Does This Look Like Risk Aversion?

Posted on August 29, 2019 by macromon

What Is Risk Averse?

The term risk-averse refers to investors who, when faced with two investments with a similar expected return, prefer the lower-risk option. Risk-averse can be contrasted with risk seeking.  – Investopedia

Austrian Century Bond

The price has risen 30% since June alone, when Austria reopened the bond to new buyers.  – Bloomberg, Aug 18th

Risk aversion?  Seriously?

That is how most of the market talking heads are explaining the behavior of global bond markets.   Piling into these bonds here is certainly not the land of the risk-free nor the home of the brave.  Unless buyers are certain the ECB will take them out at 225 in the next round of QE.

 

Posted in Uncategorized | 4 Comments

Rent Control Issues Hit 7-year Bond Auction

Posted on August 29, 2019 by macromon

At least, that is our view.

We have worried out loud how global interest rate repression may cause ugly bond auctions. A problem that similarly arises in the rent-controlled housing market.

…we are watching the Treasury auctions closely and suspect they could get sloppy and ugly down at these yields.

With repressed yields a sort of “rent control” problem arises, where there is a shortage of funds at the given fake or below market yield.   Just as the case with a shortage of housing when rents are held below their market rates.

This is just a thought and first cut and needs to be further fleshed out.  — GMM, August 6th

Today’s 7-year auction was ugly.  Zero Hedge describes it as “deplorable,”

The demand was, in a word, deplorable: the bid to cover slumped from an already low 2.274 to just 2.159, the lowest in over ten years, going back to February 2009, and far below the 2.44 six auction average. The internals were ugly as well, with Indirects barely taking down a majority of the auction, or 50.2%, down from 59.4% in July, and the lowest since December 2015. And with Directs allotted 16.1%, or also below the 19.9% recent average, it left Dealers holding 33.8%, the highest since December 2015.  – ZH, August 29th

7_year Auction.png

Source:   Zero Hedge

Current Interest Rate Environment

I spoke with a friend the other day, an academic economic historian, who will no doubt win the Nobel Prize one day.  He said never before in history has the sovereign debt markets behaved as they are today, i.e.,  the ubiquity of negative-yielding debt.

Why is that?

Because the world is headed for the worst deflationary bust in human civilization?

We don’t think so.  The central banks have been clear they will not let that happen.  Inflation will be the end game as the central banks will provide ATMs to consumers on every street corner to tap their Universal Basic Income (UBI) accounts if they have to.  They have signaled nothing less.   Modern Monetary Theory (MMT) will provide the intellectual and political cover.

Why then?

Momentum Trade

Since almost all yield curves of the DMs are inverted, we suspect its a ginormous duration momentum trade aided by a QE induced technical and structural shortage of risk-free fixed income instruments (central banks, including the Fed, own almost 50 percent of the U.S. market coupon curve).  All wrapped in the narrative of the coming global recession.

DM_Yield Curves

Source: RIA

As the momentum-driven algos with no context drive more and more long bonds across the Rubicon into negative-yield land, mainly in Europe and Japan,  the sheeple do follow by front running an expected new round of QE, believing they can sell the negative-yielding bonds to the ECB at almost any yield.  No more zero bound on long-duration bonds.

Why not -2 percent on the bund?  Why not -5 percent?  The ECB bid will be there to take out the buyers, no?

 

German_bond

Source:  Market Insider

The 30-year Geman bund is up over an astounding 35 percent in the past 12 months.  Why buy Amazon stock when you get 30 percent-plus in risk-free German bonds?   Move out about 70 years and 700 kilometers south-east into the Austrian century bond and the returns are even more impressive or unbelievable,

Nothing illustrates the desperate hunt for yield among high-quality global issues better than Austria’s 100-year bond. The debt was issued at just below “par” (the nominal value of 100 used when first issuing bonds) in 2017, but in the two years subsequently it has more than doubled in worth to 210. That’s an annualized return of nearly 50%. The price has risen 30% since June alone, when Austria reopened the bond to new buyers.  – Bloomberg, Aug 18th

Wow!  A 30 percent price return since June in a low-coupon sovereign bond with massive interest rate risk!  Has somebody communicated to the buyers the ECB will be there with a 225 bid in the next round of QE?   Otherwise, that doesn’t appear to be risk-averse behavior to us and looks like one of the biggest bubbles we have ever seen, and we have seen many.

Austrian Century Bond

That “greater fool theory” is driving the global bond bubble, folks.  Caveat emptor.

We don’t know the market microstructure but our instincts lead us to believe it’s time to start thinking about getting shorty the Austrian century bond.

