Category: global investing

The easy money policies along with QE were supposed to bring back growth but if this is the best we get, then STAGFLATION is coming next .Martin Armstrong writes in his blog “What we will first see before ever reaching that point in the United States is the significant impact of STAGFLATION. Rising taxes increase the cost of doing business and cause prices to rise. However, they rise only because of rising costs and not demand. Therefore, you have rising prices defined as inflation, but without the economic growth or demand. Thus, what unfolds is called stagflation and this instigates civil unrest for the standard of living declines with the net disposable income.
We are entering a period of STAGFLATION where economic growth has been declining. Central banks will be jumping for joy just to return to a 3% real GDP growth rate. Annual growth rates have been in a bear market since the 1950s. The bigger the government becomes, the more it must extract from the economy to sustain itself.”

if what he writes turns out to be true then the civil unrest is only going to become more widespread and the investing environment only becomes challenging because most assets (barring precious metals) react negatively to rising cost but barely rising income or growth.

Lasciate ogne speranza, voi ch’intrate (Abandon hope all you who enter here) 

Inscription on the Gates of Hell, from Dante’s Divine Comedy

Your author does not need a politician of the European Union to assign him to his special place in hell. Dante, author of The Divine Comedy, allotted anyone who tried to forecast the future to the eighth circle of hell – Malebolge. In Malebolge the fortune tellers, with their heads turned back to front, walked backwards through the fourth Bolgia unable to see anything for their tears. Dante himself may well have ended up in Malebolge given that rather accurate foretelling of life at the modern morning meeting in an investment bank! Similar such meetings in German Pensionskasse must today also be fraught affairs as those with legal responsibility look at the dive in German Bund yields and ponder their solvency. What fresh hell is this?

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https://www.eri-c.com/news/158

Doug Noland writes……

February 8 – Bloomberg (Brian Chappatta): “Bond traders are dusting off their tried and true post-crisis playbook after the Federal Reserve’s pivot last month. What they don’t realize is that the game has most likely changed. In an unabashed reach for yield, investors suddenly can’t get enough of the riskiest debt, with the Bloomberg Barclays U.S. Corporate High Yield Bond Index posting a staggering 5.25% total return in the first five weeks of 2019, led by those securities rated in the CCC tier. In the largest CCC borrowing since September, Clear Channel Outdoor Holdings Inc. received orders this week of more than $5 billion for a $2.2 billion deal, allowing it to price its debt to yield 9.25%, compared with whisper talk of about 10%.”

A Friday headline from a separate Bloomberg article: “Corporate Bonds on Fire as Dovish Fed Soothes Investors,” with the opening sentence: “Fear is turning to exuberance in credit markets.” According to Lipper, corporate investment-grade funds enjoyed inflows of $2.668 billion last week, with high-yield funds receiving $3.859 billion. Bloomberg headline: “High-Yield Bond Funds See Biggest Inflow Since July 2016.” This follows the highest high-yield inflows ($3.28bn) since December 2016 from two weeks ago.

There’s support for the argument that financial conditions have loosened significantly over recent weeks. Prices of corporate bond default protection have declined. After trading as high as 95 bps on December 24th, by Tuesday an index (Markit) of investment-grade credit default swap (CDS) prices had dropped all the way back to 64 (near October levels). Risk premiums have narrowed, especially for high-risk junk bonds. U.S. high-yield spreads (Bloomberg Barclays) traded as wide as 537 bps on (tumultuous) January 3rd. By this Wednesday they were back down to 400 bps (still significantly above the 300bps from October 3rd).

Bank bond CDS prices have retreated. After spiking to 129 bps on January 3rd, Goldman Sachs CDS was back down to 82 bps on Tuesday (closed the week at 89). For perspective, GS CDS traded at 55 on the final day of July and 59 bps on October 3rd. After trading to 218 bps on January 3rd, Deutsche Bank CDS was back down to 167 bps by the end of January (ended Friday at 189bps)

February 8 – Reuter (Marc Jones): “Investors pumped record high volumes of cash into emerging markets shares and bonds in the past week, Bank of America Merrill Lynch (BAML) said on Friday amid expectations U.S. monetary policy could lead to a weaker U.S. dollar… Investors have piled into emerging market equities and bonds in recent months amid expectations that the U.S. Federal Reserve will not raise interest rates as quickly as previously expected or even no longer tighten its policy.”

February 7 – Reuter (Marc Jones): “A ‘wall of money’ is set to flood into emerging markets assets now the U.S. Federal Reserve has eased the risk of a sharp rise in global borrowing costs, the Institute of International Finance (IIF) said… The IIF, which closely tracks financing flows, said its high frequency indicators were picking up a “sharp spike” of inflows following last week’s confirmation of a change of tack from the U.S. central bank. ‘Recent events look likely to restart the ‘Wall of Money’ to Emerging Markets,’ IIF economists said in a report.”

Institute of International Finance estimates put January ETF inflows on a quarterly pace of about $50 billion, ‘already equal to strong EM inflows in 2017 and likely to go higher.’”

