Since late 2007, the Federal Reserve has embarked on grand-scale collusion with other G-7 central banks to manufacture a massive amount of money. The scope and degree of this collusion are historically unprecedented and by admission of the perpetrators, unconventional in approach, and - depending on the speech - ineffective.
Central bank efforts to provide liquidity to the private banking system have been delivered amidst a plethora of grandiose phrases like “unlimited” and “by all means necessary.” Central bankers have played a game with no defined goalposts, no clock rundown, no max scores, and no true end in sight.
At the Fed’s instigation, central bankers built policy on the fly. Their science experiment morphed into something even Dr. Frankenstein couldn’t have imagined. Confidence in the Fed and the U.S. dollar (as well as in other major central banks globally) has dropped considerably, even as this exercise remains in motion, and even though central bankers have tactiltly admitted that their money creation scheme was largely a bust, though not in any one official statement.
Cracks in the Facade
On July 31, 2017, Stanley Fischer, vice chairman of the Fed, delivered a speech in Rio de Janeiro, Brazil. There, he addressed the phenomenon of low interest rates worldwide.
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August 31, 2017
August 30, 2017
Emerging Market Debt: Dumb, Dumber, And Dumbest
One of the classic signs that the credit cycle is nearing the end is that borrowers that shouldn’t be getting financed not only get funded, but get it at terms that seem crazy. I’ve recently written about the silly things happening in global high yield debt, Chinese debt and the global attitude to sovereign debt. Continuing this theme are recent examples of emerging market sovereign debt; Greece, Argentina and Iraq. Each of these shouldn’t have been funded, but the desperation for yield saw all three get funded on terms that seem crazy. Here’s the detail on each.
Conclusion
In considering emerging market debt, investors have to be careful to consider each country on its own merits. In the examples of Argentina, Greece and Iraq, bond buyers have suspended sceptical analysis. They’ve banked the equity case, hoping for a substantial change from historical precedents, even though they won’t get a share of the upside if the rosy scenario occurs.
The examples aren’t unusual; as shown in the graph below from Bloomberg Belarus, Mongolia and Ukraine are all CCC+ rated but have bonds yielding less than 6%.
These examples point to the greater fool theory playing out in many credit markets. We’ve now reached the point in the credit cycle where further gains seem dependent upon more dumb money arriving and pushing spreads even tighter.
How much longer can this farce continued?
Read the entire article
Conclusion
In considering emerging market debt, investors have to be careful to consider each country on its own merits. In the examples of Argentina, Greece and Iraq, bond buyers have suspended sceptical analysis. They’ve banked the equity case, hoping for a substantial change from historical precedents, even though they won’t get a share of the upside if the rosy scenario occurs.
The examples aren’t unusual; as shown in the graph below from Bloomberg Belarus, Mongolia and Ukraine are all CCC+ rated but have bonds yielding less than 6%.
These examples point to the greater fool theory playing out in many credit markets. We’ve now reached the point in the credit cycle where further gains seem dependent upon more dumb money arriving and pushing spreads even tighter.
How much longer can this farce continued?
Read the entire article
August 29, 2017
What Does the Surprise Selection of Expedia’s Dara Khosrowshahi as CEO Mean for Uber?
You could have gotten whiplash from watching Uber’s CEO selection ping pong today. First former supposed lead horse, ex GE CEO Jeff Immelt, withdrew, apparently because he’d gotten wind he wasn’t going to get the nod. Then the press briefly reported that HP’s Meg Whitman was who the board wanted….despite her having said firmly she didn’t want the job, twice. It turns out she’d come on Saturday, apparently at Benchmark’s behest, and given the board a little speech on what she thought Uber ought to do.
Not long after that, the press started reporting that the board had settled on a name that had been kept under wraps, that of Dara Khosrowshahi, currently the CEO of Expedia, who was also the highest paid CEO in 2015, pulling down a cool $94.5 million in 2015. While there has been some grumbling about Khosrowshahi’s rich compensation, he’s never made any of the “overpaid CEO” lists. That’s because his spectacular 2015 payday was almost entirely the result of a grant of $90.8 million in stock options…for signing a long term employment agreement stipulating that he remain at the helm until September 2020. In 2016, his pay was a more staid $2.45 million.
But Khosrowshahi is going to be Uber’s $100+ million man, since that’s going to be the order of magnitude cost of buying him out from his Expedia agreement plus whatever special inducements needed for him to join Uber (almost certainly vastly richer in expected comp if you believe that Uber will be able to do an IPO at a suitably lofty valuation, an idea we regard with considerable skepticism).
The press has been positive about the choice, if nothing else because Expedia has been a drama-free tech company and the financial media likes the idea of a tech CEO for Uber (arguably a necessity to keep up the fantasy that a local transportation company deserves a unicorn premium). Expedia managed to be one of two winners in what was originally a four-company fight for dominance in the travel booking business. And it also represents at least a momentary cessation of hostilities at the Uber board, since the vote on Khosrowshahi was unanimous. Recode gives some detail about his background, focusing on factors that may help him succeed, without acknowledging the magnitude of the task.
Read the entire article
Not long after that, the press started reporting that the board had settled on a name that had been kept under wraps, that of Dara Khosrowshahi, currently the CEO of Expedia, who was also the highest paid CEO in 2015, pulling down a cool $94.5 million in 2015. While there has been some grumbling about Khosrowshahi’s rich compensation, he’s never made any of the “overpaid CEO” lists. That’s because his spectacular 2015 payday was almost entirely the result of a grant of $90.8 million in stock options…for signing a long term employment agreement stipulating that he remain at the helm until September 2020. In 2016, his pay was a more staid $2.45 million.
But Khosrowshahi is going to be Uber’s $100+ million man, since that’s going to be the order of magnitude cost of buying him out from his Expedia agreement plus whatever special inducements needed for him to join Uber (almost certainly vastly richer in expected comp if you believe that Uber will be able to do an IPO at a suitably lofty valuation, an idea we regard with considerable skepticism).
