It’s Not Bad Trade Deals–It’s Bad Money, Part 2

By David Stockman

In Part 1 we made it clear that the Donald is right about the horrific results of US trade since the 1970s, and that the Keynesian “free traders” of both the saltwater (Harvard) and freshwater (Chicago) schools of monetary central planning have their heads buried far deeper in the sand than does even the orange comb-over with his bombastic affection for 17th century mercantilism.

The fact is, you do not get an $810 billion trade deficit and a 66% ratio of exports ($1.55 trillion) to imports ($2.36 trillion), as the US did in 2017, on a level playing field. And most especially, an honest free market would never generate an unbroken and deepening string of trade deficits over the last 43 years running, which cumulate to the staggering sum of $15 trillion.

Better than anything else, those baleful trade numbers explain why industrial America has been hollowed-out and off-shored, and why vast stretches of Flyover America have been left to flounder in economic malaise and decline.

But two things are absolutely clear about the “why” of this $15 trillion calamity. To wit, it was not caused by some mysterious loss of capitalist enterprise and energy on America’s main street economy since 1975. Nor was it caused—c0ntrary to the Donald’s simple-minded blather—by bad trade deals and stupid people at the USTR and Commerce Department.

Continue reading It’s Not Bad Trade Deals–It’s Bad Money, Part 2

Trump and Tariffs – Not a New Risk

By Michael Ashton

Last week, the stock market dove in part because President Trump appeared to be plunging ahead with new tariffs; on Monday, the market recouped that loss (and then some) as the conventional wisdom over the weekend was that Congress would never let that happen and so it is unlikely that tariffs will be implemented.

I’m always fascinated by market behavior around events like this. Investors seem to love to guess right, and to put 100% of their bet on an outcome that depends on being right. Here’s what I know about tariffs – prior to last week, if there was a risk that tariffs would be implemented that risk was not priced into the markets. And markets are supposed to price risks. Regardless of what you think the probability of that outcome is, surely the probability is non-zero and, therefore, ought to be worth something on the price. Putting it another way: if I was willing to pay X for the market when I wasn’t worried about the possibility of the detrimental effect of future tariffs, then assuredly I will pay less than X once I start to consider that possibility. Although the outcome may be binary (there will be increasing tariffs and decreasing free trade, or there won’t be), the risk doesn’t have to be either/or.

This is one of the things that irritates me about the whole “risk on/risk off” meme. There is no such thing as “risk off.” Risk is ever-present, and an investor’s job is not to guess at which risks will actually present themselves, but to efficiently preserve as much upside as possible while protecting against downside risks cheaply. Risk management is really, really important, but it often seems to get overlooked in the ‘storytime’ that 24-hour market news depends on.

To be sure, the risk of tariffs coming out of the Trump Administration is not new…it’s just that it has been ignored completely until now. Right after Trump’s election, in our Quarterly Inflation Outlook I wrote about which elements of Trump’s professed plans were a risk to steady inflation. The one area which I felt could be the real wildcard leading to higher inflation as a result of policy (as opposed to higher inflation from natural dynamics, which are also a risk as interest rates normalize) was the possibility of a Trump tariff. Here is what I wrote at that time – and it’s poignant today:

Continue reading Trump and Tariffs – Not a New Risk

Trump Advisor Cohn Resigns, S&P 500 Futures Slide (Tariffs Are A BAD Idea)

By Anthony B. Sanders

Goldman Sach’s Gary Cohn has resigned from the Trump Administration, allegedly over Trump’s threat of imposing tariffs on steel and aluminum.  It is not the resignation of Cohn that is causing the jitters (there are plenty of smart, free trade advocates around). It is the realization that a destructive tariff may be a reality (and the resulting retaliatory tariffs).

(Bloomberg) — The prospect of escalating protectionism depressed European and Asian stock markets on Wednesday as President Donald Trump’s plans to punish foreign imports appeared to gather force. U.S. equity futures slumped, while most government bonds climbed.

The Stoxx Europe 600 Index headed for the first drop in three days, led by mining and auto shares. Gauges in Asia slid earlier as investors mulled the implications of the resignation from Trump’s administration of economic adviser Gary Cohn, a free-trade proponent. News that the White House is considering clamping down on Chinese investments and imposing broader tariffs added to the gloom.