The End Game 

We doubt,  if Europe is serious in implementing fiscal stimulus and committing to significant deficit spending, and the U.S. keeps up with its massive new issuance, the current fake interest rates will allow for smooth sovereign bond auctions going forward, which should cause some to fail and/or get very sloppy, such as today’s 7-year U.S. Treasury auction.

Yields will have to rise to clear the market or a new round of QE will have to commence in earnest to monetize the deficits (see chart below), which will tip what has been an attempt by central banks to generate demand-pull inflation into monetary inflation.   Fiat currencies are a confidence game, after all, is said and done and printed.

Sorry, deflationistas.

We could be wrong but that is our view of the end game, folks.  A strong conviction held loosely.

How and how long it takes to play out is anyone’s guess.

 

Rent Control_2

Radioactive Long Bonds

This is not fuzzy math, folks.

Why would anyone in their right mind hold a negative-yielding long-duration bond in their portfolio, which is so radioactive it decays returns the longer you hold them?   One of the unintended consequences of all the nonsense going on today is that risk-free long-term sovereign bonds, intended to be held until maturity, have been transformed into short-term radioactive hot potatoes.    That can’t be good.

We hear that pension funds or banks by law have to hold a specific allocation to risk-free fixed income and are forced to buy these radioactive hot potatoes.  Were not that familiar with the regulations but to that, we say change the laws before the mushroom clouds start rising over these sectors.

P.S.

The stock market is trading like Trump is going to cave on slapping on the September 1st tariffs or remove them soon thereafter.   That is probably what the Chinese are hoping and will table first (note table defined the opposite in the U.S.) in the next round of passing the peace pipe if there is the next round.

Update 4:11 pm

Interesting comment from one of our friends down in Argentina.  The Banco Central De La Republica Argentina (BCRA) has no problem generating inflation.

You got a 2.1 bid to cover ratio! That’s great, here in Argentina yesterday we had to close the offering because the ratio was below 0.10. Only Public Institutions were amongst the offers. People are taking their savings out of the banks. Are you worried about deflation? Come back to Argentina, land of fine wine, fine meat and 50% inflation rates.  – Leo in B.A. 

Posted in Bonds, China, Credit, Uncategorized | Tagged , | 8 Comments

The People’s Republic of The Future

Posted on August 27, 2019 by macromon

Great watch…

When it comes to technology, Shenzhen may well be the most fascinating city in the world. It makes the majority of our electronics. It clones the best technology Silicon Valley has to offer with ease. And, these days, Shenzhen buzzes with new ideas and an unrivaled energy that ensure it will play a major role in shaping our collective futures. In this episode of Hello World, journalist Ashlee Vance heads to the spectacle that is Shenzhen to experience it firsthand. The results are equal parts inspiring and disconcerting as tech-fueled entrepreneurs try to navigate an authoritarian regime.

https://www.bloomberg.com/hello-world

 

Posted in China, Video | Tagged , , | 13 Comments

Are Central Banks Ready To Break Their Codependency?

Posted on August 27, 2019 by macromon

Breaking our radio silence as we couldn’t help ourselves after reading former NY Fed President William Dudley’s piece imploring the Fed to stop enabling Trump’s  trade war.

It sounds like central bankers are starting to realize they are, and have been, enabling the bad behavior of the politicos, who do not have the backbone to make the politically tough choices to fix their economies through the difficult but necessary structural reforms.  The central banks have been the only game in town.   Maybe not so much anymore.

Nevertheless,  it was “spooky at a distance”  reading Dudley’s piece this morning (thanks to CK for forwarding) as it seemed he was channeling our July 16th, Codependent Central Bankers, reposted below, or, if you like, we were channeling Dudley’s future post a month earlier.  Though he didn’t call for a “sex strike” it was like there was some mysterious communication channel.   So quantum.

Markets

All is noise until the markets get clarity and certainty about whether the September 1st tariffs are implemented or diverted.

If Trump caves, all bargaining power goes to China and the negotiators will most likely cut a Potemkin deal.  We expect a huuuuge rally.

Trump’s China Trade Deal Ray Of Hope Expires Sept. 1

The big question: Will Trump do what it takes to make China trade talks viable? That likely would require a humbling retreat.  – IBD, August 27th

If the tariffs go ahead,  almost zero chance of a deal and more escalation.  We expect a big sell-off.

Back to vacation.

Dudley

…what if the Fed’s accommodation encourages the president to escalate the trade war further, increasing the risk of a recession? The central bank’s efforts to cushion the blow might not be merely ineffectual. They might actually make things worse.

…Officials could state explicitly that the central bank won’t bail out an administration that keeps making bad choices on trade policy, making it abundantly clear that Trump will own the consequences of his actions.