The press has been positive about the choice, if nothing else because Expedia has been a drama-free tech company and the financial media likes the idea of a tech CEO for Uber (arguably a necessity to keep up the fantasy that a local transportation company deserves a unicorn premium). Expedia managed to be one of two winners in what was originally a four-company fight for dominance in the travel booking business. And it also represents at least a momentary cessation of hostilities at the Uber board, since the vote on Khosrowshahi was unanimous. Recode gives some detail about his background, focusing on factors that may help him succeed, without acknowledging the magnitude of the task.
Read the entire article
August 28, 2017
On The Coming Collapse Of China's Ponzi Scheme Economy
As long as it keeps growing everything is fine. When it stops growing it collapses.
In this case you justify production with demand based purely on more production. As long as you keep pushing production up everything looks fine. At its peak in 2014 China turned out 30 times more cement than the United States, and the latest production figures are only a smidgen less than 2014’s.
Command systems may be good at deciding where to direct economic effort in wartime but they are hopeless in peacetime at deciding when to stop and do something else.
They just keep going down the same old track and then what you get is economic cancer, uncontrollable growth.
You don’t see it right away. Any Ponzi scheme looks just fine as long as more people can be found to put their money in. But the end is inevitable and the longer it is delayed the more resounding the collapse.
It has so long been delayed in the mainland that, when the end finally comes, I believe more than half of the loans and advances of the financial system will prove irrecoverable, which would be very resounding indeed.
Read the entire article
In this case you justify production with demand based purely on more production. As long as you keep pushing production up everything looks fine. At its peak in 2014 China turned out 30 times more cement than the United States, and the latest production figures are only a smidgen less than 2014’s.
Command systems may be good at deciding where to direct economic effort in wartime but they are hopeless in peacetime at deciding when to stop and do something else.
They just keep going down the same old track and then what you get is economic cancer, uncontrollable growth.
You don’t see it right away. Any Ponzi scheme looks just fine as long as more people can be found to put their money in. But the end is inevitable and the longer it is delayed the more resounding the collapse.
It has so long been delayed in the mainland that, when the end finally comes, I believe more than half of the loans and advances of the financial system will prove irrecoverable, which would be very resounding indeed.
Read the entire article
August 27, 2017
Ford To Abandon "Traditional Credit Scores" For Underwriting Decisions As Sales Stall
So, what do you do when your sales are stalling because you've already financed new cars for every man, woman and child with a credit score north of 500? Well, you simply abandon credit scores in the underwriting process and instead explicitly mandate that your loan officers approve every potential car buyer that walks through the door with a pulse.
Maybe we're exaggerating a little, but according to a new report from the Wall Street Journal, Ford Credit "has decided to change its approval process to look beyond credit scores in an effort to pump up sales." Which is a genius strategy if we understand it correctly.
The company says it is looking at ways to increase loan and lease approvals for applicants with limited credit histories. These consumers are often denied credit because they lack a history of managing debt and as a result have low credit scores. Ford’s credit division plans to review new data to try to determine whether these customers, as well as those with more robust borrowing histories, are likely to repay their loans.
The move by Ford Motor's financing unit is expected to unfold in coming years, even as concerns mount about rising auto-loan losses in the industry. Ford Motor Credit is expected to announce the plans as soon as Friday.
Read the entire article
Maybe we're exaggerating a little, but according to a new report from the Wall Street Journal, Ford Credit "has decided to change its approval process to look beyond credit scores in an effort to pump up sales." Which is a genius strategy if we understand it correctly.
The company says it is looking at ways to increase loan and lease approvals for applicants with limited credit histories. These consumers are often denied credit because they lack a history of managing debt and as a result have low credit scores. Ford’s credit division plans to review new data to try to determine whether these customers, as well as those with more robust borrowing histories, are likely to repay their loans.
The move by Ford Motor's financing unit is expected to unfold in coming years, even as concerns mount about rising auto-loan losses in the industry. Ford Motor Credit is expected to announce the plans as soon as Friday.
Read the entire article
August 25, 2017
What Financial Conditions Tell Us (Two Charts & A Prediction)
It seems every bank, including central banks, publishes a financial conditions index these days. And because financial conditions typically lead the economy, it makes sense to track them. In fact, they might contain even more information than they get credit for. They might offer the elusive “crystal ball” that foretells our economic fortunes.
Sound far-fetched? Spend a few minutes with this week’s pictures and talk, and you’ll be well equipped to judge for yourself. We start with seven of our favorite indicators, shown in the table below:
With one exception, all of the indicators measure a separate piece of the economy’s financial side. We add business earnings (the exception) because they interact closely with financial conditions. When earnings are healthy, stock prices and business credit conditions are usually healthy, too, whereas weak earnings usually weigh on stocks and credit.
Instead of melding the indicators into a single index, though, we think it’s more revealing to treat them individually. The chart below shows each indicator in the quarter before and the quarter of the last nine business cycle (BC) peaks, although with less data for lending standards, which the Fed began surveying for the first time in mid-1990.
Read the entire article
Sound far-fetched? Spend a few minutes with this week’s pictures and talk, and you’ll be well equipped to judge for yourself. We start with seven of our favorite indicators, shown in the table below:
With one exception, all of the indicators measure a separate piece of the economy’s financial side. We add business earnings (the exception) because they interact closely with financial conditions. When earnings are healthy, stock prices and business credit conditions are usually healthy, too, whereas weak earnings usually weigh on stocks and credit.
Instead of melding the indicators into a single index, though, we think it’s more revealing to treat them individually. The chart below shows each indicator in the quarter before and the quarter of the last nine business cycle (BC) peaks, although with less data for lending standards, which the Fed began surveying for the first time in mid-1990.
Read the entire article
August 24, 2017
Japanese Bond Market Volume Collapses To Record Low
The Japanese bond market remains paralyzed with trading volumes hitting record lows as private bondholders no longer dare to even breathe without instructions from the central bank.
Gross purchases of JGBs by investors dropped 22% to 12.6t yen ($115.1b) in July, the least since May 2016, according to the latest data from Japan Securities Dealers Association Monday. On a rolling 12-month average basis, the volume was at an all-time low.
