October 17, 2017

ECB May Have Only €220 Billion In QE Left If The Hawks Get Their Way

After seemingly sending out trial balloons (via Bloomberg and Reuters simultaneously) on tapering last Thursday, which had almost zero impact (see “ECB Reportedly Considering Slashing QE in Half in January, EURUSD Shrugs), Draghi’s minions have been busy again.

“Central bank officials familiar with the matter” told Bloomberg that some - presumably quite hawkish - ECB policy makers “see room for little more than 200 billion euros ($235 billion) of purchases under the institution’s bond-buying program next year.”  With said “officials” (who asked not to be named because the talks are not private anymore) seeing a limit to bond buying of 2.5 trillion euros under the current rules and purchases expected to reach 2.28 trillion by the end of 2017, we can do the calculation.

According to last week’s trial balloons, the ECB was looking at reducing its purchases from €60 billion euros to about €30 billion for at least nine months.

As we also explained in “How Will The ECB's QE Tapering Impact The Market? Here Are The Possible Scenarios”, the market neutral level of APP extension estimated by Citi appears to be around 250 billion Euros, or roughly €50 billion more than "some" ECB policymakers will permit. The three broadly market neutral scenarios laid out in Citi’s model were €20bn x 12mth, €30bn x 9mth and €40bn x 6mth as shown below.

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October 16, 2017

China's Mortgage Debt Bubble Raises Spectre Of 2007 US Crisis

Behind the dream of property ownership they share with many like-minded friends lies an uninterrupted housing price rally in major Chinese cities that dates back to former premier Zhu Rongji’s privatisation of urban housing in the late 1990s.

Rapid urbanisation, combined with unprecedented monetary easing in the past decade, has resulted in runaway property inflation in cities like Shenzhen, where home prices in many projects have doubled or even tripled in the past two years.

City residents in their 20s and 30s view property as a one-way bet because they’ve never known prices to drop. At the same time, property inflation has seen the real purchasing power of their money rapidly diminish.

“Almost all my friends born since the 1980s and 1990s are racing to buy homes, while those who already have one are planning to buy a second,” Mai, 33, said.

“Very few can be at ease when seeing rents and home prices rise so strongly, and they will continue to rise in a scary way.”

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October 13, 2017

China Launches Yuan-Ruble Payment System

The monetary regimes of China and Russia, two of the world's most resource-rich nations, are drawing closer with every passing day.

In the latest push for convergence, China has established a payment versus payment (PVP) system for Chinese yuan and Russian ruble transactions in a move to reduce risks and improve the efficiency of its foreign exchange transactions. The PVP system for yuan and ruble transactions, designed to streamline commerce and curency transactions between the two nations, was launched on Monday after receiving approval from China’s central bank, according to a statement by the country’s foreign exchange trading system.

It marks the first time a PVP system has been established for trading the yuan and foreign currencies, said the statement, which was posted on Wednesday on the website of the China Foreign Exchange Trade System (CFETS). PVP systems allow simultaneous settlement of transactions in two different currencies.

According to CFETS, the system would reduce settlement risk as well as the risk of transactions taking place in different time zones, and improve foreign exchange market efficiency. Of course, if the two countries had a blockchain-based settlement system, they would already have all this and much more.

CFETS said it plans to introduce PVP systems for yuan transactions with other currencies based on China’s Belt and Road initiative, and complying with the process of renminbi internationalization. Russia, however, is a top priority: the world's biggest oil producer recently became the largest source of oil for China, the world’s top energy consumer.

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October 12, 2017

Goldman Is Allowing Its Clients To Bet On The Next Financial Crisis

Just over a decade ago, as the S&P was hitting all time highs and there was a line around the block of 30-some year old hedge fund managers, desperate to put other people's money in various ultra risky investments just so they could pick a few excess bps of yield over Treasurys - a situation painfully familiar to what is going on now - Goldman had an epiphany: create new synthetic products that have huge convexity, i.e., provide little upside (such as a few basis points pick up in yield) versus unlimited downside, link them to the shittiest assets possible and sell them to gullible, yield-chasing idiots (collecting a transaction fee) while taking the other side of the trade (collecting a huge profit once everything crashes). The instruments, of course, were CDOs, and not long after Goldman sold a whole of them, the financial system crashed and needed a multi-trillion bailout from which the world has not recovered since.

