Liquidity Supernova and the Big Ugly Flaw

By Doug Noland

Credit Bubble Bulletin: Liquidity Supernova and the Big Ugly Flaw

April 21 – Reuters (Vikram Subhedar): “The $1 trillion of financial assets that central banks in Europe and Japan have bought so far this year is the best explanation for the gains seen in global stocks and bonds despite lingering political risks, Bank of America Merrill Lynch said on Friday. If the current pace of central bank buying, dubbed the ‘liquidity supernova’ by BAML, continues through the year, 2017 would record their largest financial asset purchases in a decade…”

From the report authored by BofA Merrill’s chief investment strategist Michael Hartnett: “The $1 trillion flow that conquers all… One flow that matters… $1 trillion of financial assets that central banks (European Central Banks & Bank of Japan) have bought year-to-date (= $3.6tn annualized = largest CB buying in past 10 years); ongoing Liquidity Supernova best explanation why global stocks & bonds both annualizing double-digit gains YTD despite Trump, Le Pen, China, macro.”

A strong case can be made that Q1 2017 experienced the most egregious monetary stimulus yet. No financial or economic crisis – and none for years now. Consumer inflation trends have turned upward on a global basis. Stock prices worldwide have surged higher, with U.S. and other indices running to record highs. At the same time, global bond yields remained just off historic lows. Home prices in many key global markets have spiked upward. Meanwhile, central bank balance sheets expanded at a $3.6 TN annualized pace (from BofA) over the past four months.

With U.S. bond yields reversing lower of late, there’s been a fixation on weaker-than-expected Q1 U.S. GDP. Meanwhile, recent data have been stronger-than-expected in China, Europe and Japan. EM has been buoyed by strong financial inflows and a resulting loosening of financial conditions. Thus far, Fed baby-step normalization efforts have been overpowered by the “liquidity supernova”.

April 21 – Reuters (Balazs Koranyi): “Global growth and trade appear to be picking up strength but risks for the euro zone economy remain tilted to the downside, so ‘very substantial’ accommodation is still necessary, European Central Bank President Mario Draghi said on Friday. In a statement largely reflecting the bank’s March policy statement, Draghi said that while the risk of deflation has largely disappeared, underlying inflation has shown no convincing upward trend.”

April 20 – Reuters (Leika Kihara): “Japan has benefitted from global tailwinds that boosted exports and factory output, [Bank of Japan Governor Haruhiko] Kuroda said, describing its economy as ‘expanding steadily as a trend’ – a more upbeat view than last month. But he offered a bleaker view on Japan’s inflation, saying it lacked momentum with no clear sign yet it was shifting up. ‘That’s why the BOJ will continue its ultra-easy monetary policy to achieve its 2% inflation target at the earliest date possible,’ he said.”

Continue reading Liquidity Supernova and the Big Ugly Flaw

Money in America

By Jeffrey Snider of Alhambra

In 1830, France was once more swept up in revolution, only this time at the end of it was installed one king to replace another. Louis-Phillipe became, in fact, France’s last king as a result of that July Revolution. The country was trying to make sense of its imperial past with the growing democratic sentiments of the 19th century. Despite being one of the richest men in all Europe and aligned with the Bourbons, he was Duke of Orleans and married to a Neapolitan princess, the reign of Louis-Phillipe I was supposed to be a milder form of dominion, the so-called citizen king or bourgeois monarch.

Caught up in the upheaval of 1830 were many who had been aligned with the deposed Charles X. Because the citizen king was viewed as a usurper throughout much of France, his time on the throne tended to be more repressive, particularly toward those who had at least been in the Charles court and government. Among them was a Versailles lawyer named Gustave de Beaumont, who, sensing that the political winds had shifted despite the grand upheaval toward (outwardly, at least) more liberal sentiments, gained permission to get out of the country.

Beaumont would travel to the United States ostensibly to study in grand and comprehensive detail its penal system. He set out in April 1831 taking with him a young 25-year old friend, a former magistrate who had similarly found himself of disfavor under the bourgeois monarch. The two landed in Rhode Island and traveled all over the country doing quite a bit more investigation than strictly prison life in the United States. It was, in fact, an examination of this country’s political soul.

The pair returned to France in 1832 to the stark contrast of what must have been near constant unsettled dynamics, from political to economic life (though in those days there was no difference between politics and economics). Beaumont was largely responsible for the authoring the official work derived from their journey, On the Penitentiary System in the United States and Its Application In France. His partner, Alexis de Tocqueville, was more interested in America as an ideal, completing in 1835 the first part of what would be one of the most influential books of the whole 19th century, Democracy In America.

