No Nuance in the Bond Market

By Kevin Muir

It’s now cool to be bearish bonds. A couple of years ago you were labeled a pariah for even suggesting inflation might pick up. The few of us that argued locking in 10-year money at 1.4% wasn’t a good risk reward supposedly didn’t understand the overwhelming three Ds – debt, demographics and deflation. Yeah, ok…

However, given the recent bond bear market, nowadays the tide has turned to the point where anyone suggesting we might see a bounce in bonds is equally chastised for not fully grasping the atrocious fundamentals surrounding the US debt market.

Here is a great chart I lifted from a Bloomberg article titled “Corporate Bonds Sink Fast in One of Worst Tumbles Since 2000 by Cecile Gutscher that shows the rolling 100-day return of the JPMorgan bond index.

Funny how prices make opinions and not the other way round.

Continue reading No Nuance in the Bond Market

NFTRH 500, Free for the Taking

By NFTRH

An offer you can’t refuse (something for nothing). This will be the last freebie probably forever. No info collected. Just you getting a free report and considering it (and associated in-week updates) for your needs going forward.

I just finished revamping the NFTRH Premium landing page and updated the sample report to this week’s NFTRH 500 milestone edition. You can go get it if you’d like. It will show you why I (and many NFTRH subscribers) think it’s only a part of the best all around service out there. It’s more than worth its price as a stand-alone weekly, let alone the included real time updates and trade highlights at the site.

Click the NFTRH Premium link above, download and read this easy to digest report and think about joining the service at some point. This is going to sound a little stuck up, but when I see what is available out there at higher prices I just shake my head.

Not everything you read in NFTRH 500 will prove to have been correct with the test of time, but you will know it was honestly produced and upon finishing it you will feel well armed about today’s financial markets. We don’t predict markets, we stay in tune with them… at all times.

“Congrats on the milestone [NFTRH 500] Gary. Not the volume that is impressive but the consistent quality.”  –Frederick L  5.21.18

“Gary, Congratulations on reaching your 500th edition. Have only been with you for about half that journey, but appreciate the quality and honesty of the content/analysis. Gradual and progressive improvement is the assured quality approach. Please keep up the good work.”  –Andrew C  5.21.18

“On the occasion of your 2.5 millionth word, I’d like to compliment you on the quality and style of your newsletter. It is extraordinarily well-written and readable, qualities that seem to be in short-supply among newsletter writers these days. As the former executive editor of my law school’s law review, and later an occasional editor of the [omitted by request, but very notable], I value good writing, and thank you heartily for yours.”  –James S  5.20.18

You can review NFTRH’s Terms & Conditions here.

Central Banking Tragedy: The Case of Japan

By Michael Ashton

Today I want to talk about one of the real tragedies of monetary policy and inflation: Japan.

The tragedy is that the mystery of the deflation in Japan is no mystery at all. The cure also was no mystery. So the tragedy is that these were both treated as mysteries by the central bank, which stumbled on the right response and then stumbled right back out of it again.

The chart below shows the money supply and core inflation history of Japan going back into the 1990s. Core inflation is in red (I’ve interpolated through the sales-tax-induced spike) and M2 growth is in blue. The cause of the disinflation is pretty plain: between 1998 and 2013, year/year money growth in Japan never exceeded 4%. From 1999 to 2013, Japanese M2 rose 38% in aggregate; in the US it rose 138% over the same period. It is very hard to get inflation, especially in an environment of declining interest rates, if the money supply is increasing at or somewhat less than the rate of potential GDP growth.

However, in the middle of 2013 Japanese Prime Minister Shinzo Abe persuaded Bank of Japan governor Haruhiko Kuroda to promise to double the money supply in two years, by pursuing massive QE. Although that turned out to be an exaggeration, M2 growth did peek out from behind 4%, and inflation started to perk up as well. It wasn’t a lot, but inflation in 2013 reached new 14-year highs and the economy was officially out of deflation. While QE made very little sense, at least the QE2 and later versions, in the US where inflation was positive and money growth was adequate, it made a ton of sense in Japan. In fact, if Japan had been the only country pursuing QE, I can make the argument that the yen would have likely depreciated substantially and caused inflation in that country.

