are going to pump in liquidity
We are early in the cycle
The real economy has issues
We are in a fairy tale world because the Fed is giving you so much money
Disposable income is up on the year, not down, which makes no sense
My friends are getting richer than I am

Click here to view the video

Market Begins To Internalize Reality

June 25, 2020

Market Begins To Internalize Reality

Summary

The financial media is beginning assign blame to the recent stock market weakness to the spike in COVID cases and the potential for a November Democratic sweep of the White House and both chambers of Congress
Nothing new to GMM as we have been on this early and stood alone
The stock market’s valuation is at a historical extreme
The stars are aligned for a nasty and protracted bear market. Timing is anyone’s guess
The Fed has created an asset scarcity induced stock market bubble, similar to the Beanie Baby bubble of the late 1990s

In graduate school, Rudy Dornbush, Jacob Frankel, and Michael Mussa, all giants in the field of macro and international economics, gave a seminar to our economics department. I was invited to dinner with them along with the department’s international economics professors. The one take-away from that dinner was a comment seared into my mind by Jacob Frankel, who went on to become the Governor of the Bank of Israel and now serves as Chairman of JPMorgan Chase International.

Why Markets Do What They Do

Over dinner, he laughingly mocked the financial media for their propensity to assign specific reasons for why the market did what it did on a daily basis. He quoted two diametrically opposed and contradictory headlines, one from the NY Times and the other from the LA Times, which explained why the market was down that day. That comment has stuck with me throughout my career — nobody knows what really causes the stock market to do what it does on a daily basis. The best, and the safest explanation I have heard on a down day, for example, is “there were more sellers and buyers,” which doesn’t even suffice. The comment should be qualified, “there were more sellers than buyers at yesterday’s closing prices.”

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

Battle OF The Fibos & The Negative Yield Wall

May 14, 2020

Battle OF The Fibos & The Negative Yield Wall

Fibonacci retracement levels are horizontal lines that indicate where support and resistance are likely to occur. They are based on Fibonacci numbers. Each level is associated with a percentage. The percentage is how much of a prior move the price has retraced. The Fibonacci retracement levels are 23.6%, 38.2%, 61.8%, and 78.6%. While not officially a Fibonacci ratio, 50% is also used. – Investopedia

Traders and ‘bots are clearly in control of this market.

We are fairly convicted the 50% Fibo won’t hold, which sets up a quick move to 50-day moving average at 2721-ish.

Source: Carl Quintinalla

Be careful out there, folks, the shorts have been destroyed in the big bounce off the March 23rd bottom and there is very little holding up this market now x/ hope, delusion, and the specter of more financial asset shortages, in our opinion.

Bonds

Moreover, there is little room in yields for bonds to now be used as a stock market hedge or short proxy.

Though it’s possible the trading momo boyz & ‘bots may believe Jerome Powell will take them out of their longs at -2.0 percent, we have our doubts as it will create a real problem for the Fed and Treasury.

It’s [negative interest rates] an unsettled area. I know that there are fans of the policy, but for now, it’s not something we’re considering. We think we have a good toolkit, and that’s the one we’ll be using.” – Chairman Powell, May 13th

Though the Chairman was likely referring to only policy interest rates, it is not clear that if traders pushed U.S. notes and bond yields into negative territory the Fed would be there to buy as part of their QE program. If they do, imagine the shit show this would cause with the monthly Treasury auctions.

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

GDP Now Q2 Estimate At -34.90 Percent, So What Now?

May 11, 2020

GDP Now Q2 Estimate At -34.90 Percent, So What Now?

Summary

The Atlanta Fed’s GDP Now is estimating a -34.9 percent Q2 GDP print, which is 3.5x the largest quarterly decline in the post-WWII economy
If realized, the 11.3 percent non annualized first-half GDP collapse in 2020 will approach the worse year of the Great Depression, when in 1932, the economy shrank 13.1 percent for the entire year
We are not paying much attention to these numbers as they reflect an economy that has been closed for two months, which should experience a relatively sharp snapback in Q3, with unemployment most likely peaking this month
Nonetheless, the pandemic and economic lockdown will do long-term structural damage to the economy
The rapid growth of the monetary aggregates alleviates much of the deflationary forces in the economy in the short-term and we perceive inflation a much bigger risk over the medium-term
If the GDP Now estimate holds, and even if GDP prints a record annualized 27.6 percent number in Q3, real output will still be 7 percent below the Q4 2019 level with unemployment remaining close to low double digits
We suspect the recovery will come too late and not be enough to save President Trump and the Republicans though the White House will tout it as “the greatest economic recovery in the history of the world“
Investors and companies should plan for higher capital gains and corporate taxes
Check out the astonishing performance of our stock picker’s large-cap portfolio, which is trouncing the S&P500 this year

Since the COVID crisis hit America, many businesses are operating at limited capacity while others have ceased operations completely. The unprecedented aggregate supply and demand shock to the U.S. economy has resulted in horrific economic data, including the 20.5 in nonfarm payroll jobs lost in April and the unemployment rates shooting up over 14 percent.

