Stuck in Yesterday

By Jeffrey Snider of Alhambra

Crude oil never did fully embrace “reflation” because it couldn’t, and that tells us something

It is understandable why everyone is right now fixated on Washington. The repeal, or not, of Obamacare is, to paraphrase former Vice President Biden, a big deal. In terms of market expectations, it is difficult to discern by how much. That was to be, after all, but one step of several reductions to the administrative burden on the economy. Maybe as the first it is given outsized importance not because it might deliver the biggest impact, but rather because as the first it can tell us something about the realistic nature of what is supposed to happen differently under a Trump administration.

Even though to this point it has been a disappointment for the “reflation” idea, I believe it is more so a distraction to parts that may be far more important. Attention might better be removed to Oklahoma than DC. As noted yesterday, there has been a sizable shift in the dynamics for oil, far removed from the interminable nature of “stimulus” politics. It has been oil above all else where “reflation” is governed, given the gloss of realism first by its rise from the ashes of last February and then at first its apparent staying power, lingering above $50 for months so as to allow those political hopes a realistic basis by which to cling on for however much longer.

Physical fundamentals are ruthless, though, and have a tendency to ruin mistimed romance. The connected nature of inventory in gasoline and crude point to the underlying truth of today, which toward the end of March 2017 probably should have by now at least started to look like that tomorrow.

Continue reading Stuck in Yesterday

Economics Through the Economics of Oil

By Jeffrey Snider of Alhambra

The last time oil inventory grew at anywhere close to this pace was during each of the last two selloffs, the first in late 2014/early 2015 and the second following about a year after. Those events were relatively easy to explain in terms of both price and fundamentals, though the mainstream managed to screw it up anyway (“supply glut”). By and large, the massive contango of the futures curve that showed up as a result of “dollar” conditions made it enormously profitable to pull crude out of current flow and deposit it wherever storage might be available, even at some considerable cost (so steep was the contango). It was the symbolic intersection between economy and finance which told the world there was nothing good about those times.

This time, however, there is only minor contango in WTI (or Brent) futures and a curve that isn’t much changed over the last year. And still crude is pouring into Cushing at an alarming rate, so much so that by earlier this month oil investors started to leak out of the over-crowded long trade. You have to believe that the unusually steady price of WTI from mid-December forward despite almost everyone being long was related to this once again gaining imbalance – no matter how hard you try to fashion “rate hikes” into a much more robust future economy there is this very visible degree of caution that cries out “not so fast.”

Continue reading Economics Through the Economics of Oil

I’m No Chart Whiz, But About That Whole Reflation Thing…

By Heisenberg

Ok, so this comes with the usual caveat about me not being the chart wizard that some other folks are, but this is starting to look like a sh*t show from where I’m sitting in terms of the reflation narrative….

Since the Fed:

ShitShow

Long bond (30Y yield dropped below 3% on initial report of London terror attack):

ShitShow2

USDJPY (dollar fell for a sixth day; USD/JPY dropped to 110.73):

Shitshow3

Brent (-32c to end session at $50.64, below 200-day MA; price touched $49.71; first trades below $50 since November):

Brent

Small caps (the damage to this popular Trump trade was of course done yesterday):

Russell

Or, in cartoon form…

Reflation

The American Dream: An Endangered Ethos

By Danielle DiMartino Booth

Few words are slipperier than ‘ethos’ to grasp

Even the best translation of the word – essence – is hard to get your arms around. Perhaps that is why so many of us were blissfully unaware until recently that the very essence of the American Dream was slipping through our fingers. Though the phrase, which captures the very, yes essence, of the American thirst for adventure, dates back to the hopes and spirit that emboldened prospectors to ‘Go West,’ those who first engaged in California Dreaming, it was James Truslow Adams’ popularization of the term that cemented the ideal into our collective psyche.

“But there has been also the American Dream, that dream of a land in which life should be richer and fuller for every man, with opportunity for each according to his ability or achievement. It is a difficult dream for the European upper classes to interpret adequately, and too many of us ourselves have grown weary and mistrustful of it. It is not a dream of motor cars and high wages merely, but a dream of social order and in which each man and each woman shall be able to attain to the fullest stature of which they are innately capable, and be recognized by others for what they are, regardless of the fortuitous circumstances of birth or position.”

