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Rabobank: You Only See How Stable A System Really Is By Pushing It To Its Limits

Rabobank: You Only See How Stable A System Really Is By Pushing It To Its Limits

“Stonks” and “Burneds”

We are, it is now being widely decried, in the middle of a “stonk” bubble. The Financial Times(!) is carrying an article calling on the Federal Reserve to stop its easy money; and Bloomberg(!) has strategy advice that: “…your best bet has been to buy the biggest pile of steaming rubbish you can find on an income statement,” which overlaps with the pattern of behavior 18 months before the bursting of the 1999 tech bubble…before then concluding this is nonetheless the only thing fund managers can ‘rationally’ do.

Against that backdrop, regulators in D.C. are looking at the ‘Reddolution’ of earlier this month, where “stonks” of firms were being manipulated by the public to try to teach hedgefunds a lesson. They will no doubt harrumph on cue with all due seriousness –like those surrounding Governor Lepetomane in ‘Blazing Saddles’– without asking awkward questions about the roots of our stonking great problem that end up being redirected towards the Fed. This only underlines that they are far behind whatever remains of a curve.

There is recognition even in financial media that central banks are institutional “stonk”-bubble blowers. There is matching recognition that the solution for reflation lies with fiscal, not monetary policy (though many of the recent converts to this view apparently couldn’t see it as true until it was already happening – “Harrumph for the governor!”). Yes, we *are* likely to see a *major* short-term fiscal boost –in the US alone– with suggestions the White House’s stimulus package could be worth many thousands of dollars for the average US family – for a yearThen the old crunch comes back again unless US labor has magically gained power over global capital. How, exactly?

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

 

Rabobank: The Everything Bubble Has Become More Everything And More Bubble

Rabobank: The Everything Bubble Has Become More Everything And More Bubble

Oh-No-Bi-Wan Kenobi

For those who haven’t seen it –and I accept there are now probably many readers who haven’t– there is a classic scene in the first Star Wars film (Episode IV) in which Jedi Master Obi-Wan Kenobi tells his villainous duelling opponent, his former apprentice, Darth Vader: “You can’t win, Darth. If you strike me down, I will become more powerful than you can possible imagine.” Darth being Darth of course strikes him down: and Kenobi disappears entirely, leaving only his outer garment (but no shoes or underpants, etc.). So it looks like Darth has won the fight. Except Kenobi goes on to become an immortal ‘Force ghost’, who like a happier Banquo, helps guide Darth’s son to blow up the mega battle-station he has until then been prowling up and down menacingly.

We are less than a month into the Biden administration, and despite a slight down-day for stocks on Tuesday, it is quite clear, according to a slew of commentators, that the Everything Bubble has become more Everything and more Bubble. The Federal Reserve and other global central banks are still pouring their fully operational firepower into the economy, fully aware that little of this flows to productive assets or wages, and most of it to speculation: but when financial/asset speculation IS most of the ‘economy’, that looks like victory to them. Indeed, doesn’t it feel like victory to those who speak Bloombergian? There is more money than ever; a major global airline has decided you don’t have to wear masks in business or first class on long-haul flights; and the luxury Maldives is seeing record hotel occupancy!

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

Rabobank: The Purge Could Contribute To A Widening Of The Cultural And Political Divide

Rabobank: The Purge Could Contribute To A Widening Of The Cultural And Political Divide

On Friday Twitter took the decision to permanently suspend President Trump from its platform due to the “risk of further incitement of violence”.  The day before Facebook had already blocked him.  Tech giants have also moved against right-wing social media platform Parler, with Apple and Google removing it from their app stores over the weekend and Amazon withdrawing the cloud service in which it stores its data.  In view of the events on Capitol Hill last week, the actions have brought relief for many.  However, this news has also sparked warnings that the actions of the tech giants cannot make dissenting opinion vanish and that the purge could contribute to a widening of the cultural and political divide in the US. 

For certain there are concerns that the Democrats’ efforts to impeach the President could underscore amongst his supports Trump’s unfounded allegations that the November election was ‘stolen’ from him.  Democrats are expected to introduce a motion to the House of Representatives today calling on Vice-President Pence to invoke the 25th Amendment in order to strip Trump of his office.  If Pence fails to do so, they plan to impeach Trump later in the week.  For Senate Republicans, however, this looks to be a step too far.  While several have publically criticised the President for his role in the last week’s violence in Washington which led to the death of five people, many have indicated that impeachment may not be the best way to hold Trump accountable.  Senator Toomey instead has called for the President to resign and “go away as soon as possible.”