Because of the age in which they landed, there was at the time really no single America. It was still a collection of states but grouped in binary arrangement by the economic ends of its politics. There was the slavery South of agriculture and plantations set against the industrial North with its factories. These two vastly different systems collided at several points, but most especially along the Ohio River. It struck de Tocqueville as one of the most rigorous juxtapositions in all of his journeys:

On the north bank of the Ohio, everything is activity, industry; labor is honored; there are no slaves. Pass to the south bank and the scene changes so suddenly that you think yourself on the other side of the world; the enterprising spirit is gone.

He further described Kentucky as a place where “society has gone to sleep…it is nature that seems active and alive, whereas man is idle.” The South had accumulated a vast wealth, to be sure, but it was of a static sort that was more in keeping with the 18th century than the modernizing world of the 19th.

The economic issue, as always, is labor. The difference North to South in those terms was not really plantation versus factory, but specialization versus sameness. Capitalism is what sets the creative minds of industry free by allowing people to do what they do best. Slavery, quite obviously, by treating most as interchangeable blunt instruments is forever limited in its capacities.

Continue reading Money in America

Look! More Crazy ETF Charts

By Heisenberg

It’s not entirely clear when the “enough is enough” moment will come in terms of highlighting charts that illustrate the epochal (and increasingly dangerous) shift to passive versus active management, but I don’t think we’re there yet.

It may just be me, but it certainly seems as though ETFs are getting a lot more attention over the past several months and that’s saying something because they’ve been a hot topic for years.

We – and a lot of other folks – have tried our best to stay abreast of the latest in what’s becoming a vociferous debate. Here are some recent posts for anyone who might have missed them:

Well admittedly, we’re going to milk this topic for all it’s worth and not because we necessarily think you need to see anymore charts, but rather because given the rampant proliferation of these vehicles and the associated danger they pose to markets, this is a topic that quite literally can’t get enough attention.

Via BofAML

Below we update our report from July. The trend of flows shifting to passive investments has been impacting equities for over a decade (Figure 8, Figure 9). For fixed income the shift accelerated following the Taper Tantrum rise in interest rates in 2013, and re-accelerated again in November of last year (Figure 10, Figure 11, Figure 12, Figure 13). In high yield, on the other hand, the share of passive funds and ETFs remains relatively low (Figure 14, Figure 15).



How to Add Breadth to GDXJ

By Otto @ IKN

Your humble scribe has been spending the morning catching up with market things after a couple of days on the road and reading up on the whole GDXJ snafu. The basic problem is that the ETF is getting to the stage where it threatens to collapse in on itself due to its own excess gravity, black hole style. When money flows into the ETF, is has to distribute that around its component part shareholdings and as a lot of these juniors don’t have much market cap heft compared to the massive ETF NAV, we’re now at the stage where GDXJ holds more than 10% of stock in many of its components and gets close to the all-important 20% in some of them.

So trouble’s been brewing for a while and the VanEck solution, just announced, is to widen the number of companies included in the GDXJ universe. It’s the obvious move but due to the fact that the big player needs liquidity in holdings as well as size, we’re now into the weird-assed situation in which companies like Kinross, Pan American, Gold Fields, Buenaventura and a whole lot more like them are being added to the “juniors” precious metals ETF. Now you can call those companies a lot of names (and I often do), but “juniors” they are not.

Real juniors, ones outside the GDXJ universe, find themselves excluded due to size, float, price, market cap restrictions. That’s something I also understand, you can’t have GDXJ piling into a stock that trades 50k avg per day as its metrics will immediately go wappy. So here’s a potential solution for some or other intrepid brokerage or insto (and I’d wager it would be extremely profitable for the first footer too). The framework can be summed up in three simple stages:

1) Create a whole bunch of “mini junior ETF” vehicles. You could do it by geography, e.g.:

  • Canadian exploreco ETF
  • Canadian junior producer ETF
  • Asia exploreco ETF
  • Asia junior producer ETF
  • Latin America exploreco ETF, etc

Or you could do it by metal:

  • Copper exploreco ETF
  • Copper smallcap prodicer ETF
  • Uranium exploreco ETF, etc

2) Then choose a bunch of smallcaps from each junior sub-sector and weight your ETF. These in effect become bundles of stocks that together, under a larger (but still small) ETF umbrella get the necessary size to become attractive to GDXJ as a part of its holdings.

3) The result is that after time GDXJ gets to broaden its share base and the money filters down into the junior section, instead of money theoretically destined for the junior mining world filtering up into midcaps. The type of cash flow that would benefit the mining industry at a grassroots level.

FWIW, I could see Sprott doing this.

Is Iron Ore Weighing Down Stock Market?