It is sweeter still, in the annals of our proud U.S. history that these words were written in 1931, during the thick of the most ravaging economic devastation this country has ever known. And still hope defeated despair, reigning supreme, inviting the lowliest of street urchins to achieve greatness in this country of endless possibilities. Were that only still the case today.

The housing crisis has long stopped commanding headlines. According to ATTOM Data Solutions, the new parent company of RealtyTrac, default notices, scheduled auctions and bank repossessions slid to 933,045 last year, the lowest tally since the 717,522 reported in 2006. Is the final chapter written? Not if you live in judicial foreclosure states such as New York, New Jersey and Florida where ‘legacy’ foreclosures take years to clear. At the end of last year, 55 percent of mortgages in active foreclosure were originated between 2004 and 2008. Factor in what’s still in the pipeline and one in ten circa 2006 homeowners will have lost their homes before it is all said and done.

That helps explain one part of the chart below which was generously shared with me by one Dr. Gates. Longtime readers of these missives will recognize the nom de plume of my inside-industry economic sleuth. His first take on this sad visual, was that, “The heart of the American Dream has stopped beating.” Did that stop your heart as it did my own?

As you can see, after a steady 40-year build, owner-occupied housing has stagnated and sits at the lowest level since 2004. This has sent the homeownership rate crashing to 63.4 percent, the lowest since 1967. It would be nice to think that things were looking up for would-be homeowners. But it’s difficult to be overly optimistic when the local newspaper reports that house flipping in the Dallas-Ft. Worth area rose 21 percent in 2016, seven times the national rate.

In all, 193,000 properties nationwide were flipped for a quick inside-12-months profit last year, a 3.1 increase to a nine-year high. Moreover, the median age of a flipped home rose to a two-decade high of 37 years, about double the median age of homes flipped before the crisis hit. That translated into a median gross profit of $69,624 on a median selling price of $189,900 in 2016, a neat 49.2 percent margin, the highest on record. Awesome!

That is, unless we’re still talking about the American Dream. But then maybe homeownership isn’t all it’s cracked up to be.

At least you can still hang a shingle in this country. Right?

You may note that the decline in self-employed is appreciably more dramatic than the fade among the ranks of owner-occupied homes.

You see, it took more than even the cruelest recession to wipe out two decades of ingenuity, to decimate a trend, to shift a culture. Think of the financial crisis as merely the initial catalyst, the first nail in the coffin.

Then came access to capital, which was dealt a once in a century body blow. Seemingly overnight, credit cards and home equity lines of credit disappeared as a source of operating income. Arguably these two growth governors spread the lack of wealth evenly across the country. But it was the heartland that suffered the most as the number of community banks in the six years ending 2013 sank by 14 percent. Federal Reserve data found that this shrinkage resulted in a 40 percent decline in the number of people with access to community banks. (No, Dr. Bernanke, zero interest rates do not benefit the little guy. They just make it cheaper to borrow for those who have never and never will lose their entree to the credit markets.)

Note that neither ‘Dodd’ nor ‘Frank’ were mentioned in that last paragraph. The awful Act did indeed further impinge access to credit, but let’s say that falls under a different heading, the most insidious of the plagues unleashed on small businesses.

To that end, it’s the last nail in the coffin, the one that’s left behind the most difficult stain to eradicate, as we are beginning to find out the hard way as the GOP tears itself asunder on the public stage. Of course, we speak of the imposition of a regulatory burden that knows no precedent. It’s all but inconceivable to fathom an additional $100 billion in annual regulatory costs but that’s the reality, the legacy of the last administration.

More than anything else, even the Federal Reserve’s assigning of the have’s and have not’s among us, this suffocation of the ability to succeed that raised the hackles of middle-income Americans, bitter that they’ve lost the right to what once was every American’s birthright. The hope is that the nascent rebound off 2014 lows in self-employment continues as red tape is rightly slashed back to where it belongs, that is countries where capitalism doesn’t exist, that the 40-year low in new business formation is squarely in the rearview mirror. The prayer is that recession is not around the corner, an unwelcome development that would undo what little progress has been made.

