The Market Radar

We anticipate monitor and comment on market-moving global economic and geopolitical issues.  No dark side brooding, no wanting the world to end, no political rants.  Traders, investors, policymakers, or market observers can’t afford to ignore us.

 

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Wall Street Algos v. Baseball Sabermetrics

Mike Santoli dishes on Wall Street algorithms and Baseball Sabermetrics.  Very cool!

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Can free-cash handouts help society? | The Economist

This is not going away.

Listened to a Ray Kurzweil podcast the other night.  He said UBI will be ubiquitous by 2030.

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China trade deal is near and Beijing will get everything it wanted – CNBC

  • The U.S.-China trade dispute appears to be ending: Signals are pointing to a done deal. Based on those signs, China will continue to run large trade surpluses with the U.S., and it will never accept Washington-imposed reforms of its trade and industry.
  • U.S. President Donald Trump was apparently (ill) advised that China’s readiness to reduce the bilateral trade imbalance won’t be enough.
  • An election-bound Trump wants the China trade problem out of the way.

Trump was apparently (ill) advised that China’s readiness to reduce the bilateral trade imbalance won’t be enough. No, Washington needed to impose on China enforceable structural reforms. Without that, as has been frequently repeated by U.S. Commerce Secretary Wilbur Ross, China’s destabilizing trade surpluses would be back in no time. – CNBC

This is a no win situation for Trump.  Markets will rally temporarily and then sell, in our opinion.

Also, lot’s of Mad King risk.

Trump will be accused of being weak and out negotiated.   Fox News is already pounding him to nuke the China trade deal.  Conversely,   Forbes is saying the March 1 tariffs cometh.

Who knows how POTUS will react to another one of these covers?

 

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There is history.

Go no further than the recent government shutdown.  A repeat, similar to that, will be a disaster.

Oh yes,  you did hear it here waay first.

Kudos to POTUS for trying but the U.S. would be in much better shape if the administration had handled the China talks with a multilateral approach, enlisting allies – who were with us — and negotiating through the World Trade Organization (WTO).

 

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Happy Presidents Day: Jefferson’s Message To Millennials

Happy President’s Day!

Summary of Jefferson’s Message To Millennials

  • Change the estate laws
  • Debt should not be valid and passed on to the next generation
  • The Constitution should be rewritten for every generation

Jefferson In Paris

Thomas Jefferson,  America’s third president and author the Declaration of Independence,  was the Minister to France at the beginning of the French revolution.  He supported and even allowed his residence to be used as a meeting place for some of the rebels led by Lafayette.

Jefferson was able to observe the causes and consequences of the French revolution first hand and understood that debt and aristocracy were inexorably linked  and were anathema to republican democracy

Letter To James Madison

In 1789, Jefferson wrote a letter to James Madison, the Father of the U.S. Constitution,  where he laid out the rationale for sweeping social and political reform to prevent such a revolution in the new formed States.

Jefferson had estimated the natural life of a generation during its majority.  He used the mortality tables of the great scientist Georges-Louis Leclerc Buffon and arrived at the term of 19 years.  Life expectancy during the day was approximately between 30 and 40 years, so, of course, the 19 years would have to be indexed into current life expectancy, let’s say 40 years.  Nice, the biblical approximation of a generation.

“The Earth Belongs To The Living”

The upshot of the third president’s letter to the fourth president, a decade or two before either would assume power,  was the basic proposition “that the earth belongs to the living: that the dead have neither powers nor rights over it.

That is every generation has a claim to rule itself and that every generation was like an independent nation with respect to every other generation.

TJ offered three applications of this principle:

  1. First, was respect to property, above all landed property.  The government should strike down laws that entail, a property that is estates are kept entire.  They can never be broken.  Jefferson viewed first hand the feudalism that destroyed 18th century France and lobbied Madison for America to take immediate steps so that no great aristocratic estates arise in the new country because aristocracy is the opposite of democracy.   Aristocracy means the rule of a few privileged families forever.  In today’s parlance, aristocracy is the eternal rule of the 1 percent at the expense of the other 99 percent.  The privileged minority that constitutes the State itself, that control the government.  Sounds eerily similar to what the body politic is debating today, no?
  2. Second, that one generation could not be burdened with the debts of another. The generation that enjoyed the benefits of the borrowing would not impose the costs of such borrowing on the next.  The yuuge debts of the Bourbon monarchy had contributed to the French Revolution, just as those of Great Britain had earlier set off the events culminating in the American Revolution.  Should not France declare in its new constitution that no debt be contracted for payment beyond the term of 19 years?  Jefferson thought, not only, would a provision save the people from oppressive taxes; it would also “bridle the spirit of war” by reducing the power to borrow within natural limits.
  3. Third, and most importantly, the Constitution,