Ten years later, Goldman is doing it again, only instead of targeting subprime mortgages, this time the bank has focused on quasi-insolvent European banks.

And just like right before the last financial crash, Goldman is once again allowing its clients to profit from the upcoming collapse, or as Bloomberg puts it, "less than a decade after the last major banking crisis, Goldman Sachs and JPMorgan  are offering investors a new way to bet on the next one."

The trade in question is a total return swap, a highly levered product which is similar or a credit default swap but has some nuanced differences, which targets what are known as Tier 1 , or AT1 or "buffer" notes issued by European banks, and which usually are the first to get wiped out when there is even a modest insolvency event (just ask Banco Popular), let alone a full blown financial crisis.

Goldman and JPM are offering the derivative trades that enable investors to bet on or against high-risk bank bonds that financial regulators can wipe out if a lender runs into trouble. Other banks are also hoping to get in on the fun, and start making markets in the contracts, known as total-return swaps, or TRS, in the coming weeks, according to Max Ruscher, the London-based director of credit indexes at IHS Markit Ltd., which administers the benchmarks that the swaps are linked to.

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October 11, 2017

National Rents Stall For 4th Month In A Row As Multi-Family Supply Glut Takes Its Toll

After a steady march higher in the wake of the 'great recession' nearly a decade ago, a note today from Rent Cafe reveals that average rents in the United States have now stalled for 4 months in row with September's national average coming in at $1,354 per month, which is virtually flat from the $1,350 average reached in the summer.

National rents have barely moved through the entire peak rental season and into September, marking the longest period of stagnation in recent history — 4 consecutive months. Coming in at $1,354 for the month of September, the average rent is only 2.2 percent higher than this time last year. This is the slowest annual growth rate we’ve seen in more than six years — having reached a high point of 5.5%-5.6% peak growth around two years ago — a pretty good indicator that the rental market has entered calmer waters.

Still, that doesn’t mean rents have flat-lined everywhere. Though nationally and in the most expensive cities for renters prices have finally come to a full stop, there are still some holdouts—and it seems renters in smaller and mid-sized cities are not yet getting a break, on the contrary.

As we pointed out over the summer, just like almost any bubble, stagnating rents are undoubtedly the symptom of a massive, multi-year supply bubble in multi-family housing units sparked by, among other things, cheap borrowing costs for commercial builders.  Per the chart below from Goldman Sachs, multi-family units under construction is now at record highs and have eclipsed the previous bubble peak by nearly 40%.

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October 10, 2017

Mapping The World's Trillion-Dollar Asset-Manager Club

In the late 1700s, it was the start of the battle of stock exchanges: in 1773, the London Stock Exchange was formed, and the New York Stock Exchange was formed just 19 years later.

And while London was a preferred destination for international finance at the time, Visual Capitalist's Jeff Desjardins notes that England also had laws that restricted the formation of new joint-stock companies. The law was repealed in 1825, but by then it was already too late.

In the U.S., exchanges in New York City and Philadelphia took full advantage by dealing in stocks early on. Eventually, for this and a variety of other reasons, the NYSE emerged as the most dominant exchange in the world – helping propel New York and Wall Street to the center of finance.

THE CENTER OF FINANCE

Wall Street and the U.S. in general is now synonymous with finance – and most of the world’s largest banks, funds, and investors maintain a presence nearby. The biggest asset management companies, which pool investments into securities such as stocks and bonds on behalf of investors, are no exception to this.

Today’s chart shows all global companies with over $1 trillion in assets under management (AUM).