The Bank of Japan’s unprecedented asset purchase program has released a creeping paralysis that is freezing government bond trading, constricting the yen to the tightest range on record and braking stock-market activity.
“All the markets have been quiet,” said Daisuke Uno, the Tokyo-based chief strategist at Sumitomo Mitsui Banking Corp. “We’ve already seen the BOJ dominance of JGBs since last year, but recently participants in currency and stock markets are also decreasing as those assets have traded in narrow ranges.”
“The flows on both the buying side and selling side continue to fall,” said Takehito Yoshino, the chief fund manager at Mizuho Trust & Banking Co., a unit of Japan’s third-biggest financial group by market value. “Falling volatility is a very serious problem for traders and dealers who are unable to get capital gains.”
Read the entire article
Gross purchases of JGBs by investors dropped 22% to 12.6t yen ($115.1b) in July, the least since May 2016, according to the latest data from Japan Securities Dealers Association Monday. On a rolling 12-month average basis, the volume was at an all-time low.
The Bank of Japan’s unprecedented asset purchase program has released a creeping paralysis that is freezing government bond trading, constricting the yen to the tightest range on record and braking stock-market activity.
“All the markets have been quiet,” said Daisuke Uno, the Tokyo-based chief strategist at Sumitomo Mitsui Banking Corp. “We’ve already seen the BOJ dominance of JGBs since last year, but recently participants in currency and stock markets are also decreasing as those assets have traded in narrow ranges.”
“The flows on both the buying side and selling side continue to fall,” said Takehito Yoshino, the chief fund manager at Mizuho Trust & Banking Co., a unit of Japan’s third-biggest financial group by market value. “Falling volatility is a very serious problem for traders and dealers who are unable to get capital gains.”
Read the entire article
August 23, 2017
Jackson Hole Preview: Market Reactions, And Why UBS Says "Don't Skip Lunch"
Historically the annual Jackson Hole symposium has been a major market-moving event as it has traditionally been the venue where central banks make critical announcements such as Bernanke's preview and hints of QE2 and QE3 in 2012, as well as Draghi's suggestion of the ECB's QE in 2014. As shown in the chart below, market reactions following these events have been material.
This year, however, while there was a sharp build-up in expectations after several media trial balloons suggested that Draghi would unveil the ECB's taper, the fact that the market sent the EUR just shy of 1.20 in frontrunning of this announcement, prompted the ECB head to abort the entire affair, "leaking" that no material announcement would be made this week in Wyoming after all. Which is why, in previewing potential market moves, Barclays says that "the risk for the EUR around the event is biased to the downside, and that EUR bulls might be disappointed by a lack of meaningful hints on ECB monetary policy normalisation."
ING is quick to take the fun out of this week's annual meeting: "this year's major speakers, Fed Chair Janet Yellen and the ECB President Mario Draghi, are likely to keep their cards close to their chest. Both speeches are likely to be fairly "high level" and lack any major hints about future policy."
As Deutsche Bank's Jim Reid echoes, "there might be a few less nerves about the next few days in markets than many felt a few weeks ago. Back then, Thursday's commencement of the annual Jackson Hole Symposium seemed to be a natural place for Mr Draghi to signal that exit from QE was soon to be accelerated. However a combination of still soft global inflation data and the Euro's recent ascent has made it unlikely that the event will be a watershed moment. Expect him to be upbeat on the economy but the hawkish/dovishness indicator might be swayed one way or the other on how much attention the Euro gets in his remarks."
Read the entire article
This year, however, while there was a sharp build-up in expectations after several media trial balloons suggested that Draghi would unveil the ECB's taper, the fact that the market sent the EUR just shy of 1.20 in frontrunning of this announcement, prompted the ECB head to abort the entire affair, "leaking" that no material announcement would be made this week in Wyoming after all. Which is why, in previewing potential market moves, Barclays says that "the risk for the EUR around the event is biased to the downside, and that EUR bulls might be disappointed by a lack of meaningful hints on ECB monetary policy normalisation."
ING is quick to take the fun out of this week's annual meeting: "this year's major speakers, Fed Chair Janet Yellen and the ECB President Mario Draghi, are likely to keep their cards close to their chest. Both speeches are likely to be fairly "high level" and lack any major hints about future policy."
As Deutsche Bank's Jim Reid echoes, "there might be a few less nerves about the next few days in markets than many felt a few weeks ago. Back then, Thursday's commencement of the annual Jackson Hole Symposium seemed to be a natural place for Mr Draghi to signal that exit from QE was soon to be accelerated. However a combination of still soft global inflation data and the Euro's recent ascent has made it unlikely that the event will be a watershed moment. Expect him to be upbeat on the economy but the hawkish/dovishness indicator might be swayed one way or the other on how much attention the Euro gets in his remarks."
Read the entire article
August 22, 2017
An Unexpected Problem Emerges: Chinese Banks Exhaust 80% Of Loan Quotas In First Half Of 2017
When we discussed the latest monthly Chinese credit data reported by the PBOC, we pointed out something which to most pundits was broadly seen as success by the Politburo in its deleveraging efforts: for the first time in 9 months, debt within China's shadow banking system - defined as the sum of Trust Loans, Entrusted Loans and Undiscounted Bank Loans - contracted. These three key components combined, resulted in a 64BN yuan drain in credit from China's economy, the first negative print since October 2016, and rightfully seen by analysts as evidence that Beijing’s campaign to contain shadow banking and quash risks to the financial system, is starting to bear fruit.
Offsetting this unexpected decline in shadow bank credit (if not Total Social Financing) was a greater than expected increase in traditional yuan bank loans. As we observed last Tuesday, both corporate loans and household loans increased greater than last year; new corporate loans advanced to CNY354bn from a decline of CNY3bn a year ago, with long-term corporate loans contributing CNY433bn (a year ago: CNY151bn) and short-term loans adding CNY63bn (a year ago: CNY-201bn). New household loans registered CNY562bn, compared with CNY458bn a year ago.
