dog with robo dog

Incentive Based Returns

“God knows how any of you can place your vote based on ISS or Glass Lewis,” says JPMorgan CEO Jamie Dimon.  “If you do that, you are just irresponsible, I’m sorry.  And you probably aren’t a very good investor, either.”  Or you probably aren’t in favor of Dimon’s last paycheck: “investors are seeking that a greater portion of executives’ incentive pay be based on performance…Proxy advisers [ISS and Glass Lewis] had recommended investors reject the pay resolution.”  Meanwhile, “S&P 500 companies returned a record $242 billion to shareholders in the first three months of the year via buybacks and dividends, surpassing the previous high of $233 billion in the second quarter of 2007…While dividends and buybacks prop up stocks in the near term, they can come at the expense of long-term growth initiatives.”  Meanwhile, “productivity has declined in all the major developed economies.  This fall is not a mystery, as is often claimed.  Poor productivity is a consequence of low investment, and in the UK and the US a major cause of low investment is the incentives created by the bonus culture…Bonuses encourage managers to put more emphasis on the short term for which they are rewarded and pay less attention to the longer-term dangers their companies face…We should therefore expect the rise in short term incentives to have been accompanied by low investment and high profit margins.  This is exactly what has happened…Bonuses should be linked to increases in productivity as well as to profit targets.”



Here are some things you could know about hedge funds: “the top 11% of managers controlled 92% – or $2.78 trillion — of total hedge fund assets at the end of Q1 2015…Of these top firms, more than 400 managing $1 billion to $4.9 billion collectively controlled $892 billion while 22 managers with $20 billion or more, had $790 billion all together…On average, managers with more than $20 billion were established in 1992.”  To which Josh Brown thinks that “if you founded a hedge fund in the early 1990’s, you probably had 100 serious competitors in chasing down the alpha that used to be the lifeblood of the hedge fund game.  Cramer was running like a hundred million and he was considered to be a big dog back then…It’s not that hedge fund managers are unskilled — it’s that way too many of them are so highly skilled.  This is why alpha is so hard to come by.”  Here’s another theory: it’s not that hedge fund managers are unskilled — it’s that way too many passive algorithms are highly skilled: “the middle of the day has become awfully quiet on the U.S. stock market, as index funds and computer models push the action toward the end of the trading day…These include programs that dribble out trades at intervals, known as ‘volume weighted average price’ algorithms.  Their proliferation has led volumes to snowball at times when investors are already active, such as at the close…Another factor behind the shift has been the proliferation of passively managed investments…buying or selling a stock at its closing price better aligns their performance with the index they are trying to emulate.  Actively managed funds, in contrast, aim to beat, not match, stock indexes.”


China: Stock Market Plunges More Than 6% (Alt)


USA: Fed’s Latest Survey On Financial Conditions Of American Households


ICYMI: Los Angeles Has Taken The Baton From Seattle


WM: Damodaran: “Why Low Interest Rates & Large Cash Balances Skew PE Ratios”


AAPL: Dropping Lots Of Car Hints


bill murray

What If There Is No Tomorrow?