Jefferson applied the principle to the constitution and laws of government. “No society can make a perpetual constitution or even a perpetual law. The earth belongs always to the living generation. . . . The constitution and laws of their predecessors [are] extinguished . . . in their natural course with those who gave them being. . . . Every constitution then, and every law, naturally expires at the end of 19 years.  If it be enforced longer, it is an act of force, and not of right.”  Madison, who had just gotten the Bill of Rights passed, would have nothing to do with it.  – VQR

So, there you have it, millennials,  WWJD – “what would Jefferson do?

Madison thought TJ’s letter was nuts and Jefferson never really pressed these issues any further.   Interesting, provocative, and a bit prophetic, nonetheless.   Party like 1999 1789!

Siena’s 6th Presidential Expert Poll 1982 – 2018

 

Loudonville, NY – For the sixth time since its inception in 1982, the Siena College Research Institute’s (SCRI) Survey of U.S. Presidents finds that experts rank Franklin D. Roosevelt, Teddy Roosevelt, Abe Lincoln, Thomas Jefferson and George Washington as the United States’ top five chief executives. The 157 participating presidential scholars for the first time name Washington as number one with FDR second, Lincoln third, Teddy Roosevelt fourth and Jefferson fifth. Donald Trump enters the survey as the 42nd rated president, and he joins Andrew Johnson, James Buchanan, Warren Harding and Franklin Pierce in the bottom five. Dwight Eisenhower moved up to sixth, the highest ranking he has ever achieved, while Ronald Reagan was up five spots to 13th, and George W. Bush was up six places but remains in 33rd place. Barack Obama slipped two spots to 17th, Bill Clinton dropped to 15th from 13th, and Andrew Jackson fell five places to 19th.

…Scholars rate presidents on each of twenty categories that include attributes – background, imagination, integrity, intelligence, luck and willingness to take risks, abilities – compromising, executive ability, leadership, communication, and overall ability and accomplishments – party leadership, relationship with Congress, court appointments, handling the economy, executive appointments, domestic accomplishments, foreign policy accomplishments and avoiding mistakes. Theodore Roosevelt is rated highest on attributes, Lincoln tops the list on abilities and Washington leads on accomplishments.

…The Siena College Research Institute (SCRI) Survey of U.S. Presidents is based on responses from 157 presidential scholars, historians and political scientists that responded via mail or web to an invitation to participate. Respondents ranked each of 44 presidents on a scale of 1 (poor) to 5 (excellent) on each of twenty presidential attributes, abilities and accomplishments. Overall rankings were computed by assigning equal weight to each of those twenty categories. For additional information about the survey visit http://www.siena.edu/sri/research or contact Don Levy at 518-783-2901, dlevy@siena.edu or Doug Lonnstrom at 518-783-2362.  – Siena Research Institute

The Best and Worst Ranked

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Ranking Of Recent Presidents

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Changing Historical Perspective

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QOTD: Et toi?

Voltaire

QOTD = Quote of the Day

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Week In Review – February 15

Summary

  • More risk on. EM bond yields x/ Turkey & Indo and Euro spreads in on the week
  • U.S. credit continues to rally
  • The dollar a bit stronger, EM FX weaker
  • Euro stocks on fire last week led by Italy, up 4 1/2 percent
  • Russell in a huge ramp this year, up over 16 percent.  Where is the recession? What will the Fed do?
  • Crude breaking out

Commentary:  Markets partying like the world is on the verge of a huge global growth spurt.  Yet we see commentary the Fed will be cutting  rates and buying Treasuries later this year even with core CPI consistently running over 2 percent.

Moreover, the inside scoop is that China is not moving on big issues but POTUS says all is well with trade negotiations.

Markets need their own version of the 25th amendment.  Waaay overbought, steering clear, and selling.

Happy Presidents Day and happy hunting this week, folks.

Crude Breaking Out

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Sector ETF Performance – February 15

Wow!  Not one red bar.  Don’t think we have ever seen this.  Must be a contrarian signal.