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

Long Pitchforks And Water Cannons

April 12, 2020

Long Pitchforks And Water Cannons

The juxtaposition of the following two tweets is absolutely stunning and just freaking… WOW!

Potential Major Political Blowback

Can you imagine the political blowback that is coming if the economy doesn’t snap back soon as the levered bad actor oil companies (just to name one sector) have been bailed out while the Administration is still trying to kill Obamacare and even tried to cut food stamps to the poor earlier this year?

Nothing partisan here, we are just extrapolating the consequences and political analysis of the GFC to the current crisis. Think about it, last week Main Street registered another 6 million-plus hit in lost jobs and junk bond investors got bailed out of their risky and dumb-ass bets.

Op-Ed: Get ready for the recovery of the 1%

There were two important economic events on Thursday. The government reported that 6.6 million Americans filed for unemployment, an all-time record. And the Federal Reserve announced a new program to flood the economy and financial markets with $2.3 trillion in liquidity — including buying up junk bonds from debt-laden companies.

Which one moved the market? The Fed move, driving the Dow Jones Industrial Average up 500 points by midday.

The market jump, unemployment surge and Fed rescue efforts all converged to form a new split in the economy, between the asset-rich and the rest of America. — CNBC

Also, seeing a lot of the privileged Bailout Queens on Twitterati taking victory laps thinking they’re geniuses — and some even grotesquely posting pictures of their steak and lobster dinners like anybody gives a shit — after the Fed has saved their bacon for the umpteenth time. Yet they have no clue of the consequences of what may be about to come. Must be the ultimate contrarian signal.

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

Wall Street Has Now Morphed Into A Full Blown Soviet Sausage Factory

April 10, 2020

Wall Street Has Now Morphed Into A Full Blown Soviet Sausage Factory

To paraphrase the police officer who told me my old neighborhood had burned down during the 2017 NorCal fires, “the markets are no more.”

After the Fed announced it is bailing out junk bonds today, Wall Street has now morphed into a full-blown “Soviet Sausage Factory.”

Jay Powell probably had no choice and needed to blunt the blow of another 6 million-plus print of new unemployment claims but isn’t Socialism and state intervention dandy?

We can understand providing support to local and state municipalities, now strapped with severe cash flow problems as their tax revenues have gone to near zero, but junk?

You know, like many of the same companies that levered up to buy back shares while shitting all over their employees or, say, the wildcat and shale-oil drillers? Even Jed Clampett and Ellie May understood Texas Tea is risky business. Come on, man.

Chapter 11 and debt restructurings are not only the right thing to do but the only thing to do lest we lose an entire generation to stagflation and a zombie economy. That’s probably the best case unless the economy miraculously snaps back, which assumes the economy was structurally sound before the virus took it out. We seriously doubt that.

Here’s to hoping the bailouts are just a bridge to a major economic restructuring with the long-needed structural reforms.

Waste Of Time

There’s no sense in wasting time analyzing the markets anymore.

We will sit on cash and gold, hope and pray the virus soon passes, and try and tune out this shit show until the major political dislocation that is surely coming on the other side.

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

The Global Supply & Demand Shock Of The Coronavirus

February 1, 2020

The Global Supply & Demand Shock Of The Coronavirus

Our analysis of the impact of the Coronavirus is a work in progress and nobody knows the endgame. It is still the early days of the epidemic, and its dynamics will take time to understand. The scale of the impact will depend on how contagious and lethal it reveals itself.

There is a supply shock to global manufacturing as many factories in the world’s supply chain will be shuttered for longer, which shifts the global supply curve left, increasing-price and production pressures. Ergo component shortages, higher prices, and lower production.

The 2 percent decline in the U.S. stock market and collapse in bond yields are signaling a potential global aggregate demand shock that offsets the supply shock.

As of Friday, 10,000 cases have been confirmed by China, surpassing the total from the 2002-2003 SARS epidemic. The new virus has killed 171 people in China.

The epicenter of the outbreak is Wuhan, one of China’s largest manufacturing centers. Foxconn and Pegatron have operations there, as do memory manufacturers such as XMC (nor flash) and Yangtze Memory Technologies Co. (non-volatile memory).

Auto producers, such as General Motors, Honda, Volkswagen, BMW and Daimler also populate the region.