“My hope is for our current President to turn this tide. Lord knows the last President didn’t do anything to get us back on track, and neither did the Fed,” Dr. Gates observed. “At least we still have baseball, hot dogs and apple pie.”

It goes without saying, ‘tis the season for all three of those National Treasures. Thank you, Dr. Gates.

As for yours truly…shall we dispense with the niceties for just a moment? Like it or not, part of what’s happened in housing is a natural Darwinian outgrowth of the ridiculous zero interest rate policy that’s set profit-seeking scavengers on one another. What we’re witnessing is a mere reflection of a world in which rational investments have been whittled down to nothing.

Still, might we at least raise an eyebrow to the schadenfreude that’s infected the housing market? Should we truly take pride in crowding out those who would rather own than rent a home in the name of hard-to-come-by profits in a low rate world? And what good have we done, allowing our feckless politicians to snuff out a proud history of entrepreneurship that put our country on the map? Will the one percent be capable of lifting all boats, or even care to do so, in order to reestablish our national pride?

It was later in life that James Truslow Adams placed a punctuation mark on his written legacy with the following:

“The American dream, that has lured tens of millions of all nations to our shores in the past century has not been a dream of merely material plenty, though that has doubtlessly counted heavily. It has been much more than that. It has been a dream of being able to grow to fullest development as man and woman, unhampered by the barriers which had slowly been erected in the older civilizations, unrepressed by social orders which had developed for the benefit of classes rather than for the simple human being of any and every class.”

No more elegant words were ever written to ensure our ethos would never be endangered. And yet it is at risk of extinction today. It is high time we stand up for what is rightly ours and take back the American Dream for one and for all.

How Falsehoods Become Facts

By Steve Saville

All is certainly not well with the global economy, but you can’t properly make that point using a nonsensical statistic

The more an invalid piece of information is quoted as if it were true, the closer it will come to being widely viewed as correct. Here are four examples that spring to mind:

1) The claim that there is a severe shortage of physical gold in Comex inventories, making a Comex default likely. This claim seemingly originated at ZeroHedge.com and was ‘supported’ by a chart showing the ratio of Open Interest to Registered Gold. Even though it was never true, the Comex gold shortage story started by Zero Hedge got picked up by numerous gold-focused sites/newsletters and quickly became accepted as fact within a significant portion of the “gold community”. I debunked the story multiple times at the TSI blog, including in the May-2016 post linked HERE.

2) The claim that the “science is settled” on the matter of Anthropogenic Global Warming. This claim is ridiculous, because:

a) Many scientists dispute the theory that the most recent warming period was primarily the result of human activity.

b) The models that were constructed over the past three decades to show what would happen to the climate under different CO2 emission outcomes haven’t worked.

c) The science is NEVER settled. Instead, it is constantly evolving as new information becomes available.

Despite being ridiculous, the “science is settled” claim has been quoted so often that many people now believe it to be a fact.

3) The claim that the Russian government colluded with the Trump team and conducted operations during the 2016 US Presidential campaign to hurt Clinton, including the hacking of DNC (Democratic National Committee) emails and the leaking of these emails to WikiLeaks. I don’t know for sure that this claim is false, but it is currently not supported by any evidence (WikiLeaks has stated that the emails did not come from Russian hacking). Despite being unsubstantiated by hard evidence and quite possibly being a completely fictitious story, the supposed Russian involvement in Trump’s election victory has now been mentioned so many times that it is widely viewed as confirmed.

4) Oxfam’s statement that the eight richest men in the world, between them, have the same amount of wealth as the bottom 50% of the population combined. This statement has been cited in countless articles and is generally considered to be evidence that all is not well with the global economy, but it is claptrap. As pointed out in Felix Salmon’s article at fusion.net:

…if you use Oxfam’s methodology, my niece, with 50 cents in pocket money, has more wealth than the bottom 40% of the world’s population combined. As do I, and as do you, most likely, assuming your net worth is positive. You don’t need to find eight super-wealthy billionaires to arrive at a shocking wealth statistic; you can take just about anybody.

All is certainly not well with the global economy, but you can’t properly make that point using a nonsensical statistic.