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

 

How Reality Became A James Bond Movie: Rabobank Explains

What’s Your Favourite Bond Theme?

We live in a world where all can agree on very little – but one thing that should be clear is that it’s all very James Bond. Charismatic billionaires; Cold War; secret agents; skulduggery; poisonings; spy apps in innocuous devices; military build-ups and warnings of hot war; police crack-downs; and, of course, a killer virus. Ironically, Bond himself is absent because the latest movie iteration, “No Time To Die”, has been delayed because of Covid-19: when it eventually comes out, is it going to be a wilder ride than what we already see in real life? And could Hollywood ever tell a story that contains any elements of real life developments given how it is now financed? That’s what US Republicans are asking anyway. (Personally, I feel Bond lost his mojo with the internet. Who wants to see a man licensed to double-click to save the day?)

Anyway, a British poll of ‘Who was the best Bond?’, the kind of thing Brits ask themselves all the time for some reason, unsurprisingly had Sean Connery as the top 007, but with Timothy Dalton as #2, followed by Pierce Brosnan, then Roger Moore, current Bond Daniel Craig, and finally and naturally, George Lazenby. Besides being rather unkind to Roger Moore, the king of eyebrow-raising and cheesy puns, this got me thinking: what’s your favorite Bond theme to describe what we see around us at the moment?

Perhaps “All Time High”? Which suits both US equities, shortly, and virus infection numbers. “Tomorrow Never Dies” perhaps suits equities more though..

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

Rabobank: Is Judge Dredd A Vision Of What Awaits Our Society

Rabobank: Is Judge Dredd A Vision Of What Awaits Our Society

Elon and Eloi

It was just a few short weeks ago that governments in Australia and the UK were congratulating themselves on how they had performed under Covid-19, and both were enthusiastically looking ahead to getting life back to normal. Today Victoria, Australia is under new lockdown and Melbourne faces six weeks of virus curfews, while in the UK a state of emergency has been declared in Manchester, a trial balloons have been floated to cut-off London from the rest of the country if needs be –which we were recently told would never happen– and for the over 50s to have to stay at home to allow everyone younger to get back to normal – which were again told would never happen. Oh, for a time machine back to when all was well with the world! (Which was a time when the virus was still out of control in the US, and Brazil, and Mexico, and India, and South Africa, but never mind.)

On which note, the dwindling band of US-China optimists who can remember how recently “Chimerica” was the future should note that the US has placed new Magnitsky sanctions on China over the treatment of Uighurs in Xinjiang. This time it is not just individuals but the Xinjiang Production and Construction Corps (XPCC), a paramilitary organization that employs almost 12% of Xinjiang’s total population, is involved in the production of one-third of China’s cotton, and which data show back in 2014 comprised 17% of the Xinjiang’s economy. That’s a move with huge implications – and potentially even for Hong Kong, where the September LegCo election has been cancelled, a move dubbed possibly illegal by its bar association.

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

Rabobank: Everyone Thinks They Know What’s Going On When They Actually Don’t

Rabobank: Everyone Thinks They Know What’s Going On When They Actually Don’t

Try Not To Be Rash(omon)

The 1950 movie ‘Rashomon’ from director Akira Kurosawa a classic which infamously telling the story of a terrible crime from four different points of view. The “Rashomon effect” is a related term describing the notorious unreliability of eyewitnesses, where an event is given contradictory interpretations or descriptions by the individuals involved. A bit like markets: Everyone thinks they know what’s going on when they actually don’t.

With the full disclaimer that I don’t either, let’s try to thread together a narrative, however. In doing so I personally find an alternative cinematic technique —split screen, as used in The Thomas Crown Affair (1968)— works very well to try to tie simultaneous narratives unfolding in different places which all build to a unified conclusion.

On one screen we have the Fed, which is now lower-er forever-er, with no real change yesterday other than an extension of its swap lines and the FIMA repo facility through to March 2021, alongside a verbal reiteration that they are not even thinking about thinking about raising rates. With 5-year US yields hitting a new low of just below 0.25%, who needs yield curve control? Nobody is thinking about the Fed thinking about thinking about raising rates until at least 2026. And with 10-year yields at 0.57%, there isn’t more than one hike expected in the next decade.