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October 9, 2017

Economic Slowdown Confirmed: The U.S. Economy Lost Jobs Last Month For The First Time In 7 Years

Don’t worry – even though the employment numbers are terrible the mainstream media insists that everything is going to be wonderful for the U.S. economy in the months ahead.  According to the Bureau of Labor Statistics, the U.S. economy lost 33,000 jobs during September.  That was the first monthly decline in seven years, and as you will see below, overall 2017 is on pace for the slowest employment growth in at least five years.  But the Bureau of Labor Statistics insists that the downturn in September was due to the chaos caused by Hurricane Harvey and Hurricane Irma, and they are assuring us that happier times are right around the corner.

Economists were projecting that we would see an increase of around 80,000 jobs last month, and we need to add at least 150,000 jobs each month just to keep up with population growth.  So the -33,000 number was a huge disappointment.

But even though we lost 33,000 jobs last month, the Bureau of Labor Statistics says that the unemployment rate fell from 4.4 percent to 4.2 percent.

Yes, I know that doesn’t make any sense at all, but that is what they are telling us.

Perhaps if several volcanoes go off inside this country, terrorists detonate a dirty bomb in one of our major cities and Godzilla invades the west coast next month the unemployment rate will drop all the way to zero.

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October 6, 2017

Will Retailers Switch to a Price Tag System That Screws Customers at Every Opportunity?

Retailers intend to engage in very sneaky price discrimination. But big data is way overhyped and regularly underdelivers. It might be great at pricing airline seats, but airlines have only so many routes and run planes only so many times of day and days of the week. By contrast, the average grocery store has over 40,000 SKUs. They aren’t going to have granular enough data to discriminate finely on a lot of things. They may try to draw crude inferences, like “People who go to Starbucks daily are higher income and can/will pay more” but aside from using certain criteria to pick out less price sensitive customers, how much price gouging they might take is a crude inference. And what about stores you rarely visit, say the once a year at best sports store shopper?

In addition, this type of price discrimination is against the law in many cities which require merchants to post prices and honor them. But the threat of this sort of system is an argument in favor of not using ApplePay and other phone-based payment systems, which could provide even more granular info about your shopping habits, or not using a smart phone, or putting it in a mini Faraday cage when you are going on a serious shopping mission. Plus if this sort of system starts to be implemented, it’s not hard to imagine that software developers would implement apps to block inquiries from purchase snooping systems, or better yet, feed them incorrect data that says you are price sensitive (like a false history of shopping regularly at discounters).

But as Ramsi Woodcock, professor of legal studies at Georgia State University, observes, those outraged by Delta’s reportedly asking $3,200 for a ticket out of Florida as Hurricane Irma approached should be aware that dynamic pricing enabled Delta to charge the same price to last minute customers two weeks before.

We’ve imposed no limits on dynamic pricing, although we’re nibbling around the edges of imposing some constraints on the sale of our personal data. Woodcock believes dynamic pricing could have anti-trust implications. Anti-trust is justified by many as a way to stop or break up monopolies that could artificially raise prices and reduce total consumer welfare. In a detailed article, Woodcock argues that big data enables “price discrimination (that) extracts more value from consumers than uniform pricing, by tailoring price to the maximum level tolerated by each consumer.” And thus warrants anti-trust enforcement.

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October 5, 2017

De-Dollarization & Disintermediation - Russian Mobile Phone Operator Issues First Blockchain-Backed Bond

Russian Mobile phone operator, Megafon, issued RUB500 million in zero-coupon blockchain-based bonds recently. This was purely a proof of concept issuance.

But, it speaks to the bigger picture of bypassing traditional book runners, i.e. the major banks, for selling securities to investors. No longer does Goldman Sachs, Standard Charted, HSBC and Deutsche Bank have a stranglehold on how capital is raised for emerging markets.

Moreover, it will prove just how much of an advantage the blockchain has over these older and much more expensive business models. 

This reduces the cost of a bond issuance to practically nothing, beyond the needed legal work. 

These bonds can and will be sold without the need for the middle man to take a huge cut.

The blockchain is changing everything.