The MSCI Emerging Market equities index has gained 7.3% y-t-d. So far in 2019, dollar-denominated bond yields are down 828 bps in Venezuela, 36 bps in Indonesia, 34 bps in Ukraine, 33 bps in Saudi Arabia, 31 bps in Russia, 30 bps in Chile, 30 bps in Colombia, and 16 bps in Turkey. Local currency yields have sunk 91 bps in Lebanon, 77 bps in Philippines, 35 bps in Hungary, 35 bps in Mexico and 27 bps in Russia.

With “risk on” back on track, why then would “safe haven” bonds be attracting such keen interest? German 10-year bund yields sank eight bps this week to nine bps (0.09%), the low going back to October 2016. Two-year German yields were little changed at negative 0.58%. Ten-year Treasury yields declined five bps this week to 2.64%, only nine bps above the panic low yields from January 3rd. Japanese 10-year yields declined another basis point this week to negative three bps (negative 0.03%), only about a basis point above January 3rd lows. Swiss 10-year yields declined six bps this week to negative 0.33% – the low since October 2016.

So, who’s got this right – risk assets or the safe havens? Why can’t they both be “right” – or wrong? There is much discussion of a confused marketplace: extraordinary cross-currents leaving traders confounded. In search of an explanation, I’ll point to the consequences of Monetary Disorder.

It has now been a full decade of near zero interest rates globally. Trillions (estimates of around $16 TN) of new central bank “money” were injected into global securities markets. What’s more, global central banks have repeatedly intervened to buttress global markets – from 2008/09 crisis measures; to 2012’s “whatever it takes”; to 2016’s “whatever it takes to support a faltering Chinese Bubble”; to last month’s Powell U-turn. The combination of a decade of artificially low rates, an unfathomable amount of new market liquidity and an unprecedented degree of central bank market support have fostered momentous market structural maladjustment. We’re living with the consequences.

It is certainly not easy to craft an explanation for today’s aberrant market behavior. I would start by positing that a massive pool of speculative finance has accumulated over this protracted cycle. There is at the same time liquidity excess, excessive leverage and the proliferation of derivatives strategies (speculation and hedging). In short, there is trend-following and performance chasing finance like never before – keenly fixated on global monetary policies. Illiquidity lies in wait.

When this mercurial finance is flowing readily into inflating securities markets, the resulting conspicuous speculative excess pressures central bankers to move forward with “normalization” (Powell October 3rd). At the same time, this edifice of speculative finance is innately fragile.

Speculative markets reversing to the downside rather quickly unleash “Risk Off” dynamics. These days, de-risking/deleveraging abruptly alters a market’s liquidity profile. Not only is there the liquidation of holdings and the collapse of leverage, the resulting downward market pressure triggers risk aversion more generally for this imposing global pool of speculative finance. And as the ETF complex suffers outflows, the leveraged speculating community and derivatives industry move to shed risk ahead of a retail investor panic. And when a meaningful component of the marketplace seeks to hedge market risk, it’s difficult to envision who takes the other side of such a trade.

Meanwhile, major shifts in dynamic-hedging programs unfold throughout the derivative universe. When markets are running on the upside, derivative-related buying (i.e. hedging in-the-money call options written/sold) exacerbates already powerful trend-following flows. But when a speculative upside (i.e. “blow-off” or “melt-up”) market advance eventually reverses course, derivative-related buying swiftly transforms into destabilizing selling. For example, a quant model used for (dynamic) “delta hedging” exposures from derivatives previously written (i.e. call options) would halt aggressive buy programs – immediately becoming a seller into market weakness.

Meanwhile, sinking markets will see keen interest in buying downside derivative protection (i.e. puts) – both for speculation and hedging. The sellers of these derivatives will then dynamically hedge these instruments, essentially requiring selling into declining markets. Using out-of-the-money puts options as an example, the amount of selling required to protect the seller/writer of these instruments expands exponentially as market prices approach option strike prices. The point is, derivatives tend to play a significant role in promoting destabilizing upside market moves, dislocations that are then highly susceptible to reversals and destabilizing market breakdowns.

Why have risk markets rallied so strongly to begin 2019? Because the Powell U-Turn incited a reversal of short positions and the unwind of bearish hedges and speculations. Derivative-related (“dynamic”) selling – that had been rapidly gaining momentum – reversed course and became aggressive buyers. Market momentum then incited buying from the enormous trend-following/performance chasing Crowd. Who can afford to miss a rally? Certainly not the global leveraged speculating community, with many at risk of losing assets, incomes and businesses.

Why have safe haven assets performed so well in the face of surging equities and corporate debt? Because current Market Structure is inherently unstable and increasingly prone to an accident. Today’s buyers of Treasuries, bunds and JGBs are less concerned with January/Q1 equities and junk bond returns, keenly focused instead on acute global market instabilities and the inevitability of a systemic market liquidity event. I would further argue that this dysfunctional market dynamic recalls the destabilizing rally in Treasuries and agency securities in 2007 and well into 2008. This market anomaly stoked end-of-cycle speculative Bubble excess and exacerbated systemic fragilities.

When risk markets advance, news and analysis invariably focus on the positives – an expanding U.S. economy, prospects for a trade deal with China, buoyant profits, a backdrop of ongoing exciting technological advancements, perpetual low interest rates, endless loose financial conditions, etc. With markets advancing, mounting risks are easily disregarded. “Deficits don’t matter.” Debt concerns are archaic. Market Structure is a nothing burger. Best to ignore escalating social, political and geopolitical risks. The unfolding clash between the U.S. and the rising China superpower – it’s nothing. An increasingly fragmented and combative world – ditto.

