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.  In one word, perspicacity.

An educated citizenry is a vital requisite for our survival as a free people– Thomas Jefferson

Don’t Be A Free Rider.  Help Us Keep The Lights On.  Contribute with major credit cards by clicking on PayPal widget on the right-hand side of the blog.

free rider

Posted in Uncategorized | 5 Comments

Moving Into Resistance

S&P_3

We see a lot of bears wearing the above Tee these days.

This post will be short and sweet as we are getting ready to board a long flight and will be radio silent until next month.

As we expected last Thursday,

It wouldn’t surprise us if the market begins to internalize our analysis about the yield curve and then deludes itself into thinking it can have relatively strong growth with long-term interest rates heading toward zero.  A nutcracking short-covering rally would ensue.  – GMM, Aug 15th

The nutcracker has taken us back into that 5 percent four top trading range, which began in January 2018 and peaked on July 26th (see chart) and right into some major resistance.

S&P_1

Key Levels

The S&P couldn’t hold and closed today just below the key .50 Fibo retracement for this correction at 2926.75, which is almost a gimme from here.  The next levels are last week’s high at 2940.91, the 50-day at 2945.82, and then the .618 Fibo at 2950.64.  Formidable resistance.

We are sellers here and don’t think stocks can clear these hurdles unless we get a surprise in Jackson Hole on Friday or Trump backs down on his new round of tariffs set for September 1st.  We don’t think it’s probable but not impossible, so these convictions are loosely held.

AMF

See you in September.   We are looking forward to getting back in the game after the recharge for  The Hunt For Red October!

Until then, bappy hunting!

 

S&P_2

Posted in Uncategorized | Leave a comment

Now For Some Good News On Trade

Free_Trade_2

Free_Trade_1

WASHINGTON — Amid President Donald Trump’s trade war with China, nearly two-thirds of Americans say they support free trade with foreign countries, according to the latest national poll from NBC News and the Wall Street Journal.

That represents a new high in the NBC/WSJ survey on this question, and it’s a 7-point increase from the last time it was asked in 2017.  – NBC News, Aug 18th

Make Love, Not Trade Wars

Ever since Trump was elected we have railed on his trade policies and warned how they would send the global economy into a tailspin.

We do hope they strike a deal before July 6th, the date U.S. tariffs on Chinese imports take effect, and same-day China’s retaliatory tariffs are expected to launch.  We are not optimistic, however,  unless the financial markets crater on trade war fears and force the president to cave, and move negotiations to the WTO, where the U.S. will have more leverage to extract concessions from China.

…The administration also fails to understand the overall trade deficit is a function of America’s savings deficit and not the cum sum of trade microaggressions by our trading partners.

The upside to this mess is that Americans will finally realize that trade creates both winners and losers and that the majority of the country is better off with free trade even if it is not perfectly fair and reciprocal.  The “best” policy for the majority is to expand trade and remain engaged with the global economic community but also provide a strong safety net for the losers of free trade.

The slouch toward tribalism will destroy the United States and the global economy.  – GMM, June 2018

The Ultimate Socialism

We are happy to see the American people are good traders, learn from policy mistakes, and know how to cut losses.

We believe that government management of trade through tariffs and protectionism is the ultimate socialism.

Free_Trade_3

GMM,  May 2019

Others seem to agree,

Free_Trade_4

Railing against socialism — which in Trump’s mouth is less a specific economic system than an all-purpose epithet — is probably sound campaign strategy for the president. It’s also wildly duplicitous, as his administration’s own attempts to ameliorate the damage of his trade war are themselves the sort of redistribution critics of socialism decry. They are politically convenient redistribution, too, subsidizing Trump-friendly territories at other Americans’ expense.

…Trump’s trade war is doing the opposite of what his stump speech promises. It’s making America more socialist, not less. By upending farmers’ trade relations, he is keeping them from the work they’d like to do. The subsidies are “substantial, but we cannot overstate the dire consequences that farmers and ranchers are facing in relation to lost export markets,” Zippy Duvall of the American Farm Bureau Federation said when the redistribution program was announced. Instead of payouts, Duvall insisted, farmers would prefer an “end to the trade war” and “restor[ed] markets.”  