This news also puts paid the news from a couple of months back that the National Settlement Depository is moving, via the WAVES platform, to token-ize as much of the Russian economy as it can. This is your first example of their integrating with the Moscow Exchange to trade securities via the blockchain.

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October 4, 2017

Uber Shareholder Drops Lawsuit Against Kalanick, Clearing Way For Softbank Investment

Tuesday’s meeting of the Uber Inc. board – the first following Kalanick’s unilateral decision to appoint former Xerox Corp. Chairwoman and CEO Ursula Burns and former Merrill Lynch Chairman and CEO John Thain – appears to have been a productive one.

Reuters is reporting that the board voted to move ahead with two issues, a change in governance rules, and an investment by Japan’s Softbank Group, which it was reported last month has been in talks to invest as much as $10 billion in the cash-burning ride-share giant.

To anyone who hasn’t been following the ongoing boardroom struggle between former Uber CEO Travis Kalanick, who was ousted after an investor revolt in June, and Benchmark Capital, these might seem like routine housekeeping matters.  

But in reality, they’re signs that two warring factions have agreed to put aside their differences - for now, at least - for the good of the company (not to mention their bank accounts). Benchmark has been trying to change the board's rules to try and limit Kalanick's power with the ultimate goal of ensuring he never returns as CEO. But today, Kalanick assented to the governance changes, albiet in a watered-down form. Meanwhile, Kalanick also gave his blessing to the Softbank deal, letting go of his reservations despite reports that Softbank had struck an agreement with Benchmark to do everything in its power to oppose Kalanick’s return as CEO as a condition of its investment, which should result in the Japanese company gaining control over at least one board seat.

Of course, by allowing both of these proposals to proceed, Kalanick is making some major concessions. What is he getting in return?

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October 3, 2017

Hard Assets In An Age Of Negative Interest Rates

In a word, the hard asset vision is about building wealth outside the stock market. It refers to three main strategies overall: 

1) land ownership and/or farmland, forestry and agriculture

2) gold, other precious metals, and certain base-metal commodities, and

3) The (Old Masters/Classic Modern) art market.

Where this last is concerned, we mean art as investment and not art-as-commerce, such as that which contaminates today’s insipid and overpriced world of ‘Balloon-Dog’ bad art. The auction world of Rembrandt and Picasso; of El Greco and Gerhardt Richter has been on a tear, is smashing records, and cannot be ignored as an excellent safe-haven vehicle, as outstanding works of art traditionally always have been.

To begin with, physical gold and precious metals remain an investment enigma despite being market-leading performers for the past seventeen years. Gold is a must-have portfolio asset amid the aggressive debt levels and monetary debasement that have so unhinged the market. Silver, for its part, in addition to its prestige status, also has innumerable industrial applications and throughout the precious-metal bull market since 2000.

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October 2, 2017

Blowback? NFL Ticket Sales Crash 17.9% As Owners Lose Control Of Players

Probably just a coincidence... or just transitory, but The online ticket reseller TickPick told The Washington Examiner that sales have dropped 17.9 percent, far more than the usual Week Three fall...

17.9 percent decrease in NFL orders this week compared to the previous week.
Last year the drop was 10.8 percent in orders on Monday & Tuesday following Week Three games.

"We have seen a massive decrease in NFL ticket purchases this past week in comparison to years past. Week 3 seems to usually have less ticket orders than week 2, but this year ticket purchases are down more than 7 percent from this time last year," said TickPick's Jack Slingland.

"While we can't specify if this decrease is due to the president's comments, player and owner protests, play on the field, or simply the continued division of consumer's media attention, the conversation around the NFL this week has focused on the president's comments as well as the players' and owners' reaction. As viewers continue to abandon their NFL Sunday habits, both the number of ticket sales and the purchase price of tickets will drop," he told us.