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ETF_YTD

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Global Risk Monitor – February 15

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RiskMon_2

 

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The Elusive China Trade Deal

Forbes asks the $382 billion question this morning,  Is A China Trade Deal Slipping Away?

President Trump and Chinese leaders are trying to put a positive spin on their marathon trade talks, but the fact is that there is little sign of progress. – Forbes, Feb 16th

That is our thinking and watched with astonishment the Puff The Magic Dragon rally on Friday, with the Dow closing up over 400 points.

You know our thoughts,

Seriously, folks,  do you really think the Middle Kingdom, with all its history and past glory, after climbing back to global superpower status after hundreds of years, is now going to cave and give up some of its sovereignty because Trump demands it?

President Xi already seems to be preparing his population for the worst case scenario, warning of “challenging times ahead” possibly in the event Trump goes ahead with the tariff hikes.  Maybe we are reading too much into it and maybe not. – GMM

No way in hell will the Chinese give up sovereignty because Trump, whom they now view as Paper Tiger, demands it.  No doubt they were watching the government shutdown negotiation debacle with great interest and learning.

Potemkin Trade Deal

So, it looks like we will get an extend and pretend of the March 1 deadline unless Trump decides to play hard and bring down the markets and economy.   Xi’s big gamble is that he is too politically weak to do so and won’t.

There is a possibility that I will extend the date. And if I do that; if I see that we’re close to a deal or the deal is going in the right direction, I would do that at the same tariffs that we’re charging now. I would not increase the tariffs.  – President Trump,  Feb 15th

The Trump team has run into a “Great Wall” of Chinese negotiators and seem to have failed to access what the deal breakers are for President Xi, which is one of the first principles of good negotiating.  Bullying and threats of tariffs won’t work and will result in a worse situation than the status quo.

The final deal will be some sort of convoluted Potemkin trade deal (yet another one) with little structural reform to the Chinese economy, which will then invite great criticism of the administration.  That is that he caved once again.

Again, we reserve the right to be wrong and will eat our crow BBQ style drowned in sriracha sauce.

BS Degrees From MSU

All administrations, political parties, and governments, in general, are full of officials with BS degrees from MSU.  BS, as in Bull Shit;  MSU, as in Make Shit Up.

But they seem more ubiquitous in the Trump administration, starting at the top.  Weak in economic training, expertise, and understanding, and strong on ideology,

…Malpass nomination highlights the remarkable character of Trump’s economic appointments.

Remarkable in what way? Well, remarkably bad. Every economist, yours truly very much included, gets it wrong sometimes. But Trump only seems to choose men who have been wrong about everything.

Beyond that, however, what’s remarkable is the extent to which this president consistently chooses economists whose ideology is at odds with his own professed views on policy.  – Paul Krugman, Feb 14th

When will Mr. Market learn?

 

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Gundlach’s Coming Corporate Bondageddon

Nice piece in ZH on Jeff Gundlach dishing with Yahoo Finance on the vulnerability of the corporate bond market in the next recession.   In our data analysis piece, which we reposted below, we highlight the fact largest holders of U.S. corporate bonds are “weak handed” foreigners.   Given the diminishing market making capacity of the Street, good luck finding a bid when they decide to hit the exits.

Money quotes from the Bond King,

Major risks facing the market

JULIA LA ROCHE: Right. Well, a lot certainly has changed, as you mentioned. And you’re someone who’s known as someone who always looks at risk. You look at various risks. So I’m curious, what is on your radar right now? What are you focused on?

JEFFREY GUNDLACH: Well, I think the biggest risk– and it may not materialize for a little while longer– is that when the next recession comes, there’s going to be a lot of turmoil because the corporate bond market is extraordinarily leveraged. The ratings of the corporate bond market are very low. There’s a study by Morgan Stanley research that said that if you use leverage ratios alone– and there are other variables that the rating agencies used, but the most important, of course, is leverage ratios of a corporation. And if you use leverage ratios alone, that 45% of the investment grade bond market would be rated junk right now. Right now.

So if there’s a recession, obviously, these ratings will have to be lowered. For now, the rating agencies are listening with sympathetic ears to reassuring statements by some large corporations that they’re aware that their leverage ratios are kind of high, but they plan on addressing that sometime in the next few years. If there’s a recession, it’s obvious that the leverage ratios will not be addressed, and the ratings will have to go. So that’s a really big risk.