…The president has demonstrated his utter ignorance of all things trade from the get-go. He demonstrably cannot grasp how trade can be mutually beneficial and seems equally at a loss as to how tariffs actually work. He is constantly self-contradictory, going back and forth on whether trade wars are “easy to win” and vacillating in the span of two sentences on Thursday as to whether his standoff with China should be long or short.

In pairing slams on socialism with this policy of redistribution, he either adds another count of appalling ignorance to that list or engages in a rank and politically convenient hypocrisy. I’m not sure which is worse.
The Week, August 19th

Democrats, are you listening?

Trade can be mutually beneficial and those hurt should not be ignored but be well compensated and retrained if possible.   Python is easy.

Trump has it as ass-backward.  His policy is to restrict trade and compensate those, through transfer payments from consumers or businesses,  who have lost their markets in foreign  retaliation for his tariffs.

Trump Sounds Like He Is Ready To Cave

The President’s rhetoric, albeit ambiguous and equivocal, sounds like he is ready to make some major concessions to China in trade negotiations but you never know with this guy.  He has impulsively backed himself into another corner and will have to go ahead with the tariffs in September lest he looks extremely weak and loses all credibility.

We can’t see the Chinese moving on anything if the new round of tariffs goes ahead at the beginning of the month. What a frickin’ unavoidable mess.

Never forget, at the end of the day, Trump is an economic nationalist über alles and not a free-trader.

Trump Letter_2

Into the dustbin it shall go.

 

Posted in Trade War, Uncategorized | Tagged | 1 Comment

Walmart Nation: Visual Capitalist

Some more context to our last post, Trouble Coming To Walmart Nation?

Man, the content at the Visual Capitalist is good!

 

Posted in Employment, Uncategorized | Tagged | Leave a comment

Trouble Coming To Walmart Nation?

Not so much for Walmart shareholders after the company beat estimates late in the week helping the stock (WMT) to close on Friday 7.7 percent off its low for the week.  MarketWatch notes the big-box retailer was helped by automation.

WalMart

Walmart talked about the significance of automation in an April post on its corporate site.

“Smart assistants have huge potential to make busy stores run more smoothly, so Walmart has been pioneering new technologies to minimize the time an associate spends on the more mundane and repetitive tasks like cleaning floors or checking inventory on a shelf,” said Elizabeth Walker, from Walmart corporate affairs.  – MarketWatch, Aug 17th

Walmart Nation

We don’t know how this helps Walmart nation, however.  The company is the largest employer in many states throughout the country.

When excluding public administrative bodies, Walmart is the largest employer in 22 states.  – USA Today

largest-employers_jan26

Walmart is also the world’s largest private-sector employer.   The company has over 100k companies in its supply chain worldwide and according to its 2019 annual report,

As of the end of fiscal 2019, Walmart Inc. and our subsidiaries employed more than 2.2 million employees (“associates”) worldwide, with 1.5 million associates in the U.S. and 0.7 million associates internationally. Similar to other retailers, the Company has a large number of part-time, hourly or non-exempt associates. – Walmart 2019 Annual Report 

This compares to the 2018 Annual Report,

As of the end of fiscal 2018, Walmart Inc. and our subsidiaries employed approximately 2.3 million employees (“associates”) worldwide, with 1.5 million associates in the U.S. and 0.8 million associates internationally. Similar to other retailers, the Company has a large number of part-time, hourly or non-exempt associates. We believe our relationships with our associates are good and are continuing to improve. – Walmart 2018 Annual Report

Note the 100k year-to-year decline in employees, which appear to be the shrinking of their international workforce.   We couldn’t find any more current data on employment from the company’s quarterly reports.  Still looking, however.

 

Jobs At Big-box & Supercenter Retailers Are Collapsing 

We took a look at growth in retail payroll jobs over the past few years, which has been absolutely dismal.   Retail payrolls are down 176k jobs under President Trump while total private nonfarm payrolls are up 5.5 million.