By Tom McClellan

Iron ore prices versus SP500
April 20, 2017

Some U.S. stock market investors are getting worried about the price of iron ore in China.  This week’s chart helps to show why.

One analyst who noticed this relationship was Alastair Williamson of Stock Board Asset, who published this Tweet on April 18, 2017:

StockBoardAsset tweet

It is definitely an intriguing chart, and a relationship I had not explored before.  I have come across a large number of interesting intermarket relationships like this one, and it is always fun to find (or be shown) a new one.  But not all of them have merit.  So what I’d like to do is use this one to show you how I typically like to contemplate a new relationship that I encounter.

So my first question is about whether the relationship is a durable one.  The answer, it turns out in this case, is no.  The two have only recently fallen into this apparent correlation.  Here is a longer term look:

Continue reading Is Iron Ore Weighing Down Stock Market?

It Will Restart All Over Again in the Small Things

By Jeffry Snider of Alhambra

Six months ago back in October, IBM reported what seemed to be encouraging results. Though revenues at the company were down for the eighteenth consecutive quarter, they were so by the slimmest of margins, just -0.3%. For Big Blue, that had been the best revenue comparison since the first quarter of 2012 back when global recovery was the most plausible. The positive momentum was attributed to the company’s shift toward the new growth model, cloud, SAAS, and other next step technologies in lieu of IBM’s traditional hardware products.

Fortune reported at the time:

Some analysts expressed optimism that the company’s 44% gain in cloud revenue shows that IBM CEO Ginni Rometty’s plans to focus on higher-growth businesses are working. At Fortune’s Most Powerful Women Summit, Rometty emphasized IBM’s commitment to Watson and related technologies, saying that while “some companies are high-growth,” IBM is “high-value.”

One such analyst from Zacks Investment Research was more blunt:

This suggests that IBM is finally turning around its fortunes as new strategic business lines like cloud computing, big data and mobile security are growing in double digits.

By this point after going on so long, it is clear that a lot of interest in the company’s circumstances is pure morbid curiosity, the sort of macabre entertainment you might get from watching a train wreck in ultra-slow motion. But that isn’t the whole story, there is a bellwether in there still and it tracks pretty closely at least the direction of the global economy if not always its intensity (though I believe even by that parameter IBM’s results aren’t that far off).

The worst quarter in terms of revenue was Q3 2015 and the storm of “global turmoil” that in (statistical) hindsight was a surefire downturn both in the US and almost everywhere else. Throughout last year, IBM’s revenue like the economy as a whole improved, which is to say that it stopped getting worse. Like “reflation”, it was merely extrapolated that lower negative growth rates and even some positive ones meant the malaise was done and the world turned over (positive, for once). The “rate hikes” at the end of 2016 and toward the start of 2017 confirmed, for the mainstream, this had to be the case.

For IBM, at least, it hasn’t turned out that way. Rather than turning positive in Q4 2016 in the straight line extrapolation of improvement, the company reported declining revenue again and at a slightly faster rate. The quarterly figure of -1.4% wasn’t a huge decline by any means, but it was certainly the wrong direction against expectations. The latest quarterly results released yesterday only furthered the opposite case that much more. Revenues that were thought verging on breakout are now half a year with none to be found; actual revenue was just $18.2 billion in Q1 2017, down 2.8% year-over-year and the lowest for Big Blue in a good long time.

Many will be quick to dismiss these results yet again as just IBM being IBM; the standard for 21st century tech dinosaurs being left behind by the next new age. As with most things, there is truth to the indictment. But, again, the revenue history for this particularly company is uncomfortably close to matching the shifting trajectory of the global economy which by 2007 standards at least would have been wholly unsurprising. Their products are sold all over the world and as true capex are quite sensitive to macro changes whether idiosyncratic to whatever country, monetary conditions, or the global economy that follows the money.

If you think IBM means nothing more than its own success or failure, obviously none of this will matter. On the other hand, if there remains even the slightest relationship to the marginal macro environment, the past six months have to be concerning in a way that doesn’t bode well for “reflation” and everything thereafter. We already know (too) well that nothing has really changed, but so far outside of the auto sector while there isn’t exactly growth taking place there isn’t further contraction, either. Unless something somewhere actually does change in a meaningful way (not very likely) we are just patiently waiting for the next downward “cycle.” And it will start small so that it can be characterized afterward as “unexpected.”