In conclusion, the more that a false statement or misleading number is quoted, the closer it will come to being generally perceived as factual. If it gets quoted enough its validity will no longer even be questioned.

I wonder if there is a lot less fact-checking and healthy scepticism these days, or if it just seems that way.

Again?

By Jeffrey Snider of Alhambra

It would have been better in 2011 for central banks to sit that one out, to let a second crash develop even if it was equal in size and duration to the first one

It is more than interesting that Herbert Hoover has become the modern ideal of the liquidationist. In these very trying times, one is either that or a Keynesian, Hoover’s supposed opposite, an interventionist who believes there is no good in any recession or deflation at any time. To “prove” the superior foundations of the latter, the ideological associates of that position will always invoke the Great Depression. In what is the economic equivalent of Godwin’s Law, in some ways just a corollary since it was the Great Depression that made the Nazi extreme possible, to advocate free market liquidation is to be pressed into the corner of wanting another Great Depression.

It is, of course, a true non sequitur, for most who are committed to free markets can be so without ever having the slightest desire for calamity. It has been in the decades since the 1930’s a common tactic to associate free markets with such dangerous messiness and the role of government the virtuous economic janitor forced to clean up from the chaos. The panic in 2008 gives us a great test to some of those theories, especially as intervention was the rule almost from the start (August 2007 rather than February 2007, but still close enough to the initial rupture).

The fact that the Fed interceded at every turn but also on every count humiliatingly failed demonstrates one fact of false interventionist lore – that without the skill and courage, as Mr. Bernanke himself has called it, the Great “Recession” would have become a second Great Depression. In other words, without QE in this specific case there would have been no stopping the destructive capacity of the panic; it would have gone on and on and on until there was nothing left to the global economy.

That was always an irrational assumption, as even the messiest of free markets undergoing the messiest of liquidations reach on their own an end. No economy will ever liquidate down to zero. The idea that a crash will just keep on going until the enlightened central banker stops it is more politics than economics. In the case of 2008, it was truly absurd because nothing any central banker did led to any positive effects whatsoever. If the Panic of 2008 stopped, it was because it was always going to stop.

The case of the Great Depression was a singular, unique one; though there are enormous similarities of general outline between the 1910’s to 1930’s and the 1990’s to the so far 2010’s, in truth there are a great many differences especially monetarily. In the former period the public payment system was greatly endangered by its close and often direct connection to asset markets; in the latest period, the public’s money was never in such peril, as it was only interbank money where panic was realized. The worst of this age was never what happened up front in late 2008, it has been instead the lack of growth following it.

Even though the 2007-09 liquidation stopped largely on its own, intervention has continued almost constantly anyway. Largely based on the credit central bankers had initially given themselves, they kept at it year after year after year even though after several years it was more than enough time to realize “something” wasn’t working. As of last year, even central bankers have quietly surrendered, leaving them to finally admit that something was their “stimulus” – though they have yet to truly consider why.

The problem is primarily global economic potential, on that point even the interventionists have finally agreed. The Great “Recession” in other words was never actually a recession, it was instead a giant and permanent rupture in global economic function. Orthodox economists have no idea why even if they now recognize it for that condition. This is the so-called “supply side” where “stimulus” is exclusively intended for aggregate demand; if the supply side is so impaired then it is no wonder demand side stimulus failed to stimulate.

But how could the supply side become so shrunken? There is no mechanism in their literature that could explain it, which is why economists and policymakers have turned to the ludicrous almost exclusively. They will never willingly re-evaluate the assumptions that underpinned their interventionist stance. Including:

“All the stakeholders emphasized today that we have to avoid delays,” EU Economic Affairs Commissioner Pierre Moscovici told a news conference after the meeting. “That would be very harmful. That would impair the confidence of investors and consumers. That would be detrimental to economic recovery.”

I have to confess that when I read this paragraph I actually laughed. It was an inappropriate one, and so more about again the ridiculousness of it the ideas expressed literally rather than the plight which was being described related to it. The article which contains that passage is one published initially yesterday relating apparently a new crisis in Greece, the fifth or sixth depending upon your definitions; which is to say the same crisis of Greece that has been ongoing for now seven years without interruption no matter the intervention.