There’s been an abundance — nay, “cesspool of rotations” ever since the Fed announced the beginning of the end the tapering.  “Many were positioned this Jan for US macro liftoff.  Once weaker-than-expected Q1 data caused the Fed to ‘blink’ in March, an immediate painful US$ peak, biotech selloff and trough in oil prices ensued.”  Remember that?  About 6 months ago no one felt like chewing Mario Draghi’s grass?  Well: “investor appetite for U.S. stocks has slumped to its lowest level in more than seven years.  Though the S&P 500 has hit three new highs in May, the region has suffered its biggest drop in equity allocation since September 2008, with the number of investors overweight U.S. equities declining to a net 19% in May, according to [Merrill Lynch’s] monthly fund manager survey…Only 7% of those questioned cited the U.S. as the region with the most favorable earnings outlook.  The vast majority prefer Europe and Japan, where central banks are still committed to quantitative easing programs.”  “Not unlike the 1993 comedy ‘Groundhog Day,’…investors are doomed to relive a perpetual daisy chain of mediocre U.S. economic reports and lackluster returns from risky assets…Until (a) the US economy is unambiguously robust enough to allow the Fed to hike and (b) the Fed’s exit from zero rates is seen not to cause a market or macro shock (as it infamously did in 1937-7), the investment backdrop will likely continue to be cursed by mediocre returns, volatile trading rotation, correlation breakdowns and flash crashes.”  And Icahnic tweets: “Amidst this light trading volume environment, it does not take much to get markets moving.”  For example: the “market-moving impact of Carl Icahn, who tweeted on Monday that Apple is worth $240 a share.  That kick-started a rally in [Apple] and, it seems, the entire U.S. stock market…It is surprising to hear so many investors deny the bubbly nature of this market when such moves are now commonplace.”  Meanwhile, Tobin’s Q is getting a lot of attention suddenly: “Valuation tools are being dusted off around Wall Street…If you sold every share of every company in the U.S. and used the money to buy up all the factories, machines and inventory, you’d have some cash left over.  That (literally) is the math behind a bear case on equities that says prices have outrun reality.”  Meanwhile, here are some better questions to be asking yourself.  Also, what if everything started to go right in the world economy?


USA: Nah Just Kidding, There’s A Recession Coming


What: It’s Up To Us To Understand How The Leap Second Will Impact Our World


investors Finally Get What They Wished For Are Rubbing Their Lamps Again

Government bonds are continuing to sell off today: “the US 10-year Treasury yield rose to 2.36 per cent in early New York trading, its highest level since November…Euphoria over the [ECB’s] €60bn-a-month monetary stimulus that pulled the German 10-year bond yield down towards zero per cent last month has faded on improving growth prospects and climbing inflation expectations…’[the sell-off] is starting to stretch the boundaries of what you could call a technical correction.  A lot of strategists are getting nervous,’” says a strategist.   John Williams, however, thinks nervous is healthy: “my personal preference is that we don’t have the most telegraphed policy decisions in history, as we did in 2004…In a normal economy there is some volatility in markets, that is just a healthy functioning of markets trying to understand and filter what the data means for policy.”  Meanwhile, German Bund investors may need to up their intake of aspirin: “It took 102 trading days for 10-year Bund yields to rally from 68bp to their all-time low of 7bp on April 20th.  It took just 15 days after that to jump back to 68bp again.”  Furthermore, “in the volatility of the last week, the backdrop of negative yielding assets in Europe has changed significantly.  Higher yields means fewer negative yields…But even €1 trillion down..negative yielding Eurozone government debt remains greater than the size of positive yielding Euro credit.”  Reuters thinks this could be “a shot in the arm” for the ECB:  “this has broadened the pool of bonds the ECB can buy under its quantitative easing (QE) purchase programme, which excludes all paper yielding below the minus 20 basis points that corresponds to the bank’s deposit rate.”  Meanwhile, “if bond yields are going up because investors demand a higher premium for holding risk, then the losses on riskier assets like equities ought to be bigger still.  But that doesn’t appear to be the case.  Government bond yields seem to have ticked higher because inflation expectations have been rising…If bond yields are going up because growth expectations are picking up, this should ultimately be favorable for equity markets, albeit after a round of near-term volatility.”  Also, the main argument for why this is a “technical” correction has been the surprise announcement by Treasury to issue $64 billion in treasuries this week.  However, “demand for the U.S. government securities sold at auction has declined in each of the past three months, after also slumping in the August-through-October 2014 period…the Treasury is also competing with more than $20 billion of debt slated to be sold by companies.”  We should get a preview of the “technical” correction thesis today as $24 billion three-year notes go up for auction.  Stay tuned.


