zondag 5 juli 2020

Earnings Estimates Update

Over the next two weeks, we will enter the earnings season for all publicly traded corporations. Of course, we will mostly hear about those companies which comprise the S&P 500 index. I am writing a more comprehensive report on the earnings estimates for Tuesday’s “Technically Speaking.” Still, I did want to make a quick comment about what is coming. As with every quarter, we are about to play “Millennial Soccer.” Such is where Wall Street analysts continually lower earnings estimates for the quarter until companies can beat them. When you see the analysis that 70% of companies beat their estimates, just remember analysts lowered the bar to a point where “everybody gets a trophy.”
# What will be important to pay attention to is “revenue,” which happens at the top of the income statement. Companies can do a lot to fudge bottom-line earnings by using accruals, “cookie jar” reserves, share buybacks, and a variety of other accounting gimmicks. It is much more difficult to manipulate revenue. However, the market will focus on reported earnings. As stated, the estimates have fallen sharply over recent weeks, and are far lower than where they were set previously...



Importantly, while Wall Street has dramatically lowered estimates for the coming quarter, expectations remain for a rapid recovery in the economy. Given the rise in COVID-19 cases as of late, states pausing reopening, and depressionary levels of unemployment, it is highly likely those future estimates will ratchet sharply lower. Such makes the mantra of using 24-month estimates to justify paying exceedingly high valuations today even riskier. “Price is what you pay, value is what you get”, as Warren Buffett said...


# A Quick Note On The Jobs Report; While the BLS reported a massive 4.8 million in employment for June and a drop in the unemployment rate to 11.1%, these numbers remain distorted by bad data gathering and analysis. As Mish Shedlock noted on Thursday: “I question both the strength of the rise in jobs and the decline in the unemployment rate based on claims data and the reference week.” I agree. It’s hard to reconcile a 4.8 million increase in jobs in a month where you added over 4-million to initial jobless claims and continuing claims continued to remain near the highest levels on record...


More importantly, there is a problem in the data when you have more people getting unemployment benefits than there are unemployed workers.
* “As the DOL reported, there were 19.29 million workers receiving unemployment insurance. And yet, somehow, at the same time, the BLS also represented that the total number of unemployed workers is, drumroll, 17.75 million. If you said this makes no sense, and pointed out that the unemployment insurance number has to be smaller than the total unemployed number, you are right. And indeed, for 50 years of data, that was precisely the case.” 
The main point here is that employment is what drives earnings, corporate profits, and GDP. Given the exceedingly high level of unemployment, in real terms, the recovery to earnings will much slower than expected. Such suggests that expectations for the bull market to continue “to infinity and beyond,” will likely prove disappointing...

zaterdag 4 juli 2020

Trump Signs 5-Week PPP Extension With Fiscal Cliff Looming

The White House released a statement Saturday morning indicating President Trump has signed a bill extending the Paycheck Protection Program (PPP) until August 8.
* On Saturday, July 4, 2020, the president signed into law: S. 4116, which (1) reauthorizes lending under the Paycheck Protection Program (PPP) through August 8, 2020; and (2) separates the authorized limits for commitments under the PPP from other Small Business Administration loan programs, the statement read.
PPP is designed to support businesses impacted by coronavirus-lockdowns, which had expired last Tuesday with $130 billion in leftover funds...


The bill provides the president with five additional weeks, while Congress is set to debate the next round of stimulus. The Small Business Administration (SBA) recently said the program approved over 4.8 million emergency loans to millions of small businesses. On Wednesday, the president told Fox Business he supports another round of direct payments - also promoting a payroll tax holiday and tax incentives for corporate America. At the moment, there is mass confusion in Washington as coronavirus cases erupt across the country, and economic data rebounds:
* "It's a little confusing for people because you've got a higher rate of covid in the last few weeks and better job numbers than anybody expected," said Sen. Rob Portman, adding that the recovery could reverse if the virus pandemic continues. 
Portman could be right, as virus cases surge, and reopenings across the country are paused or reversed, economic data in the coming weeks, if not by the end of summer, could start beating to the downside. We recently outlined the latest economic surge is almost entirely a function of the massive government spending spree, a spree which in just over a month will be effectively over.
* Quarterly Change US Economic Surprise Index vs. S&P500..


Citing a Bank of America report, we noted how the economy is facing fiscal cliffs which could cause the recovery to disintegrate, with four particular areas of focus:
* expiration of extended unemployment insurance,
* the fading support from stimulus checks,
* exhaustion of PPP
* stress from state and local aid gov'ts.
"In summary, after July 31, the US economy is set to fly off a fiscal cliff that could be just as painful as what happened in late March/April unless there is a bipartisan agreement in Congress on trillions more in fiscal stimulus. The clock is now ticking," we noted. Could the Democrats have the Trump administration at a so-called checkmate? Dems could easily send the economy off a fiscal cliff by withdrawing support for the next round of stimulus, something that could affect the president's reelection odds....