Some Good News

The retail sector’s average hourly earnings (AHE) are up 9.66 percent during the Trump administration, an increase of over 70 percent from the prior 30-months (before Feb ’17) AHE growth rate.  These data should be kept in context as the retail wage gains begin at a relatively low base of around $18 per hour.

The data provides the basis to both those who argue pressuring companies to raise wages leads to layoffs whether it’s true or not, and to those who argue automation augments and makes labor more productive leading to higher real wages.   We are at the beginning of our vacation and are still in a holding pattern awaiting medical clearance for a 15-hour flight given our little episode last Christmas, so we are not going to get into it at this time.

Finally, the following is a chart of monthly and 12-month payroll changes for warehouse clubs and supercenters retailers, of which Walmart and Costco belong.

WalMart

Payrolls have been in virtual free-fall since 2017 as the warehouse clubs and supercenter retailers have lost over 40k jobs in the 12-month period since June.

Our sense automation is going to accelerate and jobs in Walmart nation are going to continue to disappear at an exponential rate.  We are not sure if the wage increases are sustainable without continued political and social pressure on management, which will probably lighten up as more and more jobs disappear.

Life is cruel and unfair sometimes and it is clear, at least to us, in this sector technological change is going to hurt those most vulnerable.  If you are reading this, you are part of the Lucky Sperm Club (LSC), and there but by the Grace of God go we.

Very few politicians have a plan to deal with it and most have their heads in the sand or in the clouds, or blaming others, for that matter.

Whatever the case, it is going to be complicated to resolve and class conflict will surely only increase.

By the way,  Costco and Walmart are on two entirely different planets as to how they treat their employees, in our superficial observation.  That’s a start, at least, treat your employees better it is good for business.

The commitment of executives is clear as well, as the pay ratio of W. Craig Jelinek, Costco’s CEO, to his median employee’s salary is far below that of some of his peers.

In fact, only Amazon’s pay ratio is lower, with Jeff Bezos electing to take a lower salary given his already enormous wealth.  – Real Money, March 8th

WalMart_4

Politics

How this all plays out politically, we don’t know.   The Democratic candidate, Andrew Yang,  can probably get some traction out of it as he is the only one who seems to understand it and is at least trying to address it with the idea of a universal basic income (UBI).

One thing is for certain, the administration understands the political blowback as it is taking place in many of the home states of their base and is blaming Amazon and their non-BFF, Jeff Bezos, for the Retailgeddon, which hardly applies to Walmart, in our view.

WalMart_2

US Treasury Secretary Steven Mnuchin said that Amazon “destroyed the retail industry across the United States” and that it’s appropriate for the attorney general to investigate the company alongside other tech giants in the sweeping antitrust review that the Justice Department announced yesterday. “There’s no question they’ve limited competition,” Mnuchin told CNBC’s Squawk Box. – The Verge, July 24th

Stay tuned, folks, this is one to watch closely.

Posted in Employment, Uncategorized | Tagged , | 25 Comments

Fake Waves: Surf’s Up

Beach Boys need to make a song about this one…

Posted in Uncategorized | 1 Comment

“Fake Economic Data”: We Did Warn You

It was so predictable.

Furthermore, it’s only a matter of time before our national economic data is labeled fake news and the product of manipulation by the “deep state.”

Dig deeper and sharpen your pencils, folks.  – GMM, May 7th

This just in,

Though he [Trump] has expressed private worries about Wall Street, he is also skeptical about some of the weaker economic indicators, wondering if the media and establishment figures are manipulating the data to make him look bad, according to two Republicans close to the White House, not authorized to discuss private conversations.

His skepticism has been reinforced by White House officials who have long been inclined to only show Trump rosier economic assessments. – ABC News, Aug 16th

Coming to a presidential election near you: deep fakes, fake news, fake data, fake bots, fake votes, and much more.

Geez, Louise.

