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“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.

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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.

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“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.

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“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.

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Rabobank: What Level Of Interest Rates Will Incentivize You To Risk The Death Of Yourself And Your Family

Rabobank: What Level Of Interest Rates Will Incentivize You To Risk The Death Of Yourself And Your Family

“Tonight the super trouper lights are gonna find me
Shining like the sun (sup-p-per troup-p-per)
Smiling, having fun (sup-p-per troup-p-per)
Feeling like a number one…”

So sang markets yesterday in excitement as we enter what I am dubbing “Super Trouper Tuesday”. Indeed, the Dow Jones went up a whole baseball cap-and-a-bit to close at 26,703 even as the 10-year US remain at an unprecedented 1.12%. Not because the Fed mumbled something on Friday, but didn’t act, and not because the BOJ pumped all of USD4.6bn into markets yesterday, and not because the RBA cut rates 25bp to a new low of 0.50% earlier today, meaning that they now have one more cut left to go before it’s “Oz-QE, Oz-QE, Oz-QE” (Oi!Oi!Oi!) time. (Good timing not only due to Covid-19, as building approvals tumbled -15.3% m/m in January anyway.)

It’s also not due to more signs the virus spread is in “uncharted territory” according to the WHO (which means “pandemic” but is contractually obliged not to ever say it, it seems), with more deaths, and as UK police and army draw up lockdown plans and supermarkets plot their own contingency plans, for just one real-life example.

Rather it’s a reflection of the fact that the not-so-magnificent G-7, and G-7 central banks, have pledged that they will meet today to act jointly on the virus, and the IMF and World Bank are also prepared to help if needed; Covid-19, it seems, is a threat that requires immediate action in a way that the potential risk of the end of life on earth (if you are Green), or increasingly Victorian/Gilded Age levels of wealth inequality (if you are Piketty) are not. Then again we have to recall that stocks had just fallen by over 10% in a week, and that house prices risk following: Come on you cynical people, priorities, please!

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Rabobank: Markets Need To Start Pricing For One Of Two Things – One Bad, The Other Terrible

Rabobank: Markets Need To Start Pricing For One Of Two Things – One Bad, The Other Terrible

It is that rarest of occasions. Not a global pandemic, because: 1) we still aren’t in one yet, officially; and 2) we have had that pandemic declaration made in the relatively recent past (2009-10). Rather, we are being told by well-known voices on Wall Street NOT to buy this particular dip in stocks, which closed down once again in the US (S&P -0.4%) to make it three losing sessions in three. The Nikkei is also down another 2.1% this morning in Asia. Furthermore, those “Kud-LOW” bond yields are also now Kud-LOWER, with the 10-year US Treasury at 1.30%, a new record that I suspect will not hold for long. Aussie 10s also hit a new record low of 0.84%, as once the virus hits housing prices in Sydney and Melbourne, the RBA will of course be forced to act.

Is that equity slump and yield-move justified though? Certainly, when the WHO notes that the spread of COVID-19 is now faster and wider outside China than within it. (Albeit with a further press report alleging that China’s numbers are far higher than being officially recognised). At time of writing we now have the first cases in new locations like Georgia, Greece, Finland, Macedonia, Norway, and Romania, to say nothing of suspicions of what may be happening unrecorded in Africa, as well as what looks like the first case in the US unrelated directly to China, and with 91 reported as under precautionary quarantine in the States too. This virus is indeed now threatening to spread at the pace previously seen in China in many other locations.

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Rabobank: Several Things Cratered Yesterday

Rabobank: Several Things Cratered Yesterday

Several things cratered yesterday. 

The first was global stocks. The S&P dropped 3.4%, which once upon a time was just a normal bad day in the office, but in our new normal of central banks tacitly and US presidents openly targeting stock prices as the key driver of the global ‘economy’, that kind of decline in plutocratic wealth is both rare and a nasty shock. Regardless, more and more companies are now reporting that either earnings or supply chains are going to be impacted by this crisis – as we had feared would be inevitable. Asia this morning has seen follow-on equity selling, with the Japanese Nikkei -3.3% at time of writing and even China, where all is now close to being closer to normal again (or so we are told) -1.6%. However, US futures are rising as I type. It is, after all, cheaper to buy, and our underlying asset-pumping infrastructure is still intact, even if global supply chains and the real economy aren’t. But who cares about them anyway? Indeed, “Please hold the panic” says the Wall Street Journal, and US Treasury Secretary Mnuchin yesterday happily overstepped his boundaries to tell us that central banks will of course cut rates if the virus impact grows.