Cohn’s resignation “shows that within the Trump administration the pendulum is swinging toward anti-trade,” said James Cheo, an investment strategist at Bank of Singapore. “What we should be watching out for is how other countries react in response to the tariffs.”

cohnsp500mini

As a general rule, trade tariffs are a BAD idea. They are often levied by a country to protect it’s industries from foreign competition. The history on tariff wars is bleak, such as the Smoot-Hawley Tariff Act that was signed into law on June 17, 1930. The act raised U.S. tariffs on over 20,000 imported goods, allegedly to protect infant industries.

Continue reading Trump Advisor Cohn Resigns, S&P 500 Futures Slide (Tariffs Are A BAD Idea)

That’s Not a Bond Bear Market

By Kevin Muir

MacroTourist Announcement.

I am going to break from regularly scheduled programming with a quick story.

Eighteen years ago today, I was sitting on the institutional equity derivative desk at a big bank-owned Canadian securities dealer. I had not yet turned thirty, but I was lucky to have been given a chance to trade for the bank at an early age, and combined with the great DotCom bull market, I had done better than any young punk deserves. But then my first child was born, and I realized I no longer wanted to deal with the issues of working in a large organization, so I quit. I didn’t know what I wanted to do. I just knew I wasn’t having fun anymore and life was too short.

So I set about to trade for myself. I didn’t know if I would be successful, but I figured I could always go back.

To no great surprise, it was tons of fun. No one to tell me I couldn’t trade such and such security. No office politics. No commuting to a downtown office. And most importantly, I could spend more time with my growing family.

I found the freedom allowed my trading skills to expand into other areas of the financial markets that had always interested me. Soon I was no longer just an equity derivative specialist, but fluent in a wide array of different asset classes. Moving to whatever area of the market offered the best opportunities, I found myself successful enough to never have to go work for a big institution again.

Well, one year faded into another, and last fall my wife and I sent our firstborn off to university.

I always knew at some point I wanted to do more with my career, but I wasn’t sure when. Writing the MacroTourist newsletter was my first step. Sharing the years of wisdom earned from countless hours staring at charts and pouring through research was an enjoyable experience. To be truthful, I often get more than I give with the letter. I am hugely appreciative of the loads of kind readers who share their vast knowledge of the financial markets.

Yet I still wanted to do more. To take my aspirations to the next level, I concluded I had reached the point where it would be better to team up with some people with experience in the money management business.

Therefore, last month I took the next step and joined a colleague at his investment management firm. It’s a great fit for me. It’s an excellent boutique firm that caters to high-net worth individuals and families, with terrific employees that make even the hard work fun. And most importantly, my old friend (and new boss) shares my philosophy about markets and the financial services industry.

I am proud to announce that I now work at East West Investment Management. Together, I believe we can create some innovative and dynamic solutions for our clients. Although it has been a long time since I was a young buck on the desk, I feel like it’s 1994 all over again and I am stepping back on the trading floor for the first time. We have some exciting things planned for our firm. If you are an accredited investor and would like to be kept abreast of the developments, then please sign up for our newsletter.

I am also pleased to announce the ‘Tourist will continue exactly as-is. We commit to keeping the content fun yet informative. As promised, we won’t be spamming you with advertising.

Thank you for your support throughout the years. It’s been a ton of fun writing the ‘Tourist and I look forward to many more. Now, that’s it for the sappy stuff. I promise no more for a long time. Onward to talk about the markets!


What a true bond bear market looks like

A couple of years ago I remember having a discussion with a hedge fund manager. I told him about my theory that the next big surprise would be higher bond rates, not the other way round. I distinctly remember him lecturing me about the overwhelming forces of demographics, technology and globalization. All of these added up to deflation – not inflation. I couldn’t convince him that when everyone agrees on something, it’s time to expect something different. We agreed to disagree.

Continue reading That’s Not a Bond Bear Market

China Going Boom

By Jeffrey Snider

For a very long time, they tried it “our” way. It isn’t working out so well for them any longer, so in one sense you can’t blame them for seeking answers elsewhere. It was a good run while it lasted.

The big problem is that what “it” was wasn’t ever our way. Not really. The Chinese for decades followed not a free market paradigm but an orthodox Economics one. This is no trivial difference, as the latter is far more easily accomplished in a place like China. Economists do love their Keynes, a doctrine that falls on a different part of the same spectrum as Communism.

At the 17th Communist Party Congress way back in 2007, the idea of the “harmonious society” was in trying to strike some balance between growth and living with growth. Rapacious transformation had uglied for a great many the simple basics of human life. The Chinese understandably did not want to give up the economy for it, however.