The electronics industry is poised for a cascading disruption that could change industry growth forecasts for the year. Bill McLean, president of semiconductor research firm IC Insights, said the virus has exacerbated the economic unease that has stalled semiconductor capital investment.
“Brexit, trade issues and now the coronavirus are causing global uncertainty,” he said at a Boston-based forum. “Uncertainty causes [businesses and consumers] to freeze.” Worldwide, semiconductor capital spending is forecast to decrease by roughly 6 percent this year, from $103.5 billion in 2019 to roughly $97.6 billion.

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

Household Leverage Ratios By Wealth Distribution

September 12, 2019

Household Leverage Ratios By Wealth Distribution

We are just starting play with the wealth distribution data and will have much more coming your way. What we have seen so far is shocking.

The distribution of wealth has deteriorated significantly over the past 20 years and is now so skewed toward the top that average U.S. household wealth is close to $1 million, though the median household wealth is only around $70k.

In fact, the aggregate level of wealth of the bottom 50 percent peaked in Q1 2000, the height of the dot.com bubble, and is down almost 10 percent in nominal terms. Whereas, the aggregate wealth level of the top 1 percent is up almost 120 percent over the same period.

If I brought a number or a forecast like that to my manager when I was a very young economist working on the World Bank’s capital flows model back in the day, he would say,

“You are forecasting revolution.”

Note the relative leverage ratio of the bottom 50 percent. For several quarters after the GFC the bottom 50 percent, not all households but in aggregate, were technically insolvent, where debt levels were greater than the value of assets ( > 100 percent on the chart).

These data put the current political climate and debate around debt forgiveness in context. They also reflect the two-speed U.S. economy.

Stay tuned for some more shocking data.

Long pitchforks.

Modern Monetary Theory (MMT) Has An Argentina Problem

September 4, 2019

Modern Monetary Theory (MMT) Has An Argentina Problem

Proponents of Modern Monetary Theory emphasize that a country that controls its own currency and borrows in its own currency, like the United States, cannot default on its debt. This is because the central bank can, if necessary, “print” the money needed to pay the government’s creditors… — Econofact

The MMT crowd has some ‘splaining to do after Argentina’s default on local currency Treasury Bills (Lecaps) last week.

We have argued for years with our MMT friends about the dubious assumptions and logic that Modern Monetary Theory is built, most importantly, that a sovereign borrower with an independent central bank and currency, by definition, cannot default. Though the debate has evolved over the years to now what is the true definition of “full monetary sovereignty,” a free floating exchange rate is a big assumption, for example, it would always come down to the case of the 1998 Russian default on ruble Treasury bills known as GKOs. to which the MMT crowd would retort, “special case.” Ironically, the Russians paid their hard currency Eurobonds and defaulted on local currency debt, the complete opposite of what MMT concludes.

Argentina could have monetized the Lecaps last week and let the peso float and collapse as the maturing peso debt would have immediately been converted to dollars. The government chose not to.

We would try to explain to our friends that when a sovereign borrower gets into trouble and experiences “rollover risk” and cannot refinance maturing debt due to a sudden stop of market financing, a policy choice must be made. Either monetize the maturing debt and send the country into hyperinflation as Bulgaria did in late 1996, or default and restructure as Russia did in 1998. We suspect Russia chose the latter because much of their debt was held by foreigners, including hedge funds, such as David Tepper, who said the GKO trade was the worst of his career.

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

On This Day: One Wrong Turn & History’s Biggest “Butterfly Effect”

June 29, 2019

On This Day: One Wrong Turn & History’s Biggest “Butterfly Effect”

This post seems more relevant than ever as many believe the initial conditions of today are very similar to those of the Spring and Summer of 1914.

One wrong turn, one small change in initial conditions can change the course of history enormously.

Originally Posted on June 27, 2017

The butterfly effect is the concept that small causes can have large effects. Initially, it was used with weather prediction but later the term became a metaphor used in and out of science.
In chaos theory, the butterfly effect is the sensitive dependence on initial conditions in which a small change in one state of a deterministic nonlinear system can result in large differences in a later state. The name, coined by Edward Lorenz for the effect which had been known long before, is derived from the metaphorical example of the details of a tornado (exact time of formation, exact path taken) being influenced by minor perturbations such as the flapping of the wings of a distant butterfly several weeks earlier. Lorenz discovered the effect when he observed that runs of his weather model with initial condition data that was rounded in a seemingly inconsequential manner would fail to reproduce the results of runs with the unrounded initial condition data. A very small change in initial conditions had created a significantly different outcome. — Wikipedia

On this day in history, June 28, 1914, 105 years ago to the day, the driver for Archduke Franz Ferdinand, nephew of Emperor Franz Josef and heir to the Austro-Hungarian Empire, made a wrong turn onto Franzjosefstrasse in Sarajevo.