As we saw in December, sinking markets direct attention to an expanding list of troubling developments. Years of inflating securities prices seemed to demonstrate that so many of the old worries were unjustified – none really mattered. The problem is that many do matter – and some tremendously. The current extraordinary backdrop has all the makings for a decisive bearish turn in market sentiment that would create a problematic feedback loop within the real economy – domestically and globally.

I’ll highlight an issue that has come to be easily dismissed – yet matters tremendously. Zero rates and QE were a policy experiment. The consensus view holds that the great success of this monetary exercise ensures that QE is now a permanent fixture in the central banking “tool kit”. The original premise of this experiment rested on the supposition that a temporary boost of liquidity would stimulate higher risk market prices and risk-taking with resulting wealth effects that would loosen financial conditions while stimulating investment, spending and income growth throughout the real economy. The expectation was that a shot of stimulus would return the real economy back to its long-term trajectory.

History teaches us that monetary inflations are rarely temporary. Travel down that road and it’s nearly impossible to get off. Dr. Bernanke, the Federal Reserve and global central bankers never contemplated what a decade of unending monetary stimulus would do to Market and Financial Structure. Most – in policy circles and the marketplace – believe beyond a doubt that monetary stimulus was hugely successful in resuscitating economic growth dynamics.

But it’s on the financial side where consequences and repercussions have been fatefully neglected. It’s in the financial world where a decade of QE, zero rates and central bank market backstops imparted momentous structural change: the colossal ETF complex, the passive “investing” craze, quantitative strategies, algorithmic and high-frequency trading, a proliferation of derivative trading, leveraging and trend-following speculation on a global basis – to list only the most obvious. Along the way, aggressive monetary stimulus had much greater inflationary effects on risk markets than upon real economies. This ensured a continuation of aggressive stimulus – and only deeper market Bubble maladjustment.

For a month now, markets have celebrated the view that Chairman Powell (and global central bankers more generally) will not be attempting to “normalize” monetary policy. No Fed-induced tightening of financial conditions, along with no fretting the new Chairman’s commitment to the “Fed put.” Lost in all of this is recognition that a decade of experimental monetary stimulus has failed. Global finance is much more fragile today than prior to the 2008 crisis – the global economy more imbalanced and vulnerable.

Never has it been so easy to speculate – equities and corporate Credit alike. Never has corporate Credit availability – and financial conditions more generally – been governed by the interplay between the ETF complex, derivatives strategies and a distressed global leveraged speculating community. The Powell U-Turn unleashed another round of speculative excess. Right in the face of faltering global growth, I would argue this bout of speculation is especially precarious. And when the current “risk on” gives way to reality, maladjusted Market Structure will ensure liquidity issues on a scale beyond December.

“This is deflation, the amazing lurch toward recession despite QE…,” read the opening sentence of a friendly email I received last week. Yet I remember all the talk of deflation after the 1987 stock market crash. It became even louder in 1990 – then again in ‘97/’98. Deflation was the big worry with the bursting of the “tech” Bubble and then with corporate debt problems in 2002. Global central bankers have been fighting deflation now for a decade since “the worst crisis since the Great Depression.”

For a long time now, I’ve argued that Bubbles are the overarching risk. The “scourge of deflation” was not the ghastly plight to vanquish with interminable “whatever it takes.” Rather, deflation is a fateful consequence of bursting Bubbles – Bubbles inflated in the process of central bankers fighting so-called “deflationary forces.” Now, after thirty years of unending global Credit growth, activist central banking and egregious financial speculation, Bubble risk has never been so great. “The amazing lurch toward recession” and financial dislocation specifically because of a failed experiment in QE and inflationist monetary management.

But I’ll conclude with Market Structure. Global markets have turned even more synchronized during this upside convulsion. This increases already highly elevated risk come the next downturn. And I wouldn’t expect much in the way of diversification benefits from Treasuries, bunds and JGBs. It’s worth mentioning that Italian 10-year yields were up 31 bps in two weeks (spreads to bunds widening 41 bps!). With Italian and European economic prospects seeming to darken by the week, European corporate debt came under some pressure this week. Germany’s DAX equities index fell 2.4%, and Japan’s Nikkei dropped 2.2%. And one could almost see fissures start to appear in EM currencies, equities and bonds. Eastern European currencies were notably weak, while the South African rand, Brazilian real and Argentine peso were all down about 2%.

http://creditbubblebulletin.blogspot.com/2019/02/weekly-commentary-delusional.html

https://cdn2.hubspot.net/hubfs/4043042/Commentaries/2018%20Q4%20Commentary/2018.Q4%20Goehring%20&%20Rozencwajg%20Market%20Commentary.pdf

Doug Noland writes..