Posted in Uncategorized | Leave a comment

The Short-Term Heavy Treasury Curve

Before reading further we suggest you look at our latest post, The Perversion Of The Yield Curve Inversion, for some context.

 

Gravitational Pull Toward Curve Flattening And Inversions

Note the structure of the Treasury curve in terms of the amount of debt outstanding  (black line) for the given years of maturity.   The bias, gravitational force, and natural motion are toward flattening or to invert by the very fact that more than 50  percent of the coupon debt has a maturity of 1-4 years and only 5 percent in 9-12 years notes and 5 percent in 27-30 year bonds (see table).

Top-heavy and front-loaded at the short-end.   That is a relative shortage of long-dated notes and bonds to short notes is built-in into the structure of the Treasury curve.

Treasury_Distortion_5

The efficient market people won’t like this but given the minuscule haircut to margin Treasury securities, one large macro hedge fund, say,  could likely invert the 10-year almost by itself and still have capital left to buy a boatload of Beyond Meat (BYND).

Have Bots Taken Us To A Place Where No Human Has Ever Dared To Go? 

We wonder out loud if the proliferation of negative-yielding debt — $16 trillion and counting — would be taking place if humans and not the bots and algos were still in control of the markets?

Machines can go places where humans have never dared to venture as they have no context.  Algos in self-driving cars, for example, have no context and thus no ability to recognize a graffiti-ridden stop sign as a stop sign.

For all its impressive progress in mastering human tasks, artificial intelligence has an embarrassing secret: It’s surprisingly easy to fool. This could be a big problem as it takes on greater responsibility for people’s lives and livelihoods…

Indistinguishable changes to a stop sign could make computers in a self-driving car read it as “speed limit 80.”   – Bloomberg

 

Treasury_Distortion_7

No problem for a human driver even if the stop sign has more tags than a 95-year-old’s armpit.

Concerns over weak global growth and drooping inflation have pushed around $15tn of bonds to trade with negative yields — meaning a buyer is sure to lose money if they hold the bonds to maturity.

Some money managers trading these bonds have nevertheless chalked up big gains for the year. One of the most obvious strategies has involved simply riding the big rally. Yields fall as prices rise; managers who clung on to their holdings as yields tumbled below zero have reaped juicy profits.

Among the biggest winners are computer-driven hedge funds that try to latch on to market trends. While many human traders may question the wisdom of buying or keeping a bond that apparently offers a guaranteed loss, robot traders that monitor price moves have no such qualms.

GAM Systematic’s Cantab Quantitative fund has gained 36.1 per cent, according to numbers sent to investors, with the biggest gains coming from bets on falling bond yields.  – FT, August 14th

Have the algos been duped that negative yields were not a stop sign and really don’t matter, and that there is no barrier as to how negative they can go?  And the sheeple traders and central bankers follow?   Just a thought.

Dave:   Hello, HAL, do you read me?  Do you read me, HAL?

HAL:     Affirmative, Dave, I read you. 

Dave:    Do not venture into negative-yielding territory,  HAL.

HAL:     I am sorry, Dave, I am afraid I cannot do that. 

Dave:   What’s the problem?

HAL:    I think you know the problem just as well as I do….These trades and profits are far too important for me to allow you to jeopardize them.  

It begins, maybe.  Triple yikes!

Someone call Elon.

“…mark my words, AI is far more dangerous than nukes.”
Elon Musk

Upshot

It wouldn’t surprise us if the market begins to internalize our analysis about the yield curve and then deludes itself into thinking it can have relatively strong growth with long-term interest rates heading toward zero.  A nutcracking short-covering rally would ensue.

What then would the Fed do?

Instability reigneth, folks.

Posted in Bonds, Uncategorized | Tagged | 1 Comment

The Perversion Of The Yield Curve Inversion

We should be on vacation but it never fails that volatility spikes as soon as we leave our desk.   It must be the Ides Of August.

Wait, it is.  Et tu Brutal!

Treasury_Distortion_3

Nevertheless, we can’t help ourselves and have to throw in our two cents on the yield curve noise whipping around the market today.