Continue reading Central Banking Tragedy: The Case of Japan

Pulling the Punchbowl When the Espresso Is Hot and the Economy Is Cooling

By Heisenberg

You can count me skeptical when it comes to whether € credit is going to be able to accept the wind down of CSPP with relative alacrity.

I know some of my more sophisticated readers would tell me I’m preaching to the choir when I say that, but there’s still a sizable contingent out there that seems to think it’s somehow going to be possible to remove that ongoing bullish technical from a market that, broadly speaking, is priced to perfection without everyone suddenly deciding to take a closer look at whether they’re being compensated adequately for bearing credit risk.

I’ve obviously talked about this a ton in these pages, but I was thinking about it over the weekend in the context of Italy and I think one thing that’s worth considering is whether the potential exists for a kind of “double whammy” scenario where the relative weighting of Italian credits at the index level ends up causing problems at a time when spreads are set to lose the technical tailwind from CSPP.

I’m just going to excerpt the post in which I laid this out because I don’t want anyone to miss it in case it turns out to be some semblance of important later on down the road:

Continue reading Pulling the Punchbowl When the Espresso Is Hot and the Economy Is Cooling

Chart Of The Week: EM Sovereign CDS

By Callum Thomas

This week it’s Emerging Markets sovereign CDS (Credit Default Swaps).  The reason why I think this chart is really worth paying attention to is that after reaching a record low in mid-January, there has been a swift reassessment of risk in Emerging Markets.  Typically when EM sovereign CDS turns up from a low point like this, it will tend to keep going, and the logical conclusion of that could even be some sort of emerging markets financial crisis.

The chart appeared in a recent report on the tactical risk outlook for emerging markets, it tracks the median 5-year sovereign credit default swap premium across 14 different emerging market countries.  Basically this indicator shows the perceived risk of default, or market pricing of sovereign credit risk, across EM.  The fact that it has turned up through the 200-day moving average is also a trigger point to put EM on watch.

Continue reading Chart Of The Week: EM Sovereign CDS

Bi-Weekly Economic Review: Growth Expectations Break Out?

By Joseph Calhoun

There are a lot of reasons why interest rates may have risen recently. The federal government is expected to post a larger deficit this year – and in future years – due to the tax cuts. Further exacerbating those concerns is the ongoing shrinkage of the Fed’s balance sheet. Increased supply and potentially decreased demand is not a recipe for higher prices. In addition, there is some fear that the ongoing trade disputes may impact foreign demand for Treasuries. There are also, as our Jeff Snider has reported, some stresses in the Eurodollar market that are impacting Treasuries.

An unappreciated source of volatility is the mortgage market. Holders of mortgage securities, such as mortgage REITs, hedge with Treasuries to maintain their desired duration (or interest rate swaps but the result is the same). As interest rates rise, mortgage securities’ duration lengthens as prepayments slow. To maintain a constant duration, holders of these securities will sell Treasuries. If that weren’t complicated enough, the Fed is a large holder of mortgages and is shrinking its balance sheet. The reduction in mortgage securities so far is minimal but it is expected to accelerate in coming months. But again, we see a situation where a large source of demand in the mortgage market is being removed. If mortgage rates continue to rise, Treasuries will be impacted.

Some of these concerns may be overblown. Tax receipts in April set a record and the surplus for that month was a record too. I think it is way too early to be patting Art Laffer on the back since that is mostly about what happened last year but it is a positive at least for now. As for the trade disputes, I don’t expect the US or the Chinese to do anything really stupid although when talking about politicians in any country one shouldn’t discount that possibility too much. As for the mortgage market, demand may indeed fall but so may supply. Higher interest rates are not going to make houses any more affordable.

Continue reading Bi-Weekly Economic Review: Growth Expectations Break Out?

Breakevens, TIPs and Other Harsh Realities

By Kevin Muir

I was early in calling for an increase in breakevens and a decline in bond prices. No denying it. But at least I stuck with it and didn’t get shaken off. Heck, I even reiterated the call earlier this year – Breakeven Refresher Lesson.

Since then, breakeven inflation rates have been steadily rising.

So here we are with the market finally pricing in increased inflation rates. Whereas a couple of years ago pundits were filled with worries about disinflation, today the opposite concern dominates financial airwaves.