Mo’ Money, Mo’ Problems

“While [Apple] may well become the first $1 trillion market cap company (Carl Icahn’s recently top-ticking tweets notwithstanding), did you know that AAPL is now bigger than the entire market cap of all Spanish stocks combined?  Or that Austria’s $99 billion gross market cap is the size of Mastercard.  Or that Finland’s entire stock market is about the size of Verizon?”  Speaking of which, Finland Verizon has no idea what to do with all their money is buying AOL.  Also, mutual funds have no idea what to do with all their money are hunting unicorns.  Also, sovereign wealth funds have no idea what to do with all their money are “[harnessing] the premium associated with more illiquid assets.


USA: Retail Sales Indicate Divergence Between East And West Coasts


Tech: Google Is Currently Putting 10,000 Miles A Week On Their Self-Driving Cars


USA: Why Do You Think Disney’s Rags-To-Riches Love Stories Are So Popular?

Music Director Riccardo Muti and the Chicago Symphony Orchestra 2011 European Tour

Music To Draghi’s Ears

“In the negative-yield vortex that is the European bond market, investors are discovering just what lengths they’re willing to go to generate returns…even the most risk-averse investors are taking chances on assets and regions that few would have considered just months ago.”  Mmm, sweet melody, do continue.  “‘When you are paying some governments to own their bonds, 4 percent actually looks very decent’…European enthusiasm for higher-yielding assets has helped U.S. borrowers sell 3.28 billion euros of junk bonds in 2015, the busiest start to a year since the currency started in 1999.” …this symphony is a little heavy on the brass — “Unlike the Fed’s three waves of quantitative easing, the ECB’s version is coming as European governments are trimming budgets.  That means they issue fewer bonds, and European investors have more reason to look abroad for returns instead of paying dearly for relatively scarce assets at home or having cash in euros that they might need to pay to hold on to.  ‘There are more and more euros being printed, but these are hot-potato euros.’”  Also, “the euro’s turbocharger has been removed”: central banks around the world have slowed their accumulation of dollars and euros and are relaxing their control over their currency (i.e. float the currency).  Meanwhile, “a weak euro and signs of an economic recovery have spurred China to step up its push into Europe.  Analysts at Deloitte say depressed asset prices in the euro zone have created ‘vast opportunities for bargain seekers in China.’”  Well.  


Oil: US Still Gushing Oil

“US crude oil stocks rose 22% y/y to a record 458.5 million barrels during the week of March 13…refineries are working overtime to convert crude oil — which the government bans from exporting — into refined products…over the past 12 months through February, global oil supply is up 2.5% y/y, while demand is up 0.7%…North American frackers have flooded the world market with so much oil that the Saudis are aiming to shut them down with lower prices.  It’s not working so far.  The US and Canada produced 13.2mbd during February, up 4.0mbd since August 2012.  That well exceeds the Saudi’s 9.6mbd.”  Also, oil bears can smell a nuclear deal with Iran which might raise sanctions on another 1.0mbd from Iranian oil fields.  Meanwhile, Oil Rigs Shmoil Rigs (The official title of Goldman’s latest memo on oil rigs, I presume).


USA: Center For Financial Stability Sees Increase In Short-Term Credit

“The CFS defines market finance as the total stock of money-market funds, commercial paper and security repurchase, or repo, contracts held by financial institutions — credit instruments that are generated and traded outside of the regulated banking system.  The figure totaled $4.124 trillion in February, up from $4.111 trillion in January but 46% below its peak seven years ago.”


USA: Economic Surprise Index (Alt)

“The surprise index doesn’t rise or fall with the ebb and flow of the economic cycle…It measures a rolling average of how things turn out relative to forecasts…When the index is deeply negative, as it is today, that is usually a good sign for stocks.  Following the weakest 5% of observations since 2003, the S&P 500 rose by 14.4%, on average, during the following six months.


