Chinese Investors Exit Bitcoin, Flood Into Gold ETFs

Amid a weakening yuan and a tumbling Bitcoin (amid crackdowns on 'virtual' capital outflows from China), Chinese money is moving to bullion as investors seek an alternative to the 'managed' fiat paper offered by the PBOC. In the week through Monday, China attracted $52 million, the biggest inflow into commodity-linked exchange-traded funds of all countries tracked by Bloomberg.

As China cracks down on various Bitcoin exchanges, sparking an exodus from Bitcoin China platforms, gold has pushed higher...

As Bloomberg reports, Huaan Yifu Gold ETF, China’s largest ETF backed by raw materials, is getting all the attention, attracting almost $72 million last week.

“Chinese capital outflow has certainly elevated the risk to the financial system,” Chad Morganlander, a portfolio manager at Washington Crossing Advisors, which oversees $1.5 billion, said in a telephone interview. “It would be no surprise to me that Chinese gold ETF caught a bid under this elevated or increased concern about reserves, about the currency and about trade relations.”

Huaan Yifu attracted the third-biggest inflow into gold ETFs in the week through Monday, behind Frankfurt-listed Xetra-Gold, which got $172.9 million, and London-listed Source Physical ETF, which lured $73.6 million. ETF holders are bucking the trend in China’s jewelry market that saw the nation’s gold imports from Hong Kong fall in November to the lowest since January.

There are other troubles triggering capital flight and sending money to gold. The International Monetary Fund warned that China’s continued reliance on policy stimulus measures and the slow progress in addressing corporate debt raise the risk of a “sharper slowdown or disruptive adjustment.” The IMF issued the warning even as it raised the nation’s growth forecast for this year by 0.3 percentage points to 6.5 percent.

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China Central Bank Injects A Record 1.035 Trillion In Bank Liquidity This Week

Heading into the Chinese Lunar New Year, local banks are suddenly starved for liquidity like never before. On Tuesday China’s benchmark money-market rate jumped the most in two years, with unprecedented cash injections by the central bank being overwhelmed by demand before the Lunar New Year holidays.

Demand for cash in China tends to increase before the Lunar New Year holidays, when households withdraw money to pay for gifts and get-togethers. Month-end corporate tax payments are adding to the pressure this time, with the break running from Jan. 27 through Feb. 2. At that point the PBOC usually steps in with liquidity "injections" in the form of reverse repos. However, what it has done this year is literally off the charts.

On Wednesday, the People’s Bank of China put in a net 410 billion yuan ($60 billion) through open-market operations, the biggest daily "injection" on record. Despite this massive boost in liquidity, the interbank seven-day repurchase rate still jumped 35 basis points, the most since December 2014, to 2.76 percent, according to weighted average prices. Yesterday, the overnight repo rate rose 10 basis points to 2.50 percent, the highest since April 2015, according to weighted average prices.

So, with liquidity still scarce, moments ago on Thursday morning, the PBOC added another net injection of 190 billion consisting of 100Bn in 7-day repo and 150BN in 28-day repos, offset by 60bn yuan in previous loans maturing.

As a result, the PBOC has injected a net of 1.035 trillion yuan via reverse repos so far this week, an all time high.

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NY Fed President Dudley Thinks A New Housing Bubble Is A Perfect Cure For Soft Retail Sales

In general, most people would agree that the housing collapse of 2008/2009 was a negative event in U.S. history.  A combination of misinformed regulations from Washington D.C., low interest rates, poor underwriting standards that allowed for, among other things, the idiotic "cash out" mortgage, and an insatiable demand for securitizations drove one of the biggest asset bubbles in history which almost brought down the entire global financial system.

But, at least one person, namely New York Fed President Bill Dudley, thinks that a repeat of the 2008 mortgage crisis is exactly the cure for America's stagnant retail sales.  Speaking at the National Retail Federation's annual convention in New York, which was undoubtedly full of perplexed retailers wondering why their store traffic remained so weak amid Obama's stunning "economic recovery", Dudley intimated that the cure for weak retail sales was a return to 2006 practices in which debt thirsty Americans repeatedly withdrew every dollar of equity in their homes to fund their trips to the mall.

