After months of internal discord, House Republicans finally approved a bill to overhaul Obamacare, which they have been attacking since it was enacted in 2010. While there are various nuances, here are the bill's main provisions courtesy of Reuters:
COVERAGE
- The Republican plan would maintain some of Obamacare's most popular provisions. It would allow young adults to stay on their parents' health plan until age 26.
- The bill would let states opt out of Obamacare's mandate that insurers charge the same rates on sick and healthy people. It would also allow states to opt out of Obamacare's requirement that insurers cover 10 essential health benefits, such as maternity care and prescription drug costs.
- The measure would provide states with $100 billion, largely to fund high-risk pools to provide insurance to the sickest patients. The bill also would provide $8 billion over five years to help those with pre-existing conditions pay for insurance.
- It would let insurers mark up premiums by 30 percent for those who have a lapse in insurance coverage of about two months or more. Insurers won a provision they had long sought: The ability to charge older Americans up to five times more than young people. Under Obamacare, they could only charge up to three times more.
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For all the younger traders in our audience, we would like to inform you that maybe not now, but once upon a time, markets actually used to respond to economic data. That includes both stocks as well as the market that has been historically considered far "smarter" than equities, the Treasury market. Sadly, as central banks took over, the significance of economic data released declined until recently it has virtually stopped mattering, something we predicted would happen back in 2009 when we warned that soon the only financial report that matters is the Fed's weekly H.4.1 statement.
Today, some six years later, Goldman picks up where we left off nearly a decade ago, and asks "Does the Treasury Market Still Care about Economic Data?"
What it finds is simple (and something even the most lay of market observers these days could have told them): no.
As Goldman's Elad Pashtan writes, "the sensitivity of US Treasury yields to economic data surprises has declined to near record-lows over the last two years. We find that the pattern of reactions to data surprises across the yield curve matches pre-crisis norms—with higher sensitivity for short-term rates than longer-term rates—but the average reactions are much lower; for breakeven inflation reactions to growth data are not discernible from zero."
So if it is not the economy, then what does the "market" respond to? Take a wild guess:
In contrast, Treasury yields have reacted more strongly to Fed communication, at least according to one measure of policy surprises, and the sensitivity of exchange rates to activity news has increased.
Here are the details:
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In other words, at one extreme, if the market perceives the policy as a failure, credit risk and demand/supply imbalances are likely to dominate, putting even further downward pressure on yields. At the other extreme, if the policy is perceived as a loss of monetary discipline, inflation expectations would spike, leading to an aggressive re-pricing of yields higher.
Simply said: too little, and the deflationary vortex will swallow all; too much, and yields will explode. DB continues:
A “successful” helicopter drop may therefore be easier said than done given the non-linearities involved: it needs to be big enough for nominal growth expectations to shift higher and small enough to prevent an irreversible dis-anchoring of inflation expectations above the central bank’s target. Either way, the behavior of the latter is the key defining variable both for the policy’s success as well as the asset market reaction.
Which brings us to DB's politically correct conclusion: "under the assumption of policy “success” without fears of hyperinflation, we would conclude that bond yields rise"... the same success which DB also says "will be easier said than done", which then means, drumroll, that the dominant outcome will be one in which "fears" of hyperinflation are justified.
In which case, please go ahead and sell your gold to Goldman: the vampire squid has repeatedly said it will buy everything you have to sell.
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As noted yesterday morning, "Goldman does it again" when just hours after Goldman said the "bearish cash for iron ore was intact," the commodity recorded its biggest surge in history crushing anyone short, and soaring 20% across the globe. That however has not dented Goldman's conviction that the commodity rally is overdone (we actually agree with Goldman for once) and just hours ago the head of commodities at Goldman Jeffrey Currie doubled down on Goldman's bearish commodities call saying "market views on reflation, realignment and re-levering have driven a premature surge in commodity prices that we believe is not sustainable.
Indeed the fundamentals - especially in oil - remain dire, with land storage especially in PADD2/Cushing about to overflow as we have been showing for the past 2 months, and yet the sentiment has shifted the most in years. As Currie puts it: "Energy needs lower prices to maintain financial stress to finish the rebalancing process; otherwise, an oil price rally will prove self-defeating as it did last spring."
It is this premature excitement that according to Goldman, will be catalyst that leads to the next leg lower in commodities, as the price surge gone far too soon and long before the much needed rebalancing and excess production was taken out:
Last year commodity prices were driven lower by deflation, divergence and deleveraging which were reinforcing through a negative feedback loop. Deflationary pressures from excess commodity supply reinforced divergence in US growth and a stronger US dollar which in turn exacerbated EM funding costs and the need for EMs to de-lever though lower investment and hence commodity demand. While we believe that these dynamics likely ran their course last year resulting in signs of rebalancing, the force of their reversal has created a new trend in market positioning that could run further. However, the longer they run, the more destabilizing they become to the nascent rebalancing they are trying to price.
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What does one make of it when someone whose career has been based on having powerful friends and contacts at the top levels of the financial services industry appears to be acting as a traitor to his class? In this case, the apparent turncoat is one Neel Kashkari, ex Goldman, ex Treasury, ex Pimco employee, now the new President of the Minneapolis Fed, who in his first speech in his new job, said all sorts of unpleasant truths: the financial crisis imposed huge costs on society as a whole, Dodd Frank didn’t go far enough, the authorities won’t be willing to risk using untested new powers in a financial meltdown and will bail out banks again. He also argued that the financial system was now stable enough to make (by implication overdue) transformative changes to end the “too big to fail” problem, such as breaking up banks and regulating them like utilities. Kashkari plans to come up with a comprehensive plan by year end and is seeking public input, including having expert discussions that will be webcast.
Now readers might think I’ve gone soft in the head by virtue of having an insider advocate some of our pet ideas, such as treating banks like utilities, when I tell you there are reasonable odds that Kashakri is serious.
As much as there was a great deal to like in his speech, I feel compelled to comment on a couple of issues before turning to the big question of “What to make of this?”
Kashkari Calls for a “Bold Approach”
This is the guts of Kashkari’s speech:
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