So far, so good: after all a transition from the largely unregulated, and speculative shadow bank issuance to conventional bank issuance is just what the PBOC, China's regulators and most importantly, Xi Jinping want ahead of this year's all important Congress. Furthermore, the fact that China's economy continues to grow at a healthy pace, even if it means creating the occasional industrial metals bubble...
.... thanks to healthy bank loan creation, is good for both China and the rest of the world, and suggests that despite the sharp drop in China's credit impulse, there is more where it came from.
Read the entire article
Offsetting this unexpected decline in shadow bank credit (if not Total Social Financing) was a greater than expected increase in traditional yuan bank loans. As we observed last Tuesday, both corporate loans and household loans increased greater than last year; new corporate loans advanced to CNY354bn from a decline of CNY3bn a year ago, with long-term corporate loans contributing CNY433bn (a year ago: CNY151bn) and short-term loans adding CNY63bn (a year ago: CNY-201bn). New household loans registered CNY562bn, compared with CNY458bn a year ago.
So far, so good: after all a transition from the largely unregulated, and speculative shadow bank issuance to conventional bank issuance is just what the PBOC, China's regulators and most importantly, Xi Jinping want ahead of this year's all important Congress. Furthermore, the fact that China's economy continues to grow at a healthy pace, even if it means creating the occasional industrial metals bubble...
.... thanks to healthy bank loan creation, is good for both China and the rest of the world, and suggests that despite the sharp drop in China's credit impulse, there is more where it came from.
Read the entire article
August 21, 2017
Builders Complain Of Record Labor Shortages: Up To 75% Of Employers Can't Find Workers
Late last month we reported the remarkable anecdote of an Ohio factory owner who has numerous blue-collar jobs available at her company, but has one major problem: she is struggling to fill positions because so many candidates fail drug tests. Regina Mitchell, co-owner of Warren Fabricating & Machining in Hubbard, Ohio, told The New York Times this week that four out of 10 applicants otherwise qualified to be welders, machinists and crane operators will fail a routine drug test. While not quite as bad as the adverse hit rate hinted at by the Beige Book, this is a stunning number, and one which indicates of major structural changes to the US labor force where addiction and drugs are keeping millions out of gainful (or any, for that matter) employment.
Mitchell said that her requirements for prospective workers were simple: “I need employees who are engaged in their work while here, of sound mind and doing the best possible job that they can, keeping their fellow co-workers safe at all times." And yet, almost nobody could satisfy these very simple requirements.
Whether it was due to pervasive drug abuse, or for some other reason, but fast forward two weeks when in response to a special question in the July NAHB/Wells Fargo Housing Market Index (HMI) survey, US homebuilders said that labor and subcontractor shortages have become even more widespread in July of 2017 than they were in June of 2016.
This is a concern as the inventory of for-sale homes recently struck a 20-year low. And while economists and the public cry for more inventory, many builders are pressed to meet demand. A labor and subcontractor shortage in the building industry has worsened over the past year, according to the National Association of Home Builders/Wells Fargo Housing Market Index survey of single-family builders.
Read the entire article
Mitchell said that her requirements for prospective workers were simple: “I need employees who are engaged in their work while here, of sound mind and doing the best possible job that they can, keeping their fellow co-workers safe at all times." And yet, almost nobody could satisfy these very simple requirements.
Whether it was due to pervasive drug abuse, or for some other reason, but fast forward two weeks when in response to a special question in the July NAHB/Wells Fargo Housing Market Index (HMI) survey, US homebuilders said that labor and subcontractor shortages have become even more widespread in July of 2017 than they were in June of 2016.
This is a concern as the inventory of for-sale homes recently struck a 20-year low. And while economists and the public cry for more inventory, many builders are pressed to meet demand. A labor and subcontractor shortage in the building industry has worsened over the past year, according to the National Association of Home Builders/Wells Fargo Housing Market Index survey of single-family builders.
Read the entire article
August 15, 2017
Used Car Prices Crash To Lowest Level Since 2009 Amid Glut Of Off-Lease Supply
The U.S. auto market is at an interesting crossroads with used car prices crashing to new lows every month while new car prices continue to defy gravity courtesy of a somewhat 'frothy', if not suicidal, lending market that has seemingly decided that anyone with a pulse is financially qualified for a $0 down, 0% interest, 80 month loan on a brand new $40,000 luxury vehicle of their choice.
As the Labor Department’s consumer-price index data showed last Friday, used car prices once again dropped in July to the lowest level since the 'great recession' of 2009. In fact, since the end of 2015, the cost of used vehicles has dropped in all but three months and are now roughly 10% off their 2013 high.
Unfortunately, the outlook for the used market is only expected to get worse with the volume of lease returns expected to soar to nearly 4mm units by 2018.
Meanwhile, despite modest weakness over the past two months, new car prices have held up fairly well...
...even as the domestic auto OEM's continue to flood dealer lots with new inventory that isn't moving.
Of course, logic would dictate that some level of substitution would have to take over at some point as the financial benefits of buying a used car eventually outweigh the social indignity of cruising around town in a 3-year old clunker.
That said, those innovative "Low Credit Score" discounts do make new car buying very attractive...
Read the entire article
As the Labor Department’s consumer-price index data showed last Friday, used car prices once again dropped in July to the lowest level since the 'great recession' of 2009. In fact, since the end of 2015, the cost of used vehicles has dropped in all but three months and are now roughly 10% off their 2013 high.
Unfortunately, the outlook for the used market is only expected to get worse with the volume of lease returns expected to soar to nearly 4mm units by 2018.
Meanwhile, despite modest weakness over the past two months, new car prices have held up fairly well...
...even as the domestic auto OEM's continue to flood dealer lots with new inventory that isn't moving.
Of course, logic would dictate that some level of substitution would have to take over at some point as the financial benefits of buying a used car eventually outweigh the social indignity of cruising around town in a 3-year old clunker.
That said, those innovative "Low Credit Score" discounts do make new car buying very attractive...