On a second, the US Congress seems incapable of finding an adequate fiscal response to keep the economy afloat, despite the Fed’s pleas. Another few days, perhaps(?) Perhaps not. US tech giants were given a mixed reception, meanwhile. Some came to praise and some came to bury. Few came to seriously call for regulation or breaking them up

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

It’s Easier To Pretend Our Economic System Works And Just Blow Endless Asset Bubbles

It’s Easier To Pretend Our Economic System Works And Just Blow Endless Asset Bubbles

Yesterday saw the US comprehensively beat China. Not in any sporting sense, and certainly not in any dimension of the current Cold War: and for those who still like to think the latter isn’t happening, just listen to what US Attorney General Barr said yesterday. He attacked China for “economic blitzkrieg – an aggressive, orchestrated, whole-of-government (indeed, whole-of-society) campaign to seize the commanding heights of the global economy and to surpass the United States as the world’s pre-eminent superpower.” He also called out Hollywood and US firms for kowtowing to Beijing, alleging corporate officials “display hammer-and-sickle insignia at their desks and attend party lectures during business hours,” before concluding “If Disney and other American corporations continue to bow to Beijing, they risk undermining both their own future competitiveness and prosperity, as well as the classical liberal order that has allowed them to thrive.”

So just where did the US win? In the field that matters most to markets, in fact the only thing that matters to markets – spending. While Chinese retail sales for June fell 1.8% y/y, US retail sales leaped 7.5% m/m vs. 5.0% expected. Yes, it’s apples and oranges, and the US are still down marginally y/y, but considering the States are at least a quarter behind China in the recovery process, it’s a genuinely dynamic retail rebound. USA! USA! USA!

So what is driving this latest round of the US consumer miracle? The $600 a week in special virus-related unemployment benefits. In many instances this is worth more than people’s pre-crisis salary.

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

Rabobank: “We Live In A Pretty Crazy World Right Now”

Rabobank: “We Live In A Pretty Crazy World Right Now”

Crazy World

I think we can all agree that we live in a pretty crazy world right now: and that’s an appropriate title for the Daily today too, for reasons that will be explained shortly.

It’s a world where we are seeing staggering increases in public-sector deficits. We have already seen WW2 level spending in the UK, for just one example: and yet the British Chancellor is now planning to introduce 10 deregulated “free ports” across the country where UK taxes and tariffs will not apply at all. It’s obviously the inverse tactic of spending more money on left-behind places. Yet will somewhere like Luton hypothetically become the next mini-Hong Kong just because there are no regulations and no taxes to be paid there? We shall see: and those deficits will swell even further. Laffer would approve of course: and using the logic his fans always push for, by cutting taxation to zero, presumably tax revenue will now be infinity.

Equally, it’s a world where despite one in three Americans worrying about making rent, there appears reticence from the White House to push for a new major fiscal package. Is this all political timing, and huge stimulus looms in weeks? Or do the it-will-all-be-fine arguments from economic advisors like Stephen Moore and Larry Kudlow reflect the official line?

It’s a world where despite all this state largesse, or absence of state largesse, bond yields continue to move lower anyway: the US 5-year touching 0.25% last week (though at the giddy heights of 0.29% at time of writing) as it does not throw in the kitchen sink; the UK 5-year gilt is at -0.07% even though they ARE throwing in that ‘no-taxes-here’ sink.

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

“Stupid And Ridiculous”: Rabobank Says The Fed Will Cause Everything To Come Crashing Down In Epic Ruin

“Stupid And Ridiculous”: Rabobank Says The Fed Will Cause Everything To Come Crashing Down In Epic Ruin

Powell Play

Central banks carry out a nation’s monetary policy and control its money supply, often mandated with maintaining low inflation and steady GDP growth. On a macro basis, central banks influence interest rates and participate in open market operations to control the cost of borrowing and lending throughout an economy.” Investopedia

Really? That’s how it works, is it? At this point anyone who can’t see our real economic/financial market paradigm is either foolish, ignorant, or wilfully blind. The Fed has just admitted wages can’t rise except by making very rich people very much richer for a long, long time; then, finally, they might start to go up – perhaps. Moreover, the Fed has demonstrated yet again that it not only ignores asset bubbles –it will “never hold back support for the economy even if asset prices are too high”– but that it wants those bubbles. How can this end well?

Look at the uneven distribution of stock holdings. Gallup states that as of 4 June 2020, 55% of the US owns some stock: 66% of those aged 50-64 and 32% of those 18-29; 58% of men and 52% of women; 64% of whites, 42% of blacks, and 28% of Hispanics; 85% of post-graduates and 33% of those with no college education. It is far from genuine equality of ownership by any means. But what Gallup does not say, and Goldman Sachs does, is that as of February this year 50% of the US stock market was owned by the top 1% of society.