The second to crater was global bond yields. In this case, 10-year US Treasuries hit a low of under 1.36%, although we are back up to 1.39% along with US equity futures, with the 2-year at 1.28%. The market is now expecting the Fed to cut again later this year, which should be no real surprise to anyone except the Fed. (Not so much over the risk to life, perhaps, or to growth – just to equities.) In the meantime, we got ‘just’ around USD40bn in new Fed repo madness to tide us over for a few days…or perhaps hours. Who knows?

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

Rabobank: Our Coronavirus Base Case Is Rapidly Shifting From “Bad” To “Ugly”

Rabobank: Our Coronavirus Base Case Is Rapidly Shifting From “Bad” To “Ugly”

Regular readers will know that our four projected COVID-19 scenarios were “Bad, Worse, Ugly, and Unthinkable”. Current news today suggests risks that the base case is rapidly shifting from “Bad”, meaning only China is impacted, to “Ugly”, where both emerging Asia and developed economies see soaring infection rates and deaths.

After all, following Vietnam, Iran now has eight deaths and an uncertain number of cases, prompting schools and universities to closed and the borders with Afghanistan and Pakistan to be sealed from the other side. For an economy already being crushed by sanctions, this is all that it needed. More worrying for markets, South Korea (with a GDP of over USD1 trillion) has also been swamped by hundreds of new cases, a 20-fold leap in just five days, and, as in China, is seeing the highest-level emergency declared, cities on lock-down, gatherings and travel bans in place, and the national assembly additionally suspended. Samsung has had to shutter at least one factory, in the city of Gumi. The Asian economy, already reeling, it about to suffer another major kick.

Worse, in Europe there also are over 160 cases in a cluster in northern Italy, with three deaths so far, and the regions of Lombardy and Veneto, the industrial and financial heartlands, in both panic and lockdown. Venice’s Carnival has been cancelled, and so was a recent fashion show. Italy is 11% of Eurozone GDP, and those two regions are 30% of Italy’s GDP. For a Eurozone already close to recession, that shock could well be more than enough to generate a downturn.

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

The Four Coronavirus Scenarios: The Bad; The Worse; The Ugly; And The Unthinkable

The Four Coronavirus Scenarios: The Bad; The Worse; The Ugly; And The Unthinkable 

Summary

  • The Covid-19 coronavirus could be more disruptive than markets are currently pricing in. Not in the least because the ‘true’ number of infected people remains uncertain, as the recent surge in cases exemplifies
  • We outline four scenarios in which the virus increasingly becomes severe: The Bad; The Worse; The Ugly; and The Unthinkable 
  • We provide rough estimates for China’s growth trajectory in these scenarios although we stress that these are not our official forecasts since we are still working out the details
  • The three main channels through which Covid-19 will affect the global economy are tourism, net exports, and intermediate goods
  • In the ‘Bad’ scenario the virus outbreak does not last far beyond Q1. China’s GDP growth for 2020 could drop to below 5%, with production taking the biggest hit and a catch up in Q3 and Q4. This is our base case scenario, although with the recent surge in mind, the second scenario is becoming increasingly likely
  • In the ‘Worse’ scenario, the virus outbreak lasts beyond Q1. In that case China’s GDP growth could end up below 4% in 2020
  • In this scenario, next to China, Asia will bear the brunt of the prolonged outbreak due to its dependence on Chinas as an export market and intermediate imports as well as for tourism
  • In China itself, defaults of non-financial corporates in China could start to rise rapidly
  • This will lead to a decline in China’s long-term growth potential as private companies will suffer most, while less efficient SOEs will likely be bailed out. As a result, debt levels will balloon further, leaving China more vulnerable in the future
  • There will also be downwards pressure on the Chinese currency as extra CNY liquidity is made available

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

Rabobank: The Dilemma Facing China Is Truly Awful

Rabobank: The Dilemma Facing China Is Truly Awful

As has been the case since Monday’s sell-off, there is an attempt to try to look on the bright side of the virus headlines. Chinese officials are spreading the word globally that things are under control and that other countries should not be closing their borders to China, in line with the WHO recommendations that says that free-flows of people during a potential epidemic is completely fine.Of course, at home China is still under draconian lockdown, with tens of millions of people not allowed to leave their homes, and hundreds of millions more voluntarily following the same advice. Moreover, as a former Mexican ambassador to China publicly notes, when Mexico briefly suffered from H1N1 bird ‘flu back in 2009 China’s response was to ignore the WHO’s recommendations and: place all Mexican nationals in China under quarantine; cancel all direct flights to Mexico; stop issuing visas to Mexicans; and closed all its consulates in Mexico.    