AAPL: Apple Has Roughly 170 Billion Reasons To Scare Their Future Competitors (Alt)


ICYMI: There’s A Few People Calling The Fed’s Bluff

Meanwhile, “often wrong but seldom boring” guy is done pretending.


What: America’s First Kenyan President Inspires Canadian To Run

Meanwhile, Asset Classes in the Obama Years

running of the bulls

The Trick Is To Stay Ahead Of The Bulls

“Entering its seventh year, the ageing US equity bull market looks vulnerable (alt)…Uncertainty over how asset prices will react once borrowing costs rise for the first time since 2006, looms large over Wall Street.”  People are pretty worried about the rising dollar, buybacks fueling the bull, lower energy earnings, etc.  All that being said, a “modest tightening from the Fed [may] sustain the appeal of owning equities even with the S&P trading at 17 times future earnings.”  Meanwhile, it’s been four days since the ECB began purchasing bonds and guess what?  The ECB’s QE Is Working Well!  “The ECB has finally broken the QE taboo and has become a normal central bank…The lack of contagion from the recent Greek turmoil is a good example of this confidence effect.  Euro area bonds have again become risk-free assets, hopefully putting to rest the mistaken view that euro area countries ‘don’t have a central bank’…Quantitative easing has erased most of the near term deflationary risks and has restored the ECB’s long-term price stability credibility…and markets are now moving in the right direction.”  Meanwhile, the grass is greener in currency hedged European equity ETF funds: “These funds have become multibillion-dollar blockbusters because of alpha seekers.  But they could be in for a surprise once the trend ends or even if the movement goes into hibernation for a while as the foreign exchange market consolidates.  The takeaway is this: It’s probably fair to expect parity between the euro and the dollar.  But once parity is reached, it might make sense to think through this currency-hedging decision again and carefully.”  Meanwhile, Ray Dalio explains the power of not knowing: “You can’t make money agreeing with the consensus view, which is already embedded in the price.  Yet whenever you’re betting against the consensus, there’s a significant probability you’re going to be wrong, so you have to be humble…We all make better decisions by maintaining an independent view and the conflicting possibilities in our minds simultaneously, and then trying to resolve the differences.  We’re always in the place of holding an opinion and simultaneously stress-testing the hell out of it.”


Homeownership By Age

Michelle Meyer, an economist at Merrill Lynch, has some numbers on homeownership rates by age: “The biggest decline in the past ten years has been among the 30-34 year olds, followed closely by the 35-44 year old cohort….There was a similar story for the 25-29 year olds, but not quite as extreme.  In contrast, the homeownership rate for 65+ has been little changed.”  Meanwhile, “the National Association of Realtors said millennials, or those between 18 and 34 years old, accounted for the largest share of home buyers last year at 32%…The median age of millennial homebuyers was 29, their median income was $76,900 and they typically bought a 1,720-square foot home costing $189,900.”


What’s Oil Doing?

UBS economists say that “if oil prices were to remain close to current levels over the remainder of 2015, it would be unusual.  There have only been 8 occasions in the last 150 years, for example, when the cumulative 2-year change in oil prices has been more than 50%, which is what it would be if oil prices remained close to $60/bbl from here.  Putting that another way, there is at present a 25% chance that oil prices climb to $80 or higher by the end of 2015 based on the pure statistical properties of oil price swings in the past as well as relative to what is discounted in the forward curve.”  Meanwhile, some large oil companies may enjoy trading the fruits of production more than others: “In the first quarter of 2009 (the last bear market for oil), BP said it made $500 million above its normal level of profits from trading.  That means that trading accounted for, at the very least, 20 percent of BP’s adjusted income of $2.38 billion that quarter…oil trading could provide BP, Shell and Total with an edge over U.S. rivals Exxon Mobil Corp. and Chevron Corp., which sell their own production, but largely eschew pure trading as a means of generating profits…Although extra profits from trading won’t offset the much larger loss of revenue from lower oil prices, it could help the three companies to weather the crisis and, perhaps more importantly, beat analysts’ estimates.”


