Another Confesses The Impossible, We Might Not Have Known What We Were Doing

By Jeffrey Snider

When you go around claiming that central bankers don’t know the first thing about money, people tend to think you are crazy. It’s not really their (people’s) fault. Not only have we been conditioned to believe in a technocracy of sorts, it is raw human nature to immediately suspect such a radically contrarian view.

It would be one thing to say, well, central banks screwed up and were behind, making a few big mistakes along the way and we had the pay the price for it. Even that would be hard for some to really accept. But to make the indictment that they really don’t know what they are doing even on the most fundamental level just cuts way too deeply against convention. Your natural instinct is to believe there is no way that could possibly be true.

The Maestro, after all.

Yet, if you actually take the time to listen to what they say, and have said in the past, they do admit as much. It’s never summarized in that fashion, of course, and any potentially negative implications are downplayed or dismissed.

Since the Great Inflation monetary policy has been quite intentionally stripped of money. Banks evolved and there was really no easy way to define money beyond a certain point (in the sixties), so Economists just gave up trying. This is no small thing, but in Economics it is treated trivially.

Continue reading Another Confesses The Impossible, We Might Not Have Known What We Were Doing

What’s Wrong With This Picture? Citi Macro Surprise Versus NASDAQ and Fed Funds Target Rate

By Anthony B. Sanders

Italy 10-year Yield UP 26.6 BPS

One of these indicators isn’t like the other one.

Take Citi’s Macro Surprise Index for the US and compare it to the NASDAQ index and The Fed Funds Target Rate (Upper Bound).


In 2018, both The Fed Funds Target Rate (upper bound) and NASDAQ Composite index have risen.  But the Citi Macro Surprise index has fallen over 2018.

And then there is Italy which is threatening to leave the Euro. Its 10-year sovereign yield is up 26.6 basis points today.


Vesuvius Redux?

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Here We Are Again! More Than 75% Of Loans Backing CMBS Deals Are Interest-only Mortgages

By Anthony B. Sanders

Similar Level To Late 2006 and early 2007

While interest-only mortgages have almost disappeared in the residential space (thanks in part to the Consumer Financial Protect Bureau’s efforts), they are growing again in the unregulated commercial space.

(Bloomberg) – Commercial mortgage bonds are getting stuffed with the lowest-quality loans since the financial crisis by one measure, according to Moody’s Investors Service, a warning sign that the $517 billion market may be headed for harder times. More than 75 percent of the loans backing the bonds a re interest-only mortgages, a similar level to late 2006 and early 2007, Moody’s said. Those loans are riskier because borrowers don’t pay any principal early in the debt’s life. When that period expires, the property owners are on the hook for much higher payments.


The percentage of interest-only loans in a commercial mortgage bond is an “important bellwether” for the industry, according to Moody’s analysts, because the loans are more likely to default and to bring bigger losses to lenders when they do. Underwriters aren’t taking steps to fully offset the rising risks, the ratings firm said.

Continue reading Here We Are Again! More Than 75% Of Loans Backing CMBS Deals Are Interest-only Mortgages

Brent’s Back In A Big Way, Still ‘Something’ Missing

By Jeffrey Snider

The concept of bank reserves grew from the desire to avoid the periodic bank runs that plagued Western financial systems. As noted in detail starting here, the question had always been how much cash in a vault was enough? Governments around the world decided to impose a minimum requirement, both as a matter of sanctioned safety and also to reassure the public about a particular bank’s status.

Later on, governments added other forms of bank “reserves” which could be used to satisfy any statutory deposit requirement as opposed to actual depositor needs or desires. Typically tied to the level of reported deposits, a depository institution could use not only cash and money but also any positive account balance drawn from a central bank window or liquidity program whether or not there was any actual cash or money associated with it (almost always never).

The implicit assumption is that a positive reserve balance can be made into actual cash or converted into money because of the central bank’s ability to print the former and mobilize its holdings of the latter.

Continue reading Brent’s Back In A Big Way, Still ‘Something’ Missing

Potpourri for $500, Alex

By Michael Ashton

When I don’t write as often, I have trouble re-starting. That’s because I’m not writing because I don’t have anything to say, but because I don’t have time to write. Ergo, when I do sit down to write, I have a bunch of ideas competing to be the first thing I write about. And that freezes me a bit.

So, I’m just going to shotgun out some unconnected thoughts in short bursts and we will see how it goes.

Wages! Today’s Employment Report included the nugget that private hourly earnings are up at a 2.8% rate over the last year (see chart, source Bloomberg). Some of this is probably due to the one-time bumps in pay that some corporates have given to their employees as a result of the tax cut, and so the people who believe there is no inflation and never will be any inflation will dismiss this.

On the other hand, I’ll tend to dismiss it as being less important because (a) wages follow prices, not the other way around, and (b) we already knew that wages were rising because the Atlanta Fed Wage Tracker, which controls for composition effects, is +3.3% over the last year and will probably bump higher again this month. But the rise in private wages to a 9-year high is just one more dovish argument biting the dust.

Continue reading Potpourri for $500, Alex

Sleep Walking Into the Next Crisis?

By Kevin Muir

Quick – the United States suddenly backtracks on half century of globalization and enters a trade war with almost all of its trading partners – do you buy or sell equities? And how about bonds?