January 30 – Financial Times (Sam Fleming): “After putting traders on notice six weeks ago to expect further increases in US interest rates in 2019, the Federal Reserve… executed one of its sharpest U-turns in recent memory. Leaving rates unchanged at 2.25-2.5%, Jay Powell, Fed chairman, unveiled new language that opened up the possibility that the next move could equally be down, instead of up. Forecasts from the Fed’s December meeting that another two rate rises are likely this year now appear to be history. Changes to its guidance were needed, Mr Powell argued, because of ‘cross-currents’ that had recently emerged. Among them were slower growth in China and Europe, trade tensions, the risk of a hard Brexit and the federal government shutdown. Financial conditions had also tightened, he added. Yet the about-face left some Fed-watchers wrongfooted and bemused. Many of those hazards were already perfectly apparent in the central bank’s December meeting, when it lifted rates by a quarter point and kept in place language pointing to further ‘gradual’ increases.”

The Wall Street Journal’s Greg Ip pursued a similar path with his article, “The Fed’s Mysterious Pause.” “Last December, Mr. Powell noted his colleagues thought they’d raise rates two more times this year, from between 2.25% and 2.5%, which was at the lower end of estimates of ‘neutral’—a level that neither stimulates nor holds back growth. On Wednesday, he suggested the Fed could already be at neutral: ‘Our policy stance is appropriate right now. We also know that our policy rate is in the range of the… committee’s estimates of neutral.’ If indeed the Fed is done, that would be a breathtaking pivot. Yet the motivation remains somewhat mystifying: What changed in the past six weeks to justify it?”

No Mystery. Don’t be bemused. The Fed Chairman was prepared to hold his ground, but the ground was suddenly giving way. Between the December 19th and January 30th FOMC meetings, acute systemic fragilities were revealed.

Not to dismiss economic weakness in China and Europe – or even tenuous U.S./Chinese trade talks and the government shutdown. But January 3rd was pivotal, not coincidently the wild market session ahead of Chairman Powell’s January 4th U-turn. Recall the currency market “flash crash” – with an 8% intraday move in the yen vs. Australian dollar, along with the dramatic widening of credit spreads (and a 19bps surge in Goldman Sachs CDS prices). Markets were careening toward dislocation.

Chairman Powell appeared somewhat downtrodden during his Wednesday press conference, a notable shift from his confident demeanor in December. We can assume Powell and other Fed officials have been alarmed by how swiftly booming securities markets succumb to instability and illiquidity. I believe Powell wanted to see markets begin standing on their own; that, in contrast to his three most-recent predecessors, he would be in no rush to come to the markets’ defense. He was content to see overheated markets commence the cooling process. A correction would actually be constructive for system stability. The predicament: Overinflated Bubbles don’t calmly deflate.

Circumstances forced the Fed’s hand. Old fears soon reemerged of escalating market instability getting ahead of the Fed. Better to act quickly before market/liquidity issues turned intricate and precarious. While not blatantly shock and awe, kind of along the same line. And responding to criticism of blurred messaging, the course of FOMC policymaking must appear coherent and decisive.

There will be no more rate hikes anytime soon. Now heeding market alarm, the Fed will also be reevaluating the runoff of its securities holdings. The Fed would prefer to convey that it remains “data dependent” in an environment of extraordinary uncertainties, while tepid inflation provides convenient cover for embracing “patience.” Well enough, but markets saw it for what it was: The Fed “caved” – just as the markets knew it would. No longer in doubt, the latest incantation of the “Fed put” is alive and well (irrespective of job or GDP growth). Indeed, the new Chairman’s hope for lowering the “put” strike price (Fed support not invoked before a significant market decline) was rather hastily quashed by acute market fragility.

There’s really nothing like a short “squeeze” to get market speculative juices flowing. How about a synchronized global squeeze across myriad asset classes? Only weeks ago, global markets were alarmingly synchronized to the downside. Now it’s everyone off to the races – lockstep (seemingly inebriated). Stocks and corporate Credit; EM currencies, stocks and bonds; Treasuries, bunds and JGBs; Italian bonds; crude and commodities and so on.

Here in the U.S., “Stocks Wrap Up Best January in 30 Years.” The DJIA surged 1,672 points (returning 7.2%) during the month. The S&P500 returned 8.0%, robust gains overshadowed by the broader market. The S&P 400 Midcaps jumped 10.4% in January, with the small cap Russell 2000 rising 11.2%. The average stock (Value Line Arithmetic) gained 11.2%. The Banks (BKX) rose 12.4%, with the Nasdaq Financials up 9.7%. The Nasdaq Composite also rose 9.7%. The Goldman Sachs Most Short index jumped 12.5%. The Philadelphia Oil Services index surged 19.3%.

Some of the problem-children EM currencies bounced strongly. The South African rand gained 8.2% in January, the Russian ruble 6.6%, Brazilian real 6.2%, Chilean peso 6.0%, Colombian peso 4.6%, Thai baht 4.2%, Indonesian rupiah 3.0% and Mexican peso 2.9%. The Chinese renminbi gained 2.7% against the dollar in January.

Over the past month, local currency bond yields were down 137 bps in Lebanon, 93 bps in the Philippines, 50 bps in Russia, 47 bps in Brazil, 34 bps in Cyprus, 33 bps in Hungary and 21 bps in Mexico. Equities gained 19.9% in Argentina, 14.0% in Turkey, 13.5% in Russia, 10.8% in Brazil, 9.6% in South Korea and 9.2% in Colombia. Dollar-denominated bond yields sank 124 bps in Argentina, 100 bps in Ukraine, 50 bps in Turkey, 34 bps in Indonesia and 35 bps in Russia.