“The good news is that, while the current expansion is quite old in chronological terms, it is still relatively young in terms of the health of household finances,” Dudley said in a speech to the National Retail Federation.

“Whatever the timing, a return to a reasonable pattern of home equity extraction would be a positive development for retailers, and would provide a boost to economic growth,” Dudley said.

Homeowners may have overlearned the lessons from the housing boom and bust, the New York Fed President said.

Even though home values have risen over 40% since 2012, housing debt has stayed virtually flat, he said.

“The previous behavior of using housing debt to finance other kinds of consumption seems to have completely disappeared,” and people are leaving the wealth generated by rising home prices “locked up” in their homes, he said.

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Peak Savings: Wall Street Faces 20 Years Of Retirement Withdrawals As Boomers Hit 70 1/2

The United States is a demographic time bomb, plain and simple.  Over the next 30 years, the U.S. economy will face an unrelenting demographic transition as ~75 million baby boomers exit the highest wage earning years of their life and start to draw down what little retirement savings they've managed to tuck away while wreaking havoc to the public "safety net" ponzi schemes, like Social Security, that will almost certainly be insolvent in a decade.

Per the U.S. Census Bureau, over the 30 years, the number of people in the U.S. over the age of 65 is expected to double while those 85 and up will triple.  Needless to day, the overall population growth of the United States is a fraction of that which means that millennials are about to get crushed by their parents....so it's probably a good thing they already live in mom and dad's basement.

In aggregate, per the Wall Street Journal, Boomers have saved $10 trillion in various tax-deferred saving accounts.  While that sounds like an impressive figure, with 75 million Boomers, it equates to an average of $133,000 per person which, needless to say, is insufficient to fund ~20 years of retirement. 

But while the Boomers, and by extension taxpayers, are facing a harsh future, Wall Street has made a killing in fees off of managing the ever growing balance of retirement accounts as Baby Boomers have come of age.  But that all looks set to change as America's aging population is forced by IRS regulations to take retirement withdrawals once they hit 70 1/2 years of age.

As illustrated by the chart below, over the past 2 decades Americans have consistently contributed more than they've withdrawn from tax deferred accounts, excluding recessionary periods.  But that all changed in 2013 and 2014 as the first wave of Boomers hit the magical age of 70.5 with a total of $25 billion of net withdrawals in 2014 alone.

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Why The Stock Market Has Soared (And We'll All Soon Know What It's Like To Be A Madoff Client)

What is driving the US stock markets to such amazing gains?  While some corporations have seen increases in sales and most have innovated to reduce costs, lessen waste, and maximize efficiency, I'll focus on some of the other means that have driven profits higher helping to push US equities into record territory.

1- Declining % of profits going to Uncle Sam.

2- Minimal wage growth and holding the line on new hires.

3- Debt fueled stock buybacks and dividends at the expense of investment in mid and long term activities (R&D, cap-ex, exploration, etc.).
To represent the US market as broadly as possible, we'll use the Wilshire 5000 index, representing all 3600+ publicly traded US corporations (chart below vs. the 10yr Treasury rate).

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The Corporate Bond Market: Binge-Borrowing

Celery and raspberry? Marathon miles of Sudoku and crossword puzzles? Extra reps at the gym? Binge away.

‘Tis the season after the season, that other most wonderful time of the year when it’s a challenge to get a machine at the gym and resolutions are resolute, at least until February or a more intriguing deal comes along. What better way to make amends for that huge holiday hangover that crescendos with so many a New Year’s Eve bash?

Some of us chose to ring in 2017 in a substantially more subdued manner that nevertheless entailed binging of a decidedly different derivation. Enter Netflix. Yours truly must confess that closet claustrophobia was the culprit in keeping this one indoors coveting the control, confining the choices to richly royal romps. It all started innocently enough, with a recommendation to catch The Crown, which has just won a Golden Globe. The devolution that followed began in Italy, with Medici, stopped over in France, with Versailles, and round tripped back to England, with the epic saga that kicked off the modern day, small screen genre, The Tudors. At some point hallucinations began to give the impression that all the series’ stars had British accents. Wait, they actually did.