AAPL: Apple’s Moat: Mall Rats Edition


What: Mountain View Resident Suspects He May Live To See 500

Sand Hill Exchange

Power To The Venture Capitalist People

The Financial Times says there “is a sense among many in the industry that private equity is no longer at the leading edge of investment, with that mantle having moved on to the venture capital world (alt)…Quietly, firms including Blackstone, Carlyle and KKR have looked at acquiring venture capital firms…several of the private equity firms are shifting their pitch to investors.  Rather than emphasising the big (and often disastrous) buyouts of the last cycle, they refer to their interest in providing growth equity to much younger companies.  Being masters of smaller alternative universes has suddenly become the new, new thing.”  Meanwhile, Sand Hill exchange “is offering anyone who wants to deposit money with the firm the chance to buy and sell synthetic derivatives linked to unlisted tech companies…The ‘contracts’ that make this possible are British-style contracts for difference — Cfds.  Rather than owning the asset outright, you enter into a contract with a counterparty to cash settle any subsequent moves in the price of that asset… But Cfds specifically are illegal in the US…What Sand Hill appears to have done is to simply sidestep the entire 40-year old edifice of the CFTC by using the blockchain, that bit of the Bitcoin infrastructure that acts as a distributed public ledger, for transactions.”  Meanwhile, according to the city of Orlando, “nerds love Orlando.


Investable Asset Classes

“If U.S. investors have learned one thing since the bull market started six years ago, it is don’t bet against central banks’ easy-money policies…According to Lipper, U.S. stock funds have seen $5 billion in outflows so far this year, while European equity funds have collected $4 billion in assets and those in Japan have gathered a little over $1 billion in 2015.  Returns in 2015 have already paid off for those invested in foreign markets.  Across the pond, Europe is higher by 15%, while Japan has risen 8%.  At home though, the S&P 500 is up only 1% this year even as the U.S. economy improves and jobs growth is the strongest it’s been in over a decade.”  Meanwhile, “euro-denominated corporate bonds have gained 1.4 percent this year,” unless your passport has an eagle on it, in which case euro-denominated corporate bonds have lost 9 percent this year.  “With yields at record lows, that means this trade is as much a bet on the euro as anything else.  And that’s a huge problem given the euro’s 10 percent drop against the greenback this year.  The average yield of less than 1 percent on European investment-grade corporate bonds isn’t enough to offset that currency move.”  “Although ECB QE is expected to boost demand for euro-area assets, that may not buoy the currency…Many of the bonds the ECB buys are likely to come from foreign investors, according to David Woo, a strategist at [Merrill Lynch].  That could lead to as much as €10 billion worth of euro selling against other currencies every month, he said.  QE has already drawn overseas investors to eurozone equity markets.  But most foreign buyers are hedging their currency exposure, negating any upward pressure on the euro.”  Meanwhile, here’s what “don’t bet against central banks’ easy-money policies” looks like.  Also, Europe’s central banks are still playing hot potato with the expected losses from negative yields.


USA: CBO Projects Even Lower Deficit


Global: Female Managers Are Negatively Correlated With Fraud, Scandal (Alt)


What: Apple Watch Won’t Rescue Gold Bugs


WaitWhat: Is Cash An Investable Asset Class Or Not?

