Category: Macro Posts

Deutsche Bank in my view is the systematically most important bank Ex US and it just dropped below 7€, the default probability keeps on rising and Coco bond yield is now 12.5%. Any attempt to bail out or merge it will negatively effect EURO.

EM bonds, stocks & currencies will outperform developed markets next year, with Brazil being the top pick of traders, investors & analysts surveyed by Bloomberg. I think we will get great opportunity to buy Brazil over next six months when dollar tops out and commodities are bottoming.

The @NDR_Research Crowd Sentiment Poll is showing the most pessimism in 2.75 years but is still well above levels seen at 2010, 2011 and 2016 lows. Pessimist extremes are different every cycle, but this suggests there’s more work to do.

US 1-year inflation expectations are negative, plunging since February. Much more than normal seasonality.

Wall street expects the Fed will pause its rate-hike policy.

Martin Armstrong writes in this must read post ….I understand this can get confusing because there are so many people who talk without any real-world experience. The Fed MUST raise rates to help the crisis in Pension funds. It raised the Fed Funds Rate (what banks charge each other) 25 basis points to 2.25-2.5%. While the Fed indicated there would be two more rate hikes in 2019, what has gone over everyone’s head is exactly what I have been warning about. We are witnessing indeed not a Currency War but a Central Bank War.

This is a brand new Central Bank War that nobody seems to get I suppose since I may be the only person who actually speaks to central banks outside the USA. All the various central banks and the IMF have been lobbying the Federal Reserve since 2014 pleading with it NOT to raise rates. I have stated many times that the rate hikes by the Fed have NOTHING to do with economic growth, inflation, or trying to stop a speculative bubble in stocks. We can see that GDP growth since the high back in 1978. That may come in the future when the stock market rallies, but not now.
I cannot say this any stronger! The Fed is dealing with reality. It MUST raise rates, not for the economy but in order to NORMALIZE interest rates because lowering rates makes it cheaper ONLY for borrowers while it destroys the philosophy of saving for your retirement when you cannot earn enough interest to buy a nice dinner. Then pension funds are going belly-up like the fish in a polluted pond. State pension funds then turn to their respective governments who then raise taxes lowering the standard of living (i.e. California & Illinois). The ECB is trapped and I have warned that it is the ONLY central bank that can actually go bankrupt because all central banks do not have the same structure. I have made it clear that by their very own standards, the ECB itself is insolvent.
At the end of 2017 in the USA, total household debt exceeded $13 trillion. Total non-financial business debt stood at $6.1 trillion at the end of 2017. The Fed’s balance sheet was $4.4 trillion of which $2.4 is US Treasuries – the bulk of the rest is simply excess reserves. The national debt stood at $20.5 trillion at the end of 2017. That meant the actual Quantitative Easing was not $4.4 trillion, but $2.4 or about 10% of annual GDP compared to Europe at 20% and Japan over 100%. If we look at this perspective, this means the money supply is $41.6 trillion just using the debt. If we then add M2 (all accounts & money market accounts) which stood at $13.8 trillion at the end of 2017, this brings us to a liquid money supply of $55.4 trillion. The Fed’s balance sheet does not even reach 10% of that figure and the QE portion is less than 5%.

Now let us add the stock market, which is liquid. That reached $30 trillion by the end of 2017. Therefore, the liquid assets/cash position stood at $85.4 trillion at the end of 2017. Then let us add total personal real estate (homes) in the United States which stood at $31.8 trillion
Raising rates is NECESSARY for the Fed also realizes that come the next economic recession, the only tool they have is to lower rates. They do NOT share this theory running around that full employment will only take place with NEGATIVE rates at -4% to -5%. The ECB is looking at that BECAUSE they cannot raise rates. Why do you think the IMF is now telling everyone to adopt cryptocurrency? That way they end hoarding and can ENFORCE negative rates outlawing all private cryptocurrencies. Where politicians in Australia have called for the removal of the $100 bill claiming cash is for criminals, the Reserve Bank of Australia (central bank) has defended the embattled $100 note arguing that criminals prefer $50. The response is eliminate both.