Read the entire article
August 14, 2017
US Launches Quiet Crackdown On Cryptocurrencies
While all eyes were distracted with the Trump-demeaning headlines of the foreign sanctions bill, few spotted the hidden mandate that foreign governments monitor cryptocurrency circulations as a measure to combat "illicit finance trends" in an effort to "combat terrorism."
As Coinivore reports, the bill requires the governments to develop a “national security strategy” to combat the “financing of terrorism and related forms of illicit finance.”
Governments will be further required to monitor “data regarding trends in illicit finance, including evolving forms of value transfer such as so-called cryptocurrencies.”
According to the bill, an initial draft strategy is expected to come before Congress within the next year, and will see input from U.S. financial regulators, the Department of Homeland Security, and the State Department.
Read the entire article
As Coinivore reports, the bill requires the governments to develop a “national security strategy” to combat the “financing of terrorism and related forms of illicit finance.”
Governments will be further required to monitor “data regarding trends in illicit finance, including evolving forms of value transfer such as so-called cryptocurrencies.”
According to the bill, an initial draft strategy is expected to come before Congress within the next year, and will see input from U.S. financial regulators, the Department of Homeland Security, and the State Department.
Read the entire article
August 11, 2017
"We Need More Suckers At The Table" - Quant Funds Stumble As Dumb-Money Disappears
The omniptence of artificial intelligence is unquestioned. The 'future' is automation, robotization, and algorithmic domination is the mantra of the new normal prognosticators - and anyone who challenges this world view is a luddite or 'denier'.
There's just one problem - those quantitative, AI-based, computerized algos, that are supposed to be making people obsolete in the financial markets, are in trouble. As Bloomberg reports, program-driven hedge funds are stumbling, a promising startup has closed, and once-reliable styles are showing weakening returns.
This isn’t just normal volatility confined to a single month, according to noted quant fund manager Neal Berger, the founder and chief investment officer of Eagle’s View Asset Management, a $500 million fund-of-funds that invests with 30 managers, half of them quants. Returns have been decaying for a year, suggesting the rest of the market has figured out what the robots are doing and started taking evasive action, Berger said.
Bloomberg notes that June was the worst month on record for Berger’s fund, as usually robust strategies lost their footing and the firm fell 2.4 percent. The worst pain has been among quants in the market-neutral equity space, which take long and short positions to isolate bets on price patterns and relationships.
Read the entire article
There's just one problem - those quantitative, AI-based, computerized algos, that are supposed to be making people obsolete in the financial markets, are in trouble. As Bloomberg reports, program-driven hedge funds are stumbling, a promising startup has closed, and once-reliable styles are showing weakening returns.
This isn’t just normal volatility confined to a single month, according to noted quant fund manager Neal Berger, the founder and chief investment officer of Eagle’s View Asset Management, a $500 million fund-of-funds that invests with 30 managers, half of them quants. Returns have been decaying for a year, suggesting the rest of the market has figured out what the robots are doing and started taking evasive action, Berger said.
Bloomberg notes that June was the worst month on record for Berger’s fund, as usually robust strategies lost their footing and the firm fell 2.4 percent. The worst pain has been among quants in the market-neutral equity space, which take long and short positions to isolate bets on price patterns and relationships.
Read the entire article
August 10, 2017
From Coke To Coors: Philly Soda Tax Leading To Alcoholism As Beer Now Cheaper Than Soda
Perhaps The Burning Platform summarized the idiocy of Philadelphia's soda tax better than anyone to date:
In a shocking development, the Philadelphia soda tax is a big fucking fail. Who could have predicted that. Democrat government drones and their brain dead minions are so desperate for money to fund their gold plated union pensions and bloated salaries, they lie, cheat and tax the poor into oblivion. Result: lost jobs, further impoverished poor people, no help for children, more closed businesses, and a further hole in the city budget. But at least the city union workers can keep their gold plated pensions – for now. Maff is hard for liberals, but it always wins in the end.
But, as The Washington Free Beacon points out, the unfortunate side effects of Philly's disastrous soda tax may not be limited just to the economic consequences enumerated above. As a study by the Tax Foundation recently found, there are social consequences as well with people now choosing to substitute beer for soda in light of the fact that, well, beer is just cheaper.
Philadelphia's tax on sugary drinks has made soda more expensive than beer in the city.
The Tax Foundation released a new study on the excise tax last week, finding that the 1.5-cent per ounce tax has fallen short of revenue projections, cost jobs, and has forced some Philadelphians to drive outside the city to buy groceries.
The study finds that the tax is 24 times higher than the Pennsylvania tax rate on beer.
"Purchases of beer are also now less expensive than nonalcoholic beverages subject to the tax in the city," according to the study, written by Courtney Shupert and Scott Drenkard. "Empirical evidence from a 2012 journal article suggests that soda taxes can push consumers to alcohol, meaning it is likely the case that consumers are switching to alcoholic beverages as a result of the tax. The paper, aptly titled From Coke to Coors, further shows that switching from soda to beer increases total caloric intake, even as soda taxes are generally aimed at caloric reduction."
Read the entire article
In a shocking development, the Philadelphia soda tax is a big fucking fail. Who could have predicted that. Democrat government drones and their brain dead minions are so desperate for money to fund their gold plated union pensions and bloated salaries, they lie, cheat and tax the poor into oblivion. Result: lost jobs, further impoverished poor people, no help for children, more closed businesses, and a further hole in the city budget. But at least the city union workers can keep their gold plated pensions – for now. Maff is hard for liberals, but it always wins in the end.
But, as The Washington Free Beacon points out, the unfortunate side effects of Philly's disastrous soda tax may not be limited just to the economic consequences enumerated above. As a study by the Tax Foundation recently found, there are social consequences as well with people now choosing to substitute beer for soda in light of the fact that, well, beer is just cheaper.
Philadelphia's tax on sugary drinks has made soda more expensive than beer in the city.
The Tax Foundation released a new study on the excise tax last week, finding that the 1.5-cent per ounce tax has fallen short of revenue projections, cost jobs, and has forced some Philadelphians to drive outside the city to buy groceries.
The study finds that the tax is 24 times higher than the Pennsylvania tax rate on beer.