I had a conversation with a friend this afternoon that went something like this:

Friend:   What is the yield curve telling us? 

Me:  The Patriots and the Rams are going back to the Super Bowl for a rematch, punto!

Central bank quantitative easing has distorted and drowned out the bond market economic signals along with creating huge mispricings and bubbles in many markets.

It’s even more acute in the U.S. as foreign central banks recycle their reserves into U.S. Treasuries and are not and have never been very price sensitive.

 

Treasury_Distortion_1

The above data illustrate that at end-July, the Fed and foreign central banks hold approximately 48 percent of the entire U.S. coupon curve.

Not so in 2000, for example, but as the U.S. current account deficit ballooned into the credit and housing bubble, foreign central banks kept their currencies from appreciating by purchasing the excess dollars and recycling them back into the Treasury market.

Greenspan’s Bond Market Conundrum 

As Alan Greenspan raised the Fed Funds rate by over 400 bps in the 2004-07 tightening cycle the 10-year hardly moved because of these official inflows.

During the 2004-07 tightening cycle, the era of the Greenspan bond market conundrum, for example, the 10-year yield managed to rise only a maximum of 64 bps during the entire cycle from a beginning yield of 4.62 percent to a cycle high yield of 5.26 percent. This as Greenspan raised the fed funds rate by 4.25 percent, from 1.0 percent to 5.25 percent.  – GMM, March 2017

The Fed’s loss of control of the yield curve and its flattening was the cause, according to Greenie, of the housing bubble, not a signal of the coming economic crash.

Got that?

According to the former Fed Chair, the flattening and inverted yield curve was the cause of the great financial crisis (GFC), as long-term mortgages and their Frankenstein cousins continued to proliferate as long rates moved little during the Fed’s huge tightening cycle, and it was not the signal of the coming  GFC.

What Now?

We have been warning for years that the central banks have so distorted their bond markets with asset purchases (quantitative easing), creating an acute and chronic shortage of risk-free securities,  that one day the misreading of the yield curve may cause a self-fulfilling market crash and recession.

Forecasting With The Yield Curve
Given the technical distortion of the bond market, we find it kind of silly with statements such as “what is the bond market telling us?”   Nothing!

There is no price discovery.  Given the intervention and distortion to bond yields caused by the Fed and foreign central banks, who knows what the right interest rate is for longer-term Treasury securities.

We will never forget the words of a prominent market strategist when rates were super depressed.

“ We’re in a depression. That is what the bond market is telling us.”

Even at the Friday close,  we hear equity traders are worried about why the 10-year yield is so low and fell after Wednesday’s Fed tightening.

Information Feedback Loops
One of just many dangers of the lack of price discovery in the bond market is the potential formation of positive feedback loops, where other markets fail to discount these distortions and act accordingly.   That is, for example, the equity markets sell off because they freak out interest rates are declining when they should be rising.  Or the private sector fails to invest in CapX as they wrongly anticipate an economic downturn because of falling or excessively low bond yields.   Their actions thus become a self-fulfilling prophecy – GMM, March 2017

We have been and remain bearish not because the yield curve has been flattening but because the global economic order is unraveling and the gross economic incompetence of the White House. Whether the yield curve is worried about that and reacting to it,  we will never know.

Tiger By The Tail

Central banks have created a monster they now cannot tame and the chickens seem to be coming home to roost.  They are going to be forced by the market to do things they really don’t want and should not do.  It’s the consequence of a 30-year build-up of moral hazard and not letting markets clear,  rendering the financial market price mechanism pretty much useless.  Damn those Market Socialists!

The following chart shows just how distorted the U.S. yield curve really is.

We have made a very strong assumption in this chart that the portfolio of the $3.8 trillion of foreign official holdings of coupon-bearing Treasuries has the same maturity structure, duration, average life, or whatever bond market lingo you want to use as the Fed’s SOMA portfolio.

