vip-atomic-bomb-observers

Significant Expectations

“When the big expected thing happens, whenever that is, it will be fully expected, and we should all be able to handle it without much trouble.  That’s been the message from a couple of richly credentialed central bankers in the past day or so, as they try to reassure investors that by the time the Federal Reserve starts snugging up interest rates, the move will be well telegraphed and will occur for the right reasons.”  Remember: the future is gradual…slow…calm.  And far away: “regardless of when the first increase comes, futures show traders don’t see rates exceeding 1 percent by the end of 2016, versus the Fed’s estimate of 1.875 percent.”  Furthermore, there is a general belief that “policy makers have consistently overestimated the strength of the economy,” which is fair for GDP, but definitely not fair when it comes to the unemployment rate.  Either way, the Fed is “optimistic and hopeful their policies are going to work the way they are intending.”  “Pessimists, however, believe the pilot is flying blindly through dense clouds with a faulty radar and constant risk of storms, making the policy normalisation process particularly risky.  ‘For me the new thing to look out for is what they do to the portfolio,’” says chief investment officer.  In case you forgot, the Fed is still flying with $4 trillion explosives on board.  “BlackRock’s Investment Institute pointed out in a recent report that a third of the Fed’s entire Treasury portfolio, about $785bn, comes due by the end of 2018…’Letting these bonds run off represents an additional tightening of monetary policy — a dynamic that may well have greater impact on financial markets than the ending of [zero interest rates] in the short run.’”  Meanwhile, Can Your Portfolio Survive Rising Interest Rates?  “The average [compound annual growth rate] for the diversified portfolio (30% S&P 500, 30% MSCI EAFE, 40% Barclays Agg) during rate hike cycles has been 8%, which is lower than the overall 12-month return of 9.7% but still quite robust…Of the eight rising rate periods since 1976, there have been zero instances where this diversified portfolio has produced a negative return.”  Also, in case you needed a reminder

 

USA: A Tax Deal That Fixes U.S. Roads?

“The clever twist is that President Barack Obama has taken boosting infrastructure spending — a favorite policy of Democrats — and tied it to a favorite policy of Republicans — reforming corporate taxes…the president wants a one-time 14 percent tax on these accounts, with the revenue earmarked for infrastructure projects, and to allow the funds to be repatriated to the U.S…the six-year, $478 billion infrastructure upgrade to highways, bridges, and public transit in the U.S. would also replenish the Highway Trust Fund.”

 

China: Mountains Everywhere

 

USA: GDPNow At 0.8%

 

USA: How Grand Theft Auto Explains Productivity Slowdown Mirage

 

Yellen: Not Going To Jackson Hole

 

Gross: Janus Global Unconstrained Is Down 3% On The Short Of A Lifetime

 

FIFA: Did You Think The NFL Has Problems?

 

What: CEO Prepares For Post-Unicorn Modeling Career Becoming A Real Business Boy!

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candy crush mascot on NYSE floor

Enamored With Easy Money The Bull

There is a strange amount of taunting going on in financial media right now.  Exhibit A: We Dare You To Try Raising Rates This Year.  “The market is essentially calling the Fed’s bluff.  Traders are betting that policy makers won’t be able to raise rates this year…’In the end, the Fed is more likely to ‘cave’ to the market as opposed to ‘fight it’ by hiking when the market does not have it priced in.’”  Exhibit B: Fed Rate Move Will Make Doves Cry.  “There are some investors…who don’t think any increase will happen this year.  It is this last group — who are likely enamored of sectors paying big dividends, such as utilities and master limited partnerships — the Fed has to worry about…If the Fed does raise rates in September, these folks are going to be surprised — and inflict a few shocks of their own on vulnerable sectors.”  But wait…what if it’s all going to be fine you guys?  “Think about it: bond yields have spiked over the past two weeks…The stock market, however, hasn’t really been hurt that much as this has been going on.”  And “the more people see examples of rising yields and a fairly stable stock market, the more this ‘it’s going to be OK’ idea slips into daily conversations at steakhouses, by water coolers, and at lunches with clients.”  Meanwhile, Jesse Livermore (of blogging/Twitter fame, not, like, real life Jesse Livermore fame…that would be weird because real life JL is really dead) has significantly changed his tone on profit margins and I highly recommend reading this entire post but here’s the key point: “dramatic technological changes of the last 20 years have made credible competition in certain key sectors of our economy more difficult, and have allowed dominant [companies] to command sustainably higher profit margins.”  He argues that barriers to competition are most pronounced “where the dominant players have pricing power,” e.g. finance, technology and health care.  In conclusion, the undead Livermore thinks “bearishly inclined investors should seriously consider the possibility that the ‘mean-reversion’ that they’ve been patiently waiting for is not going to happen, at least not to the extent expected.”  Meanwhile CHECK OUT THE GROWTH.