Continue reading Again?

The Corporate Bond Market: The Start of the Matter

By Danielle DiMartino Booth

Of all virtues to which we must ultimately aspire, forgiveness demands the most of our souls. In our naivety, we may fancy ourselves man or woman enough to absolve those who have wronged us. But far too often, we find our pool of grace has run dry. So deeply burdened are we by our emotions that grace to us is lost. How many of us have the strength of resolve to let bygones be gone for good? Those of the cloth recognize the damage self-inflicted scars sear into our souls as they seek to guide us through life’s most difficult journeys. They pray for our deliverance from a painful inner turmoil and with it the peace only forgiveness can convey.

None who have ever heard Don Henley’s The Heart of the Matter could be blamed for thinking divine inspiration itself came down from the heavens to spawn those longing lyrics. But it isn’t just the words that scorch their way into your memory, it’s Henley’s tone, the raw pain that pierces every time you’re caught off guard by the mournful ballad released in 1989. Henley sings of our feeble struggle as no other, grasping for our collective release in humility. “The more I know, the less I understand. All the things I thought I’d figured out, I have to learn again.” In the end, Henley hands down the cruelest of convictions: If you truly want to vanquish your demons, you must find the strength within to forgive.

Astute policymakers might be saying a few prayers of their own on fixed income investors’ behalves. The explosion in corporate bond issuance since credit markets unfroze in the aftermath of the financial crisis is nothing short of epic. Some issuers have been emboldened by the cheap cost of credit associated with their sturdy credit ratings. Those with less than stellar credit have been prodded by equally emboldened investors gasping for yield as they would an oasis in a desert. Forgiveness, it would seem, will be required of bond holders, possibly sooner than most of us imagine.

For whatever reason, we remain in a world acutely focused on credit ratings. It’s as if the mortgage market never ballooned to massive proportions and imploded under its own weight. In eerie echoes of the subprime mania, investors indulge on the comfort food of pristine credit ratings despite what’s staring them in the face – a credit market that’s become so obese as to threaten its own cardiac moment. It may take you by surprise, but the U.S. corporate bond market has more than doubled in the space of eight years. Consider that at year end 2008, high yield and investment grade bonds plus leveraged loans equaled $3.5 trillion. Today we’re staring down the barrel of an $8.1 trillion market.

The age-old question is, and remains:  Does size matter?

Continue reading The Corporate Bond Market: The Start of the Matter

China Starts 2017 With Chronic, Not Stable and Surely Not ‘Reflation’

By Jeffrey Snider of Alhambra

January-February economic statistics do not really indicate stable let alone, as “reflation” would have it, restoration

The first major economic data of 2017 from China was highly disappointing to expectations of either stability or hopes for actual acceleration. On all counts for the combined January-February period, the big three statistics missed: Industrial Production was 6.3%, Fixed Asset Investment 8.9%, and Retail Sales just 9.5%. For retail sales, the primary avenue for what is supposed to be a “rebalancing” Chinese economy, that was the lowest growth rate in more than a decade, the first time below 10% since the January-February period in 2006.

Analysts had been expecting Chinese retail sales to rise either 10.5% or 10.6%, depending on the source collating expectations, meaning that actual sales missed by a wide margin during the holiday period. What was perhaps most noteworthy was the growing dichotomy between online sales and retail sales overall. Virtual sales rose by more than 25% year-over-year, echoing a similar dynamic we have observed in US retail sales since early last year. Consumer prices according to government statistics have been stable (and actually decelerated sharply recently) and therefore different than in the US, so it might not suggest the same oil price effects as here but instead a similar underlying baseline weakness that hasn’t dissipated even though the worst of the “rising dollar” is now a year in the past.

The rest of China’s statistics propose the same assumptions. Industrial production at 6.3% is no different at all than the level of growth it has been for two years now. The noticeable lack of volatility in the changes month-to-month continues to suggest (louder) less reliability, perhaps, than might be hoped for (like China’s GDP estimates). If there were actually some appreciable acceleration in Chinese industry we would expect to see it here, meaning that it is very likely only the downside that might be obscured by an almost perfect and increasingly likely artificial sideways trend.