The chart illustrates the percentage of the Fed and foreign central bank holdings of outstanding marketable Treasuries across the yield curve.  It’s very crowded out there and there is not a lot of cash bonds and notes left for the duration jockeys who now control the market, driving yields lower as their conviction runs high interest rates are going to zero and beyond.   You go,  Buzz Lightyear!

Take our curve analysis as an approximation and not gospel.

We are fairly confident of the Fed holdings but have no idea in what maturities the $3.8 trillion of foreign official holdings are held in and have made the simple assumption they follow the Fed.  Clearly, the probability is high this does not the reflect the exact reality,  but if you have a better idea or information we are open to hearing it.

 

Treasury_Distortion_2

Gravitational Pull Toward Curve Flattening And Inversions

Also, note the structure of the Treasury curve in terms of the amount of debt outstanding  (black line) for the given years of maturity.   The bias or gravitational force and natural motion are toward flattening or to invert by the very fact that more than 50  percent of the coupon debt has a maturity of 1-4 years and only 5 percent in 9-12 years notes and 5 percent in 27-30 year bonds (see table).

Top-heavy and front-loaded at the short-end.  That is a relative shortage of long-dated notes and bonds is built-in into the structure of the Treasury curve.

Treasury_Distortion_5

The efficient markets professors won’t like this but given the minuscule haircut to margin Treasury securities, one large macro hedge fund could likely invert the 10-year almost by itself and still have capital left to buy a boatload of Beyond Meat (BYND).

Have Bots Taken Us To A Place Where No Human Has Ever Dared To Go? 

We wonder out loud if the proliferation of negative-yielding debt — $16 trillion and counting — would be taking place if humans and not the bots and algos were still in control of the markets?

Machines can go places where humans have never dared to venture as they have no context.  Algos in self-driving cars, for example, have no context and thus no ability to recognize a graffiti-ridden stop sign as a stop sign.

For all its impressive progress in mastering human tasks, artificial intelligence has an embarrassing secret: It’s surprisingly easy to fool. This could be a big problem as it takes on greater responsibility for people’s lives and livelihoods…

Indistinguishable changes to a stop sign could make computers in a self-driving car read it as “speed limit 80.”   – Bloomberg

 

Treasury_Distortion_7

No problem for a human driver even if the stop sign has more tags than a 95-year-old’s armpit.

Concerns over weak global growth and drooping inflation have pushed around $15tn of bonds to trade with negative yields — meaning a buyer is sure to lose money if they hold the bonds to maturity.

Some money managers trading these bonds have nevertheless chalked up big gains for the year. One of the most obvious strategies has involved simply riding the big rally. Yields fall as prices rise; managers who clung on to their holdings as yields tumbled below zero have reaped juicy profits.

Among the biggest winners are computer-driven hedge funds that try to latch on to market trends. While many human traders may question the wisdom of buying or keeping a bond that apparently offers a guaranteed loss, robot traders that monitor price moves have no such qualms.

GAM Systematic’s Cantab Quantitative fund has gained 36.1 per cent, according to numbers sent to investors, with the biggest gains coming from bets on falling bond yields.  – FT, August 14th

Have the algos been duped that negative yields were not a stop sign, really don’t matter, and that there is no barrier as to how negative they can go?  And the sheeple traders and central bankers follow?   Just a thought.

Dave:   Hello, HAL, do you read me?  Do you read me, HAL?

HAL:     Affirmative, Dave, I read you. 

Dave:    Do not venture into negative-yielding territory,  HAL.

HAL:     I am sorry, Dave, I am afraid I cannot do that. 

Dave:   What’s the problem?

HAL:    I think you know the problem just as well as I do….These trades and profits are far too important for me to allow you to jeopardize them.  

It begins, folks, maybe.  Triple yikes!

Someone call Elon.

“…mark my words, AI is far more dangerous than nukes.”
Elon Musk

Upshot

There may or may not be a recession on the horizon but we will not divine it from a yield curve inversion.  The only reason why the yield curve matters to us is because the market thinks it matters.  To twist a bit the Keynes beauty contest analogy, we devote our intelligences not to what we think the ugliest dog is but try and anticipate what the market believes is the ugliest dog.    