2 Aircraft Carriers Lead 'Show Of Strength' In South China Sea As Navarro Slams Beijing For "Spreading The Virus"

On the eve of Independence Day, the White House is once again stoking tensions with Beijing, as President Trump continues to embrace aggressive rhetoric toward China as a key campaign issue that (he hopes) will help bring out more Trump voters worried about Biden and/or members of his family's dubious business ties to China and Ukraine...


Media reports claim that the US is sending not one but two aircraft carriers into the South China Sea, one of the hottest flashpoints on earth right now (at least, one of the hottest flash points that's not situated along India's land-border), as the US Navy holds military exercises in the area, a major middle finger to Beijing and the PLA-Navy. The USS Ronald Reagan and USS Nimitz are scheduled to hold some of the Navy's largest exercises in recent years in the area, which is frequently beset upon by American destroyers sailing within 12 miles of certain islands developed by China that are the subject of competing international claims. The exercise will involve the two carriers as well as 4 other warships along with round-the-clock fights and missions. The news comes as Peter Navarro, who has seemingly been relegated back to a supply closet office in the West Wing now that the trade deal is dead in the water, has apparently been let out of his cage long enough to rant about Beijing and the CCP leadership's unforgivable failure to contain the coronavirus. Perhaps it's because China has seemingly been on a agricultural commodity buying spree in Latin America?
* Acyn Torabi @Acyn Navarro: They spawned the virus, they hid the virus, they send hundreds of thousands of Chinese nationals over here to seed and spread the virus..
For a while there, it seemed like China would buy up ever-more American agricultural products for the simple reason that they were cheap and China needed the supplies. But now that China is walking away with its money, we wouldn't be too surprised to hear Navarro once again declare the trade deal to be "over" (like he did the other week before Beijing and his colleagues leaned on him to recant). Though he didn't go quite to that extreme here, at this point, his rhetoric is probably the best barometer, and if he starts talking about the deal being "over" again, it might be time to start listening....

Egon von Greyerz; An "Ominous Disconnect", What Powell And Lagarde Should Have Told The G-7

Here is a joint statement from Lagarde and Powell at a secret G7 meeting with all Leaders and Finance Chiefs of the seven nations attending as well as the IMF and BIS: “The financial system has been on the verge of collapse since September 2019 when we started Repos and QE. And since then it has only got worse. The coronavirus hit us at a time when the banking system was almost down and out. We had enough problems saving the banks. But now we must save big corporations, small companies, individuals, local municipalities and states, the Federal State and this on top of rescuing a financial system which is deteriorating by the day. The whole system is leaking like a sieve and we are struggling to keep it all afloat. Fortunately we have printing presses and that helps to keep it all going but only just. Our big fear is that the market will realise that all the money we are printing is worthless. And it is of course but we can’t tell anyone. But if the world wakes up to this one day soon, the financial system could implode in a matter of days. And we would be totally helpless to stop it."
* EXPONENTIALLY WORSE THAN 2008, A BLACK HOLE; And this dear readers is where the world stands today. On the verge of an implosion of the whole financial system. Just a small crack could push the whole system into a black hole. All that is needed is a severe second wave of CV-19 or a bank collapse, triggering an implosion of debt markets and the whole system. Yes, we know the world was in a similar situation in 2008 but with over $100 trillion more in debt and who knows how many additional $100s of trillions of derivatives plus a world economy disintegrating, it is now exponentially worse from a risk point of view. We must also remember that bad debts in the financial system are going up by the minute with most borrowers under severe financial pressure. Just look at the chart below how bad debts follow unemployment. The banks haven’t reported this yet but we will see it in the next couple of quarters...