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

In Honor Of Veteran’s Day: The Butterfly Effect

November 12, 2018

In Honor Of Veteran’s Day: The Butterfly Effect

To honor Veterans’s Day, we are reposting our June 2017 butterfly piece, which illustrates how sleepwalking can lead the world into a war that nobody wants.

French President, Emmanuel Macron, warned today about sleepwalking into another great conflict.

“I know there are old demons which are coming back to the surface. They are ready to wreak chaos and death. History sometimes threatens to take its sinister course once again. – President Macron

Vets

History’s Biggest “Butterfly Effect” Occurred On This Day

The butterfly effect is the concept that small causes can have large effects. Initially, it was used with weather prediction but later the term became a metaphor used in and out of science.

In chaos theory, the butterfly effect is the sensitive dependence on initial conditions in which a small change in one state of a deterministic nonlinear system can result in large differences in a later state. The name, coined by Edward Lorenz for the effect which had been known long before, is derived from the metaphorical example of the details of a tornado (exact time of formation, exact path taken) being influenced by minor perturbations such as the flapping of the wings of a distant butterfly several weeks earlier. Lorenz discovered the effect when he observed that runs of his weather model with initial condition data that was rounded in a seemingly inconsequential manner would fail to reproduce the results of runs with the unrounded initial condition data. A very small change in initial conditions had created a significantly different outcome. — Wikipedia

On this day in history, June 28, 1914, the driver for Archduke Franz Ferdinand, nephew of Emperor Franz Josef and heir to the Austro-Hungarian Empire, made a wrong turn onto Franzjosefstrasse in Sarajevo.

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

Where The Next Financial Crisis Begins

October 28, 2018

Where The Next Financial Crisis Begins

We are not sure of how the next financial crisis will exactly unfold but reasonably confident it will have its roots in the following analysis. Maybe it has already begun.

The U.S. Treasury market is the center of the financial universe and the 10-year yield is the most important price in the world, of which, all other assets are priced. We suspect the next major financial crisis may not be in the Treasury market but will most likely emanate from it.

U.S. Public Sector Debt Increase Financed By Central Banks

The U.S. has had a free ride for this entire century, financing its rapid runup in public sector debt, from 58 percent of GDP at year-end 2002, to the current level of 105 percent, mostly by foreign central banks and the Fed.

Marketable debt, in particular, notes and bonds, which drive market interest rates have increased by over $9 trillion during the same period, rising from 20 percent to 55 percent of GDP.

Central bank purchases, both the Fed and foreign central banks, have, on average, bought 63 percent of the annual increase in U.S. Treasury notes and bonds from 2003 to 2018. Note their purchases can be made in the secondary market, or, in the case of foreign central banks, in the monthly Treasury auctions.

In the shorter time horizon leading up to the end of QE3, that is 2003 to 2014, central banks took down, on average, the equivalent of 90 percent of the annual increase in notes and bonds. All that mattered to the price-insensitive central banks was monetary and exchange rate policy. Stunning.

Greenspan’s Bond Market Conundrum

The charts and data also explain what Alan Greenspan labeled the bond market conundrum just before the Great Financial Crisis (GFC). The former Fed chairman was baffled as long-term rates hardly budged while the Fed raised the funds rate by 425 bps from 2004 to 2006, largely, to cool off the housing market.

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

The Taiwan Strait Getting Hot, Hot, Hot…

October 23, 2018

The Taiwan Strait Getting Hot, Hot, Hot…

We posted the following in July after President Trump threw Montenegro under the bus.

Taiwan may be about to get hot, hot, hot in the next year after last night’s Commander in Chief’s ambiguous message on defense treaties. – GMM

One of GMM‘s most excellent followers, who we very much like and respect, responded with this:

This whole article is a science-fiction of oh, this could happen, and oh that could happen…. And we could be hit with an asteroid tomorrow. Just sit back and watch the hands that are dealt and how they are played. This article is either Sci-fi or false news. Your choice!

We still like and respect the reader, by the way.

U.S. To Send Warships Through The Strait, Again

Yesterday, Zero Hedge posted a great piece, In Latest Provocation To Beijing, US Plans New Warship Passage Through Taiwan Strait, bringing to our attention the following Reuters article,

The United States is considering a new operation to send warships through the Taiwan Strait, U.S. officials tell Reuters, a mission aimed at ensuring free passage through the strategic waterway but which risks heightening tensions with China.

The United States is considering a new operation to send warships through the Taiwan Strait, U.S. officials tell Reuters, a mission aimed at ensuring free passage through the strategic waterway but which risks heightening tensions with China. – Reuters

John Bolton’s Fingerprints

The show of force by the U.S. in the Taiwan Strait appears to be a hardening line against and challenge to President Xi’s One China Policy and has National Security Adviser, John Bolton’s fingerprints all over it.

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

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