Thankfully, at some point, bowl games snapped the spell and reality rudely reared its redemptive head before anyone’s else’s head rolled (those royals were a bloodthirsty lot!). Sleep and sanity followed.

Sadly, the same cannot be said of borrowers of almost every stripe these days. For those tapping the fixed income markets, the borrowing binge fest is conspicuous in its constancy. Not only did global bond issuance top $6.6 trillion last year, a fresh record, sales are off to a galloping start thus far in January.

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Why Are Wal-Mart And Boeing Laying Off Workers If The U.S. Economy Is In Good Shape?

The stock market has been on quite a roll in recent weeks, but signs of trouble continue to plague the real economy.  Earlier this week, I talked about the “retail apocalypse” that is sweeping America.  Major retail chains such as Sears and Macy’s are closing stores and laying off workers, but I didn’t think that Wal-Mart would be feeling the pain as well.  Unfortunately, that is precisely what is happening.  USA Today is reporting that approximately 1,000 jobs will be cut at Wal-Mart’s corporate headquarters in Bentonville, Arkansas by the end of this month…

Walmart’s plan to lay off of hundreds of employees is the latest ripple in a wave of job cuts and store closures that are roiling the retail industry.

The world’s largest retailer is cutting roughly 1,000 jobs at its corporate headquarters in Bentonville, Ark., later this month, according to a person familiar with the matter who was not authorized to speak about it.

The company is saying that these cuts are necessary because Wal-Mart is always “looking for ways to operate more efficiently and effectively“.  But something doesn’t smell right here.  You don’t get rid of 1,000 employees at your corporate headquarters if everything is just fine.

I have driven past Wal-Mart’s headquarters in Bentonville a number of times, and it is in a beautiful part of the country.  Bentonville and the surrounding areas had been booming, but it looks like times may be changing.

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Fed Remits Only $92 Billion To Treasury In 2016, Lowest Since 2013

The world was reminded of the cozy relationship between The Fed and The Treasury again today as Janet sent Jack $92.0 billion of freshly ponzi'd net income for 2016 providing the federal government with an important source of funding. This, however, is down almost 6% from 2015 and despite a considerably larger balance sheet is the lowest remittance since 2013 due to doubling the handouts to the major banks to $12 billion last year.

As Reuters reports, part of the decline is due to a drop of about $2.6 billion in what the Fed earns on its holdings of U.S. Treasury bonds and mortgage-backed securities accumulated in fighting the 2007 to 2009 financial crisis.

But most of it is a result of the interest paid on excess reserves held by commercial banks at the 12 regional Federal Reserve institutions. Banks are required to hold some reserves, but are allowed to deposit more if they choose.

Between more cautious lending and weak economic growth, total reserves have been at historically high levels since the financial crisis -- roughly $2 trillion as of the end of the last year compared with a few billions of dollars in more typical times.

When the Fed increased its target interest rate in Dec. 2015 by a quarter of a percentage point, to a range of between 0.25 and 0.5, it increased the rate paid to banks as well - and pushed its overall reserve interest costs from $6.9 billion in 2015 to $12 billion last year. 

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Mysterious $5 Billion Biotech Firm Moderna Lays Out Drug Pipeline

Moderna Therapeutics, based in Cambridge, Mass., has raised $1.9 billion at a valuation approaching $5 billion–higher than most publicly traded biotechnology companies. But the company is so secretive that until now the company didn’t even disclose what most of the drugs and vaccines it is developing are meant to do.

Today, at the J.P. Morgan Healthcare Conference in San Francisco, Moderna is unveiling new details about its pipeline and strategy.

The company now has five vaccines in clinical trials. Two are for strains of influenza that could become pandemic, for which governments might want to stockpile vaccines. Another is for Zika virus, and a fourth, being developed with AstraZeneca, would treat heart attacks disease. The goal of a fifth, being developed with Merck, is not being revealed. Another vaccine, for Chikungunya virus, a mosquito-transmitted disease, is ready to start trials.