America’s Gilded Age 2: On the Rocks

By Danielle DiMartino Booth

America's Gilded Age 2, Danielle DiMartino Booth, Money Strong, Fed Up

Some movies beg to be one and done

No sequel. No Part II. No Redux. 1981’s smash hit Arthur is a classic example of what happens when well is not left alone. There was never going to be a way to replicate the hilarity born of sublime scripting and delivery to say nothing of the perfectly unconventional combination of casting and direction. Upon reflection, the only question is what sort of prig it takes to award the movie anything but five full stars – Amazon has it as 4.5 stars. (We’ll leave that one for another day, but you know who you are and you clearly need to get out more.)

Who, after all, could fault Dudley Moore’s best moments portraying Arthur Bach, cinema’s most darling drunk? A smattering of the film’s snippets:

When Susan, his fiancé by way of an arranged-marriage, suggested that, “A real woman could stop you from drinking,” Arthur rebutted that, “It’d have to be a real BIG woman.”

Or his description of his day job: “I race cars, play tennis and fondle women. BUT! I have weekends off and I am my own boss.”

Then, of course, there’s the farcical exchange between Arthur and his proper aunt and uncle when he’s caught out with a spandex-clad prostitute. Endeavoring to render his “date” passable, he claims she’s a princess from a speck of a country: “It’s terribly small, a tiny little country. Rhode Island could beat the crap out of it in a war. THAT’s how small it is.”

One beat later when it (re)dawns on him that his arm candy is actually said prostitute? Well, that’s the best of the best: “You’re a hooker? Jesus, I forgot! I just thought I was doing GREAT with you!”

Continue reading America’s Gilded Age 2: On the Rocks

Don’t Get Hung Up on Bull/Bear Labels

By Steve Saville

In the real worlds of trading and investing it’s best not to get hung up on bull and bear labels

Gold is probably immersed in a multi-decade bull market containing cyclical bull and bear markets. We can be sure that a cyclical bear market began in 2011, but did this bear market come to an end in December of 2015? In other words, did a new cyclical gold bull get underway in December-2015? I don’t know, but the point I want to make today is that the answer to this question is not as important as most gold-market enthusiasts think.

During the first half of 2016 my view was that although a new cyclical gold bull market had probably begun, it was far from a certainty. The main reason I had some doubt was that gold’s true fundamentals* were not decisively bullish. However, by November of last year I thought it likely that a new gold bull market had NOT begun in December-2015. This was mainly because the true fundamentals had collectively become almost as gold-bearish as they ever get. It was also because it had, by then, become crystal-clear that the US equity bull market did not end in 2015.

The cyclical trend in the US stock market is important for gold. During any given year the gold price and the US stock market (as represented by the S&P500 Index) are just as likely to move in the same direction as move in opposite directions, but over long periods they are effectively at opposite ends of a seesaw. As far as I can tell, it would be unprecedented for a cyclical gold bull market to begin when a cyclical advance in the US stock market is far from complete.

In any case, for practical speculation purposes there is never a need to answer the question: bull market or bear market? In fact, there is never a need to even ask the question. The question that should always be asked is: based on all the relevant evidence at the current time, should I buy, sell or do nothing?

For example, based on the extreme negativity that prevailed at the time, the length and magnitude of the preceding price decline and a number of other considerations, it could be determined in January-2016 that an excellent opportunity to buy gold-mining stocks had arrived. Coming to this conclusion did not require having an opinion on whether a new gold bull market was getting underway. For another example, during May-August of last year an objective assessment of the price action and the important sentiment indicators revealed numerous excellent opportunities to reduce exposure to the gold-mining sector, regardless of whether or not a new bull market had begun several months earlier. For a third example, the analysis of the salient evidence in real time during December of last year suggested that another sector-wide buying opportunity had arrived in the world of gold mining. Again, taking advantage of this buying opportunity did not require an opinion on whether a cyclical gold bull market had begun back in December-2015.

The upshot is that assertions to the effect that an investment is in a bull market or a bear market can make for colourful commentary, but in the real worlds of trading and investing it’s best not to get hung up on bull and bear labels. As well as being unnecessary, fixating on such labels can be problematic. This is because someone who is convinced that a bull market is in progress will be inclined to ignore good selling opportunities and someone who is convinced that a bear market is underway will be inclined to ignore good buying opportunities.

*In no particular order, the fundamental drivers of the US$ gold price are the real US interest rate (as indicated by the 10-year TIPS yield), US credit spreads, the relative strength of the US banking sector (as indicated by the BKX/SPX ratio), the US yield curve, the general trend in commodity prices and the US dollar’s performance on the FX market (as indicated by the Dollar Index).

Goldman: About That “Top” Long Dollar Trade – Fuck it

By Heisenberg

Those who, like me, are in the maddening habit of tracking markets on a minute-by-minute basis have already seen the Goldman dollar call.

