The Short-Term Heavy Treasury Curve

Posted on August 15, 2019 by macromon

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

Treasury_Distortion_2

 

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 | 3 Comments

The Perversion Of The Yield Curve Inversion

Posted on August 15, 2019 by macromon

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 , | 3 Comments

More Monetary Insanity & The Negative Yielding Bond Bubble

Posted on August 13, 2019 by macromon

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 , | 3 Comments

It’s That Time…

Posted on August 13, 2019 by macromon

Time for the summer holiday, folks.

Happy hunting.

See you in September.

 

Posted in Uncategorized | Leave a comment

Deep Fakes Seem So Real…

Posted on August 13, 2019 by macromon

Stunning.

Imagine how these will be weaponized in the 2020 presidential campaign.

 

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The Global Consequences Of A Narcistic And Incompetent POTUS

Posted on August 12, 2019 by macromon

The world is starting to move sideways.

The market talking heads are so clueless.

It’s almost laughable listening to them trying to explain away in isolation how the pieces of the puzzle are starting to converge that will or already have ushered in, what we believe, will be an ugly bear market.

Believing the Fed can rescue anything and everything is so naive and ridiculous.  We remain perplexed why JFK didn’t call in the Fed to end the Cuban Missile Crisis, or why President Trump doesn’t call upon Fed Chairman Jay Powell to unleash some QE to bring about peace in the Arab-Israeli conflict.

Global Geopolitical Instability

The rivets are starting to pop both in the U.S. and world.

We won’t mince words here.  We believe much of the growing instability is the consequence of the narcissistic and incompetent leader of the free world named Donald J. Trump.

Full Disclosure

Full disclosure, we don’t like Trump as a president nor as a man. But we don’t believe our perspective is steeped in some sort of blind political partisanship but is more the result of a positive analysis of the totality of his policies and character.   If the data points were different, we have no doubt our conclusions about Trump would be different.

We are independents or what California’s  Secretary of State labels “No Party Preference (NPP).”  We have no problem splitting tickets and often do.  We generally don’t like voting for incumbents down-ballot.

We are right-of-center on most economic issues but believe the government should provide a strong, efficient, and effective safety net for those less fortunate and not born into the Lucky Sperm Club or who are temporarily down on their luck, which all of us could go there but by the Grace of God.  If you are reading this post you are most likely part of the Lucky Sperm Club.

We are also golfers and believe in the handicap system.  Those non-scratch economic players, such as people born into  poverty with very high hurdles of escaping their plight should be given extra strokes to become competitive and to have skin in the game of life.

We believe in fiscal responsibility and that if the current budget trajectory continues big inflation will eventually come to burn away past liabilities that no way in hell will ever be paid back in hard currency but probably not before the deflationistas have another day in the sun.   Can’t you just see this scenario setting up as the street cred of Modern Monetary Theory (MMT) is rising almost as fast as Beyond Meat (BYND) stock?

We are left of center on most social issues but respect others beliefs.  Our motto is: no pushy our agenda onto others;  especially our California values onto the conservative states unless constitutional issues are at stake.

The following is how we voted in the presidential elections since 2000 with a short justification.   We will strategically vote the Republican ticket in the 2020 California primary but for Governor William Weld if he is on the ballot.  Not so in the general in November, however.

2000 –  George W. Bush:  Tired of the lies from both Clintons and their lack of political principles.   Though we thought Clinton did fairly well on economics, especially not spending the fiscal surpluses late in his administration as Larry Summers surely knew they were only a windfall and largely the result of the stock market bubble.   Totally disagreed with the Clinton/Gore expansion of NATO, which botched efforts to bring Russia into the West, which the world now suffers the consequences.

2004 –  John Kerry:   Invasion of Iraq and the deception that justified it.   Unforgivable.  Bush won the election because he won Ohio, period.  If Kerry had come out against gay marriage, which was the wedge issue driving that election along with scaring the American people about terrorism,  Bush loses the election.  Kerry came under intense pressure to denounce gay marriage and support the Ohio initiative opposing it but wouldn’t.  That was a true profile in courage, in our book.  Like trading, timing is everything in politics.  Sadly, the country just wasn’t ready for same-sex marriage in 2004.