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

Rabobank: Stocks Go Up As Everything Is Going Down In Flames

Rabobank: Stocks Go Up As Everything Is Going Down In Flames

It’s All Going to the Dogs (and Goats)

Friday’s April US payrolls report showed 20.5 million jobs lost when in an ordinary downturn 200,000 might be considered bad; the drop in March alone was larger than that seen during the worst of the global financial crisis. In short, we face a global future of mass unemployment (now 14.7% in the US and 13% in Canada) on top of mass debt, both public and private.

Last week the German Constitutional Court (GCC) ruled that it is superior to the European Court of Justice (ECJ), and that the ECB has three months to prove it is not exceeding its remit with its extraordinary monetary policy. Yesterday the President of the EU Commission von der Leyen threatened to sue Germany, stating the final word on EU law is always spoken by the ECJ. Guess which court ultimately hears the case? The ECJ. How is this going to play out if the GCC doesn’t back down? Very badly in the Eurozone periphery, to the benefit of Euroskeptics. How is it going to play out in Germany if the GCC is forced to back down? Badly in Germany, to the benefit of Euroskeptics. Given the ECJ won’t back down and the ECB has said it will ignore the GCC, and the GCC is not likely to blink either, we seem set for an institutional crisis over the scope and shape of the Eurozone financial market – albeit one that rumbles on rather than erupting immediately.

US Vice-President Mike Pence, titular head of the US virus task force, is self-isolating after figures close to the White House were diagnosed as positive for Covid.

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

“Worst. Recession. Ever.”

“Worst. Recession. Ever.”

When Harry Met Comic-Book-Guy

Worst global downturn since the Great Depression” says the IMF. Actually, it’s potentially worse than that.We are seeing credible (initial) claims in the UK and US that millions/tens of millions are going to be unemployed – again taking us back to black & white memories of long queues of the jobless holding signs saying “Will Work For Food.”

We are also seeing calls for GDP to collapse by up to a third in the presumed Q2 trough in the UK and the US, as just two examples, which in the space of months would already take us to the kind of depths plunged back in the 1930s (and actually this will be the worst recession since the 18th century according to one UK report.) Moreover, in a world far more economically-integrated today than it was in the 1930s, what happens in the (smaller) West will rapidly hit the (larger) rest.

As will the virus itself, of course. What is to stop it rampaging through Africa and South Asia, as just two examples? “Heat!” we have been told. Yet besides the fact that Covid-19 is transmitting in Indonesia and Singapore we see a report today that French scientists have found some strains of the virus can survive long exposures to temperatures of up to 60c, and it takes almost boiling point to kill it. Another (non-peer reviewed) study from Australian and Taiwanese researchers based on samples from India has shown Covid-19 is already mutating, shifting its mechanism used to bind to human cells – the paper concludes “This means current vaccine development…is at great risk of becoming futile.” Moreover, a Chinese scientist is warning of a serious risk of a second global wave of Covid in November – exactly the pattern seen in the 1918-19 Spanish Flu.

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

“Down The Rabbit Hole” – The Eurodollar Market Is The Matrix Behind It All

“Down The Rabbit Hole” – The Eurodollar Market Is The Matrix Behind It All

Summary

  • The Eurodollar system is a critical but often misunderstood driver of global financial markets: its importance cannot be understated.
  • Its origins are shrouded in mystery and intrigue; its operations are invisible to most; and yet it controls us in many ways. We will attempt to enlighten readers on what it is and what it means.
  • However, it is also a system under huge structural pressures – and as such we may be about to experience a profound paradigm shift with key implications for markets, economies, and geopolitics.
  • Recent Fed actions on swap lines and repo facilities only underline this fact rather than reducing its likelihood

What is The Matrix? 

A new world-class golf course in an Asian country financed with a USD bank loan. A Mexican property developer buying a hotel in USD. A European pension company wanting to hold USD assets and swapping borrowed EUR to do so. An African retailer importing Chinese-made toys for sale, paying its invoice in USD.

All of these are small examples of the multi-faceted global Eurodollar market. Like The Matrix, it is all around us, and connects us. Also just like The Matrix, most are unaware of its existence even as it defines the parameters we operate within. As we shall explore in this special report, it is additionally a Matrix that encompasses an implicit power struggle that only those who grasp its true nature are cognizant of.

Moreover, at present this Matrix and its Architect face a huge, perhaps existential, challenge.

Yes, it has overcome similar crises before…but it might be that the Novel (or should we say ‘Neo’?) Coronavirus is The One.

So, here is the key question to start with: What is the Eurodollar system? 