 

WM: More On VaR-Shocks

 

EU: Tom’s New Strategy Is Just Let Jerry Self-Destruct

 

USA: Chicago, Let Me Downgrade Ya!

 

ICYMI: Atlanta Fed’s GDPNow Is Definitely Worth Following

ps. doesn’t really jive with “CHECK OUT THE GROWTH”

 

Fed: Some Fed Economists Think Your Polar Vortex Is A Sh*** Excuse

 

WM: Algorithms Have Really Made The Markets Unsafe For Comedy

 

What: Shares Of Printing Company Rise On Rumors Of New Greek Currency

grilled cheese truck

Shockingly Sharp

Rising sovereign yields are making some equity investors nervous: “underpinning high share prices are rock bottom interest rates, and once yields climb companies will require stronger earnings growth to support their current valuations…’What has been scary about the last couple of weeks is that rates have been rising without a clear improvement in the economy.’”  Speaking of which, producer prices fell by 0.4% in April vs. an expected rise (duh) of 0.2%.  “Last month, the volatile trade services component, which mostly reflects profit margins at retailers and wholesalers, fell 0.8 percent after slipping 0.2 percent in the prior month.”  ICYMI retail sales weren’t exactly the rate-hike-hero everyone was hoping for: “while April’s payroll employment report put a Fed rate hike back on the table yet again for June, the (weak) retail sales report arguably took it off the table — yet again.  That should have been bullish for bonds.  Instead, the dollar took a dive on the soft-patch sales report.  The weaker dollar lifted the price of precious metals and oil…which also unnerved bonds.”  Speaking of which, a weaker dollar is the most crowded trade among lol no i’m kidding…kind of: “with the dollar expected to languish, some traders sank their money into assets that had been flattened by the dollar’s rally,” e.g. oil, euro, EM, sovereign bonds of Russia that kind of stuff.  “There is an element of reversal,” is something people are saying.  But let’s get back to interest rates: “the US bond yield has been joined at the hip with the German one all year…A 2% bond yield looks attractive for the US 10-year Treasury given the subdued outlook for the Fed’s rate hiking.  The problem is that if the German yield gets there, the US yield will be closer to 3%.  That would make it even more attractive as long as you didn’t buy the bond at 2%.”  Speaking of German yields, “the government bond selloff has been violent indeed, and has had its biggest effect in Europe (see rollercoaster)…the (German) 10-year yield, now around 0.74%, is nearly 15 times higher than its record low, reached on April 20.”  But consider this: “euro-denominated corporate bonds have displayed impressive resilience…the yield spread over government bonds has actually narrowed to 1.05 percentage points from 1.12 points on April 20.”  Some explanations for this might be that 1) the selloff reflects higher growth and inflation expectations, therefore corporates should benefit from a better economy, or 2) they’ll get theirs.  Meanwhile, colleagues at JPMorgan would like you to know about VaR shocks: easy monetary policy has “taken much of the guess work out of interest rates in recent years, causing bond market volatility to collapse.  In that environment, [Value at Risk] encourages traders to take on ever large positions.  Markets are now heavily populated by VaR-sensitive investors: hedge funds, mutual fund managers, dealers and banks.  When volatility ticks up, VaR also prods them to unwind those positions to avoid big losses, causing volatility to spike higher.  These movements are further exaggerated by the decline in bond market liquidity…’This volatility induced position cutting becomes self-reinforcing until yields reach a level that induces the participants of VaR-insensitive investors, such as pension funds, insurance companies or households.’”