Also, during the next recession, we’re going to have an extraordinary national debt problem, because the national debt is growing at a very rapid rate already. And we’re supposedly, if I listen to Larry Kudlow and the president, they keep telling me that it’s the best economy ever. I know that they know that they’re being hyperbolic. But it is a growing economy. Real GDP is 3% year over year of the most recent reading. And yet, the national debt in fiscal 2018, which ended September 20, was increased by $1.27 trillion.  – Yahoo Finance

Our latest data work on the corporate bond market is very interesting and kinda flew under the radar.  We repost it, right here, right now!

Ownership And Profile Of The Corporate Bond Market

 

Summary

  • Nonfinancial corporates have almost doubled their stock of outstanding bonds since the GFC moving from 19.5 percent of GDP in 2007 to 26.5 percent in Q3 2018
  • Conversely,  the domestic financial sector has been deleveraging, reducing bond debt by almost 25 percent since 2007, which reduces systemic risk
  • Foreigners are by far the largest holders of U.S. corporate bonds and, we suspect, the weakest hands

We spent most of the day crunching numbers on the U.S. corporate bond market as stocks went on another roller coaster ride.  Given all the hand-wringing and concern over the buildup of corporate debt since the Great Financial Crisis (GFC), we have a real need to see and understand the data.

The Data

We look at the changes in level, profile, and ownership of the corporate bond market over two different periods with the Fed’s Flow of Funds data.  Our point of reference is Q4 2007, which was not only the end of the early century bull run in stocks and beginning of the GFC but also the quarter where nonfinancial corporate debt as a proportion of the corporate bond market was at its lowest (26.6 percent).

Fast forward 43 quarters to Q3 2018, the latest available data, and lag back 43 quarters from Q4 2007 to Q1 1997, and there you have our three points of measurement.

Conclusions/Data Inferences

1997 Q1 to 2007 Q4

  1. The data illustrate the massive build in leverage in the domestic financial sector from 1997 to 2007, which was the primary cause of the GFC.  Domestic financial sector bond debt grew by 378 percent over the period, increasing at a compounded average growth rate of 15.7 percent, to almost 60 percent of the market.
  2. The stock of nonfinancial corporate bonds grew at a more modest CAGR at 5.5 percent during the same period, right in line with nominal GDP growth.
  3. Foreign issues in the U.S. experienced significant growth though from a small base.
  4. Overall corporate bond debt to GDP grew from 41.08 percent of GDP in 1997 to 73.15 percent by Q3 2018.
  5. Foreign issues should be excluded from the bond debt-to-GDP ratio to gain a better measure of the true debt burden on the U.S. private sector.

2007 Q4 to 2018 Q3

  1. The U.S. domestic financial sector has been deleveraging since the GFC, reflected in the negative 23.7 percent growth rate in the sector’s bonds outstanding.
  2. Conversely, nonfinancial corporates have grown their bond debt by over 90 percent to 42 percent of the corporate bond market and 26.50 percent of GDP, up from 19.47 percent in 2007.
  3. Nonfinancial corporate bonds now make up the most significant percentage of corporate bonds outstanding in the U.S. and, by extension, now the biggest
  4. The diminishing liquidity, or lack of traditional market makers, magnifies the risk of an outsized dislocation in the sector. Though not on such a massive scale,  the buildup in nonfinancial corporate bond debt since 2007 mirrors that of the financial industry from 1997 to 2007.

Who Owns The Corporate Bond Market

  1. Foreign holders of U.S. corporate bonds make up the largest ownership group subjecting the market to capital flight risk, which, in other countries, is often sparked by domestic political instability. Watch this space.
  2. Life insurance companies are the most significant domestic holders of corporate bonds, taking down almost 20 percent of outstandings.
  3. Mutual funds are a close third followed by households, which include hedge funds.
  4. Other makeup over 20 percent of corporate bondholders but each group is less than 5 percent of the market. They include state and local employee pension funds, banks, state and local governments, broker-dealers, ETFs, closed-end funds, among others.
  5. The largest hands – foreign holders – are most likely the weakest hands. Another risk not even close to the radar of most traders and investors.

Upshot

You now have the data and charts, folks.  Short and sweet, easy to read.

Now you have the knowledge and can’t claim you were unaware of the risks if the GE refrigerator falls through the kitchen floor.

 

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Data Source

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