Also, is art an asset class?

largest restaurant and retail employers in US


A modest bidding war has broken out among the retailers who hire from the bottom of the labor pool, buoyed in part by improving sales…Turnover in the retail sector has been steadily rising and now stands at 5 percent a month.  At this rate, if Walmart’s workforce were to hold to the national average, over a full year it would be losing 60 percent of its sales staff.”  Meanwhile, “employers added 295,000 jobs in [February] (alt), up from an average gain of 266,000 over the previous 12 months and comfortably above Wall Street expectations…The rate of unemployment fell from 5.7 per cent to 5.5 per cent…Pay growth was muted, however, with average hourly earnings rising by 3 cents, leaving earnings up 2 per cent on the year…The [participation rate] was little changed at 62.8 per cent.”  The dollar is trading higher on the news; EUR/USD exchange rate is now 1.08.  Meanwhile, “since December, 22 major foreign currencies have declined an average of 4.5 percent against the [$US].  A cheaper currency makes exports less expensive and thus more attractive to foreign buyers.  A devalued currency also drives up import prices, which discourage domestic consumers from purchasing foreign goods…Call it currency manipulation or domestic economic policy…almost every country in the world want their money to be cheaper.”  Keyword: almost.  “The renminbi has weakened against the dollar by about 4 per cent since October, a meaningful change in a semi-fixed exchange rate regime…This has been driven mainly by a reversal in private sector capital flows, which have traditionally been in large surplus but are now in deficit…The capital outflow has also tightened the domestic money markets, a very unwelcome development for the People’s Bank of China given the powerful contractionary forces that have taken hold in the domestic economy…Although the renminbi has fallen against the dollar, the semi-fixed band has resulted in China’s overall effective exchange rate rising by 11 per cent since early 2014…China is finding it increasingly difficult to remain tied to the dollar bloc at a time when the US Federal Reserve is tightening monetary policy and the dollar is rising…Other countries may complain about ‘currency wars’, but a gradual renminbi adjustment would be far safer for the world economy than a failed attempt to maintain a fixed rate that has outlived its usefulness.”  Meanwhile, here are some insane statistics about China: 1) There are more internet users in China than there are people in the United States and Europe combined, 2) Chinese construction firms broke ground last year on enough homes for the entire population of Australia, 3) They also built or at least worked on 143k miles of road, which is longer than five times the circumference of the earth.


USA: Grain Of Salt

Despite the positive jobs report this morning, there have actually been quite a few negative economic data points from the United States recently.  


WM: Funds Indexed To The Dow Are Gonna Have To Buy Apple And Sell AT&T


EU: Being A Tourist In Greece Is About To Get Real Awkward (Alt)


USA: Researchers Say 1 In 8 Spinoffs Preceded By Suspicious Trading In Options Markets


WM: JPMorgan Is Super Good At Returns

QE supply ECB vs Fed March 2015

Buy It All Back

Dr. Ed says that since 2009, the S&P 500 has been “highly correlated with the sum” of share buybacks and dividends.  “Buyback authorization for February 2015 — of $118.32 billion — were the strongest for [any month ever], in dollar terms.  While analysts expect H1-2015 earnings growth to be negative y/y for the S&P 500, I think buybacks could help to turn S&P 500 earnings growth positive.”  Also, the last time buybacks reached a monthly record (July 2006), “the S&P 500 advanced 23 percent in the next 14 months before hitting an all-time high.”  More: “Repurchases set an annual record of $589 billion in 2007…[Companies] were on pace to spend a sum equal to 95 percent of their earnings on repurchases and dividends in 2014, data compiled in October showed…S&P 500 companies hold $1.75 trillion in cash and marketable securities.”


Unprecedented Distortion

“European shares rose close to seven-year highs on Tuesday as better than expected German retail sales further buoyed investors days before the [ECB] kicks off a trillion-euro bond buying programme…German retail sales rose 2.9 percent month-on-month and 5.3 percent year-on-year in January, more than economists had forecast…’Euro zone economic surprises have veered from extremely negative to extremely positive in very short order.’”  A reuters columnist thinks “investors would be wise to prepare for a more optimistic outcome.  Folk wisdom holds that in strong economies stocks do well and bonds do poorly.  But years of ultra-easy monetary policy may have complicated the relationship.  Indeed, if strong growth reduces the need for new government borrowing and even a brief QE programme reduces supply, market prices might keep rising.  So negative yields may last a while longer.”  Meanwhile, a Citi strategist says that “the unprecedented distortion that ECB QE is about to introduce to € fixed income at a time of ultra-low yields has still not quite dawned on European credit.”  Meanwhile, ultra-low yields have dawned on Buffett.