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September 29, 2017

Is The Bubble About To Burst? Student-Loan Delinquency Rates Rise For First Time In Years

Since the financial crisis, most market observers and economists have cheerfully ignored the aggregate student-debt load in the US, which recently swelled to an economy-threatening $1.4 trillion. Even as student-debt, which can't be discharged in bankruptcy, grew to represent 10% of the total US debt burden, defenders of the status quo pointed to declining default rates as evidence that the government-backed student loan industry wasn’t in danger of imploding.

But that may soon change.

As Bloomberg reports, the student-loan default rate in the US ticked higher during the second quarter for the first time since 2013. While it’s only one quarter of data, it should send a chill down the spine of government and private lenders, who have every reason to worry that this could be more than a temporary blip.

To wit, the share of Americans at least 31 days late on loans from the U.S. Department of Education ticked up to 18.8% as of June 30, up from 18.6% during the same period a year ago, according to new federal data. Meanwhile, about 3.3 million Americans have gone more than a month without making a required payment on their Education Department loans—up about 320,000 borrowers.

The rise interrupts a period of 12 straight quarters of declines in delinquency rates, according to numbers dating to 2013. It also comes at a time when US economic growth is nominally expanding (the BEA announced earlier today that the US economy expanded by 3.1% during the second quarter, an improvement over its previous estimate).

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September 28, 2017

The “Trump Tax Plan” - Details & Analysis

Business tax changes:

  • A 20% corporate tax rate. This is the first time Trump has publicly backed down from one of his earliest campaign promises: a 15% corporate tax rate. The budget math required for a 15% rate was too difficult, so the somewhat higher rate is the opening bid. The current statutory federal rate is 35%.
  • A 25% rate for pass-through businesses. Instead of getting taxed at an individual rate for business profits, people who own their own business would pay at the pass-through rate. The plan also says it will consider rules to prevent “personal income” from being taxed at this rate. Mnuchin previously suggested there may be limitations on what types of businesses get this rate — it could apply only to goods producers and not service-oriented companies to prevent people from creating limited-liability corporations to store their assets and receive a lower rate.
  • Elimination of some business deductions, industry-specific incentives, and more. There are few details, but the plan includes language regarding the “streamlining” of business tax breaks.
  • A one-time repatriation tax. All overseas assets from US-owned companies would be considered repatriated and taxed at a one-time lower rate — this is designed to bring corporate profits back from overseas. Illiquid assets like real estate would be taxed at a lower rate than cash or cash equivalents, and the payments would be spread out over time. While there is no precise number in the plan, officials have indicated the rate could end up somewhere around 10%.

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September 27, 2017

California Mulls Combustion-Engine Car Ban: "You Could Stop All Sales By 2030"

California, the state which single-handedly turned Elon Musk into the billionaire that he is today by forcing taxpayers to subsidize his unprofitable electric vehicle scam via "Zero Emission Vehicle" credits, is now considering a full ban of combustion-engine cars by as early as 2030. The potential ban was discussed by Mary Nichols of the California Air Resources Board, the same folks who decided to regulate cow farts last year, who told Bloomberg that Governor Jerry Brown has expressed interest in a ban.

Governor Jerry Brown has expressed an interest in barring the sale of vehicles powered by internal-combustion engines, Mary Nichols, chairman of the California Air Resources Board, said in an interview Friday at Bloomberg headquarters in New York. Brown, one of the most outspoken elected official in the U.S. about the need for policies to combat climate change, would be replicating similar moves by China, France and the U.K.

“I’ve gotten messages from the governor asking, ‘Why haven’t we done something already?’” Nichols said, referring to China’s planned phase-out of fossil-fuel vehicle sales. “The governor has certainly indicated an interest in why China can do this and not California.”

California has set a goal to cut carbon dioxide emissions by 80 percent from 1990 levels by 2050. Rising emissions from on-road transportation has undercut the state’s efforts to reduce pollution, a San Francisco-based non-profit said last month.

“To reach the ambitious levels of reduction in greenhouse gas emissions, we have to pretty much replace all combustion with some form of renewable energy by 2040 or 2050," Nichols said. “We’re looking at that as a method of moving this discussion forward.”

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