2008 – Barack Obama:  Loved the Maverick, not so much Sarah Palin.  Would have moved out of country knowing she was a heartbeat away from the Oval.  Obama’s hope and unity rhetoric was moving.  Also, was certain a McCain/Palin ticket, coupled with the Congressional Republican ideologues could not restore the crashing global economy.  Was very worried of a complete financial and economic collapse and justifiably so.

2012 – Mitt Romney:  Didn’t like Obama’s “fat cat” divisive rhetoric.   Was impressed that the Obama administration pulled the global economy out its death spiral, however.  Totally underestimated the markets’ confidence in the dollar after massive expansion of deficits and central bank balance sheets.  Wasn’t satisfied with the pace of structural economic reform and not putting Wall Street in the dock after the Great Financial Crisis (GFC).

2016 – None of the above:   Slim Pickins for POTUS in 2016.  Could there have been two worse choices?   Would have never thunk of voting for Hillary but if my vote really counted on the margin — it doesn’t because we live in perirenal blue California — would have held my nose and voted for her.

Global Trade And The Decline Of Bretton Woods

Markets still don’t get it.  Trump is an economic nationalist, not a free-trader, much less even understands the basic tenets of trade.   Most of the 2020 Democratic candidates are not much better but may change their tune once they see the damage the trade war does to most Americans and the global economy.

The following tweets speak for themselves.

Trade War

President Donald Trump’s trade war with China is increasing the odds that America will be thrown into a recession, according to investment bank Goldman Sachs.  – NBC News, August 12t

 

The Great Unraveling

Hong Kong

What exactly did Trump say to Xi at the G20 in Osaka last month that led to this FT headline?   What signal or mixed signals did POTUS send to the Chinese government about the U.S. reaction if China’s PLA starts cracking heads in Hong Kong?   The fact that we don’t even know is a problem in and of itself.

Trump_Cuts_Deal

The words of the President, who speaks for the United States government and the rest of the free world,  have huge consequences and any ambiguity can invite aggression or destabilize global or regional stability.

Go no further than Gulf War I.

Gulf War Documents: Meeting between Saddam Hussein and US Ambassador to Iraq April Glaspie

July 25, 1990. Eight days before the August 2, 1990 Iraqi Invasion of Kuwait

July 25, 1990 – Presidential Palace – Baghdad

U.S. Ambassador Glaspie – I have direct instructions from President Bush to improve our relations with Iraq. We have considerable sympathy for your quest for higher oil prices, the immediate cause of your confrontation with Kuwait. (pause) As you know, I lived here for years and admire your extraordinary efforts to rebuild your country. We know you need funds. We understand that, and our opinion is that you should have the opportunity to rebuild your country. (pause) We can see that you have deployed massive numbers of troops in the south. Normally that would be none of our business, but when this happens in the context of your threat s against Kuwait, then it would be reasonable for us to be concerned. For this reason, I have received an instruction to ask you, in the spirit of friendship – not confrontation – regarding your intentions: Why are your troops massed so very close to Kuwait’s borders?

U.S. Ambassador Glaspie – We have no opinion on your Arab – Arab conflicts, such as your dispute with Kuwait. Secretary (of State James) Baker has directed me to emphasize the instruction, first given to Iraq in the 1960’s, that the Kuwait issue is not associated with America. (Saddam smiles)

On August 2, 1990, Saddam massed troops to invade and occupy Kuwait. — Global Research 

North Korea 

While Trump exchanges “beautiful letters” with Kim Young-un,  North Korea gets stronger and more dangerous by the day,

Trump, meanwhile, has praised Kim during for sending him a “very beautiful letter” last week despite the uptick in tests over the past three weeks — but he shouldn’t be celebrating. The increased pace of tests and revelation of new weapons means his chances of striking a nuclear deal with Pyongyang are slipping, all while North Korea builds weapons that threaten South Korea and Japan — both close US allies that host thousands of US troops.

