Trade War Hysteria: Where’s The Beef?

By Anthony B. Sanders

VIX, TYVIX, Baltic Dry, Credit Spreads Calm

The news is constantly abuzz with scary “Trade War!” headlines. But it reminds me of Wendy’s hamburger ads from the early 1980s: “Where’s the beef?”

Let’s look at the VIX (S&P 500 volatility index).  It is showing no signs of stress.

vixtrade

How about the 10-year Treasury Note volatility index (TYVIX)? Nada.

Continue reading Trade War Hysteria: Where’s The Beef?

How to Totally Misinterpret Deflationary Impulses

By Jeffrey Snider

Sometimes it pays to wait. Better to be sure than premature. In January 2014, the journal Central Banking handed out its inaugural awards. Among the recipients was Paul Volcker who was bestowed a lifetime achievement prize. The initial Governor of the Year honorific, something like a central banker MVP, went to Mario Draghi of the ECB. He graciously accepted in the glow of universal acclaim for the “unflappable conviction” of his July 2012 promise and the broad, cautious optimism it had provoked.

On behalf of the Governing Council, executive board and staff of the ECB, I’m honoured to be named governor of the year by Central Banking. Thanks to both the ECB’s actions and hard work by governments in implementing fiscal consolidation and structural reforms, conditions in financial markets have gradually eased since July 2012.

Just five months later the ECB was doing NIRP and a little less than a year beyond that the start of a QE program. This has as already expanded once, and as of the middle of 2018 it is still going.

Continue reading How to Totally Misinterpret Deflationary Impulses

Freight Volume Does Not Support Imminent Recession Theory

By Chris Ciovacco

FREIGHT VOLUME PEAKED WELL BEFORE THE FINANCIAL CRISIS

The Freight Transportation Services Index, calculated by the United States Department of Transportation, peaked in January 2005 or more than two years before the S&P 500’s major top in October 2007.   After the October 2007 peak in stocks, the  Freight Transportation Services Index dropped sharply as shown in the chart below.

short-takes-ftsi-2005.png

‘It’s Like A Death Wish’: Jeff Gundlach Takes Aim At Toxic Policy Mix, Demands You ‘Respect’ The Curve

By Heisenberg Report

When last we checked in on bond king for the post-Gross world, exposer of WSJ conspiracies, and man who showed up at Sohn dressed in a Jack Nicholson Joker costume, Jeff Gundlach, the DoubleLine boss was busy explaining how the U.S. was mixing up a toxic cocktail of Fed hikes and deficit spending.

Specifically, Jeff said the following during his latest webcast:

Increasing the size of the deficit while we’re raising interest rates almost seems like a suicide mission.

Right. And you can trust him on that, because any man brave enough to wear a purple corduroy halloween costume in late April is a man who knows something about “suicide missions”.

Here’s the chart, although there’s nothing at all unique about it:

risingdeficits

Continue reading ‘It’s Like A Death Wish’: Jeff Gundlach Takes Aim At Toxic Policy Mix, Demands You ‘Respect’ The Curve

$247 Trillion and (Rapidly) Counting

By Doug Noland

I chronicled mortgage finance Bubble excess on a weekly basis. Relevant data were right there in plain sight, much of it courtesy of the Federal Reserve. Yet only after the Bubble burst did it all suddenly become obvious. Flashing warning signs were masked by manic delusions of endless prosperity and faith in the almighty “inside the beltway”. These days, data for the global government finance Bubble is not as easily-accessible, though there is ample evidence for which to draw conclusions. It will all be frustratingly obvious in hindsight.

The Institute of International Finance is out with their latest data that, unfortunately, is not made available in detail to the general public. Global debt ended the first quarter at a record $247 Trillion, or 318% of GDP. Even after a decade of historic Credit inflation, global debt continues to expand at (“Terminal Phase”) double-digit rates (11.1% y-o-y).

Global debt growth accelerated during the first quarter to $8.0 Trillion – and surged $30 Trillion over just the past five quarters. In a single data point not to be disregarded, Global Debt Has Expanded (a difficult to fathom) $150 Trillion, or 150%, Over the Past Ten Years. Actually, the trajectory of Bubble-period Credit expansion may seem rather familiar. It’s been, after all, a replay of the reckless U.S. mortgage Credit episode, only on a much grander global scale.

