Hey, Donald: It’s Not Bad Trade Deals—It’s Bad Money (Part 1)

By David Stockman

The global trading system’s newly activated one-man wrecking crew was at it over the weekend. Mustering up his best Clint Eastwood impression, Trump invited the Brussels trade bureaucrats to make his day. Retaliate against Harley’s Hogs, Jim Beam’s bourbon and Levi’s Skinny Jeans, proclaimed the Donald, and you folks are going to find yourself neck deep in BMW’s:

If the E.U. wants to further increase their already massive tariffs and barriers on U.S. companies doing business there, we will simply apply a Tax on their Cars which freely pour into the U.S. They make it impossible for our cars (and more) to sell there. Big trade imbalance!

Let us reiterate what we said last week. This is not just another case of Trump banging on a twitter keyboard that doesn’t push back—-unlike the courts, most of the Dems, much of the Congressional GOP and a goodly part of his cabinet.

On the matter of trade policy, by contrast, the Donald has considerable unilateral running room owing to the vast presidential powers bestowed by section 232 of the 1962 trade act and section 301 of the 1974 trade act. The former authorizes protectionist measures, including tariffs, to safeguard “national security” and the latter authorizes such measures in order to enforce US trade agreements or to counter “unfair” foreign trade practices.

Continue reading Hey, Donald: It’s Not Bad Trade Deals—It’s Bad Money (Part 1)

The Wait Awaits

By Tim Knight

Hey, first, let’s do a little experiment to see if Wall Street analysts have become any better at their well-paying jobs. Let’s take, for instance, Blue Apron, and see what the boys had to say:


OK. Currently not a single “sell”, and a solid ‘Hold” for the entire available history. How’s the stock doing?


And there we have it. Conclusion: being a Wall Street “analyst” is the easiest job on the planet. Just say everything is a “Buy” (or, if it’s real toilet paper, a “Hold”) and collect a huge paycheck. Done! Some things never change.

Anyway, volatility has come back into the market, but things still seem awfully muddled now. Last week we had a very important break (on an intraday basis) in the ES, circled below. However, we had a lot of “fight back” on Friday and today (Monday). What started out as a nice weak day across the board reversed into a surge toward the horizontal drawn below. My mental “line in the sand” is about 2740 on the ES.

Continue reading The Wait Awaits

The Fed’s Accidental Preoccupation with Housing

By Michael Ashton

I get asked frequently about Core PCE inflation. Because the Fed obsesses over Core PCE, as opposed to one of the many flavors of CPI (core, median, trimmed-mean, sticky-price), investors therefore obsess over it as well.

My usual response is that I don’t pay much attention to Core PCE, for several reasons. First, there are no market instruments that are remotely tied to PCE, so you can’t trade it (and, for the conspiracy-minded among you, that means there is no instrument whose market price can call shenanigans if the government figure is ‘massaged’). Second, while PCE is interesting and useful for some uses – it measures prices from a different perspective, mainly from the supplier-side of the equation so that, for example, it captures what Medicare pays for care as opposed to just what consumers pay – those aren’t my uses. Markets respond to inflation, and to perceptions of inflation, but what the government pays for healthcare isn’t something we perceive directly.

So, I care about PCE more than, say, PPI, but only just. The only reason I care about PCE is that the Fed cares about it.

Now,  PCE differs from CPI in a couple of key ways – apart from the philosophical way mentioned above, that one measures the price of things businesses sell and one measures the price of things people buy. But those key ways are mostly interesting to pointy-head economists who are interested in calculating the third decimal point. Me, I’m just trying to get “higher” or “lower” correct. (Ironically, those folks who are interested in the third decimal point are the same folks who miss the big figure in front). So they wail at the following chart (source: Bloomberg), and moan about how the Fed has been unable to get inflation higher because of this persistent shortfall of PCE compared to CPI. Try harder!

Continue reading The Fed’s Accidental Preoccupation with Housing

A look at the February selloff and the Quantifiable Edges CBI

By Rob Hanna

As the early February volatility explosion unfolded, it was difficult to anticipate when the selling would reach a level that the market would find a bottom (at least temporarily). The selloff exceeded historical levels based on % changes in range and volatility increases. One indicator that once again demonstrated its worth was the Quantifiable Edges Capitualtive Breadth Indicator (CBI). The CBI quickly spiked to 25 and then continued up as high as 31 in the ensuing days. I noted the initial spike here on the blog, and tweeted (@QuantEdges) updates over the following days and weeks.

One CBI-based strategy I have shown in the past involves going long the S&P 500 when the CBI spikes to 10 or higher, and then exiting the position on a return to a “neutral” CBI level of 3 or lower. The chart below shows how this approach would have worked out during the February market.