Which means no matter what Trump says, North Korea has become much more dangerous — not less — since he took office.

“This is an intentional reminder that if diplomacy fails, North Korea will only be stronger and more capable today than it was four years ago,” Lindsey Ford, a former Asia security specialist at the Defense Department, told me. – VOX, August 12th

The following is nothing short of buffoonery.

We were warning of this while our friends were calling for a POTUS Nobel Peace Prize.

How embarrassing for any American with a sense of history and pride.

NATO 

We believe the words that have and will be the most destabilizing to the world is what President Trump said about NATO and Montenegro last summer.   We wrote about it the day after in our post, The Day Strategic Ambiguity Died,

The hits just keep on coming.

There is a new sheriff in town, the old order is crumbling, and we are afraid the world is going to become much more unstable in the next few years.  Assets markets are incapable of discounting or pricing it in.

President Trump Throws Montenegro Under The Bus

In an interview with Fox’s Tucker Carlson last night, President Trump seemed to question the raison d’être of NATO and foreign alliances in general.

Tucker:  So membership in NATO obligates the members to defend any member that is attacked.  So let’s say Montenegro, who joined last year,  is attacked, why should my son go to Montenegro to defend it from attack?

President Trump:  I understand what you are saying. I have asked the same question. You know Montenegro is a tiny country with very strong people… They may get aggressive, and congratulations you are in World War III…But that is the way it was set up, don’t forget I just got here. 

There are errors and misrepresentations in the above, such as NATO’s Article 5, which has only been invoked once in the aftermath of 9/11, and does not apply when the NATO member is the aggressor.

…

Xi’s One China Policy

What worries us about the Tucker Carlson interview is a potentially destabilizing effect on geopolitics, especially with China.

How do you think Xi Jinping, Trump’s new BFF,  who is becoming increasingly  aggressive about his “one China” policy, interpreted the interview?

Maybe something like:

“Why should my son go to Montenegro Taiwan to defend it from attack?”

Wars begin with misperception and miscalculation.   — GMM, July 18, 2018

Upshot

We are certainly are not blaming Trump for all that ills the world.  But he is the leader of the free world and has made things worse, not better, in our opinion analysis.

His economy in the first thirty months is only marginally better in a very narrow sense than the economy in the 30 months before he took office.

Economy

After increasing the cumulative deficit by over $2 trillion, almost $1 trillion more than the last 29 months of the Obama administration,  the average compounded GDP growth rate is only 35 bps higher.  That is an expensive 35 bps of growth, folks.

T_O_Deficit Table_Chart

 

Moreover, inflation is higher and nonfarm payroll job creation is lagging by almost one million jobs.

Man_Edit_1

Tight Financial Conditions

Trump likes to blame the Fed that “his” economy is not doing better.  This is complete nonsense.  Financial conditions have been much easier for President Trump according to most measures even though the Fed has been raising interest rates.

Dollar

Most important is that the trade-weighted dollar index has stabilized under Trump, albeit at a higher price, after strengthing more than 20 percent in the last two years of the prior administration.  That was a huge economic headwind in President Obama’s second term and really hit the manufacturing sector hard.

Man_6_$

MAGA

If you believe Trump has Made America Great Again, you have been played like a fiddle, folks.  The gaslighting has worked.

President Trump likes to play golf, tweet, and watch cable news.  No judgment, we do too, but who is minding the store at the USG?   He has fired almost everyone and anyone with just a modicum of competence, believing he knows better than anybody , even more than the Generals, for example.

That is what is most scary and echos what President Bush #43 said after listening to the Trump inaugural speech,

‘That was some weird shit,’ George W. Bush reportedly said with characteristic Texas bluntness” – Business Insider

 

Seat Belts_Mar24

Buckle up.

We sense it is about to get very ugly.  We hope we are wrong.