"Purchases of beer are also now less expensive than nonalcoholic beverages subject to the tax in the city," according to the study, written by Courtney Shupert and Scott Drenkard. "Empirical evidence from a 2012 journal article suggests that soda taxes can push consumers to alcohol, meaning it is likely the case that consumers are switching to alcoholic beverages as a result of the tax. The paper, aptly titled From Coke to Coors, further shows that switching from soda to beer increases total caloric intake, even as soda taxes are generally aimed at caloric reduction."
Read the entire article
August 9, 2017
The Volcker Rule & The London Whale: "Dear Big Media, Get A Clue"
News reports that prosecutors have dropped their case against Bruno Iksil, the former JPMorgan (NYSE:JPM) trader many know as the “London Whale,” comes as no surprise to readers of The IRA. Iksil, who resurfaced earlier this year, has been living in relative seclusion in France for the past few years.
In previous comments posted on Zero Hedge, we dispensed with the notion that the investment activities of Iksil and the office of the JPM Chief Investment Officer were either illegal or concealed from the bank’s senior management. The fact is that Iksil and his colleagues at JPM were doing their jobs, namely generating investment gains for the bank.
The outsized bets made by the “whale” in credit derivatives contracts resulted in a loss in 2012, but the operation generated significant profits for JPM in earlier years. As veteran risk manager Nom de Plumber told us in Zero Hedge in 2012:
“This JPM loss, whether $2BLN or even $5BLN, is modest in both absolute and relative terms, versus its overall profitability and capital base, and especially against the far greater losses at other institutions. In practical current terms, the hit resembles a rounding error, not a stomach punch. As either taxpayers or long-term JPM investors, we should be more grateful than sorry about the JPM CIO Ina Drew. If only other institutions could also do so ‘poorly’………”
Read the entire article
In previous comments posted on Zero Hedge, we dispensed with the notion that the investment activities of Iksil and the office of the JPM Chief Investment Officer were either illegal or concealed from the bank’s senior management. The fact is that Iksil and his colleagues at JPM were doing their jobs, namely generating investment gains for the bank.
The outsized bets made by the “whale” in credit derivatives contracts resulted in a loss in 2012, but the operation generated significant profits for JPM in earlier years. As veteran risk manager Nom de Plumber told us in Zero Hedge in 2012:
“This JPM loss, whether $2BLN or even $5BLN, is modest in both absolute and relative terms, versus its overall profitability and capital base, and especially against the far greater losses at other institutions. In practical current terms, the hit resembles a rounding error, not a stomach punch. As either taxpayers or long-term JPM investors, we should be more grateful than sorry about the JPM CIO Ina Drew. If only other institutions could also do so ‘poorly’………”
Read the entire article
August 8, 2017
Fannie, Freddie Would Need $100BN Bailout In New Financial Crisis
While the latest Fed stress test found that all US commercial banks have enough capital to survive even an "adverse" stress scenario, a severe recession in which the VIX hypothetically soars to 70, the two US mortgage giants would not be quite so lucky: according to the results from the annual stress test of Fannie Mae and Freddie Mac released today by their regulator, the Federal Housing Finance Agency, the "GSEs" which were nationalized a decade ago in the early days of the crisis, would need as much as $100 billion in bailout funding in the form of a potential incremental Treasury draw, in the event of a new economic crisis.
Under the "severely adverse" scenario, i.e., a "severe global recession" U.S. real GDP begins to decline immediately and reaches a trough in the second quarter of 2018 after a decline of 6.50% from the pre-recession peak. The rate of unemployment increases from 4.7% to a peak of 10.0% in the third quarter of 2018. CPI declines to about 1.25% by the second quarter of 2017 (so not that much further from here) and then rises to approximately 1.75% by the middle of 2018. Outright deflation is not even considered.
In addition, equity prices fall by approximately 50% from the start of the planning horizon through the end of 2017, and equity volatility soars, approaching levels last seen in 2008. Home prices decline by approximately 25% , and commercial real estate prices fall by 35% through the first quarter of 2019. The Severely Adverse scenario also includes a global market shock component that impacts the Enterprises’ retained portfolios. The global market shock involves large and immediate changes in asset prices, interest rates, and spreads caused by general market dislocation, uncertainty in the global economy, and significant market illiquidity. Option-adjusted spreads on mortgage-backed securities widen significantly in this scenario.
Most interesting is the following provision in the "severly adverse" scenario: the global market shock also includes a counterparty default component that assumes the failure of each Enterprise’s largest counterparty. Which, of course, is ironic because the Fed's own stress test of commercial banks did not anticipate any bank failing. The global market shock is treated as an instantaneous loss and reduction of capital in the first quarter of the planning horizon, and the scenario assumes no recovery of these losses by the Enterprises in future quarters.
Read the entire article
Under the "severely adverse" scenario, i.e., a "severe global recession" U.S. real GDP begins to decline immediately and reaches a trough in the second quarter of 2018 after a decline of 6.50% from the pre-recession peak. The rate of unemployment increases from 4.7% to a peak of 10.0% in the third quarter of 2018. CPI declines to about 1.25% by the second quarter of 2017 (so not that much further from here) and then rises to approximately 1.75% by the middle of 2018. Outright deflation is not even considered.
In addition, equity prices fall by approximately 50% from the start of the planning horizon through the end of 2017, and equity volatility soars, approaching levels last seen in 2008. Home prices decline by approximately 25% , and commercial real estate prices fall by 35% through the first quarter of 2019. The Severely Adverse scenario also includes a global market shock component that impacts the Enterprises’ retained portfolios. The global market shock involves large and immediate changes in asset prices, interest rates, and spreads caused by general market dislocation, uncertainty in the global economy, and significant market illiquidity. Option-adjusted spreads on mortgage-backed securities widen significantly in this scenario.
Most interesting is the following provision in the "severly adverse" scenario: the global market shock also includes a counterparty default component that assumes the failure of each Enterprise’s largest counterparty. Which, of course, is ironic because the Fed's own stress test of commercial banks did not anticipate any bank failing. The global market shock is treated as an instantaneous loss and reduction of capital in the first quarter of the planning horizon, and the scenario assumes no recovery of these losses by the Enterprises in future quarters.