The flu vaccines are an interesting strategic gambit. Neither is likely to become a product, although governments may want to stockpile them, according to Stéphane Bancel, Moderna’s chief executive officer and a 10% stockholder in the company. But they provide an early chance to prove that Moderna’s basic technology works.

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It’s A Retail Apocalypse: Sears, Macy’s And The Limited Are All Closing Stores

It has only been two weeks since Christmas, and already we are witnessing a stunning bloodbath of store closings.  Macy’s shocked the retail industry by announcing that they will be closing about 100 stores.  The downward spiral of Sears hit another landmark when it was announced that another 150 Sears and Kmart stores would be shutting down.  And we have just learned that The Limited is immediately closing all stores nationwide.  If the U.S. economy is doing just fine, then why are we experiencing such a retail apocalypse?  All over America, vast shopping malls that were once buzzing with eager consumers now resemble mausoleums.  We have never seen anything quite like this in our entire history, and nobody is quite sure what is going to happen next.

Not too long ago I walked into a Macy’s, and it was eerily quiet.  I stumbled around the men’s department looking for something to buy, but I was deeply disappointed in what was being offered.  After some time had passed, an employee finally noticed me and came over to help, but they didn’t have anything that I was looking for.

And it is a sad thing, because over the past several years when I have gone into Macy’s looking to spend money, most of the time I have come out of there without spending a penny.  Macy’s has made some very bad decisions recently, and I am hoping that they can still turn things around.  But for the moment, they are closing stores and cutting jobs.  The following comes from the New York Times…

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The Era Of Cheap Money Is Ending: "This Is The Calm Before The Storm"

We’re living in the calm before the storm.

That much everyone can sense.  The stock market highs and holiday spending spree will soon be over, the inauguration will presumably go as planned, but that’s when everything could start to go off course.

The only question is how the storm is going to stir into a frenzy – there will be a pretext of some kind. What seems certain is that it is past time to get ready for a difficult period. This could be the big, slow squeeze and the long winter.

The economy became immune to stimulus and quantitative easing; the market can only be propped up so long, and the realities of raised interest rates a matter of timing for the Fed to decide. Now, President-elect Trump provides the catalyst necessary for a dramatic rise and fall in the economy.

With the force of the economic avalanche that is poised to fall upon us all, the policies and actions of President Trump will do little to stem the tide of what is already coming; for better or worse, there is little that Trump himself can do even though it may fall squarely on his administration.

There are many putting out the talking points now; the warnings are reaching a crescendo.

Jay L. Zagorsky, Economist and Research Scientist at Ohio State University, is predicting a recession for 2017, in spite of glowing outlooks, that could dominate headlines:

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What Is This "Neutral" Interest Rate Touted By The Fed?

There’s a lot of talk these days about the so-called “neutral” (or “natural” or “terminal”) interest rate projections of the Federal Reserve. In fact, their projection of this number is a key argument in their ongoing decision to keep rates at historically very-low levels for what has been an extended period of time. (Specifically, Federal Reserve officials have argued that the neutral interest rate has sharply declined in recent years, meaning that apparently ultra-low interest rates do not really signify easy monetary policy.)

What is this neutral rate? The neutral rate, it is argued, is simply the federal funds rate at which the economy is in equilibrium or balance. If the federal funds rate were at this mysterious neutral rate level, monetary policy would be neither loose nor tight, and the economy neither too hot nor too cold, but rather just chugging along at its long-run optimal potential. The underlying theory is that loose monetary policy — where the Fed’s policy rate is set below the neutral rate — can temporarily stimulate the economy, but only by causing price inflation that exceeds the Fed’s desired target (which, by the way, eventually causes overheating and a crash). On the other hand, if the Fed is too tight and sets the policy rate above the neutral rate, then unemployment creeps higher than desired and price inflation comes in below target.