AAPL: Notes On Cars

“Many people can find $400 for a better phone or, this year, a smart watch, if they’re persuaded that they really want one, but rather fewer can find an extra $40,000 for a better car, or to replace their car every two years instead of every 4 or 8.  If you’re in the market for a $20,000 car, there is very little that anyone can do to a car that will put you in the market for a $60,000 car.  Cars do not come out of discretionary spending.”  Meanwhile, the Wall Street Journal reports that several insurance companies and an auto parts maker have included warnings about the risks of driverless cars in their official corporate filings.  


USA: Does The Fed Have A Currency Problem?

You’ve probably heard the argument that steady core inflation could prevent the Fed from abandoning a rate increase this year.  Tim Duy isn’t buying it: “On a 3-month basis, core inflation is at its lowest since the plunge in 2008.  Year-over-year inflation has been held up by a basis effect from a jump in early 2014.”  And why is core-inflation drifting lower?  “The rising dollar may be causing the Fed more headaches than they like to admit.”


USA: Wall Street Has Its Eyes On Millennials’ $30 Trillion Inheritance


WM: Royal Bank Of Scotland To Investment Banking Employees: We’re Done Here

The Raghuram Rajan Effect Is Playing Out Nicely

spaceballs ludicrous speed

Prepare For Ludicrous Speed!

“Euro zone consumer prices fell by less than expected in February while unemployment eased in January for the third month in a row.”  Unemployment “fell for the third month in a row to 11.2 percent in January from 11.3 percent in December.”  Consumer prices “fell 0.3 percent year-on-year in February after a 0.6 percent annual drop in the previous month.  Economists polled by Reuters had expected a 0.4 percent price decline.”  As in the United States, headline and core inflation are diverging: “Without the volatile energy and unprocessed food components…prices grew 0.6 percent year-on-year, the same as in January.”  “The further drop in unemployment should be supportive to euro zone consumers and they are benefitting from the boost to their purchasing power coming from deflation.”  Meanwhile, across the pond: “with gasoline prices already rising again, consumers may be suspicious that the price declines won’t last (alt).  ‘If people perceive something as transitory, they are less likely to spend the money’…inflation and growth could be weaker than expected and the Fed could delay raising rates.  If oil prices resume their declines, it could push overall prices down more, creating new worries…’It will be hard for the Fed to start tightening when the headline inflation number is negative.’”  However, despite the uncertainty around inflation and oil prices, “the Fed’s confidence in the US economy is driving them to policy normalization.  The labor market improvements are key — as long as unemployment is falling, confidence in the inflation outlook is rising.”  Also, “the Fed is sending a clear message that the subsequent path of rates is also very uncertain, and they don’t think that uncertainty is being taken seriously by market participants.”  Meanwhile, academics at the Booth School of Business say that the uncertainty around the ‘natural’ rate “argues for more ‘inertial’ monetary policy than implied by standard version of the Taylor rule,” resulting in “a later but steeper normalization path for the funds rate compared with the median ‘dot’ in the FOMC’s Summary of Economic Projections.”