 

SMH @WMT

“Wal-Mart Stores is preparing to launch a subscription fast-shipping service similar to Amazon Prime to boost its online business and take on Amazon.com, according to people involved with or briefed about the product.  Codenamed ‘Tahoe,’” which, I’ll stop you right there.  “Tahoe” doesn’t get you anywhere in the illiterate technocracy of today.  At the very least you could’ve spelled it “Taho.”  Anyways, Walmart apparently thinks it will eat Amazon while it dances on the tongue of Jack Ma.

 

Global: Foreign Money Is Pouring Into U.S. Real Estate, And It’s Not Just Houses

 

What: My 2004 Candidate Is Now Pitching Penny Stocks

“‘We’d love it if you joined with us in an investment,’ the silver-haired Clark, 70, says in a promotional video for a company called the Grilled Cheese Truck.”

genie

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?

Aloe

Data Dependency Feels Bad, And Then It Feels Good, And Then It Feels Bad, And…

“This week’s sell off might have been because too many investors believed bond yields would only go down; crowded positioning left the market vulnerable to small shifts in sentiment.”  Interesting to consider that “when fears about a eurozone break-up rise, German yields generally fall;” therefore, higher yields = less worry about Greece?  Maybe not: “right now (read: Thursday) the market is in a state of shock…A lot of people are staying clear, and that makes the market less liquid, which is helping to exaggerate market moves…the moves have reversed so sharply that [European yields] are back where they were before the stimulus was announced…’In one week we had a total unwinding of all QE-related trades.’”  Speaking of liquidity, Mohamed El-Erian says “tighter regulations and less patient shareholders have restricted the ability of broker-dealers to deploy their balance sheets counter-cyclically.  As such, they have limited appetite when it comes to accumulating inventory in the event that a large chunk of the investor base decides to go the other way.  The result has been a series of sudden out-sized price moves in quite a range of markets, from sovereign bonds to foreign exchange, emerging markets, and high-yield corporates.”  So as you can probably tell, things got a bit panicky this week; we even had a moment with Janet Yellen calling stocks overvalued and prices stretched and all that (very déjà vu).  To be fair, the panic was coming from bond markets, which have this strange ability to convince people of more things than the stock market.  But all of that is going away fast: the April jobs report came out this morning and investors are all like, “oohh…reassuring.”  🙂  “Payrolls rose 223,000 in April, following a 85,000 gain in March…The unemployment rate slid further to 5.4 per cent…more Americans entered the labour force, pushing up the participation rate to 62.8 per cent from 62.7 per cent the previous month.”  “The standard story that economists have been telling is that this is just another messy winter with worse-than-usual weather…But there’s a ‘show me’ dimension to that conclusion…So what the new jobs numbers offer is relief that the crummy first-quarter data was indeed an aberration, not a new trend.  At the same time, they are soft enough that they include no real evidence of an acceleration into a new, stepped-up rate of growth” (read: acceleration into Fed tightening).  Here are the charts.  Also, German bund yields have dropped back down to 0.53bps, and you shouldn’t feel bad if you missed out on the Gross Short of a Lifetime because apparently Bill Gross missed it as well.

 

China: Pinky Swears No QE

 

WM: Risk ≠ Volatility, Maybe

 

WM: Case For Indexing In Bonds Is Far Less Clear Than It Is For Stocks

 

What: The “Cylon Detection” System Finds 10 To 20 Spoofers A Day, On Average

 

WaitWhat: You Know That All Startup Founders Dropped Out Of College And Hate English, Right?