* TELLING THE TRUTH IS A REVOLUTIONARY ACT; So why don’t the Fed and ECB chiefs tell the truth? Well, maybe they are, in their own CB Speak. ECB President Christine Lagarde said the recovery from the coronavirus pandemic will be “restrained” and will change parts of the economy permanently. And Powell recently said: ”The path ahead is likely to be challenging. Lives and livelihoods have been lost, and uncertainty looms large.” So “restrained” and “challenging” is as far as they can stretch without panicking the world. They would obviously never warn bank depositors that their money will soon be gone. This is why people must figure it out themselves. But they won’t of course until it is too late.
* LESSONS IN RISK; Most people have never had to worry about risk in the financial system since until now they have been saved by the CBs. With more than 50 years in business you learn a lot of lessons on the way. As a young man, when acquiring my MBA back in 1969 I had to learn everything about Keynesian economics, only understanding much later how wrong it all was. My first job was in commercial lending in a Swiss Bank. Those were the days when the Swiss banking system was run on conservative principles. That was the perfect training for analysing and understanding risk and very different from the massive leverage of today with minimal capital backing. My real grounding in dealing with risk was at Dixons. At the time it was a small listed UK business which we built up to the UK’s leading consumer electronics retailer and a FTSE 100 company. I was first a green 29 year old Finance Director and a few years later Executive Vice-Chairman. Dixons was founded by a Jewish entrepreneur who was a superb businessman and retailer. It was a steep learning curve. He is now 88 and still as sharp as ever. One of our principles was to always panic early but in a controlled manner. For example, if there was a substantial downturn in consumer spending, we implemented major cost reductions across the company within a few days. And if we made major acquisitions, we quickly sold off dead or liquid assets to reduce leverage to conservative levels. By being financially prudent and commercially aggressive, we managed to grow the company fast without taking excessive risks. We survived without pressure both the oil crisis in the early 1970s and the coal miners’ strike which led to having electricity only 3 days a week. The other days we sold televisions with the help of candle lights. Low leverage and low debt were the key. So, very different to today with massive debts and leverage. And that is why no individual and no company can survive a serious crisis without massive state aid. In recent times, no one has been taught to save or build up a nest egg for a rainy day. When things go well, all the money is spent and when they go badly, you either borrow money or the state has to help. This goes for individuals as well as for big corporations. 
* DEBTS AND DEFICITS, THE MODERN MANTRA OF FINANCE; With low or zero interest rates and the value of money constantly declining, there is clearly no incentive to save whatsoever. Also, governments and central banks are setting very poor examples. But how can you expect people to be prudent when their governments and central banks have for decades been running deficits and printing money. Debts and deficits are the mantra of modern finance. But what no one seems to understand is that this mantra has become a chronic disease which is killing the world a lot faster than the coronavirus.
* WEIMAR & ZIMBABWE SQUARED IS COMING; The world’s central banks are now in the process of outshining both Weimar and Zimbabwe. Together with governments they have globally printed and borrowed $18 trillion since CV started. And since the Great Financial crisis started in 2006 they have more than doubled global debt from $125 trillion to over $275 trillion but that is just the beginning. We talk about billions, trillions and quadrillions as if we understood what it means but nobody really does. It is absolutely impossible to fathom what a trillion is. Let’s start by counting to one trillion. It will take you 32,000 years. And then you would have to count very fast, never hesitate nor make a mistake, nor start from the beginning again. Ok, so the $18T just created globally, how long would that take? Almost 600,000 years.
* FED & ECB QE HAS ZERO VALUE; So clearly totally unrealistic and impossible. Whenever this magnitude of money has been manufactured before, like Weimar, it has always been totally worthless. And it is this time too! This magnitude of debt can never be serviced at a market rate. Only at near Zero or negative rates. It can never be repaid with properly earned money. $18T represents 22% of Global GDP. And since almost all countries have deficits today, there is absolutely ZERO chance that this debt will ever be serviced or repaid in future. Remember that the US has not had a proper budget surplus since 1960. (Please don’t write to me about the Clinton years. They were fake surpluses as debt continued to increase). Virtually all the money created by the US government and the Fed in the last 20 years is totally worthless. Because any money created at will out of thin air is by definition fake. If all that was required to print the $10s of trillions was to press a button and nothing was produced by way of goods or services, then the money has ZERO value. I know I keep stressing the previous point over and over again. This is done so that at least a few people can understand what is likely to happen next and therefore prepare themselves and their financial situation. So why don’t Powell and Lagarde tell the people that central bank actions are destroying the economy and the value of the country’s money. The dollar has lost 86% in this century and the Euro 82%, measured in real money. Real money is of course gold since it represents constant purchasing power and is the only money which has survived in history.
* THE JOURNEY TO ZERO WON’T BE LONG! 
1) Stocks; There is an ominous disconnect between equity values and profits. As the chart below shows, values have doubled since 2012 with profits stagnant 2012-19. Now in 2020, profits are crashing and stocks will follow. The Dow correction up finished on May 8 and is now resuming the downtrend. All the V recovery optimists are going to get a real shock. The monthly Dow peaked in January 2020, see chart, and the downtrend was confirmed well before CV started to trouble markets. I have been saying in the last couple of weeks that a resumption of the stock market downtrend is imminent and it seems clear that imminent is now. Most market participants will be shocked as stocks around the world crash down below the March lows and long term much, much lower...