In seeking that balance, the 17th Party Congress altered slightly Chinese communism. Party officials there going back to Mao had always sought to make sure of their distinct version of political, social, and economic doctrine. Communism in China wasn’t Communism in Russia and the Soviet Union, though you’d be forgiven for mistaking the vast similarities.

For a very long time, starting in the eighties and early nineties, there was an embrace of markets as if that would define China’s ideological difference. After the massacre at Tiananmen Square, as well as the fall of Soviet Russia, a more Western embrace seemed almost easy by comparison. That included total dollarization in money as well as economy. China opened a bit, and the “dollars” flowed in.

Continue reading China Going Boom

Eighteen European Countries Have Negative 2Y Sovereign Yields

By Anthony B. Sanders

Italy’s Banca Monte Dei Paschi Siena Down From 9,097 Euros In May 2007 To 3 Euros Today

Is Europe out of the woods yet? Nope. Eighteen European countries have negative 2-year sovereign yields. Not a good sign.

eu187

Italy has positive YoY GDP growth (1.61%), but the second highest Debt as a percentage of GDP (after Greece).

italycrisis

With the Italian elections a complete mess (like their economy and banking system), problem-child bank, Banca Monte Dei Paschi Siena, continues its downward drift.

Continue reading Eighteen European Countries Have Negative 2Y Sovereign Yields

Rick Rule on Pretium (PVG) put through the Ottotrans™

By Otto rock

Rick Rule did BNN’s Market Call today and the whole thing is up on the website’s video shelf now. I’m going to offer up this segment on Pretium (PVG) as the most interesting (for my taste, anyway). Here’s the transcript and below that, the Ottotrans™:

Rule: “I have been a recent buyer of Pretium Resources. I have a very very high degree of confidence in the CEO Bob Quartermain, who I backed in his first venture which was Silver Standard I remember it going from 72c to $45 which of course engendered a certain fondness in me. Pretium as you may know started up a mine in Northern British Columbia and the first quarter they had was extraordinarily good which set market expectations very high. The second quarter was fairly bad. I think what you have to do in a deposit like this is you have to let them break the mine in. I remember saying to my clients six or seven months ago, “It’s going to take four quarters before we see what we see here”. I’m not saying that Pretium is out of the woods, what I’m saying is it is way oversold, risk relative to reward. I personally object to some market participants’ criticism of Bob Quartermain, who has become over 30 years, in addition to somebody who has made me look smart, a close personal friend and any criticism of Quartermain is insane.

Interviewer: “And that aside, what would you say is the biggest misconception about this stock?”

Rule: “I just think it’s too early to know how it’s going to work out. They had a spectacular first quarter which is tough to do when you’re breaking a mine in, obviously with regards to grade they got lucky. In the second quarter they had a lousy quarter. We have known for some period of time, given the erratic and very high grade nature of that gold, you’re going to have good quarters and you’re going to have bad quarters, you’re going to have to look over the course of a year to get a feeling of how that thing is going to produce over time.

Ottotrans™: “I am underwater on Pretium and have averaged down.”

China Property Outlook

By Callum Thomas

This week the “Chart of the Week” is focused on the outlook for China’s property market.  The Chinese property market is perhaps one of the most important markets in the world, if not the most.  What happens to this market has direct flow-on effects to global commodity prices, emerging markets and commodity producers, and considerable influence on the cyclical macroeconomic and risk backdrop domestically.

The chart comes from a report on the outlook for China’s economy (and the impact on the balance of risk vs opportunity for Copper prices).  Basically the chart shows the average year-on-year price change across the largest 70-cities in China against our leading indicator.  The key conclusion being that the Chinese property market is about to head into a slowdown.

The leading indicator incorporates interbank market interest rates, government bond yields, money supply growth, and property stock relative performance.  Historically these factors have proven to offer a good lead on the outlook (and have helped me call tops and bottoms in this very cyclical market!), and the economic logic behind these factors is sound e.g. interest rates have a direct impact on financing costs.

In terms of the implications, it really depends on whether the outcome is a slowdown or a downturn.  Given the lead-indicator has stabilized there is some hope that it will be just a slowdown (a downturn would be where property prices go into contraction, leading the property sector into recession).  However the impact of a slowdown will still be felt across global markets, as it will impact on construction and raise downside risks for commodities.

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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:

recom

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

slopechart_APRN

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.

2018-03-04-1

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