 

pigs diving

Just Some Pre-Slaughter Fun

“In the land of negative yields, even the most conservative firms…are planning to invest in sub-investment grade debt for the first time.  One of the bond market’s brightest luminaries, Jeffrey Gundlach, says you’re better off in front of one steamroller than another in junk because the only money to be made on German bunds is from betting against them.”  Speaking of which, the Gross short appears to be working: “European government bond yields, which have been on a steady downward trend for years, are suddenly trading at their highest levels in more than two months…The yield on Germany’s 10-year Bund, the benchmark in Europe, was trading at 0.43 percent on Monday (currently 0.53%).  It has soared from a record low of 0.05 percent just last month, as investors reassess bullish bets on government bonds in Europe and the U.S., where debt yields have also risen sharply.”  Indeed, “one key reason for the recent increase in US long term interest rates has been surging German rates — basically unwinding a big source of downward pressure on US yields…Unfortunately, a lot of people may soon find out the harsh truth about overpaying for the perceived safety of US Treasurys and German Bunds.”  Meanwhile, something I’ve been curious about recently has been the bond market’s idiosyncratic pricing of Greek debt vs the rest of the piggies.  Greek 10 year debt is currently yielding roughly 900bps more than Italian 10 year debt, and over 800bps above Portuguese debt.  Here’s why that may be the case: “First of all, it’s a lot smaller.  Around €34 billion of Greek government bonds trade on the open market…the Italian government bond market is around 54 times bigger, clocking in at over €1.8 trillion..Traders reckon Greek bonds change hands 20 to 30 times a day across the whole market versus thousands of trades per day in Italian debt.”  Fair enough; but if Greek yields are higher because the market believes the risk of default is higher, than what is the probability of a nice, neat implosion along the Mediterranean with little impact rippling through the debt markets of other highly indebted suinae?  Meanwhile, “a proliferation of images on the Internet and reports in newspapers suggests that creating a leaping, amphibious pig is another realm where China can claim global preeminence.”  

 

USA: The Curious Incident Of Current Account Deficits And Weaker Net Investment Position

“The U.S. net international investment position — the difference between US assets abroad and foreign claims on the US — has moved substantially deeper into the red in recent years.  But why?  You might be tempted to say that it’s obvious: we’ve been running big budget deficits, borrowing the money from foreigners…But that story implicitly requires a surge in the trade deficit (or more precisely the current account deficit, which includes investment income), which hasn’t happened…The answer, I believe, is that we’re looking at the differential performance of stock markets…The value of foreign holdings of US equities…has surged along with the Obama stock market, while US holdings abroad have seen no comparable boost.”  Meanwhile, here’s the investment thesis behind European equities that no one really wants to admit (it isn’t, y’know, fundamental).

 

Oil: The Cap Is Now $70, And That Is FINAL

 

ICYMI: Rapid Communication Is Changing The World: Short Tweets Edition

 