After having extended its Lunar New Year break, and yet with more cities and firms still shutting down than doing any re-opening, Beijing is starting to become cognizant of just how deep and serious the economic damage is going to be if this goes on much longer. We are, after all, talking about 80% of the economy, and 90% of exporters, simply not functioning. This is already seeing supply-chain knock-on effects for a swathe of global firms and this, very much like the virus itself, will snowball as time passes if nothing changes. For a country that was already seeing foreign firms talk about shifting production to other locations this is a problem. Thus, perhaps, some of the urgency in trying to stress that everything is returning to normal soon, and that the WHO advice is worth following – this time.

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

Rabobank: “What If We Are On The Brink Of An Exponential Increase In Coronavirus Cases?”

Rabobank: “What If We Are On The Brink Of An Exponential Increase In Coronavirus Cases?”

The beginning of 2020 starts to look alarmingly similar to 2018. Back then the US stocks extended their impressive 2017 gains in the first few weeks of trading only to plunge at the end of January and sustain heavy losses in the first half of February. In that period the S&P 500 Index plunged almost 12% from the peak to trough on the back of rising concerns that inflation may rise much faster than initially anticipated forcing the Fed to accelerate the pace of monetary policy tightening. It was just a taste of what was to come as 2018 proved to be a tumultuous year for the US equities which set record highs in September only to end the year deep in the red. 

Back to 2020, global stocks are in a risk off mode amid escalating concerns about the coronavirus. The S&P 500 Index plunged 1.57% on Monday trimming its year-to-date gains to just 0.40%. One could argue that this is just a correction from seriously stretched levels that will ultimately prove as an opportunity to buy stocks on the back of an assumption that the Chinese officials will, eventually, get on top of the coronavirus.

However, it is extremely difficult to estimate the negative impact on the Chinese economy at a time when the death toll is rising sharply (106 so far) and the number of confirmed cases is soaring (4,515 as of today). More than 50 million people in China are now in a lockdown.

t is also worth considering the following: what if we are on the brink of an exponential increase in the number of people affected by the deadly virus? One could argue that we have already reached this stage given that confirmed cases reportedly increased by 65% over the past few days.

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

Rabobank: “Imagine London In Full Lockdown”

Rabobank: “Imagine London In Full Lockdown”

Imagine London in full lockdown. Hard? Well, Chinese authorities just decided to issue a Wuhan travel ban, locking down a city with more inhabitants than London. Stopping the spread of the new SARS-like corona virus is the aim, as more and more cases of contagion have been reported, for which the majority are pointing at Wuhan being the place of origination. The WHO delayed its decision on whether to brand the situation as an a public health emergency of international concern and is expected to report on its deliberations today. Meanwhile, China reported 8 new deaths from the Corona virus, bringing the worldwide tally to 17.

Whilst broader risk-off sentiment in financial markets seemed slightly less intense than on Tuesday, Asian stocks took a significant beating overnight, with the Chinese CSI index dropping more than 3% as losses mounted during the trading session. Concerns that travel bans will be rolled out more widely are giving investors jitters, even though these bans are intended to prevent the situation from spiralling out of control.

Meanwhile, the stepping-down of Five Star movement leader Luigi di Maio, on which the market had been speculating already earlier this week, had relatively little impact on European bonds, with Italy’s spread volatile but even tightening slightly after the widening move yesterday. Italian minister Robert Gualtieri said di Maio’s resignation as leader would not affect his position as foreign affairs minister and would not affect the stability of the government. Apparently this was sufficient for market participants, who perhaps see this as an opportunity for the PD’s coalition partner to seek a new leader who can take on the potential threats from the rising popularity of Matteo Salvini’s League, who are expected to do well in the regional elections on Sunday.

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

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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