Don’t mistake this question as me going full tinfoil-hat – I know we are far from a trade war – but it is an interesting exercise to contemplate.

I don’t have an answer how a trade war would affect financial markets. The reality is that “it depends”. I know, I know – the old joke about the one-handed economist is probably applicable here, but the financial repercussions from a trade war are not as obvious as they might seem at first.

Trade wars cause rising prices – no denying that point. But whether that causes stock and bond prices to rise or fall depends a lot on the reaction function of the central bank.

Continue reading Sleep Walking Into the Next Crisis?

ECB’s Turn for a Disappointing Account

By Jeffrey Snider

Earlier this week the FOMC published the minutes of its April policy meeting, disappointing “dovish” in them which more properly suggests skepticism about the state of economic affairs. Yesterday, it was the ECB’s turn. Releasing the “Account” of also its April gathering, Europe’s central bank began it by noting Germany’s federal securities. Specifically, it mentions yields falling back on them.

With regard to recent bond market developments, a gradual decline in the ten-year German government bond yield, which started in mid-February, had pushed yields back to levels not far from those observed for most of 2017.

So much for growing evidence of Europe’s boom hysteria. In fact, most of the Account is written to convey growing uncertainties about it all. Germany’s bund market is therefore a very good place to start.

We can do so, however, in a manner in which authorities never do. They quite intentionally frame any discussion about bonds, bunds, or whatever in as short of a perspective as possible. As the quote above demonstrates, that way they can make it seem like progress if yields rise more in 2018 than in 2017 (until even that stops) without having to explain why those same yields remain still nowhere close to 2014, 2011, or normal.

Not being so narrow of focus, instead we can better appreciate just how little German yields have changed in comparison to where they were or would be if there was anything like an economic boom afoot. Sustained economic weakness is therefore consistent not surprising or unexpected.

Continue reading ECB’s Turn for a Disappointing Account

European End Game

By Kevin Muir

We all know the famous Getty line about “If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” Today the numbers Getty used seem a little quaint, but we understand the sentiment.

I doubt that when Getty uttered this line more than half a century ago he ever imagined it would apply to countries, yet here we are.

Too many pundits believe Germany holds all the aces in the European power dynamic. After all, they are the creditor nation with all the wealth. They should be able to dictate the terms of the European Union and instill their fiscal and monetary dominance on the rest of the EU nations.

Yet we have long passed the point where Germany can walk away from this union. Let’s forget the political implications of an EU collapse (which are considerable and provide a great degree of inertia for the EU remaining together), and instead focus on the fiscal implications.

Continue reading European End Game

COT Black: Diverging Like ’13?

By Jeffrey Snider

During the week of February 21, 2017, Money Managers (MGR) in the WTI futures market went all the way for higher oil prices. The CFTC Commitment of Traders (COT) report showed a then-record 405k net to the long side. For whatever reason(s), oil prices didn’t necessarily follow at least not in the same nearly direct manner as they had in the past. The intensity of MGR’s net long position alone had up until the “rising dollar” determined the domestic benchmark oil price.

A week after, the final one in February last year, MGR’s started to back off. Oil prices did, too, though to a lesser degree like on the way up. After just four weeks, the long position had been pared back by almost half. WTI that had climbed to a rebound high of $54.48 on February 23, 2017, declined back to $47 in late March.

The process has repeated in 2018 with a few notable exceptions. MGR positions hit a new record long the week of January 30 – the same week that global liquidations swept across stock markets. Since, managers have cooled in their enthusiasm, though not quite in the same repositioning as 2017. The net long as of the latest estimates (for the week of May 15) has only fallen back below 400k.

Continue reading COT Black: Diverging Like ’13?

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

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?

Crisis Watch

By Doug Noland

Where to begin? Contagion… The Argentine peso dropped another 5.0% this week, bringing y-t-d losses to 23.7%. The Turkish lira fell 3.9%, boosting 2018 losses to 15.4%. As notable, the Brazilian real dropped 3.7% (down 11.5% y-t-d), and the South African rand sank 4.0% (down 3.0% y-t-d). The Colombian peso fell 3.0%, the Chilean peso 2.7%, the Mexican peso 2.7%, the Hungarian forint 2.3%, the Polish zloty 2.1% and the Czech koruna 2.0%.

EM losses were not limited to the currencies. Yields continued surging throughout EM. Notable rises this week in local EM bonds include 54 bps in Brazil, 27 bps in South Africa, 34 bps in Hungary, 36 bps in Lebanon, 25 bps in Indonesia, 28 bps in Peru, 14 bps in Turkey, 20 bps in Mexico and 11 bps in Poland.

Dollar-denominated EM debt was anything but immune. Turkey’s 10-year dollar bond yields spiked 41 bps to 7.16%, the high going back to May 2009. Brazil’s dollar bond yields surged 29 bps to 5.58%, the highest level since December 2016. Mexico’s dollar yields jumped 18 bps to 4.64%, the high going all the way back to February 2011. Dollar yields rose 19 bps in Chile, 28 bps in Colombia, 19 bps in Indonesia, 14 bps in Russia, 14 bps in Ukraine and 167 bps in Venezuela (to 32.80%). Losses are mounting quickly for those speculating in EM debt.

Developed bonds were under pressure as well. We’ll begin with Italy:

Continue reading Crisis Watch