What: Cryptocurrency Backed By Gold

Interstellar BuzzFeed

Those Aren’t Mountains…

The “esoteric concern on almost everybody’s lips” these days is bond market liquidity: “while banks have cut their inventories of bonds, asset managers have recently been gobbling them up…But the catch is that many asset managers rely on potentially flighty forms of funding (ETFs anyone?)…If US rates suddenly rise, retail investors might flood out of bond funds…If that happens, those funds might discover the bonds are completely illiquid, or untradeable except at rock bottom prices…Thankfully, nobody expects the test to come quite yet.”  Whew!  Nice.  So, what might be driving that expectation?  “The sole bright spot is the eurozone”–this is where your lower jaw falls slightly and you start questioning the decision to keep reading this “connect the dots” nonsense — “The gap between US and eurozone growth has, for now, disappeared completely.  Overall, the growth rate of the global economy has therefore slowed further…Activity growth needs to recover markedly in the next few weeks if a generalised downgrade to global growth forecasts for the 2015 calendar year is to be avoided.”  “Like a pilot spotting a smoking engine at take-off, the US Federal Reserve is having second thoughts about when to raise interest rates…[A delay] may change the shape of the global recovery, crushing hopes for a sharp rebound in the eurozone (On the back of Wednesday’s Fed statement, the euro soared to $1.125), while removing some of the gloom from the outlook for emerging markets…The longer [the Fed] waits before cutting interest rates, the further they can go with loosening monetary policy.”  Furthermore, “emerging markets may find a surprise ally in Europe.  A stronger euro would make it harder for the ECB to meet its inflation target, [leaving them with] little option but to continue with their QE programme…But they should not take too much comfort.  Fed increases are powerful tsunamis — within hours, their effects are felt even on the furthest shores.”  Meanwhile, Vanguard says that “while you might expect the prospect of the Federal Reserve raising interest rates to put the brakes on capital inflows into emerging markets, thereby worsening their financing problems, our research suggests that doesn’t have to be the case…While financial crises have coincided with a drying up of capital inflows to emerging markets, that’s been less true of monetary tightening by the Fed.”  Getting back to the US for a minute, Gavyn Davies says the “persistent tendency for US growth to disappoint” is due to one or both of the following: “weak aggregate demand, owing to a demand-side form of ‘secular stagnation’; or a permanent slowdown in productivity growth…Ultimately, the behaviour of US inflation will distinguish between the two competing hypotheses, and the Federal Reserve will have to set policy accordingly.”  Meanwhile, “if these interest rates were to continue for 10 years, stocks would be extremely cheap now,” says Warren Buffett.  Meanwhile, John Hussman understands that using the Greek alphabet is a quick way to a financier’s heart.

 

The Latest Buzz

“The word ‘wrong’ is really good,” says a senior BuzzFeed video producer.  “Started in 2006 as a lab for experimental web content, BuzzFeed has attracted an audience of 200 million monthly unique visitors, making it the sixth-largest site in the U.S. — bigger than eBay, Yahoo, and Wikipedia…It’s known for its viral hits — jokey lists about cute animals — and increasingly, its investments into journalism.  But now, like its digital pers, BuzzFeed has aggressively expanded into video…Ideas for new ‘wrong’ videos get thrown around: Snacks you’re eating wrong.  Maybe you’re running wrong, or putting your pants on wrong…When Frank asks his team what they’re working on, they rarely tell him the individual piece they’re shooting, but rather the problem they’re trying to solve.”  Meanwhile, Twitter’s live-streaming app Periscope has taken pay-per-view piracy to a whole nother level: “Soon, viewers started to notice a trend.  If a Periscope session [got] too many ‘hearts (Periscope lingo for favorites), a stream would get shut down…This wasn’t really a problem, however, because like a hydra, we could just go to another Periscope stream somewhere else in the world to watch the fight on someone else’s TV.”

 

Global: Moody’s Has Become So Senile

 

USA: “No One Is Spared Their Side-Eyed Looks”

 

USA: The Bernanke Cat Fights Of 2015: John Taylor’s Contribution

 

What: Turns Out Goldman’s Coal Mines Weren’t A Passion Project

oliver twistEat Up

“The performance of the US stock market is quite impressive considering that there isn’t much of a spring in the latest batch of economic indicators.  The winter’s ice patch is looking more and more like the spring’s soft patch.”  “It is one of the market’s paradoxes that soft economic growth can be a fine climate for stocks.  As long as the economy is advancing, corporations can increase sales and profits.  But in a soft advance, interest rates stay low, keeping costs down.  The uncertain economy keeps Federal Reserve monetary policy easy, one of the main bulwarks of a bull market…Severe bear markets usually occur when the Fed is raising interest rates sharply to cool off inflation…low inflation and low rates increase the present value of future corporate earnings.”  Meanwhile, the Wall Street Journal says “core inflation readings would be even weaker but for the pace of gains in the BEA’s measure of housing costs, which counts toward about one-fifth of its core price index.  This was up 2.9% from a year earlier in February.  Absent that, core inflation would have been running at just 1%.  Housing counts for an even bigger chunk of the Labor Department’s consumer-price index, which is a big reason why its core measure has been running ahead of the BEA’s…The rental vacancy rate fell to 7% in the fourth quarter from 8.2% a year earlier…the lowest level since 1993.”  Meanwhile, “Japanese life insurers — some of the world’s largest institutional investors — plan to keep pouring money into U.S. debt this year as the list of countries able to meet their thirst for yield shrinks…Even though the roughly 2% current yield on 10-year U.S. Treasurys is a far cry from yields of 5% or better before the global financial crisis, it is still light-years better than the current 0.16% yield for German bunds with the same maturity or the 0.29% yield for 10-year Japanese government bonds…’Considering current yield levels, liquidity, hedging of currency exposure, the U.S. is likely the primary destination.’”  So inflation and rates are low, which means there’s a lot of “stocks are expensive, BUT” going on at the moment: “stocks are expensive but while rates stay low, and earnings avoid a serious collapse, money flows into them.  A strong catalyst — really bad earnings, a bad geopolitical event, or a surprise from the Fed — is needed before the market can jolt out of its steady ascent.”  Speaking of surprises, the “Make my day, Janet Yellen” crowd is eating their last free lunch: “what the market never worried about was whether the statement would include the most dreaded news: a rate hike, and because of that, every meeting was something of a free lunch for the market.  That is the case this week, too.  The Fed’s signals have been very clear: there won’t be a rate hike at the April meeting.  However, this is the last meeting at which that certainly presides.  After this, higher rates are firmly on the table.”