In short, the neutral interest rate is one where the central bank is not itself distorting the economy. Monetary policy would really be nonexistent, as the Fed would not be altering the interest rate resulting from a free market discovery process between borrowers and savers. (This of course raises the question, why do central planners need to fabricate something that would naturally exist in their absence?) This is near where Yellen actually thinks we are these days, hence she sees little urgency in raising rates and thus lessening what, on the face of it, looks like a very loose current monetary policy.

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Bitcoin: The Best Performing Currency For A Second Year In A Row

Bitcoin is no stranger to extreme fluctuations. As Visual Capitalist's Jeff Desjardins notes, for each of the last four years, the cryptocurrency has either been the best or the worst performing currency – with nothing to be found in between.

Luckily, for those that follow the digital currency closely, those fluctuations were mostly pointed in an upwards direction for 2016. The currency finished the year at $968.23, which is more than double its value from the beginning of the year.

Bitcoin is now the best performing currency for two years in a row (2015, 2016):

And in the opening days of 2017, the cryptocurrency has already gained a head start on other global currencies. It passed the vital $1,000 mark in the first days of New Year trading, and could be poised to three-peat for the title of best-performing currency of the year.

To do it again, bitcoin prices would likely need to rise at least 30% on the year, closing in on the $1,300 mark.

Will it be another extreme for 2017 – or will the bitcoin price finally settle for middle ground among other global currencies?

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Chinese Interbank Lending Freezes; Government Bond Trading Halted After Massive PBOC Liquidity Drain

Earlier today, we were surprised to note that having aggressively drained liquidity from the interbank funding market, on the first trading day of 2017, the PBOC not only fixed the Yuan well lower (sy 6.9498 vs 6.9370 on the last day of 2016, even if this was well stronger than the Offshore Yuan), but the People's Bank of China withdrew even more liquidity. It did that by injecting CNY20 billion via 7-day reverse repos and another CNY20 billion via 14-day reverse repos in its open-market operations Tuesday, according to traders, while continuing to skip 28-day reverse repos.

The move resulted in a net drain of CNY155 billion for the day, and followed a substantial drain of a net CNY245 billion last week - the first removal of liquidity in three weeks. We promptly followed up with a warning:

Just over an hour later, it appears our warning was warranted, because according to the latest daily fixing of the Treasury Market Association, as a result of the PBOC's massive liquidity drain which soaked up a nearly a third of a trillion Yuan in the past two weeks, the interbank market is freezing again as follows:

1-month yuan interbank rate in Hong Kong rises 1.16ppts to 13.01%,
3-month CNH Hibor +89bps to 10.02%;

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How Hedge Funds Closed Out 2016, And Why Hopes For A 2017 Rebound May Disappoint

2016 was a year most hedge funds would be happy to forget. And while the same goes for 2015, 2014, 2013, 2012, 2011, and 2010, in fact virtually every year since the financial crisis in which the vast majority of the two and twenty crowd have failed to generate alpha, in 2016 - a year many said would mark a renaissance for active managers - the "flash hedge fund return" according to a report by BofA's Paul Ciana from Friday was a paltry 3.34%, which as BofA conveniently calculated meant they "underperforming the S&P 500 index by 6.2%" at which point your average underperforming hedge fund manager complains that they shouldn't be benchmarked against the S&P, even as the redemption notices flood in and the AUM gets ever smaller.

Not everyone did poorly: credit related strategies lead HF performance, including Distressed Credit, Convertible Arbitrage and Event Driven strategies. On the other end, predictably, dedicated Short Bias was down 5.10%

In recent weeks there has been a fresh burst of hope that 2017 will be better for the HF community as a result of the recent collapse in cross-asset correlation; it is hoped that the resulting returns dispersion will make it easier for hedge funds to stand out in a world in which due to central bank intervention, correlations had been abnormally high following the financial crisis.

But is that an accurate description of events?  To a great extent, the answer is no.

While correlation between diversified HF performance and S&P 500 price return declined from the May 2016 high (Chart 1), the 1-year correlation (83.7%) was slightly above the 3-year correlation (83.0%) as of the end of November. Overall, correlation remained far higher than it has been historically. Which as BofA redundantly explains, means that "when S&P 500 declines, performance of HFs with higher positive correlation is expected to suffer."

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