Read the entire article
August 7, 2017
China's Minsky Moment Is Imminent
Crescat Capital's Q2 letter to investors shouold be retitled "everything you wanted to know about the looming bursting of the world's biggest credit bubble... but were afraid to ask..." Don't say we didn't warn you...
History has proven that credit bubbles always burst. China by far is the biggest credit bubble in the world today. We layout the proof herein. There are many indicators signaling that the bursting of the China credit bubble is imminent, which we also enumerate. The bursting of the China credit bubble poses tremendous risk of global contagion because it coincides with record valuations for equities, real estate, and risky credit around the world.
The Bank for International Settlements (BIS) has identified an important warning signal to identify credit bubbles that are poised to trigger a banking crisis across different countries: Unsustainable credit growth relative to gross domestic product (GDP) in the household and (non-financial) corporate sector. Three large (G-20) countries are flashing warning signals today for impending banking crises based on such imbalances: China, Canada, and Australia.
The three credit bubbles shown in the chart above are connected. Canada and Australia export raw materials to China and have been part of China’s excessive housing and infrastructure expansion over the last two decades. In turn, these countries have been significant recipients of capital inflows from Chinese real estate speculators that have contributed to Canadian and Australian housing bubbles. In all three countries, domestic credit-to-GDP expansion financed by banks has created asset bubbles in self-reinforcing but unsustainable fashion.
Post the 2008 global financial crisis, the world’s central bankers have kept interest rates low and delivered just the right amount of quantitative easing in aggregate to levitate global debt, equity, and real estate valuations to the highest they have ever been relative to income. Across all sectors of the world economy: household, corporate, government, and financial, the world’s aggregate debt relative to its collective GDP (gross world product) is the highest it has ever been. Central banks have pumped up the valuation of equities too. The S&P 500 has a cyclically adjusted P/E of almost 30 versus a median of 16, exceeded only in 1929 and the 2000 tech bubble.
Read the entire article
History has proven that credit bubbles always burst. China by far is the biggest credit bubble in the world today. We layout the proof herein. There are many indicators signaling that the bursting of the China credit bubble is imminent, which we also enumerate. The bursting of the China credit bubble poses tremendous risk of global contagion because it coincides with record valuations for equities, real estate, and risky credit around the world.
The Bank for International Settlements (BIS) has identified an important warning signal to identify credit bubbles that are poised to trigger a banking crisis across different countries: Unsustainable credit growth relative to gross domestic product (GDP) in the household and (non-financial) corporate sector. Three large (G-20) countries are flashing warning signals today for impending banking crises based on such imbalances: China, Canada, and Australia.
The three credit bubbles shown in the chart above are connected. Canada and Australia export raw materials to China and have been part of China’s excessive housing and infrastructure expansion over the last two decades. In turn, these countries have been significant recipients of capital inflows from Chinese real estate speculators that have contributed to Canadian and Australian housing bubbles. In all three countries, domestic credit-to-GDP expansion financed by banks has created asset bubbles in self-reinforcing but unsustainable fashion.
Post the 2008 global financial crisis, the world’s central bankers have kept interest rates low and delivered just the right amount of quantitative easing in aggregate to levitate global debt, equity, and real estate valuations to the highest they have ever been relative to income. Across all sectors of the world economy: household, corporate, government, and financial, the world’s aggregate debt relative to its collective GDP (gross world product) is the highest it has ever been. Central banks have pumped up the valuation of equities too. The S&P 500 has a cyclically adjusted P/E of almost 30 versus a median of 16, exceeded only in 1929 and the 2000 tech bubble.
Read the entire article
August 4, 2017
Is The Dollar Setting Up For A "Rip Your Face Off" Rally Or Total Freefall?
The U.S. dollar's relentless decline this year poses a question: is the USD setting up for a monster rally, or is it in a slow-motion crash? Opinions vary, of course, as to the possible reasons for the massive decline: European growth is better than expected, Trump's presidency is going nowhere, the Federal Reserve won't be raising rates, and so on.
The nice thing about charts is they summarize all these inputs into a snapshot. So let's take a look at the daily and weekly charts of the USD.
There's nothing fancy here, just the basics of moving averages, RSI, stochastics and MACD. There's not much to encourage Bulls in the daily chart: every attempt to regain the support of the 20-day moving average has failed, and triggered another leg down.
RSI and stochastics are oversold, but as this chart illustrates, oversold conditions can continue for quite some time. MACD may be setting up the beginnings of a divergence/reversal, but maybe not. At this point, betting on a reversal might be a case of catching the falling knife.
The weekly chart is even more dramatic. Judging by the steep decline this year, the world is ending--at least for the USD. RSI is oversold for the first time in 2+ years, stochastics have been deeply oversold for months, and MACD is in a cliff-dive that could end in a belly-flop.
Read the entire article
The nice thing about charts is they summarize all these inputs into a snapshot. So let's take a look at the daily and weekly charts of the USD.
There's nothing fancy here, just the basics of moving averages, RSI, stochastics and MACD. There's not much to encourage Bulls in the daily chart: every attempt to regain the support of the 20-day moving average has failed, and triggered another leg down.
RSI and stochastics are oversold, but as this chart illustrates, oversold conditions can continue for quite some time. MACD may be setting up the beginnings of a divergence/reversal, but maybe not. At this point, betting on a reversal might be a case of catching the falling knife.
The weekly chart is even more dramatic. Judging by the steep decline this year, the world is ending--at least for the USD. RSI is oversold for the first time in 2+ years, stochastics have been deeply oversold for months, and MACD is in a cliff-dive that could end in a belly-flop.