2) Gold & Silver; Many have feared that the precious metals will initially fall with stocks but this seems unlikely to be the case...


On the contrary, it looks like Gold is now breaking above the important $1,770 level. Since the Gold Maginot Line was broken a year ago at $1,350, gold is up over $400 or 30%. The 6 year consolidation since 2013 has built up a lot of energy that will take gold to over $2,000 in the next move...


There has been a massive fight to hold Silver below the $18 level. It seems the LBMA boys are now losing the fight as silver has gone through the $18 level which it has held below since 2014 with 3 months’ exception in 2016...


This Silver Maginot Line is even more significant than the Gold one as it comes from a much lower level of 64% below the $50 peak. Once through, we are likely to see a silver explosion and a sharp fall in the gold/silver ratio. “Furthermore I consider that Carthage must be destroyed” is what Cato the Elder said at the end of every speech he gave in the Roman Senate prior to the 3rd Punic war 149-146 BC. In the end his persistence paid off and Carthage a Phoenician City in North Africa was destroyed. I learnt this phrase in Latin at school and also about Roman history and it has stuck ever since. The reason why I mention this is that I, like Cato, normally finish most my articles in the same way, namely that you must hold gold for wealth preservation purposes and not for gains measured in phoney paper money which is about to be totally debased. Hopefully not just my historical understanding of gold but also my passion and persistence will help a few people to avoid ruin in coming years.
* P.S. The secret G7 meeting discussed at the beginning of this article obviously never took place. But it should have!

vrijdag 3 juli 2020

Fed's Balance Sheet Shrinks For Third Consecutive Week

After three months of unprecedented gains, which saw an increase of $3 trillion to $7.2 trillion, the Fed's balance sheet has posted its third consecutive weekly decline since the start of the corona crisis according to the latest H.4.1 statement...


The drop in the week ended July 1 amounted to $73.2 billion, and was just shy of the decline recorded two week prior, which was the biggest weekly drop since May 2009. However, as has been the case in the past three weeks, the drop in the balance sheet was not due to a reversal or even slowdown in QE which continues almost every single day, with the Fed adding another $15.8 billion in Treasurys even as the settlement calendar and prepays meant MBS shrank by $32 billion in the week ended July 1 (don't worry, the Fed is also buying about $4.5BN in MBS every day), but once again due to a decline in liquidity swaps, which shrank by $49.5 billion to $225.4 billion, after a $77.5 billion in the week prior and $92 billion in the week before that. The amount of outstanding repo agreements also declined for a second consecutive week by a modest $9 billion, after an $8.9 billion decline in the week prior...


As shown in the chart below, the total amount outstanding in the swap lines, designed to ease a surge in demand for U.S. currency in the participating banks’ jurisdictions during the early weeks of the crisis, was the lowest since early April...


Coupled with other indications of slackening demand for the Fed’s bevy of emergency liquidity facilities, the reduction in currency swap line usage is for many analysts a sign that global financial markets are returning to near-normal after being upended by the coronavirus outbreak in February and March. “We expect a more rapid decline over the coming months as the majority of the swaps will roll off,” Citigroup economists wrote in a note last Friday. The flipside is that it also means that the system is once again seeing a shrinkage in the circulation of the world's reserve currency, an explicit tightening in financial conditions, and the adverse global impact of any macroshock will be substantially greater when one hits in the coming weeks. Meanwhile, with the S&P500 closely tracking the Fed's balance sheet in the past three months, which has served as the primary factor behind the rebound in the market, the latest weekly drop coincides with the period of heightened volatility in the past three weeks...


The shrinkage comes at a time when the Fed's monthly liquidity injection has been tapered to approximately $120 billion, which suggests that while the balance sheet is likely to resume growing in the next week, it will be at a more gradual pace...


It also means that for the stock market to move substantially from this point on, since the market is now fully disconnected from fundamentals and is simply a derivative of endogenous liquidity and fund flow, Powell will need to find another justification to expand the Fed's QE aggressively, as discussed in "JPMorgan Spots A Big Problem For Stocks." Something like - for example, a second wave of the coronavirus pandemic. Finally, those keeping track of how much corporate bonds the Fed has bought, the latest total for the Fed's Corporate Credit Facilities LLC which includes purchases of both ETFs and corporate bonds, the Fed disclosed that as of June 25, there was $9.7 billion in book value of holdings (the Fed does not break out how many actual bonds it has bought vs ETFs), an increase of $1.4 billion from the $8.3 billion a week prior. Which means that the Fed continues to buy around $300MM in corporate bonds and/or ETFs every single day...