Continue reading China Starts 2017 With Chronic, Not Stable and Surely Not ‘Reflation’

Fed Unlikely to Surprise Markets This Week

By Chris Ciovacco

Expectations High For Rate Hike

Markets do not like surprises. If the Fed raises interest rates at Wednesday’s FOMC meeting, it is not likely to be placed in the unexpected category. From The Financial Times:

“Investors are placing a near 100 per cent chance of a Federal Reserve interest rate hike later this month – the first tightening of monetary policy under the presidency of Donald Trump.”

Wednesday’s Fed extravaganza features a press conference and updated forecasts from FOMC members.

Rare And Rapid Shift In This Market Indicator

This week’s stock market video covers a rare shift that has only occurred a handful of times over the past 35 years.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.Video

Video

Labor Report Checked Last Box

The Reuters consensus forecast heading into Friday’s monthly labor report called for a gain of 190,000 jobs. The report came in above expectations with a print of 235,000. From Reuters:

“Wall Street’s top banks were unanimous on the view the Federal Reserve will increase interest rates at its policy meeting next week following a stronger-than-forecast February U.S. payrolls report, a Reuters poll showed on Friday. “It ticks all the boxes for the Fed to move next week,” said Michael Hanson, chief U.S. macro strategist at TD Securities in New York.”

Unparalleled Credit and Global Yields

By Doug Noland

Credit Bubble Bulletin: Unparalleled Credit and Global Yields

New Fed Q4 Z.1 Credit and flow data was out this week. For the first time since 2007, annual Total Non-Financial Debt (NFD) growth exceeded $2.0 TN – a bogey I’ve used as a rough estimate of sufficient new Credit to fuel self-reinforcing reflation. Based on some nebulous “neutral rate,” the Fed rationalizes that it’s not behind the curve. Robust “money” and Credit growth argues otherwise. A Bloomberg headline from earlier in the week: “Taylor Rule Suggests Fed is About 12 Hikes Behind.”

Though not so boisterous of late, there’s been recurring talk of “deleveraging” – “beautiful” and otherwise – since the crisis. Let’s update some numbers: Total Non-Financial Debt (NFD) ended 2008 at $35.065 TN, or a then record 238% of GDP. NFD ended 2016 at a record $47.307 TN, an unprecedented 255% of GDP. In the eight years since the crisis, NFD has increased $12.243 TN, or 35%. Including Financial Sector (that excludes the Fed) and Foreign U.S. borrowings, Total U.S. Debt has increased $11.422 TN to a record $66.079 TN, or 356% of GDP. It’s worth adding that the $2.337 TN post-crisis contraction in Financial Sector borrowings was more than offset by the surge in Federal Reserve liabilities.

For 2016, NFD expanded $2.117 TN, up from 2015’s $1.929 TN – to the strongest growth since 2007’s record $2.501 TN. Household borrowings increased $521bn, up from 2015’s $384bn, to the strongest pace since 2007’s $947bn. Household mortgage borrowings jumped to $248bn, up from 2015’s $129bn. On the back of an unusually weak Q4, total Business borrowings declined to $724bn last year from 2015’s $812bn (strongest since ‘07’s $1.117 TN).

The Bubble in Federal obligations runs unabated. Federal debt jumped $843bn in 2016, up from 2015’s $725bn increase to the strongest growth since 2013’s $857bn. It’s worth noting that after ending 2007 at $6.074 TN, outstanding Treasury debt has inflated more than 160% to $16.0 TN. As a percentage of GDP, Treasury debt increased from 42% to end 2007 to 86% to close out last year.

Yet Treasury is not Washington’s only aggressive creditor. GSE Securities jumped a notable $352bn in 2016 to a record $8.521 TN, the largest annual increase since 2008. In quite a resurgence, GSE Securities increased almost $1.0 TN over the past four years. Treasury and GSE Securities (federal finance) combined to increase $1.194 TN in 2016 to $24.504 TN, or 132% of GDP. For comparison, at the end of 2007 Treasury and Agency Securities combined for $13.449 TN, or 93% of GDP.

Continue reading Unparalleled Credit and Global Yields