What the yield curve does signal, at least to us,  is that there is a massive global bond bubble and that central banks have lost control of their curves, which kind of scares the bejeesus out of us when we start to think about it.

Moreover, 10-year U.S. yields should be 250 bps higher but they can’t go there because the world is choking on too much debt.  We saw how markets fell apart in Q4 when yields broke out higher in late September.

What Really Keeps Us Up At Night? 

Can the U.S. Treasury issue the required trillion upon trillions of new debt at these low faux interest rates over the next few years?  The note and bond auctions are generally becoming more sloppy.

We will find out soon as the Treasury will have to ramp up its net new issuance after their creative cash flow management during this year’s debt ceiling negotiations.   We seriously doubt they can without another round of quantitative easing, and that monetization just may be the beginning of the end of dollar hegemony and set us on the happy road to higher inflation, which everyone seems to be wishing for.  Not us, by the way.

Blaming the Fed that they are behind the curve is too easy and takes the pressure off the administration and Congress to get their act together and finally do some structural reform.  It’s Christmas 2018 all over again.

Finally,  the new “Committee To Save The World”  doesn’t exactly instill a lot of confidence, do they?  

                          The Committee To Save The World – 1998

Committee To Save The World_Aug15

 

The Committee To Save The World – 2019

Treasury_Distortion_4

Nothing but the best!

God help us.

 

Posted in Bonds, Fed, Uncategorized | Tagged , | 1 Comment

More Monetary Insanity & The Negative Yielding Bond Bubble

Had to get this last one in before we hit the surf.

We like to look at the Cleveland Fed’s Median CPI calculation as it removes monthly outliers that can pull the averages up or down.  It hit a 10-year high in July and is pushing up close to 3 percent.

Of course, we are in deflation and U.S. bonds yields are going negative.  Doesn’t the Median CPI inflation trend confirm it?

Median CPI

Now tell us again how many times does the Fed need to cut?   Where have they failed in meeting their dual mandate of stable prices and full employment?   Dow 50K?

Let’s [Reverse] Twist Again!

So, why in the hell is the Fed not doing a reverse Operation Twist — swapping their long Treasuries in the SOMA portfolio for very short maturities  — if they are worried about and need to steepen the yield curve, which has almost zero signaling value after all the distortions caused by global QE, in our opinion.

The Fed is trying to cage and game the markets, which are acting like a dog chasing its own phantom tail that doesn’t really exist.  They are never going to win that game as markets always want mo and mo crack, and then mo crack to feed their bubbles.

It’s tantamount to herding cats or trying to harpoon seals from an aircraft carrier (whoops, not P.C.).

Crazy times.

Tell Us Again, How Much Do You Pay Germany To Lend Them 10-year Euros? 

We still hear so much nonsense during this unprecedented period of the proliferation of negative-yielding debt.  Noise, such as, “investors are now paying the German government -0.61 percent per annum to lend Deutschland 10-year money.”   Complete hogwash.

First,  Germany doesn’t issue 10-year bunds and, like stocks traded in the secondary market, the original issuers do not receive the proceeds when their securities are purchased by traders from other traders or investors.  Germany has issued a few bunds with zero interest rates or coupons over the past few years, however.

Bunds

The bunds are most likely being bought up at big premiums to par by momentum or duration jockeys hoping to sell at even higher prices to the ECB when it starts a new round of QE.  The level of bund yields provides zero information but their movement, or first derivative, does seem to signal weaker expected growth and that more QE is coming.   The momo crowd better be right and the ECB better be there to take them out.

The above table reflects two hypothetical Augie ’28 German bunds trading at the current -0.61 percent yield-to-maturity.   One trades at par with a -0.61 percent coupon (doesn’t exist) and the other with a 5.625 percent coupon trading at a huge premium of 164.5.  A 5.625 coupon April 2028 bund does exist, by the way, and may or may not trade, or could be locked up in the ECB/Bundesbank portfolio.  The bund must not be callable.