Continue reading $247 Trillion and (Rapidly) Counting

Wall Street Competes With Unregulated Banks for the Riskiest Loans

By Anthony B. Sanders

Fewer Mortgage Originations, More C&I Lending From Banks

When compared to the 2000s, commercial banks have largely changed their mix of lending from single-family mortgage originations to business (commercial and industrial) lending. “Unregulated” entities like Quicken and PennyMac Mortgage Investment Trust have picked up share in the single-family mortgage origination space.
On one side are major banks, which are diving back into high-risk corporate lending now that U.S. regulators have loosened up.On the other are so-called shadow lenders — private equity shops, boutique banks and other financial players that muscled in on this business when regulators restrained the big banks five years ago.The result: ever-growing competition to provide junk-rated debt used in corporate takeovers. It could turn out to be a “race to the bottom,” said Frank Ossino, a senior portfolio manager at Newfleet Asset Management in Hartford, Connecticut.For the $2.3 trillion-plus market in junk bonds and leveraged loans, the question is whether all this competition ultimately brings new, greater risks. Underwriters have already been piling more and more leverage onto companies and watering down various protections for investors. Much of that debt is being packaged into complicated structured investments at a pace reminiscent of the subprime boom a decade ago.

shadows

Continue reading Wall Street Competes With Unregulated Banks for the Riskiest Loans

It’s Taking Too Long, the Boom Didn’t Boom

By Jeffrey Snider

At some point, the boom had to have boomed. We are moving into the past tense for all this now, inflation hysteria almost certainly tucked away into the economic ledger alongside four other false dawns. Data is coming in for June 2018, meaning half of this year already recorded and analyzed. It’s not what it was supposed to have been.

Even in terms of inflation, there are only regrets. The US CPI registered 2.87% year-over-year last month, but for still another month there is nothing else but energy inside that number. There is what may seem like an unfair (from the point of view of central bankers) asymmetry to oil. When it’s down that’s deflation and often consistent with the textbook description of what accompanies it.

Continue reading It’s Taking Too Long, the Boom Didn’t Boom

Why The Fed Will Be Forced To Halt QT Early And Expand The Balance Sheet In 2020, According To Morgan Stanley

By Heisenberg

The longer the current U.S. expansion drags on, and the more unapologetic Jerome Powell’s Fed comes across, the more obsessed the market becomes with curve inversion.

And when I say “curve inversion”, I mean “pick a curve, any curve.” Swaps, corporates or the old standbys in the Treasury complex. It all works if you’re running down stories. Anything to put the word “inverted” next to the word “curve” in a headline. “It’s provocative. It gets the people goin’!

2s10s

On Thursday, Morgan Stanley is out with an expansive new note that flags mid-2019 for inversion. To wit:

Continue reading Why The Fed Will Be Forced To Halt QT Early And Expand The Balance Sheet In 2020, According To Morgan Stanley

The Next 7 Years

By Charlie Bilello

What returns are you expecting from stocks and bonds over the next 7 years?

This is a question that GMO (one of the largest and most respected asset managers) attempts to answer on a quarterly basis.

Their most recent forecast was downright depressing: -2.2% per year from large cap U.S. stocks and +1.9% per year from U.S. bonds. If correct, it would mean a 60/40 portfolio of U.S. stocks and bonds would generate a return of -0.6% per year over the next 7 years.

By comparison, GMO is expecting +3% per year from cash, implying that there is little to be gained today from taking risk.

Source: GMO.com. Note: Nominal Total Return derived from GMO’s real return and adding their inflation assumption of 2.2% per year.

Continue reading The Next 7 Years

When Collapse Goes Kinetic

By James Howard Kunstler

I suppose many who think about the prospect of economic collapse imagine something like a Death Star implosion that simply obliterates the normal doings of daily life overnight, leaving everybody in a short, nasty, brutish, Hobbesian free-for-all that dumps the survivors in a replay of the Stone Age — without the consolation of golden ages yet to come that we had the first time around.

The collapse of our techno-industrial set-up has actually been going on for some time, insidiously and corrosively, without shattering the scaffolds of seeming normality, just stealthily undermining them. I’d date the onset of it to about 2005 when the world unknowingly crossed an invisible border into the terra incognito of peak oil, by which, of course, I mean oil that societies could no longer afford to pull out of the ground. It’s one thing to have an abundance of really cheap energy, like oil was in 1955. But when the supply starts to get sketchy, and what’s left can only be obtained at an economic loss, the system goes quietly insane.

Continue reading When Collapse Goes Kinetic

BIS Annual Economic Report (for posterity)

By Doug Noland

With attention focused on unfolding trade wars and summer vacations, the release of the Bank of International Settlement (BIS) Annual Report garnered scant notice (with the exception of Gillian Tett’s Thursday FT article, “Holiday Trading Lull Flashes Red for Financiers”).

From the BIS: “It is now 10 years since the Great Financial Crisis (GFC) engulfed the world. At the time, following an unparalleled build-up of leverage among households and financial institutions, the world’s financial system was on the brink of collapse. Thanks to central banks’ concerted efforts and their accommodative stance, a repeat of the Great Depression was avoided. Since then, historically low, even negative, interest rates and unprecedentedly large central bank balance sheets have provided important support for the global economy and have contributed to the gradual convergence of inflation towards objectives.”

Continue reading BIS Annual Economic Report (for posterity)