European Stocks Slide On ECB Rift, S&P Futures Flat With US Closed

Europe's Stoxx 600 index opened at three-week highs only to quickly see the 4-day rally reverse, and turn negative by as much as -0.8% with banks and energy indexes leading the decline with losses of 1.5% and 1.3% respectively, after Bloomberg reported that a conflict was brewing at the ECB over its "priced in" stimulus package coupled with political upheaval in France which saw a blitz-replacement to the prime minister...


According to Bloomberg, ECB President Christine Lagarde’s signature crisis-fighting tool "is becoming the focus of disagreement among policy makers in what could amount to her first major test of discipline." As a result, Governing Council members face a potential rift over how much their emergency bond-purchase program should stay weighted toward weaker countries such as Italy, and while the debate remains hypothetical for now, it could crystallize as the economy emerges from the coronavirus pandemic. The danger is that such friction undermines a program unveiled at the height of the crisis to reassure investors of the ECB’s resolve in defending the integrity of the euro...


That said, the fundamental landscape remains unchanged and fresh catalysts remain light, although a modest blip lower was seen upon the French PM resigning as part of President Macron’s reshuffle, a move speculated by local press in recent days. The morning also saw come comments from German Chancellor Merkel who reaffirmed her low expectations of a smooth Recovery Fund agreement, whilst again expressing concern over the Hong Kong National Security Law as Germany takes the helm of the EU presidency for the second half of the year. In terms of individual movers, Wirecard (+8%) opened with gains of around 15% amid source reports the group’s US arm has drawn interest from payment groups and could fetch around USD 400mln. EDF (+3.6%) hold onto gains after raising FY20 nuclear output. Associated British Foods (-1.1%) shares remain subdued amid a broker downgrade at Goldman Sachs. Not helping Europe was the latest batch of Service PMIs, which while coming slighlty better than expected, were still in contraction territory...


Meanwhile, while the US was closed for Independence Day, equity futures accelerated the late Thursday fade, while the dollar was modestly higher....

US Suffers Record 52k New COVID-19 Cases As Holiday Weekend Begins!

Coronavirus cases in the US hit another daily record on Thursday as Americans prepared for a distinctly joyless Fourth of July weekend that bears none of the sense of joy and revival that the country enjoyed on Memorial Day Weekend. According to JHU, the US reported 52,291 new cases, bringing its nationwide total to 2,739,879...


Last night, Washington State Gov. Jay Inslee announced that he would pause the phased reopening process for all counties in the state for 2 weeks, joining NY & NJ in delaying some of its reopening plans due to the outbreak int he south and west, while dozens of states, including Texas and Florida, arguably the two hardest hit states, have taken steps to roll back or delay their reopening. He also announced a statewide directive for businesses to require face coverings of all employees and customers, just a few hours after Texas Gov Greg Abbott issued an executive order mandating mask-wearing...


Washington's decision comes after the state reported 509 new cases yesterday, the highest single-day number since April 8. While the resurgence of new cases in Washington State is definitely discouraging, heading into the weekend, only a handful of states in the northeast, NY, NJ, Connecticut, Mass, RI, Vermont, NH and Maine, haven't seen the numbers backslide...


To put things in perspective....

Image

Market Update

# The primary count is that Intermediate wave (2) peaked on June 8th on Monday after the Friday monthly jobs report.
# After peaking in wave (a) and then downdrafting in (b), the market has rallied furiously over the last 4 days heading into the July 4th weekend. The structure counts as complete and Minute [ii] counts as peaked today on yet another "good news" jobs report. This time unemployment unexpectantly dropped again to 11.1%...


# The market jumped over the channel line this morning it couldn't wait to get higher. And then at the end of day, it fell back under the channel and pretty much finished near its low of day.
# The complete count of (1) and (2) so far...


# NYSE count, which is basically a proxy for the DJIA count more or less. I rather use the NYSE. And yes, non-confirmation with SPX, Wilshire, NASDAQ, etc...


# The big, big picture...


# Fractured market. The banks have caught no bid since they peaked. Everyone has forgotten that the world is loaded with quadrillions in derivatives. The interest rate derivatives alone would blow up the entire system if something goes haywire. Negative interest rates would signal massive asset deflation. At any rate, this is not a healthy picture. It must mean something. The banks are leading everything down, followed by the NYSE and Global Dow. The indexes on this chart are important both for the US and globally. Everything else is mostly just noise...