Let’s Be Clear: China Is Not Racing To The Bottom

“The People’s Bank of China, the central bank, cut the benchmark one-year lending rate (alt) by 25 basis points to 5.35 per cent and the one-year benchmark deposit rate by the same amount to 2.5 per cent on Saturday night…many Chinese analysts and policy makers have been calling for further monetary easing as growth continues to slide and deflation looms…Last week, central bankers from the eurozone and Japan voiced optimism that their policies of quantitative easing and currency depreciation would be successful in staving off outright deflation.”  This is where comparing monetary policies of China and Europe/Japan gets really interesting.  Bill Gross and others argue that there’s a “contest going on in global financial markets where the ‘home country’ seeks to outdo the competition in a race to the interest rate bottom…an undeclared currency war is what the world is experiencing.”  While this certainly seems to be the case for Europe and Japan, the Chinese are more like currency pacifists: “Given the large foreign debt exposure by Chinese firms and limited development of onshore foreign exchange market, the PBoC may not tolerate a sharp RMB depreciation (more than 5 percent).  Such a large depreciation could lead to huge foreign exchange losses of Chinese firms, potentially destabilizing the fragile banking system.  In addition, a relatively strong currency will also help China rebalance its economy to a services-led economy.”


USA: If A Company Can’t Wait To Tell You, Then It’s Probably Good News


AAPL: To Wear, Or Not To Wear

“So Apple now wants to pull off something that no company has ever managed before: it wants to reverse a cultural trend that it had created itself.  It wants us to start wearing a watch again.”


Global: Bitcoin’s True Value Might Not Be The Currency, But The Engine That Makes It Possible

Fed purchases of US Treasury and Agency bonds

Quantitative Tightening?

“At the heart of the challenge facing the Fed is a notion in economics that there is a short-run trade-off between unemployment and inflation…But the estimate of how low unemployment can go is imprecise and moves around depending on what else is happening in the economy…In the absence of hard-and-fast rules, Fed officials are watching wage gains”– you know all this.  The NFIB released more data on small business activity today and “the most positive news from the small business sector continued to be the demand for labor…Hiring might be higher if not for the difficulty in finding skilled workers.  The January survey found 26% of small business owners reported having job openings they cannot fill right now…’The percent of owners reporting higher worker compensation held at 25%, the best reading since late in 2007.’”  Also, the JOLTS survey released this morning shows “US job openings climbed to more than 5m in December…The figures, which eclipsed expectations for a rise to 4.98m, reached its highest level since January 2001…the monthly JOLTS survey is a favourite of Ms Yellen and the strong reading could prompt a relatively hawkish assessment of the labour force.”  Meanwhile, who says you have to raise rates before you sell the bond portfolio?  “A rate hike without draining reserves requires the use of facilities such as RRP, TDF, and others to temporarily drain reserves.  The permanent draining of reserves through letting the bonds runoff would start the process towards a system where a normal supply/demand market could exist for fed funds.”  QE “has added trillions of dollars of deposits to the banking system.  If those deposits were gone the fight for loans would be different…an overnight rate hike wouldn’t slow/tighten the channel of lending as much as a gradual balance sheet reduction.”  Meanwhile, here’s a bunch of graphs on the Fed’s current balance sheet, RRP balances, other central bank assets, etc.


No End In Sight

“As for staying power as an oil producer, North Dakota has 11 billion to 14 billion barrels of recoverable oil, according to the state, or 7.4 billion, according to the 2013 U.S. Geological Survey.  ‘That’s enough to keep the state drilling for the next 20 to 25 years, with existing wells expected to continue to produce oil for 45 years.’”  Furthermore, the IEA expects the supply growth of US shale to “slow to a trickle but regain momentum later, bringing its production to 5.2 million barrels per day (bpd) by 2020…The United States will remain the world’s top source of oil supply growth up to 2020.”  Meanwhile, Texas is producing the lion’s share of job cuts so far in the energy industry.


China: Slowing More Than Expected? Imports Fell 21% In January


USA: Google, Alibaba, Apple And…Warby Parker Who The Hell?


EU: Germany Can Smell Your Fear

But not the wine on Varoufakis’ breath.

Also, Greeks maybe like capital controls less than they like putting money in a Greek bank.


WM: Apparently There Is More Than One Reason Why Apple Likes Free Money Bonds In Switzerland

Kid Rock Demonstrates Price Rigidity Denial