 

China

“There are two main routes through which the slowdown could develop into something much worse…investment could slow sharply…[and] there could be a rise in household savings in response to concerns about falling household wealth, which is what happened during the US housing crash.  Given the bubble-like surge in equity prices, this may seem improbable, but it would become more likely if the equity surge ends in a crash.  The second route, also reminiscent of events in the US in the last decade, would be a financial crash led by stressed loans to the real estate or manufacturing sectors.”  Meanwhile, “Chinese companies are increasingly tapping the equity market for funds to pay down liabilities and invest in growth.  They’ve announced $82 billion of secondary stock offerings in 2015, a figure UBS Group AG predicts will increase to a record $161 billion by December.”  Also, “authorities have pledged to move toward a so-called ‘registration system’ where markets, rather than regulators, determine most aspects of an offering, including pricing and timing.”

 

WM: Consensus Expectations

Also, Why International Diversification Matters.

 

Greece: He Who Shall Not Be Named Shall Not Be In Negotiations

 

What: Socialist Muslim Slash Deflationary Force

help me obi wan kenobi leia

Help Me Emerging Markets; You’re My Only Hope

The weakness in retail sales from December through February didn’t jibe with the strength in employment and consumer confidence.  Another surprise was that the windfall from falling gasoline prices didn’t show up in better spending in other retail categories.  Then March employment data turned weak, and the month’s 1.0% gain in retail sales excluding gasoline (to a new record high) wasn’t much of a spring rebound following the 0.8% decline from December through February.  Even worse, on an inflation-adjusted basis, core retail sales (excluding autos, gasoline, and building materials) fell 1.3% saar during Q1.”  “Saving, not shopping, is the hallmark of this expansion…Recent consumer data suggest households remain very focused on building a financial cushion to guard against the next crisis.  To do that, they are being very cautious about their purchases…For global producers who have long depended on the American consumer…the frugality means a re-think about strategy.  Emerging middle classes in developing economies may be the best hope for consumer-related manufacturers.”  Meanwhile, a Bloomberg poll of money managers reveals some high optimism for Nigeria, Vietnam, Argentina and Saudi Arabia.  “According to the United Nations, Nigeria has the potential to become the third most populous country in the world by 2050 and also boasts the highest percentage of people under the age of 15 today…growth could eventually rival China’s.”  Meanwhile, the IMF would like you to know about the “super taper tantrum”: “higher US interest rates could expose particular vulnerabilities in emerging markets where companies have issued large amounts of debt in dollars, the IMF said, adding that between 2007 and 2014 debt had grown faster than GDP in all major emerging markets.”  Meanwhile, Research Affiliates concur with Janet Yellen’s “gradual and lower than you expect” forecast for interest rates: “Looking toward retirement and still needing to repair their balance sheets in the aftermath of the housing recession, Main Street Americans are reluctant to borrow at any price.  To reach significantly higher real interest rates, we need not only more optimistic GDP forecasts but rectified balance sheets and greater willingness to spend rather than save and invest…The demand just isn’t there.  After seven years of trying to bring the punchbowl back to the party, the Fed may be realizing that this time nobody seems interested in drinking off the hangover.  Don’t expect the party to ramp up anytime soon.”  Meanwhile, the party got turnt up in Europe this morning!