Conclusion

This is why we are in a Central Bank War. There are a lot of problems taking place and the Fed knows the Pension Crisis is taking down state and municipal governments. True, they raise rates and government debts explode. But the failure to raise rates means pension funds collapse and bailouts become necessary while states raise taxes which lower economic growth as disposable income declines. So if you can move to one of the state that do not have an income tax, do so while you still can.

So a  lot of focus today was on the Fed’s shrinking balance sheet! Powell dented any hopes of relief there…
The hawkish tone did what was expected: The yield curves flattened in response to the failure to present a dovish tone going into the New Year. The DOLLAR turned and rallied and the early strength in GOLD gave way as the flattening yield curves put a bid to the DOLLAR.

Powell is to be commended by being tone-deaf to the stock market, but going into 2019 the issue of a growing deficit in a full employment economy will be a harbinger of increased market volatility. Be prepared for Wall street to assail Powell at every turn. But at this juncture, Powell is doing a Maggie Thatcher: He is not for turning.

Here’s Fed’s shrinking balance sheet vs equities outside of the US (in USD)… Bad news for returns in the rest of the world.

The most important statement in my view was ” Some years ago, we took away the lesson that markets were very sensitive to news about balance sheet, so we thought carefully about how to normalize it and thought to have it on automatic pilot. That has been a good decision, I don’t see us changing that”
(They don’t give a shit about the markets)

Central Bankers have never admitted ,but they are the ones responsible for this inequality created through rising asset prices. Nobody after Paul Walker was willing to correct this anomaly by taking away this punchbowl until today,when Jerome Powell showed that he gives two hoots about asset prices.

This in my view will lead to a much stronger Dollar and breather for Emerging Markets is over. Commodities including Precious metals will come under renewed pressure and non investment grade bonds (including EM bonds) could see further widening of spreads.

tread cautiously… the terrain is going to get ROCKY

USD: Looking for a game-changer for Emerging Markets

If the Fed were to stop shrinking it’s balance sheet, which no one believes they will, then that would be the game-changer! (green line)

Chasing utilities is a classic development that happens at market tops.

BAML fund manager survey: – Outlook on EM stocks most bullish in 10 years, Eurozone most bearish in six years, UK allocation second most bearish ever

U.S. auto loan delinquencies have ticked up to the highest levels since 2012: Fed data

Economic Sentiment is rolling over-> New cycle high for “how to prepare for a recession”

A staggering 25% to 30% of all publicly-traded firms are actually making a loss:

Nomura View change from Prism of a diamond

Rising Wages
China’s manufacturing wages are now the highest in EM Asia. India is almost half that of China…. WOW

Blue Swan vs Black Swan
As goes China, so goes Germany. There is no  decoupling  in the face of the world’s largest and 3rd largest economies effectively being in recession. Moreover  48.6% of US CFOs also believe we’re in recession within 12 months.

Zero Bound Rates
This is what an era of free money can do to markets. Top line getting valuation forget bottom-line

The signal is loud and clear
Yields on 2-year Treasuries have fallen to 2.71%, the lowest in more than three months. Market signaling to FED…

I think we are in early stages of bear market, with very poor returns for equity investors in the years to come. But it seems looking at the chart below there is just too much bearishness

The smart money index just continues to plunge. what are they seeing that a normal investor is missing?

There was strong demand an Friday’s $16 billion auction of 30-year Treasuries, at least by one measure – primary dealers ended up taking down the second-lowest proportion of the debt on record. This speaks to the growing conviction of slowing growth ahead.

The US Trucking Boom Ends.It was fun while it lasted: One more indicator of slowing growth

Here is an interesting divergence.It seems Emerging markets are sniffing US slowdown and coming change in FED policy. Money already moving to EEM

How India became the most polluted country on earth

Read the full  article on Financial Times

https://ig.ft.com/india-pollution/?segmentId=778a3b31-0eac-c57a-a529-d296f5da8125

BlackRock estimate of Global Liquidity is also showing the lowest reading in their data series.

A picture is worth a thousand words…

CFOs are more focused on defensive strategies than they’ve been all cycle that’s why Capex is sacrificed for buybacks.

Financial stress in US is at a two and half year high. (capitalspectator.com)