Markets Have Jumped The Shark

Welcome to the Twilight Zone. Nothing seems real anymore, not the economy, not the markets, not the politics, and it is increasingly difficult to distinguish the difference between what is and what isn’t. It truly feels the economy, markets, and the U.S. political system are in a period of suspended animation.
# S&P500 to 4,000 On Money Supply Expansion? Larry Lindsey, the former director of the National Economic Council, under President Bush #43, came out on CNBC this morning making a market call of an S&P500 at 4,000, based solely on the expansion of the money supply via the Fed balance sheet. Here’s a snippet;
* Lawrence Lindsey said “I just did some math on what is happening to the money supply, when you have a rapid expansion of the Fed’s balance sheet that the main effect is on asset prices, .so I simply do the extrapolationof what might be expected to happen in stock prices.” 
The great Kelly Evans then jumps in putting a date on the 4,000 S&P target at year-end 2021. There you have it, folks, a forecast of the creation of more than $7 trillion of wealth over the next 18 months based, not on productivity gains, innovation, nor economic growth, but by keeping the digital printing press running. Whether the wealth is real at the end of 2021 will depend on the purchasing power of the dollar, which we suspect will be lower than most currently expect.
# The New Henry Kauffman? Lindsey’s call hearkens back to the days of Solomon Brothers’ economist and market guru, Henry Kaufman, using his money supply forecasts to predict interest rates;
* The job of restraining money supply growth ”will be more difficult and involve a greater degree of monetary restraint and adverse development for interest rates than is now envisioned by the authorities,” Mr. Kaufman said (NY Times, July 23, 1982). 
Nothing but Happy Days ahead as long as we keep the press that prints the digital money rolling. Just remember, folks, it was when the Fonz “jumped the shark” that ended Happy Days. M2 Money Supply Growth Does the following chart of the monthly year-on-year growth of the M2 money supply look normal, stable, or sustainable? That, folks, is what Larry Lindsey and many of today’s “market gurus” and talking heads are using to rationalize the rally in risk assets...


# What Is Money? Fair enough. But economists can’t even agree on what defines money, how it should be measured, and what should be included in the monetary aggregates. Should brokerage accounts, for example, where you can lever up on gold ETFS and still write checks on the account be considered part of the money supply? During my graduate school days when monetarism was in crisis as the relationship between the money supply figures and GDP started to unravel, the Fed even toyed, or at least, researched the possibility of including equity mutual funds in the money supply figures.
# Why This QE Is Different From The Past; The increase of the money supply via the Fed, rather than bank credit expansion, though more stable, is potentially much more inflationary. During the Great Financial Crisis (GFC) and, shortly thereafter, the financial system was impaired and credit, which also creates money, was contracting and the Fed moved quickly to offset the shrinkage of endogenous money. No credit crunch during the COVID crisis, however, as the Fed has backstopped, or announced to the world it would, almost anything and everything. Credit is flowing just about as freely as the Mississippi River during storm season. By the way, the CEO of a major restaurant chain called for the US government to backstop all restaurants’ rent payments on CNBC today. Just wow, and how do you think that would be financed? Unfunded pension plans are most likely next and it won’t stop there. We are so far down this rabbit hole there is no returning.
# Donut Shop Analogy; The Fed is adding more liquidity into the system at a zero percent IOER largely by removing financial assets from the same system and replacing them with reserves or cash equivalent balances. These reserves can then be used to create additional credit or even more money. We won’t get into it here but why would banks keep excess reserves that now earn zero or close to zero percent on their balance sheets? The Fed is also indirectly financing the USG’s budget deficits, which include direct cash grant payments to American households. No doubt much of this is needed and the right thing to do, in our opinion, but we can think of better ways to do it. The timing and necessity of speed probably left no better alternatives. If the next government doesn’t embark on a series of strong structural reforms, then we are really, you know, rhymes with shucks.
# The Local Donut Shop And Financial Asset Inflation; Imagine your local donut shop, which is very busy on Saturday mornings with lines running around the block. The donut shop serves only chocolate and maple donuts. The chocolate donuts represent financial assets and the maple represent real goods and services. The people in line, many of which already own several chocolate donuts, have certain preferences for chocolate versus maple donuts. Before opening, a Brinks Truck pulls up and buys up half the chocolate donuts in the shop and those held by the customers standing line. In addition, they hand out an additional $100 to everyone standing in the line that can only be spent in the donut shop. Take a guess at what’s going to happen to the price of chocolate donuts when the shop opens? The Fed, the Brinks Truck, has created a demand and supply shock for chocolate donuts or financial assets. A positive demand shock by handing out cash and injecting more liquidity through its purchases. A negative supply shock by removing chocolate donuts or financial assets from the donut shop and those of the customers in line. All good until the price of maple donuts begins to rise, especially if some are imported from Canada with a now weaker currency, as the mandate of Brinks company is to maintain a stable price and production of maple donuts. A crude analogy, which we wouldn’t try to defend in front of a dissertation committee but it paints a pretty good picture of what, we believe, is driving asset markets. This new supply-side economics has been going on for years but now it’s overdosing on steroids.
# The End Game; We don’t how this all this ends but imagine the owners of the donut shop, which employs most of the customers in line and has made a killing but is now very dependent on the Brinks Truck showing up every Saturday morning. The owners have used the easy money policy of Brinks to help finance a very lavish lifestyle and have borrowed money to expand production. The Brinks company sees the price of maple donuts rising. Can they now pull back and stop showing up on Saturday morning without collapsing the donut shop? We don’t think so. Infinite money demand or the notion velocity remaining an asymptotic function approaching zero is not a forever game. The risk is increasing it’s closer to the ninth inning than the first. What is truly alarming is that monetary policy is such a black box that nobody knows, including Jerome Powell and the rest of the monetary authorities....