January was also a big month for European equities. Major stock indices returned 8.9% in Portugal, 8.1% in Italy, 6.6% in Spain, 5.6% in France, 5.8% in Germany, 6.4% in Switzerland, 8.2% in Finland, 7.6% in Sweden and 8.7% in Austria. January saw 10-year sovereign yields drop 15 bps in Italy, nine bps in Germany, 15 bps in France, 22 bps in Spain, 10 bps in Portugal and 46 bps in Greece.

An overarching CBB theme over the years (debated compellingly generations ago): the problem with discretionary policymaking is that a policy mistake leads invariably to a series of mistakes. The Powell Fed coming quickly to the markets’ defense was a perpetuation of flawed policy doctrine. Moreover, it’s especially dangerous for central banks to so conspicuously buttress the securities markets at this late stage of historic speculative Bubbles. Calming language has an effect akin to electric shock therapy.

Clearly, such actions only further embolden a marketplace conditioned to reach for returns – adopting leverage while disregarding risk. Financial and economic stability are only further undermined. Blatant support of Wall Street will as well further erode public trust in such a critical institution. During the previous crisis, central bank measures were seen as vital to stabilization. I fear they will be viewed as fundamental to the problem in the coming crisis.

The delusion was believing zero rates and QE would over time support system stability. The “buyer of last resort” function during a time of crisis should never have morphed into the buyer of first resort for years of booming markets and economies. We’re now a full decade into aggressive stimulus, and global finance is more fragile than ever. Policy rates remain at zero and the ECB only recently ended its historic balance sheet expansion (to $4.7 TN). Yet economies throughout the Eurozone appear in – or headed toward – recession. Amazingly, despite a QE-induced collapse in market yields, Italy faces a recessionary backdrop with its fragile banks hanging in the balance.

Meanwhile, troubling data run unabated in China. The Caixin China Manufacturing PMI dropped 1.4 points during January to 48.3, the low since gloomy February 2016. It was also the first back-to-back months below 50 (contracting manufacturing activity) since May/June 2016. To see China’s economy weaken in the face of ongoing rapid Credit growth should be alarming to the entire world.

January 27 – Bloomberg: “The number of Chinese companies warning on earnings is turning into a flood, with no industry spared from worsening demand. Some 440 firms disclosed on Wednesday — the day before a deadline to do so — that their 2018 financial results deteriorated… Of the more than 2,400 mainland-listed firms that have announced preliminary numbers or issued guidance this season, some 373 said they’ll post a loss, the data show. About 86% of those were profitable in 2017.”

In a globalized, digitized and serviced-based economy, I never viewed consumer price inflation as the prevailing QE risk in the U.S. For the U.S. and the world more generally, zero rates and Trillions of fabricated “money” have fomented interminable Monetary Disorder (on full display during the past two months). Once unleashed, there was no controlling it. Yet with global markets in a synchronized rally, one easily assumes the Fed and central banks have again worked their magic. Stability has engulfed the world. Nothing could be more detached from reality.

The world is in the throes of a precarious period. Ill-advised central banking has ceded a historic global market Bubble additional rope. Meanwhile, until something snaps it is reckless fiscal policies accommodated by ultra-low rates, along with the precarious market perception that central banks will have no alternative other than to reinstitute QE. Central bank-induced Monetary Disorder has completely distorted sovereign debt markets, granting Washington politicians the proverbial blank checkbook. And it is worse than merely a marketplace devoid of “bond vigilantes.” Treasury yields are pressured downward by the fragility of global Bubbles and the expectation of aggressive monetary stimulus as far as the eye can see.

Reckless global monetary management fuels reckless global fiscal mismanagement. Here in the U.S., trillion-dollar plus federal deficits until the market invokes some discipline. And it’s all passed off as business as usual. If I were a bond, I’d be tense. Bailing on “normalization,” the Fed has essentially committed to perpetual loose “money” and stock market support. And in the event the risk market rally turns crazier, there’s just not much slack in the U.S. economy. Ten-year Treasury yields jumped six bps Friday (to 2.68%), although the more interesting move was the 16 bps surge in Italian yields (to 2.74%). Under the circumstances, gold’s $38 January advance was rather restrained.

To see securities markets – risk assets and safe haven alike – rally as they’ve done over recent weeks is something to behold. Sellers overwhelming the markets one month – buyers the next. Legitimate fears of illiquidity supplanted by the utter fright of being on the wrong side of the market and missing a rally. The S&P500 recorded its strongest January since 1987. It’s an apt reminder not to place too much faith in the “January effect”- especially when global markets are acutely speculative. With Monetary Disorder and Dysfunctional Market Structure operating at full-force, no reason not to expect 2019 to be anything but a momentous year.

http://creditbubblebulletin.blogspot.com/2019/02/weekly-commentary-no-mystery.html

On My Radar:

• S&P Typically Peaks After The Fed is Done Tightening
• U.S.-China Trade War Negotiations Step Center Stage
• Market Commentary and Outlook by PJ Grzywacz, President, CMG Capital Management Group
• Trade Signals – The Zweig Bond Model Turns Bullish, Equity Markets Testing Resistance (200-day MA)
• Personal Note – An Observation on a Country Which I Love

https://www.cmgwealth.com/ri/on-my-radar-an-observation-on-a-country-which-i-love/