Specifically, the “smartest” guys on the Street have seen enough. They’re throwing in the towel.


I’d really like to regale you with the long history of this reco, but somehow I doubt you care despite the fact that the story has significant comedic value.

The reason this is notable to general audiences is that it of course comes on the heels of an abysmal quarter for what, going into 2017, was the consensus trade.

One person who hasn’t helped the previously “crowded” long USD thesis is Donald Trump who, like Turkish President-turned-Sultan Recep Tayyip Erdoğan, has a penchant for playing FX/rates strategist. Witness last week’s “bombshell” WSJ interview in which, for the second time this year, Trump jawboned the greenback lower via the Journal.

No matter what Steve Mnuchin says, it’s Trump’s bombast that matters and ironically, it’s his failure to execute on his agenda that’s helped deflate the reflation narrative.

So it’s hard to blame Goldman for giving up. Below, find excerpts from the note out this morning.

Via Goldman

Today we are closing our two long-Dollar ‘Top Trade’ recommendations, initiated on November 17 of last year: long USD versus EUR and GBP, and long USD/CNY via the 12-month non-deliverable forward (NDF). The EUR and GBP trade would have resulted in a potential total return of -0.2%, as modest carry gains partially offset a spot return of -0.6%. The USD/CNY trade would have resulted in a potential loss of 1.1%, after coming close to our target just before year-end.

We see three main reasons why these trades have not performed year-to-date, each of which looks likely to remain a Dollar headwind for the time being. First, global growth has picked up, reducing the degree of US outperformance. Exhibit 1 shows changes in rolling one-year-ahead GDP growth forecasts for the G10 economies since November 7, 2016, just before the US presidential election. Although forecasters have marked up their US growth expectations over this period, the changes have been more modest than for other economies, including the UK and Euro area. Admittedly, this may partly reflect weakness in tracking estimates of Q1 GDP growth in the US—the ‘soft’ or survey-based data there offer a much more upbeat take on current growth momentum. But, so far at least, uncertainty about the true pace of activity, as well as the slow start on tax reform and infrastructure spending, appear to have kept optimism about the US outlook in check. Meanwhile, China has expanded fiscal and credit policy, lifted domestic interest rates, and closed the capital account—all of which affected our USD/CNY call.


Second, the new administration has expressed concern about further Dollar appreciation. For instance, in a recent interview with the Wall Street Journal, President Trump said: “I think our dollar is getting too strong, and partially that’s my fault because people have confidence in me. But that’s hurting—that will hurt ultimately.” This echoes his comments during the campaign, as well as press reporting on the Dollar views of some of his economic advisers (although Treasury Secretary Mnuchin said yesterday that a strong Dollar could be beneficial over the long run). The Administration’s currency views could affect the Dollar through a variety of channels, including its appointments to the Federal Reserve Board and through aspects of trade and fiscal policy. For example, concerns about additional Dollar appreciation may have been a partial factor behind the administration’s lukewarm reaction to the proposed border-adjusted corporate income tax. Currency appreciation has also come up in the context of trade negotiations, with Commerce Secretary Ross saying last month: “We need to think of a mechanism to make the dollar-peso exchange rate more stable.

Third, although we ultimately expect the FOMC to deliver more rate increases than discounted by markets, Fed officials have been in no particular hurry to speed things up. Our US Economics team expects rate increases at the June and September meetings, followed by an announcement on balance sheet normalization in Q4. Starting balance sheet normalization does not mean ending funds rate increases: the median FOMC participant expected three more hikes in 2017 at the time of the March meeting—the same meeting where officials coalesced around a plan to end full reinvestment “later this year”. However, after 2013’s ‘taper tantrum’, policymakers will likely want to move carefully around the start of balance sheet normalization, and will probably take at least a brief pause from funds rate hikes when that process gets underway. As a result, the Dollar has not benefited as much as we might have thought from hawkish communication about the funds rate in recent months. After the surprising decline in the Core CPI in March and in light of the discussion in policy circles about “opportunistic reflation”, the tone from Fed officials looks unlikely to change soon—and the medium-term outlook for policy is increasingly clouded by the Fed Chair transition next year.

In recent years we have generally maintained a bullish Dollar view, and the greenback still has a number of things going for it, including a healthy domestic economy, an active central bank, and lower political uncertainty compared with the UK and Euro area. In the near term the Dollar could gain if the Trump Administration makes progress on fiscal stimulus or if the Front National wins the upcoming presidential election in France. However, a number of fundamentals have changed on the margin, such that the long-Dollar story no longer warrants a place among our ‘Top Trades’. In addition to closing these two recommendations, we are putting the remainder of our foreign exchange forecasts under review.