For Neo-phytes

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Rabobank: “There Is Really Only One Headline Today – That PM Boris Johnson Is In Intensive Care”

Rabobank: “There Is Really Only One Headline Today – That PM Boris Johnson Is In Intensive Care”

ICU

There is really only one headline today – that UK PM Boris Johnson is in intensive care. Indeed, as several medical experts have attested, given the critical shortage of ICU beds he is likely to be on a ventilator very soon.

Of course, he isn’t the first world leader to get the disease, and we have already seen Prince Charles and UK Health Secretary Matt Hancock fully recovery, for example. Nonetheless, the sudden deterioration in his condition comes as a major shock: last week he was clapping on the door step to praise the NHS and was still leading cabinet meetings online; yesterday afternoon we were told he was only staying at home because of an annoyingly persistent temperature; then it was a cough too – but that he was still actively Prime Minister; then he was going to hospital (by car) for some tests; and then he was in an ICU and, apparently, struggling to breathe.

For the UK, this obviously hits confidence and raises questions over leadership given Boris is going to be out of it for some time, even in the best case. (And naturally everyone wishes him a full and speedy recovery.) Yet there are also key global implications here.

Equity markets rallied again yesterday, partly on a short squeeze, but partly on hopes that we are indeed flattening our virus curves and we can all go back to normal soon. Crucially, however, this bullishness presupposes that we have a strategy for once the curve has been flattened – do we, post-Boris?

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

Rabobank: “There Will Be Attempts To Go Back To Normal After This Crisis, But It Will Be Impossible”

Rabobank: “There Will Be Attempts To Go Back To Normal After This Crisis, But It Will Be Impossible”

The Grand National-ists

The weekend’s world-famous UK horse race, the Grand National, was won by Potters Corner, trained in Wales and ridden by Jack Tudor, at 18-1. That’s a little unusual – but not as much as the fact that this was all a virtual race run on a computer because the actual Grand National was cancelled for the first time since WW2 due to COVID-19.

I mention this because there is a lot of Grand National-ism about at the moment due to this virus. After all, Germany accused (then apparently retracted, to far less attention) claims of ”piracy” as 200,000 face masks in Bangkok destined for it ended up in the US instead: this is normally called “gazumping” in the UK, and in healthier times is seen as perfectly natural – which says something about how we used to operate. The US is also refusing to send medical gear to Canada. Germany itself had of course previously refused to send ventilators and masks to Italy when asked, and France requisitioned private-sector stocks weeks ago. Meanwhile, China has placed strict controls on the export of personal protective equipment (PPE), masks, and virus test kits – which is a problem given it is still the world’s bulk producer – though the Czechs, Dutch, Spanish, and Turkish have all reportedly returned such gear for being faulty, and one news report alleges Pakistan received a shipment of masks clearly made of women’s underwear.

In terms of medicine, there is also a struggle to access virus testing chemical reagents – Israel has had to scale back its testing as Germany has nationalised one of the chemical producers and South Korea has been forced to close one of its plants due to the virus itself.

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

Rabobank: Over 100 Million Could Be In Lockdown In India

Rabobank: Over 100 Million Could Be In Lockdown In India

Police State

The headlines continue to shock.

Firstly, the number of coronavirus cases surged past 300,000 on Sunday with more than 13,000 deaths now reported worldwide.

Secondly, predictions about the fall out on the global economic outlook have rapidly gone from bad to worse over the past few days.

  • In the US over 80 million people are now in a lockdown,
  • over 100 million could be in similar circumstances in India.
  • In Italy, controls on movement have been stepped up with all internal travel now banned and in numerous other countries social gatherings have been forbidden and businesses have been closed in an attempt to prevent the spread of the virus.

In just over a fortnight or so, the debate among economists has shifted from whether the US will suffer recession to how big the downturn is likely to be. Our baseline base case now is a global pandemic as outlined by our colleagues here.

Central banks and governments around the world have moved quickly to staunch the wounds, but more policy support will likely be forthcoming.

On Friday, the UK Chancellor jacked-up the size of the fiscal relief offered to the UK economy aggressively – just over a week since he delivered his budget. The new measures include a pledge by the state to pay 80% of the wages of workers, up to GBP2,500 per month. Germany has announced it will raise EUR150 bln in new debt to bolster the economy, which is an abrupt departure from its culture of fiscal discipline. By contrast the US’s Republican’s Coronavirus Rescue Package failed to pass through the Senate yesterday. Shortly after the vote DJIA futures were again limit down. Democrats argued that the package overly favoured corporations and didn’t go far enough to support individuals facing joblessness and a loss of income.

…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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