Kevin Muir writes “In the coming months, quarters and years, watch for MMT to become a much larger source of change for your portfolio and trading. You might think it’s great and that the financial world could use a change. Or you might think it’s terrible and will be a disaster. Doesn’t matter what you or I think. MMT is coming. Ignoring it would be foolish.”

https://www.themacrotourist.com/posts/2019/01/23/mmt/

Evergreen Gavekal compares Suez Canal crisis with the telecom domination and concludes

“The bottom line is this: if the symbol of British domination was the steamship, and the symbol of American strength was the Boeing 747, it seems increasingly clear that the question of the future will be whether tomorrow’s telecom switches and routers are produced by Huawei or Cisco. In that regard, the US attempts to take down Huawei and ZTE can be seen as the existing empire’s attempt to prevent the ascent of a new imperial power. With this in mind, I could go a step further and suggest that perhaps the Huawei crisis is this century’s version of Suez crisis. No wonder markets have been falling ever since the arrest of the Huawei CFO. In time, the Suez Crisis was brought to a halt by US threats to destroy the value of sterling. Could we now witness the same for the US dollar?”

Read Full article

https://blog.evergreengavekal.com/this-centurys-suez-crisis/

Doug Noland Writes….The S&P500 advanced 6.5% in 2019’s first 13 trading sessions. The DJ Transports are up 9.2% y-t-d. The broader market has outperformed. The small cap Russell 2000 sports a 9.9% gain after 13 sessions, with the S&P400 Midcap Index rising 9.3%. The Nasdaq Composite has gained 7.9% y-t-d (Nasdaq100 up 7.2%). The average stock (Value Line Arithmetic) has risen 9.7% to start the year. The Goldman Sachs Most Short index has jumped 13.6%.

Some of the sector gains have been nothing short of spectacular. This week’s 7.7% surge pushed y-t-d gains for the Bank (BKX) index to 13.7%. The Broker/Dealers (XBD) were up 5.3% this week – and 11.0% so far this year. The Nasdaq Bank index has a 2019 gain of 11.3% (up 4.9% this week). The Philadelphia Oil Services index surged 22.3% in 13 sessions. Biotechs (BTK) have jumped 16.1%.

Taking a deeper dive into y-t-d S&P500 sector performance, Energy leads the pack up 11.2%. Financials have gained 9.0%, Industrials 8.9%, Consumer Discretionary 8.4%, and Communications Services 7.9%. Last year’s leaders are badly lagging. The Utilities have gained only 0.4%, followed by Consumer Staples up 3.2% and Health Care gaining 4.2%.

Canadian stocks have gained 6.9% (“Best Start to Year Since 1980”). Mexico’s IPC Index has risen 6.3%. Major equities indices are up 6.1% in Germany, 7.6% in Italy, 6.2% in Spain, 3.6% in the UK and 3.1% in France. European Bank stocks have gained 5.3% (Italy’s banks up 5.1%). Brazil’s Ibovespa index has gained 9.3% and Argentina’s Merval 15.9%. Russian stocks are up 4.9%, lagging the 7.9% gain in Turkey. The Shanghai Composite has recovered 4.1%. Hong Kong’s Hang Seng index has rallied 4.8%, with the Hang Seng Financial Index up 5.1% to start the year. With WTI crude surging 19% y-t-d, the Goldman Sachs Commodities Index is up a quick 10.4% to begin 2019.

After trading as high as 3.25% on November 6th, 10-year Treasury yields ended 2018 at 2.69%. Yields traded quickly sank to as low of 2.54% on January 3rd and have since rallied to 2.79% – up 10 bps y-t-d. German bund yields traded to 0.57% in early-October before reversing course and ending the year at 0.24%. After trading as low as 15 bps on January 3rd, bund yields closed this week at 26 bps (up 2bps y-t-d). Japan’s JGB yields ended the week at about one basis point, up from the negative 5.4 bps on January 3rd. No “all clear” here.

I titled last year’s “Issues 2018” piece “Market Structure.” A decade of central bank policy-induced market Bubbles fostered momentous market distortions and structural maladjustment. At the top of the list is the historic shift into “passive” ETF “investing.” With the ETF complex approaching $5.0 Trillion – and another $3.0 TN plus in the hedge fund universe – financial history has never seen such a gargantuan pool of trend-following and performance-chasing finance. Add to this the global proliferation of listed and over-the-counter derivatives strategies (especially options) and trading, and we’re talking about a world of unprecedented financial speculation. It’s an aberrant Market Structure, and we’re witnessing repercussions.

After powerful speculative flows and early-2018 blow-off excess, we saw the emerging markets (EM) then succumb to abrupt market reversals, destabilizing outflows, illiquidity and Crisis Dynamics. We witnessed how fragility at the “Periphery” propelled inflows to the “Core,” pushing U.S. securities markets into a destabilizing speculative melt-up (in the face of a rapidly deteriorating fundamental backdrop). This speculative Bubble burst in Q4.

The Powell Fed chose not to come to the market’s defense at the December 19th FOMC meeting. I viewed this as confirmation that Chairman Powell appreciated how previous hurried Fed measures to backstop the markets had bolstered speculation, distorted market functioning and fueled Bubbles. By January 4th, however, the pressure of market illiquidity had become too much to bear.