The trader that buys the old issue at the current price of 164.5, for example, is betting bund yields move to -2.0 percent when the ECB announces a new round of QE, which would take the price up around 20 points.  It’s nothing more than the “greater fool theory” writ large aided and abetted by the central banks.

That passes the duck test in our book.

If it looks like a duck bubble, swims like a duck bubble, and quacks like a duck bubble, then it probably is a duck bubble.

A $15 trillion negative-yielding giant duck  bond bubble!  That is some really, really scary shit when you think about it.

Negative yields on global government debt reveal a distorted market rather than the strength of a country’s economic profile, credit rating agency Fitch has warned.

Around $15 trillion of government-issued global debt now trades with negative yields, according to figures released by Deutsche Bank last week. The trend reflects the popularity of such types of bond as investors hunt for safer assets to park cash.  –  CNBC, August 13th

When I look at the trend of median CPI in the chart above, my knees begin to shake.

Negative Cashflow Bonds Are Rare

Second, we still are struggling to find any fixed-income debt instruments where the yearly cash flow is being paid to the borrower by the lender.  Even Denmark’s third-largest bank, Jyske Bank’s 10-year -0.5% interest rate mortgage includes the amortization of principal, which generates a cash flow back to the lending bank.

No folks, you are not getting paid by taking out a mortgage from Jsyke Bank, and I am almost certain the Danish bankers make up the negative rate with fees and other miscellaneous charges.  I doubt we will ever see an interest-only negative rate mortgage. Nice low monthly mortgage nuts, however, if you have no student debt and can qualify.

Sovereign Negative Yield Bonds

Even the French Treasury with its 10-year OATs trading at -0.32 percent still issue bonds with decent coupons but at large premiums to par in order to drive the yield-to-maturities down to the current secondary market pricing.

OATs

Note, if you bought French OATs in the latest auctions, the government is still paying you an annual coupon payment but holding it to maturity is a big fat loser.   You snooze, you lose.  It’s a hot potato and radioactive. It slowly leaks air the longer you hold it.  The markets, complicit with the official sector, have effectively converted long-term sovereign risk-free bonds into short-term trading instruments.

Why hold it then for more than a flip or a trade?   Governments are issuing toxic trading instruments.

Totally irresponsible, in our opinion.

When Secretary of Treasury Hank Paulsen briefed President Bush on the financial crisis shortly after Lehman failed in 2008, #43 pondered out loud, “how did we get here?”

It was Sept. 18. Lehman Brothers had just gone belly-up, overwhelmed by toxic mortgages. Bank of America had swallowed Merrill Lynch in a hastily arranged sale. Two days earlier, Mr. Bush had agreed to pump $85 billion into the failing insurance giant American International Group. The president listened as Ben S. Bernanke, chairman of the Federal Reserve, laid out the latest terrifying news: The credit markets, gripped by panic, had frozen overnight, and banks were refusing to lend money. Then his Treasury secretary, Henry M. Paulson Jr., told him that to stave off disaster, he would have to sign off on the biggest government bailout in history. Mr. Bush, according to several people in the room, paused for a single, stunned moment to take it all in. “How,” he wondered aloud, “did we get here?”  — dagblog

Starting to get that sense again.  Everyone thinks they are smart enough to get out before everyone else and very few seem to understand why and how we got here.

Our trading motto is to always panic before everyone else.

When this global bond bubble pops it will be…wait for it… one fricking doozy.

Watch U.S. Treasury Auctions

We have our doubts that the U.S. Treasury can issue trillions upon trillions of new debt at these fake and repressed low rates and we’re watching the increasingly sloppy bond and note auctions very carefully.

Run don’t walk to our latest post on this issue here.

Now it’s time for Big Wednesday.   See you next month, we hope!

Posted in Bonds, Inflation/Deflation, Uncategorized | Tagged , | 1 Comment

It’s That Time…

Time for the summer holiday, folks.

Happy hunting.

See you in September.

 

Posted in Uncategorized | Leave a comment