Read the entire article
August 3, 2017
Remember This Milestone: The Dow Jones Industrial Average Hits 22,000 For The First Time In U.S. History
The Dow hit the 22,000 mark for the first time ever on Wednesday, and investors all over the world greatly celebrated. And without a doubt this is an exceedingly important moment, because I think that this is a milestone that we will be remembering for a very long time. So far this year the Dow is up over 11 percent, and it has now tripled in value since hitting a low in March 2009. It has been quite a ride, and if you would have told me a couple of years ago that the Dow would be hitting 22,000 in August 2017 I probably would have laughed at you. The central bankers have been able to keep this ridiculous stock market bubble going for longer than most experts dreamed possible, and for that they should be congratulated. But of course the long-term outlook for our financial markets has not changed one bit.
Every other stock market bubble of this magnitude in our history has ended with a crash, and this current bubble is going to suffer the same fate.
But many in the mainstream media are still encouraging people to jump into the market at this late hour. For example, the following comes from a USA Today article that was published on Wednesday…
“It’s still not too late to get in,” says Jeff Kleintop, chief global investment strategist at Charles Schwab, based in San Francisco. “The gains are firmly rooted in business fundamentals, not false hopes.”
I honestly don’t know how anyone could say such a thing with a straight face. We have essentially been in a “no growth economy” for the past decade, and signs of a new economic slowdown are all around us.
Read the entire article
Every other stock market bubble of this magnitude in our history has ended with a crash, and this current bubble is going to suffer the same fate.
But many in the mainstream media are still encouraging people to jump into the market at this late hour. For example, the following comes from a USA Today article that was published on Wednesday…
“It’s still not too late to get in,” says Jeff Kleintop, chief global investment strategist at Charles Schwab, based in San Francisco. “The gains are firmly rooted in business fundamentals, not false hopes.”
I honestly don’t know how anyone could say such a thing with a straight face. We have essentially been in a “no growth economy” for the past decade, and signs of a new economic slowdown are all around us.
Read the entire article
August 2, 2017
A Quarter Trillion Dollars In US Savings Was Just "Wiped Away"
As part of its historical revision to GDP, the BEA also had to adjust personal income and spending, with the full results released in today's July report. What it revealed was striking: over the revised period, disposable personal income for US household was slashed cumulatively by over $120 billion to just under $14.4 trillion, while spending was revised higher by $105 billion, to just above $13.8 trillion. There were two immediate consequences of this result.
First, as the following table shows, while government pay has remained roughly flat over the past 3 years, growing in the mid-2% to mid 3% range, wages and salaries for private workers have been steadily declining as the blue line below shows, and after hitting a 4% Y/Y growth in February, wage growth has slumped to just 2.5% in June, the lowest since January 2014 when excluding the one-time sharp swoon observed at the end of 2016.
But a more troubling aspect of today's revision is what the drop in income and burst in spending means for the average household's bank account: following the latest annual revision, what until last month was a 5.5% personal saving rate was revised sharply lower as a result of the ongoing downward historical adjustment to personal income and upward adjustment to spending, to only 3.8%.
In dollar terms, this revision means that a quarter trillion dollars, or $226.3 billion, in savings was just "wiped away" from US households - if only in some computer deep in the bowels of the BEA buildings - who as a result have that much less purchasing power, and following the revision the total personal saving in the US as calculated by the BEA is now down to only $546 billion, down from $791 billion before the revision.
Read the entire article
First, as the following table shows, while government pay has remained roughly flat over the past 3 years, growing in the mid-2% to mid 3% range, wages and salaries for private workers have been steadily declining as the blue line below shows, and after hitting a 4% Y/Y growth in February, wage growth has slumped to just 2.5% in June, the lowest since January 2014 when excluding the one-time sharp swoon observed at the end of 2016.
But a more troubling aspect of today's revision is what the drop in income and burst in spending means for the average household's bank account: following the latest annual revision, what until last month was a 5.5% personal saving rate was revised sharply lower as a result of the ongoing downward historical adjustment to personal income and upward adjustment to spending, to only 3.8%.
In dollar terms, this revision means that a quarter trillion dollars, or $226.3 billion, in savings was just "wiped away" from US households - if only in some computer deep in the bowels of the BEA buildings - who as a result have that much less purchasing power, and following the revision the total personal saving in the US as calculated by the BEA is now down to only $546 billion, down from $791 billion before the revision.
Read the entire article
August 1, 2017
Goldman Sachs Says That There Is A 99 Percent Chance That Stock Prices Will Not Keep Going Up Like This
Analysts at Goldman Sachs are saying that it is next to impossible for stock prices to keep going up like they have been recently. Ever since Donald Trump’s surprise election victory in November, stocks have been on a tremendous run, but this surge has not been matched by a turnaround in the real economy. We have essentially had a “no growth” economy for most of the past decade, and ominous signs pointing to big trouble ahead are all around us. The only reason why stocks have been able to perform so well is due to unprecedented intervention by global central banks, but they are not going to be able to keep inflating this bubble forever. At some point this absolutely enormous bubble will burst and investors will lose trillions of dollars.
The only other times we have seen stock valuations at these levels were just before the stock market crash of 1929 and just before the dotcom bubble burst in 2000. For those that think that they can jump into the markets now and make a lot of money from rapidly rising stock prices, I think that it would be wise to consider what analysts at Goldman Sachs are telling us. The following is from a CNBC article that was published on Monday…
Investors may be in for disappointing market returns in the decade to come with valuations at levels this high, if history is any indication.
Analysts at Goldman Sachs pointed out that annualized returns on the S&P 500 10 years out were in the single digits or negative 99 percent of the time when starting with valuations at current levels.
Do you really want to try to fight those odds?
Read the entire article
The only other times we have seen stock valuations at these levels were just before the stock market crash of 1929 and just before the dotcom bubble burst in 2000. For those that think that they can jump into the markets now and make a lot of money from rapidly rising stock prices, I think that it would be wise to consider what analysts at Goldman Sachs are telling us. The following is from a CNBC article that was published on Monday…
Investors may be in for disappointing market returns in the decade to come with valuations at levels this high, if history is any indication.
Analysts at Goldman Sachs pointed out that annualized returns on the S&P 500 10 years out were in the single digits or negative 99 percent of the time when starting with valuations at current levels.
Do you really want to try to fight those odds?
Read the entire article
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