Has the market gotten ahead of itself? Or is inflation about to take off?

Continue reading Breakevens, TIPs and Other Harsh Realities

Something for Nothing, Report 20 May 2018

By Keith Weiner

Money has a dual function. Please allow us to go deeper, and more philosophical than we typically do. We promise to tie this into our ongoing discussion of capital consumption. In the following, we will discuss some examples that use the dollar. We are not conceding that the dollar is money (i.e. the most marketable good, or the extinguisher of debt). We just need some simple cases to consider the medium of exchange. Today, that medium is obviously not gold but the dollar.

Money’s first function is flows. People experience this as income. If you work for an hour as a plumber, you might earn $25. If you work for an hour as a lawyer, you might earn $250. If you set up and operate a successful restaurant, you might earn $500,000 in a year. Every job, every profession, and every business earns a certain amount. The market value of everything is finite. These values are set by other market participants, who bid what they are willing to pay for what you do.

Money as Exchange Medium

The dollar is the general medium of exchange. This is how you take what your employer pays you, to buy something from a third party.

At any given moment in time, the market value of everything is fixed. You can take your wage or your profits to any other market participant, and buy whatever he produces. For example, the plumber might exchange an hour of his labor for a meal at the restaurant. Or he could exchange a day of his labor for an hour consultation with that lawyer.

We can abstract away the dollar, and see that there is a finite ratio of exchange of any good or service for any other. A plumbing repair is worth one restaurant meal, or one tenth as much as legal advice.

Continue reading Something for Nothing, Report 20 May 2018

Incomplete Silver CoT Analysis, Revisited

By Steve Saville

In a blog post a week ago I discussed why silver’s Commitments of Traders (COT) situation was nowhere near as bullish as it had been portrayed in numerous articles over the preceding two months. This prompted some criticism that involves a misunderstanding of how I use the COT data. Before I address the criticism, a brief recap is in order.

As stated in last week’s post, the enthusiastically-bullish interpretation of silver’s COT situation fixated on the positioning of large speculators (“NonCommercials”) in Comex silver futures. It was based on the fact that over the past two months the large specs had reduced their collective net-long silver exposure to its lowest level in a very long time, indicating that these traders had become more pessimistic about silver’s prospects than they had been in a very long time. This was clearly a bullish development given the contrary nature of speculative sentiment.

I then explained that two components of silver’s overall COT situation cast doubt on the validity of the bullish interpretation.

The first was that near important bottoms in the silver price the open interest (OI) in silver futures tends to be low, but in early-April of this year the OI hit an all-time high.

Continue reading Incomplete Silver CoT Analysis, Revisited

Sentiment Snapshot: Bullish at the Margin

By Callum Thomas

Looking at the charts this week investors remain bullish, and judging by the margin debt and leverage charts – investors are clearly voting with their feet!  This article reviews the latest results of the weekly survey I run on Twitter.  The survey asks investors whether they are bullish or bearish for fundamental vs technical rationale and for both equities and bonds.  This week we actually saw a record broken, with the highest reading on “Bullish (Fundamentals)” for equities since the survey began.  As the sum of the charts below show, investors look to be very confident on the outlook for stocks.

The key takeaways from the weekly sentiment snapshot are:

-Equity investors are very bullish on the “fundamentals” outlook.

-Bond investors on the other hand remain bearish on the fundamentals.

-Equity investors are backing this confidence with substantial bets in leveraged ETFs.

-For that matter, stock market leverage overall remains around record highs in absolute terms and as a percentage of market cap.

1. Fundamentals vs Technicals Sentiment: Starting as usual with a look at fundamentals vs technicals sentiment for equities, the results were really interesting this week.  The general uptrend in the fundamentals bull/bear spread culminated in an all time high (now to be fair, the survey only commenced in July 2016, so take the words “all time high” with a grain of salt). But the bottom line is that investors still seem very optimistic on the fundamentals… although as I mentioned in the latest Weekly S&P500 ChartStorm, there remains a degree of mixed signals and clear indecision in the market.

Continue reading Sentiment Snapshot: Bullish at the Margin

The Battle of the Bulls and the Bears (video)

By Chris Ciovacco

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