In this case, the selling was not over, and another brief leg down would have had to be endured to take advantage of the strategy. But those that utilized the edge and showed the fortitude to hold until the CBI again turned neutral were again rewarded.

Continue reading A look at the February selloff and the Quantifiable Edges CBI

Gold Volatility Declines As Stock & T-Note Vol Increase With Fed Balance Sheet Shrinking

By Anthony B. Sanders

As Jerome Powell and The Federal Reserve continue to raise rates and let Treasury Notes on their $4.4 trillion balance mature, we are seeing financial market disruptions, such as spikes in stock market and 10-year Treasury Note volatility. But the one asset that is seeing a decline in volatility is gold.

(Bloomberg) — While volatility surged across asset classes last week, a gauge tracking the cost of hedging against price swings in gold fell. The CBOE/COMEX Gold Volatility Index dropped for a third straight week, the longest streak of the year, as the biggest exchange-traded fund tracking bullion posted its longest run of inflows since September. With the prospect of higher inflation and U.S. tariffs on metals, investors are turning to havens such as gold.


As  The Fed let’s its balance sheet shrink, we have seen a spike in the VIX and TYVIX at th beginning of February after a large block of Treasury Notes matured at the end of January. While VIX and TYVIX subsided, they remaind elevated relative to levels before the end of January.

Continue reading Gold Volatility Declines As Stock & T-Note Vol Increase With Fed Balance Sheet Shrinking

Inflation is Not Under Control

By Keith Weiner

Let’s continue on our topic of capital consumption. It’s an important area of study, as our system of central bank socialism imposes many incentives to consume and destroy capital. As capital is the leverage that increases the productivity of human effort, it is vital that we understand what’s happening. We do not work harder today, than they worked 200 years ago, or in the ancient world. Yet we produce so much more, that obesity is a disease more of the poor than the rich. Destruction of capital will cause us to produce less, and that will mean reverting to a lower quality of life.

Keeping up with Inflation

Let’s start off by addressing how not to look at this destruction. There is a facile belief offered by both Fed propagandists and Fed critics alike. It goes like this. Increased quantity of dollars causes increased prices. Therefore it’s like a tax. And the way to measure your wealth is divide the liquidation value of your portfolio by the consumer price index. This tells you if your stocks, bonds, real estate, and the family farm could trade for more groceries and cars this year. Or less. In this view, you are hoping that somehow your assets keep up with inflation.

We insert the word somehow, because it is a kind of magical thinking. Everyone knows that a central bank cannot print wealth. If it could, Zimbabwe would be the richest country. Yet, if asset prices go up due to central bank policies, most asset owners feel richer. At least if consumer prices do not go up proportionally. One corollary of the fallacy of the Quantity Theory of Money is the fallacy of using consumer prices as the measure of economic value.

Why do we say this is not the method of looking at capital destruction? It’s because over the last 10 years, the Fed and other central banks have overstimulated capital destruction. And yet the above metric of the purchasing power of your estate has gone up. Everyone (at least those who own substantial assets) feels richer, despite economy-wide impoverishment.

If you were a doctor, and your deathly ill patient had a body temperature of 98.6F (37C), you would have to find another measurement tool. Clearly not all diseases cause a fever. Well, monetary doctors need to look past consumer price indices, inflation so called, and purchasing power of your assets.

Our first observation is that the purpose of a capital asset is not for spending. The prudent investor does not think about spending his savings, or selling the family farm. He says “I cannot afford that $300,000 Ferrari” if he has only a million or two in the bank.

Continue reading Inflation is Not Under Control

The Rising Interest-Rate Trend

By Steve Saville

The rising interest-rate trend in the US isn’t new and isn’t related to the Fed’s so-called “policy normalisation” program. However, it has only just started to matter.

That the rising interest-rate trend isn’t new and isn’t related to the Fed’s rate-hiking efforts is clearly illustrated by the following chart. This chart shows that the US 2-year T-Note yield began trending upward in 2011 — more than 6 years ago and more than 4 years prior to the Fed’s first rate hike.


As we go further out in duration we find later beginnings to the rising-yield trend. This is evidenced by the following three charts, the first of which shows that the 5-year yield bottomed in mid-2012, the second of which shows that the 10-year yield double-bottomed in mid-2012 and mid-2016, and the third of which shows that the 30-year yield continued to make lower lows until mid-2016. But even in the case of the 30-year yield the rising trend is now more than 18 months old.

Continue reading The Rising Interest-Rate Trend

Sentiment Snapshot: Turning Tides

By Callum Thomas

So far, the recovery from the February correction is proving *not* to be a “v-shaped recovery”, and rather seems to be in a process of undertaking a classic “double-dip recovery”.  Headline risk has certainly been a driver, and at this point noise, sentiment, and signals are more intertwined than ever.  So it’s timely to take a snapshot of where sentiment is sitting across a number of key indicators including the weekly survey on Twitter.