Simon Black; This Pandemic Is A Politician's Dream Come True

By the mid-1990s, the economy of Zimbabwe was in serious trouble. The national government under its dictator Robert Mugabe had spent years confiscating private property– real estate, businesses, factories, bank deposits, etc. And unsurprisingly, this had a disastrous effect on the economy. Productive citizens and talented entrepreneurs left Zimbabwe in droves– after all, who would want to keep operating under such awful conditions? So within a few years, everything from food production to mining output to manufacturing had plummeted. The banking sector collapsed. Unemployment soared. Tax revenue dried up. So Mugabe did what most politicians would do in that position: he started printing money.
# This is an old trick that governments have relied on for thousands of years. The ‘denarius’ coin of ancient Rome, for example, contained 93.5% silver in the early 100s AD under Emperor Trajan. By the time Aurelian became emperor the following century, the coin contained only 5% silver. And as the denarius became less and less valuable, prices across the empire soared. Merchants had to keep increasing their prices in order to receive the same amount of silver that they used to… so inflation was rampant. This is precisely what happened in Zimbabwe. The government conjured absurd quantities of money out of thin air in order to make ends meet… but the new money had no value. It’s not like the central bank was able to create new mining production or agricultural output. They just created a bunch of paper. And with trillions upon trillions of new Zimbabwe dollars flooding into an economy that was suffering an extreme depression, prices started to skyrocket. By 2000, Zimbabwe’s annual inflation rate was a whopping 55%. The following year more than 110%. By 2003 inflation was nearly 600% and nearly 1300% by 2006. But the government continued printing money. By 2008 the inflation rate in Zimbabwe was so extreme that no one could even calculate it anymore. Economists estimated that it was as high as 800 TRILLION percent. In April 2009, the government finally threw in the towel and the country’s economic planning minister announced that the Zimbabwe dollar would be taken out of circulation “because there is nothing to support and hold its value.”
# Duh. Frankly, this is the case whenever any country simply conjures new money out of thin air: there’s nothing to support or hold its value. So for the next ten years, Zimbabwe did not have its own currency; people used dollars, euros, renminbi, South African rand any other currency they could get their hands on. I’ve been several times to Zimbabwe, and the only Zim dollars I ever saw were in souvenir shops or wallpaper in people’s bathrooms. Then last year the government of Zimbabwe decided to give it another try… and they launched a new Zimbabwe dollar (technically called the RTGS dollar). Go figure, they’re once again in hyperinflation, with the most recent statistics estimating an annual inflation rate of 785%, and climbing. This time, in addition to printing more money, the government has imposed strict capital controls. They suspended the stock exchange and have prohibited investors from pulling their money out. They also shut down large parts of the local financial system a few days ago (which is dominated by mobile payment platforms) in order to prevent capital flight. What’s truly remarkable, though, is that nearly every country around the world is following Zimbabwe’s example. Central banks everywhere, across Asia, Latin America, Europe, and North America, have conjured trillions upon trillions of currency units out of thin air since the pandemic started...