…Central bank officials face a choice: enable the Trump administration to continue down a disastrous path of trade war escalation, or send a clear signal that if the administration does so, the president, not the Fed, will bear the risks — including the risk of losing the next election.   – Bill Dudley, Bloomberg, Aug 27th

Money quotes from our July 16th post

Can the Fed and ECB arrest the decline in the international liberal economic order, which may plunging the global economy into a deep recession, with more quantitative easing?  

We believe it would behoove central bankers to stop enabling the politicians and go on something similar to  a “sex strike,” forcing governments to implement the painful but necessary structural reforms to put their economies on more stable and sustainable trajectories.  – GMM,  July 16th

Full repost

Codependent Central Bankers

Posted on July 16, 2019

Codependency is characterized by a person belonging to a dysfunctional, one-sided relationship where one person relies on the other for meeting nearly all of their emotional and self-esteem needs. It also describes a relationship that enables another person to maintain their irresponsible, addictive, or underachieving behavior. — Pysch Central

Preface

Let us preface this post by first stating, thank goodness the central banks, especially the Fed, for their bold and decisive actions during the Great Financial Crisis (GFC).  Their behavior prior to, and after the GFC is more suspect but we know how close the global markets came to a total collapse, not just once but many times during the crisis.  This comes from our sources at the highest levels of policymaking. 

Collapse, not as in the S&P500 falling another 20 percent, but a complete meltdown of the global payments system, rendering trade in goods and services in the marketplace almost impossible.   The hijacking of Safeway trucks and martial law probably only a few days later.   

Maybe the Fed could have done things different, more effective, more efficient, and more sustainable but act they did and kept most of us from living under a freeway and eating bark for the rest of our lives.    

Stay with us if you disagree for the rest of the post. We are willing to listen to your arguments if you have better information. We are very confident in ours. 

WSJ_Fed

One of our twitter mates, who resides in the home country (led by a man named Justin) of the team that stole the NBA championship from our Warriors, tweeted out the WSJ article with the above headline.

We immediately replied with something close to the following but with much fewer characters,

When will the central bankers learn?  That they can’t solve structural economic problems with their limited cyclical toolbox — no matter how large, no matter how expanded.   

Trying to do so only exasperates the unintended consequences, such as political stress and the blowback caused by the increasing wealth inequality.  Not to mention the growing blackhole of negative yielding debt in the global bond market.  We suspect the consequences of negative yields will not, let’s just say, be optimal in the long run.    

Can the Fed and ECB arrest the decline in the international liberal economic order, which may plunging the global economy into a deep recession, with more quantitative easing?  

We believe it would behoove central bankers to stop enabling the politicians and go on something similar to  a “sex strike,” forcing governments to implement the painful but necessary structural reforms to put their economies on more stable and sustainable trajectories. 

Govenments don’t like to make the tough choices, especially given the current state of the western democracies, and this would take some major stones by central bankers as bullying from political leaders would become intense.    

Do you think Chairman Powell would/has passed that test?   

The codendency of the monetary authorities, coupled with the addictive behavior of most governments to debt and deficits is a very toxic brew.   We don’t think it ends well. 

Here are some data on the unintended consequences of quantitative easing.

Wealth Ratio of Top One Percenters To Bottom Fiddy Skyrockets

WSJ_Fed_Wealth

(Note not all of the wealth inequality is due to asset inflation but a large portion is.)

Negative Yielding Debt Spikes

Value of Negative Yield Debt_July13

EM Corporates Now With Negative Yields – Are You Kidding Me?

WSJ_Fed_Wealth_3

It’s time for the global central bankers to kick that Bear Off The Balcony At Bretton Woods and meet in New Hampshire to construct a plan to force their governments to act on structural reform.

By the way,  the Raptors are a class act. Sorry to see their star leave for the Clips.  Wonder if Microsoft stock was affected?

Posted in Monetary Policy, Uncategorized | Tagged , , , | Leave a comment

Moving Into Resistance

Posted on August 19, 2019 by macromon

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 | 1 Comment

Now For Some Good News On Trade

Posted on August 19, 2019 by macromon

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 | 4 Comments

Walmart Nation: Visual Capitalist

Posted on August 18, 2019 by macromon

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?

Posted on August 18, 2019 by macromon

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 , | 31 Comments

Fake Waves: Surf’s Up

Posted on August 17, 2019 by macromon

Beach Boys need to make a song about this one…

Posted in Uncategorized | 1 Comment

“Fake Economic Data”: We Did Warn You

Posted on August 16, 2019 by macromon

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.

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