The high level message from the equity and bond outlook and positioning surveys on Twitter is that of a gradual and material shift in sentiment from the extremes around the turn of the year.  Sentiment is immensely susceptible to being swayed simply by price, yet it can reflect a change in mood, and the perceptions around fundamentals can yield important insights.

In this respect, at once the charts show both a market that has undertaken a typical reaction to a correction in prices, while also showing scope for a further shakeout in sentiment and positioning.  This is set against a backdrop of a steady shift in the perception of fundamentals. So it’s fair to say the risks are *not* one-sided at this point.

The bullet point conclusions and observations on sentiment and positioning are:

Continue reading Sentiment Snapshot: Turning Tides

Not For The Faint-Hearted: Full Week Ahead Preview

By Heisenberg

There’s no shortage of event risk in the week ahead. This is not going to be for the faint of heart.

Chief among concerns is of course Trump’s trade war, pre-announced last Thursday, much to the surprise and chagrin of damn near everyone, including investors.

The decision on steel and aluminum tariffs rattled markets and although some Trump surrogates have suggested it shouldn’t come as a surprise given Wilbur Ross’s recommendation and, perhaps more to the point, candidate Trump’s promise to try and restore lost “greatness” by propping up dying industries, everyone was assuming that rationality (or some semblance thereof) would ultimately prevail.

Long story short, everyone was wrong.

While some analysts are still holding out hope that the rhetoric will turn more conciliatory going forward, Peter Navarro didn’t exactly inspire much confidence on Sunday. Make sure and stay tuned to Trump’s Twitter feed or maybe Fox & Friends for the latest updates on this because if we learned anything on Thursday, it’s that unless you’ve got a direct line to Wilbur Ross (which I guess would mean having two Campbell’s Soup cans joined together with a string), the first people to know what the next step is are Fox anchors and Donald Trump (in that order).

Bottom line:

The dollar managed to eke out a gain last week and it will obviously be in focus again as it’s being pulled between the twin deficit boondoggle and the administration’s weak dollar by proxy policy on one hand, and higher rates/a more hawkish Fed on the other.

Continue reading Not For The Faint-Hearted: Full Week Ahead Preview

Apocalypse Now (Retail Store-style): 23 Big Retailers Closing Stores As Wage Growth Only Back To 2009 Levels

By Anthony B. Sanders

Apocalypse Now! was a 1979 Francis Ford Coppola film starring, among others, Northern Virginia resident Robert Duvall as Lieutenant Colonel Bill Kilgore. Little did Coppola know that his immortal film would foretell the retail store apocalypse of the 2010’s.

This year, in an effort to save their businesses, the following retailers will close hundreds of their stores, according to Fox Business.

Abercrombie & Fitch: 60 more stores are charted to close

Aerosoles: Only 4 of their 88 stores are definitely remaining open

American Apparel: They’ve filed for bankruptcy and all their stores have closed (or will soon)

BCBG: 118 stores have closed

Bebe: Bebe is history and all 168 stores have closed

Bon-Ton: They’ve filed for Chapter 11 and will be closing 48 stores.

The Children’s Place: They plan to close hundreds of stores by 2020 and are going digital.

CVS: They closed 70 stores but thousands still remain viable.

Foot Locker: They’re closing 110 underperforming stores shortly.

Guess: 60 stores will bite the dust this year.

Continue reading Apocalypse Now (Retail Store-style): 23 Big Retailers Closing Stores As Wage Growth Only Back To 2009 Levels

Weekly S&P 500 #ChartStorm

By Callum Thomas

Those that follow my personal account on Twitter will be familiar with my weekly S&P 500 #ChartStorm in which I pick out 10 charts on the S&P 500 to tweet. Typically I’ll pick a couple of themes and hammer them home with the charts, but sometimes it’s just a selection of charts that will add to your perspective and help inform your own view – whether its bearish, bullish, or something else!

The purpose of this note is to add some extra context beyond the 140 characters of Twitter. It’s worth noting that the aim of the #ChartStorm isn’t necessarily to arrive at a certain view but to highlight charts and themes worth paying attention to.

So here’s the another S&P 500 #ChartStorm write-up!

1. VIX Futures Curve Indicator: First up is a look at the VXV vs VIX (i.e. 3-month VIX futures price vs the spot VIX).  The reason this is a useful and interesting indicator is that when it undertakes extreme movements to the downside i.e. the VIX spikes beyond the futures price, it can present a kind of oversold or buying signal.  This is because it basically implies that options traders are bidding up implied volatility i.e. they are more fearful vs futures traders. Of course with the benefit of hindsight, fear is sometimes rational and sometimes irrational.

Bottom line: The VXV vs VIX indicator remains in fear/oversold mode.

Continue reading Weekly S&P 500 #ChartStorm