In the United States alone, the Federal Reserve has expanded its balance sheet by $3 trillion since March and they’re barely getting started. Meanwhile the federal government’s debt has increased by the same amount– roughly $3 trillion since March– in its quest to bail out every last person across America. $3 trillion. Just think about that. I remember in the late 1990s when $1 billion was still considered a lot of money. If the government was found having wasted a few billion dollars, it was a really big deal. Then over the next decade came 9/11, endless wars, and the Global Financial Crisis. Suddenly banks were being bailed out to the tune of $800 billion. That was a shocking figure at first. But eventually people got used to it. Today these politicians and central bankers are throwing around TRILLIONS of dollars, like it’s nothing. The US runs trillion dollar deficits each year. The federal debt increased by half a trillion dollars in the last month alone, soaring past $26 trillion, and it doesn’t even make headlines anymore. In the span of 20 years, $1 billion went from being a lot of money, to a rounding error and now $1 trillion doesn’t even make the news. Honestly this pandemic is a politician’s dream come true, they have a free pass to create limitless quantities of money to pay for whatever pet project they want. Universal basic income? Print money. Free healthcare? Print money. New roads? Print money.
# Economists call this “Modern Monetary Theory”, and the idea is that prosperity is created by printing money, not by hard work and value creation. It’s extraordinary that very intelligent people believe in this nonsense. But if MMT were true, then Zimbabwe should be the most prosperous nation on earth. Yet this is literally the second time in the past 20 years that Zimbabwe has gone down this road of printing money, and then hyperinflation. You’d Zimbabwe would have learned its lesson. Or at a minimum, you’d think the rest of the world would look at the experiences in Zimbabwe and think, “Let’s never do that, ever.” But that’s clearly not the case. Policymakers around the world, including in the US and Europe, are racing to become Zimbabwe as quickly as they can. But they’re crazy enough to expect a different outcome....

donderdag 2 juli 2020

Stocks Soar To Best Week In 3 Months As COVID-Comeback Concerns Mount

Perhaps the market is seeing the scaremongering from health officials for what it is is and calling locking-down-politicians' bluffs? US COVID cases are soaring (just don't mention the low death rates)...


And that maybe why stocks were majestically pumped to their best week in almost 3 months as PMIs and jobs data beat (just don't mention jobless claims or factory orders). After last Friday's COVID scare plunge, this week saw Nasdaq outperform, surging almost 6% to a new record high...


But they did suffer a very weak close, erasing the jobs spike...


However, Nasdaq is just outperforming gold in 2020, up 19% at today's close...


Tech valuations are a little rich, just a smidge...


 The S&P bounced almost perfectly off its 200DMA...


The Dow was unable to break back above its 200DMA...


Today's price action in factor land mimicced yesterday's with an opening gap down in momo that was quickly panic bid...


Very little differentiation between cyclicals and defensives this week, just buy it all...


And opening surge in banks was sold all day...


The Treasury market closed early today (at 1400ET) but on the week, the long-end notably underperformed (30Y +6bps, 2Y -1bps)...


The 10Y Yield tried twice and failed to bet back above 70bps...


The dollar index fell on the week for the first time in 4 weeks...


Cryptos dipped today, back into the red for the week...


All the major commodities were higher this week, led by oil...


WTI is back above $40...


 Gold was briefly back above $1800 this week...

Jobs Data Officially Broken? More People Getting Unemployment Benefits Than There Are Unemployed Workers!

It's official: "data" released from the Bureau of Labor Statistics has just crossed the streams and has given birth to the Stay Puft marshmallow man jumping the shark. Alas, it also means that jobs "data" is now completely meaningless. For all the analysis of today's job report, is it good, is it bad, is this data series too hot, and does it mean that the Fed will soon be forced to hike, we have just one response. None of it matters. Why? Because a simple sanity check reveals that as of this moment the jobs report no longer makes logical sense. Consider the continuing jobless claims time series, also also referred to as "insured unemployment", and represents the number of people who have already filed an initial claim and who have experienced a week of unemployment and then filed a continued claim to claim benefits for that week of unemployment.
# By its very definition, insured unemployment is a subset of all Americans who are unemployed. In a Venn diagram, the Continuing Claims circle would fit entirely inside the "Unemployed" circle, which also includes Initial Claims, Continuing Claims, and countless other unemployed Americans who are no longer eligible for any benefits. Alas, as of this moment, the definitionally smaller circle is bigger than "bigger" one, and as the DOL reported today, there were 19.29 million workers receiving unemployment insurance. And yet, somehow, at the same time the BLS also represented that the total number of unemployed workers is, drumroll, 17.75 million. If you said this makes no sense, and pointed out that the unemployment insurance number has to be smaller than the total unemployed number, then you are right. And indeed, for 50 years of data, that was precisely the case. Until this week...


And yes, there is a "forced" explanation to justify how this may actually happen in the current situation where everyone is abusing jobless benefits, but in theory this should not be happening, and we fully expect that in the coming weeks, the already highly politicized BLS will quietly close this gap....