The Fed, once again, intervened and reversed the markets. Those believing in the indominable power of the “Fed put” were further emboldened. The resulting short squeeze and reversal of hedges surely played a commanding role in fueling the advance. And in a financial world dominated by trend-following and performance-chasing finance, market rallies can take on a wild life of their own. There is tremendous pressure on investment managers, the speculator community, advisors and investors not to miss out on rallies. All the makings for a wretchedly protracted bear market.

Serious illiquidity issues were unfolding a small number of trading sessions ago, as equities and fixed-income outflows – along with derivatives-related and speculative selling – began to overwhelm the marketplace. Fed assurances reversed trading dynamics. De-risking/deleveraging has, for now, given way to “risk on.” A powerful confluence of short covering and risk embracement (and leveraging) has acutely speculative markets once again perceiving liquidity abundance and unwavering central bank support. Dangerous.

At least at this point, I’m not anticipating a crisis of confidence in an individual institution (i.e. Lehman in October 2008) will dominate Crisis Dynamics. Rather, I see a more general unfolding crisis of confidence in market function and policymaking. A decade of reckless monetary expansion and near-zero rate policies unleashed Intractable Monetary Disorder. Among the myriad consequences are deep structural impairment to financial systems – certainly including global securities and derivatives markets. The world is in the midst of acute financial instability with little possibility of resolution (outside of crisis).

These policy-induced bouts of “risk on” bolster confidence in both the markets and real economies. Importantly, they also feed dysfunctional Market Dynamics. Upside market volatility exacerbates market instability, fueling pernicious speculation, manic-depressive flows, and destabilizing derivative-related trading dynamics. With fundamental deterioration accelerating both globally and domestically, I would argue a speculative run higher in securities prices exacerbates systemic risks – while ensuring a more problematic future dislocation.

The global Bubble has begun to deflate. Chinese data continue to confirm a serious unfolding downturn. Not dissimilar to Washington policymakers, Beijing appears increasingly anxious. In theory, there would be advantages to letting air out of Bubbles gradually. But the bigger the Bubble – and the greater associated risks – the greater the impetus for policymakers to indefinitely postpone the day of reckoning. The upshot is only worsening Monetary Disorder. With still rising quantities of Credit of rapidly deteriorating quality, systemic risk continues to rise exponentially in China (and the world).

January 14 – Reuters (Kevin Yao): “China… signaled more stimulus measures in the near term as a tariff war with the United States took a heavy toll on its trade sector and raised the risk of a sharper economic slowdown. The world’s second-largest economy will aim to achieve ‘a good start’ in the first quarter, the National Development and Reform Commission (NDRC) said… Central bank and finance ministry officials gave similar assurances. Surprising contractions in China’s December trade and factory activity have stirred speculation over whether Beijing needs to switch to more forceful stimulus measures…”

January 15 – Reuters: “Chinese banks extended 1.08 trillion yuan ($159.95bn) in net new yuan loans in December, far more than analysts had expected but down from the previous month. Analysts polled by Reuters had predicted new yuan loans of 800 billion yuan last month, down from 1.25 trillion yuan in November…”

January 15 – Bloomberg: “China’s credit growth exceeded expectations in December, with the second acceleration in a row indicating the government and central bank’s efforts to spur lending are having an effect. Aggregate financing was 1.59 trillion ($235 billion) in December, the People’s Bank of China said on Tuesday. That compares with an estimated 1.3 trillion yuan in a Bloomberg survey.”

January 15 – South China Morning Post (Amanda Lee): “China’s banks extended a record 16.17 trillion yuan (US$2.4 trillion) in net new loans last year…, as policymakers pushed lenders to fund cash-strapped firms to prop up the slowing economy. The new figure, well above the previous record of 13.53 trillion yuan in 2017, is an indication that the bank has been moderately aggressive in using monetary policy to stimulate the economy, which slowed sharply as a result of the trade war with the US. Outstanding yuan loans were up 13.5% at the end of 2018 from a year earlier… In addition, debt issued by private enterprises increased by 70% year-on-year from November to December last year, indicating that the central bank’s efforts to support the private sector are working.”

There’s a strong consensus view that Beijing has things under control. Reality: China in 2019 faces a ticking Credit time bomb. Bank loans were up 13.5% over the past year and were 28% higher over two years, a precarious late-cycle inflation of Bank Credit. Ominously paralleling late-cycle U.S. mortgage finance Bubble excess, China’s Consumer Loans expanded 18.2% over the past year, 44% in two years, 77% in three years and 141% in five years. China’s industrial sector has slowed, while inflated consumer spending is indicating initial signs of an overdue pullback. Calamitous woes commence with the bursting of China’s historic housing/apartment Bubble.

Typically – and as experienced in the U.S. with problems erupting in subprime – nervous lenders and a tightening of mortgage Credit mark an inflection point followed by self-reinforcing downturns in housing prices, transactions and mortgage Credit. Yet there is nothing remotely typical when it comes to China’s Bubble. Instead of caution, lenders have looked to residential lending as a preferred (versus business) means of achieving government-dictated lending targets. Failing to learn from the dreadful U.S. experience, Beijing has used an inflating housing Bubble to compensate for structural economic shortcomings (i.e. manufacturing over-capacity). This is precariously prolonging “Terminal Phase” excess.