We see a fading confidence in the value of free markets and international trade, forgetting that conflict, instability and poverty follow in the wake of protectionism. We’ve seen the return of isolationist sentiments, forgetting that American security is directly threatened by the chaos and despair of distant places.  – President George W. Bush

Posted in Economics, Geopolitical, Uncategorized | 2 Comments

Bring It, Richie…

Posted on August 10, 2019 by macromon

It’s dark out, but gotta believe Richie

Posted in Uncategorized | Leave a comment

Negative Yields Versus Negative Coupon Rates

Posted on August 8, 2019 by macromon

There is a big difference between a bond with a negative yield to maturity than a bond with a negative coupon rate.   Many in the market conflate the two.

We are searching for bonds that pay a negative coupon rate.  Rare, but some do exist.

Here is a good clarification.

Because of the complexity of having a negative coupon, it is common on negative-yielding issues to sell the bonds at a cash price higher than par. This means the issuer pays back less than the amount borrowed, removing the need to figure out how to organise reverse coupon payments.

This is one of the reasons negative yields on bond issues remain a rarity and off limits to many investors.

In the corporate bond world, the likes of Deutsche Bahn have issued negative-yielding bonds in the past, and this month Merck sold three tranches of debt, the shortest of which held a negative yield.  –  Reuters

But they do exist

France issued its first-ever 10-year bond at a negative borrowing rate on Thursday, meaning investors pay, rather than receive, interest for the privilege of owning French sovereign debt, said the state debt management agency, AFT.

AFT said in a statement that it issued 9.996 billion euros ($11.3 billion) in long-term bonds, with just under half — or 4.972 billion euros — in the form of 10-year bonds at a rate of -0.13 percent.  – France 24

This is an interesting one.

Copenhagen | In the world’s biggest covered-bond market, a Danish bank says it’s now ready to sell 10-year mortgage-backed notes at a negative coupon for the first time.

It’s the latest record to be set in a world that’s being dragged down by ever lower interest rates. In Denmark, where Jyske Bank will offer 10-year mortgage bonds at a fixed rate of minus 0.5 per cent, average Danes will borrow at rates far lower than those at which the US government can sell its debt.  – Financial Review

Posted in Bonds, Uncategorized | Tagged , | 13 Comments

“Rent Control” Problems Emerging In Bond Auctions

Posted on August 8, 2019 by macromon

 

Treasury_Auction.png

Hat Tip: Gregory Mannarino  @GregMannarino

The bid-to-cover ratio, indicative of the number of investors who put in offers to buy the debt and a gauge of demand, stood at 2.19. That is down from the 2.4 recorded in the last sale last month and marks the second-lowest level since March 2009.  – FT, August 8th

We were not surprised at yesterday’s weak 10-year auction though today’s $19 billion of 30-years went off fairly decent.

In our Tuesday post, we raised the question,

…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

Rent Control

Any market observer understands that the marginal price setter doesn’t necessarily reflect the level where large quantities can be liquidated or sold.

Go no further than the LTCM crisis where that hedge fund full of genius Nobel laureates set the level of credit spreads across many markets with help from a boatload of leverage.  When it tried to liquidate some of those positions, there were no buyers.

Can the Treasury issue several trillion of new debt over the next few years at these “fake yields,” which have been manipulated lower by central banks and set on the margin by the duration jockeys looking for short-term capital gains with no interest in holding the bonds for the carry?    We seriously doubt it and that conflict is indicative in the weak bond auctions.

Upshot

We expect Treasury auctions to get sloppier with the risk of some even failing.   That will send a real wake-up call to markets and the policymakers.   Zero price discovery in markets has ugly consequences, some of which, take a long time to be realized.

Yes, Virginia,  there is a debt overhang.  And yes, Vice President Cheney, deficits will matter.

Posted in Bonds, Uncategorized | Tagged | 4 Comments

The Good Ol’ Daze…

Posted on August 8, 2019 by macromon

I loved this commercial when everyone was a stock market genius back in the late 1990’s, that time was different, and eyeballs trumped earnings.

 

Posted in Uncategorized | 1 Comment