 

Fear Leads To Anger

“According to Bank of America Merrill Lynch’s monthly Fund Manager Survey, 13% of global investors believe equity bubbles are the biggest risks facing stocks.  That number is up from just 2% in February.  Among the panel surveyed, 25% believe global stocks are overvalued and 68% think the U.S. is the most expensive region.”  Meanwhile, “your appetite for risk will likely ebb and flow with the markets even if your ability to take risk based on your financial situation hasn’t changed much.”  Also, “the more confident investors are in a risk model’s saving power the more useless they become…The best a risk model can do for the investor is point out where potential areas of risk exist, not how that risk will manifest and play out.”

 

Global: The Question Is No Longer If, But When The World Will Transition To Cleaner Energy

 

Fed: The Mythic Quest For Early Warnings


Tech:
We Made 8 Trillion Transistors Every Second Last Year

ski patrol

Shreddin’ The Gnar

What the Fed has begun to worry about is financial stability…the longer rates stay very low, the greater the risk they become built into the current financial architecture…It is useful to think of the Fed’s mindset here as being like that of the avalanche patrol at a ski resort.  You detonate your tools in order to see if there are any avalanches out there to be triggered.  You don’t know if there are any out there, but you know the longer you wait, the larger the risks grow in probability and magnitude…the policy rate can be used to signal, to keep us on our toes, and to help clear the slopes now so as to lower the risk of triggering a larger and potentially destabilizing avalanche later.”  Meanwhile, John Williams is soooooo stoked bro : “As we go through time, that probability of saying ‘well, the shocks are going to push us back,’ seems to be [decreasing]…More importantly, we are really thinking about a path, we are talking about moving interest rates from zero to a normal level over several years.”  “To get that message across Williams has begun giving away T-shirts, printed at his own expense, showing an arrow busting upwards out of a computer and declaring: ‘Monetary policy — it’s data dependent.’”  Meanwhile, the powder abroad is DEEP dude: “investors speculating the dollar rally is fizzling out may be overlooking trillions of reasons why it will keep on going…Sovereign and corporate borrowers outside America owe a record $9 trillion in the U.S. currency…’There’ll be huge demand for the dollar that is much more than what’s consistent with growth or interest-rate differentials’…in addition, central banks that had reduced their holdings of the greenback are starting to reverse course, creating more demand…’Central banks are re-accumulating their dollar reserves and low, or negative, bond yields in the euro zone will probably speed up that trend.’”  Also, whether you are on snowboard Team Summers or skis Team Bernanke, the gnar is the same: “There’s too much money and not a lot to do with it.  And that’s why we’re seeing investors make some interesting, seemingly non-economic decisions with their piles of cash.”  Speaking of piles of cash, “General Electric’s deal to sell off real estate and get out of most of the finance business contains a little sweetener for the U.S. government, in the form of up to $4 billion worth of taxes on repatriated earnings…Right now, U.S.-based multinationals are not taxed by the U.S. government on what they earn overseas — until they bring that money back to the U.S….and there’s at least $690 billion in overseas cash…Companies can use it to make acquisitions abroad, or do what’s called ‘synthetic repatriation,’ which means borrowing against the overseas cash and giving it to shareholders in the form of buybacks and dividends.”  “Shareholders in the biggest US companies stand to receive a record $1tn in cash this year, as blue chips’ concerns over the global economic outlook have diverted cash away from investment and is driving a boom in buybacks and dividends.

 

USA: Financial Stability And Captive Reinsurance

 

China: Equity Rally Creates New Corporate Giants

Meanwhile, the “impossible” trade is working.