The Institute for International Finance is out with updated global debt data. In the public interest, they should make this data and their report available to the general public.

January 16 – Financial Times (Jonathan Wheatley): “Emerging-market companies have gorged on debt. Slower global growth and higher funding costs will make servicing that debt harder, just as the amount coming due this year reaches a record high. The result? Less investment for growth and yet more borrowing. These are some of the concerns raised by the Institute of International Finance… as it published its quarterly Global Debt Monitor… The world is ‘pushing at the boundaries of comfortably sustainable debt,’ says Sonja Gibbs, managing director at the IIF. ‘Higher debt levels [in emerging markets] really divert resources from more productive areas. This increasingly worries us.’ The IIF’s data show total global debt — owed by households, governments, non-financial corporates and the financial sector — at $244tn, or 318% of gross domestic product at the end of September, down from a peak of 320% two years earlier. In some areas, though, borrowing is rising. Of particular concern is the non-financial corporate sector in emerging markets (EMs), where debts are equal to 93.6% of GDP. That is more than among the same group in developed markets, at 91.1% of GDP.”

January 16 – Washington Post (Robert J. Samuelson): “Government debt has tripled from $20 trillion in 2000 to $65 trillion in 2018, rising as a share of GDP from 55% to 87%. Household debt has increased over the same years, from $17 trillion to $46 trillion (from 44% to 60% of GDP). Finally, nonfinancial corporate debt rose from $24 trillion to $73 trillion (71% of GDP to 92%)… According to the data from the IIF, emerging-market borrowers face $2 trillion of maturing debt in 2019, with about a quarter of those loans made in dollars (most of the rest are in local currency). To avoid default, borrowers must somehow raise those dollars, either from a new loan or from other sources.”

January 16 – Barron’s (Reshma Kapadia): “A record $3.9 trillion of emerging market bonds and syndicated loans comes due through the end of 2020. Most of the redemptions in 2019 will be outside of the financial sector, mainly from large corporate borrowers in China, Turkey, and South Africa. The question will be if they can refinance the debt…”

Considering the unprecedented global debt backdrop, it’s difficult for me to believe last year’s corrections went far in resolving deep structural issues throughout the emerging markets – and for the global economy more generally. “A record $3.9 trillion of emerging market bonds and syndicated loans comes due through the end of 2020…” “…Borrowers face $2 trillion of maturing debt in 2019, with about a quarter of those loans made in dollars.”

Positive headlines from Washington and Beijing engender optimism that a U.S./China trade deal is coming together. One can assume President Trump yearns for those morning Tweets lauding record stock prices. President Xi certainly has ample motivation for a deal to goose Chinese markets and the increasingly vulnerable Chinese economy.

A deal would be expected to boost U.S., Chinese and global equities. It will be curious to see how long Treasuries can observe rallying risk markets before turning nervous. So far, Treasuries, bunds and JGBs have been curiously tolerant. If the risk markets rally gains momentum, I would expect flows to be drawn out of the safe havens. A jump in global yields – perhaps accompanied by a resurgent dollar – could prove challenging for the fragile emerging markets.

Pondering the massive pool of unstable global speculative finance, I ponder how both EM and global corporate Credit will trade in the event of a more sustained recovery in global equities and sovereign yields. Bear market rallies feed optimism and perceptions of abundant liquidity. But I believe the global liquidity backdrop has fundamentally deteriorated. This predicament, however, is completely concealed during rallies – only to reemerge when the buyers’ panic runs its course and selling resumes. It would not be surprising to see liquidity issues resurface in EM currencies and debt markets. In general, the more intense the counter-trend rallies the greater the vulnerability to sharp market reversals and a return of illiquidity.

Fed officials have fallen in line with the Chairman’s cautious language. But I would not totally dismiss “data dependent.” With labor markets unusually tight, a scenario of a trade deal, speculative markets and economic resilience could possibly see the Fed contemplating a shift back to “normalization.” Market pundits were quick to highlight “hawkish” Kansas City Fed President Esther George’s newfound dovishness. Comments from “dovish” Chicago Fed President Charles Evans were as notable: “I wouldn’t be surprised if at the end of the year we have a funds rate that’s a little bit higher than where we are now. That would be associated with a better economy and inflation moving up.” It’s going to be a fascinating year.

http://creditbubblebulletin.blogspot.com/2019/01/weekly-commentary-monetary-disorder-2019.html

Russell Napier writes……..

While many investors are fretting over what stage of the business cycle we are in, the global monetary system is collapsing — with a whimper initially, but ultimately a bang. The whimper is causing losses for equity investors. The bang will impact global asset prices as much as the end of the Bretton-Woods system or the end of the gold standard. The system that is ending has no name. It is a system patched together in the embers of the Asian economic crisis, when many countries intervened in the foreign exchange markets to prevent the appreciation of their currencies. The impacts for investors were profound. The roughly $10tn rise in world foreign exchange reserves between 1999 and 2014 resulted in the forced purchasing of US Treasuries. Foreign central bankers owned just 13 per cent of the Treasury market in 1995, but held a third of it by 2014.

https://www.ft.com/content/271f4a2e-17d5-11e9-9e64-d150b3105d21