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Goldman: “Federal fiscal policy is entering uncharted territory”

A view of the Goldman Sachs stall on the floor of the New York Stock Exchange July 16, 2013. REUTERS/Brendan McDermid

Goldman: “Federal fiscal policy is entering uncharted territory”

by Bill McBride on 2/18/2018 08:02:00 PM

A few excerpts from a note by Goldman Sachs economists: What’s Wrong with Fiscal Policy?

Federal fiscal policy is entering uncharted territory. … While most of the recent fiscal expansion has not come as a surprise to us, this nevertheless raises new questions about the plan for US fiscal policy.

The Treasury continues to borrow at low rates and it should be able to do so for a while even if market rates move higher in our view, thanks to a nearly 6-year average maturity of outstanding debt. … In the past, as the economy strengthens and the debt burden increases, Congress has responded by raising taxes and cutting spending. This time around, the opposite has occurred. …

While the continued growth of public debt raises eventual sustainability questions if left unchecked, we note that the level of debt at the moment is within the range of several other DM economies, albeit at the high end of the range. Where the US is more of an outlier is in its cyclically adjusted deficit.

The fiscal expansion should boost growth by around 0.7pp in 2018 and 0.6pp in 2019, but will likely come to an end after that … the growth effect comes from the change in the deficit … some of the recent deficit expansion relates to changes unlikely to be repeated, such as the temporarily large effect of certain tax provisions.
emphasis added

CR Note: The Federal government is the only entity that can run counter cyclical fiscal policy during a recession (increase spending to offset the downturn). State and local governments cut spending during a recession, as do households. Standard policy would be to reduce the Federal deficit in the later stages of an expansion, and then increase the deficit during the next downturn. The opposite of the current fiscal policy.

Current fiscal policy is really in “uncharted territory”.

Published at Mon, 19 Feb 2018 01:02:00 +0000

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Permanent Market Support Operations


Permanent Market Support Operations

By: Doug Noland | Sat, Feb 17, 2018

U.S. stocks posted the strongest week of gains since 2013 (would have been 2011 if not for late-day selling). The S&P500 surged 4.3%, and the Nasdaq Composite jumped 5.3%. The small cap Russell 2000 rallied 4.4%. After closing last Friday at 29.06, the VIX settled back down to a still elevated 19.46. Foreign markets recovered as well. Germany’s DAX rose 2.8%, and France’s CAC 40 gained 4.0%. The Shanghai Composite was closed for the lunar new year. The dollar index was back under pressure this week, sinking 1.5%, giving a boost to commodities prices. Price instability abounds.

While stocks rather quickly recovered a chunk of recent losses, the same cannot be said for corporate bonds. Notably, investment-grade bonds (LQD) rallied little after recent declines.

February 16 – Bloomberg (Cecile Gutscher and Cormac Mullen): “Corporate bond funds succumbed to rate fears that have gripped stocks to Treasuries. Investors pulled $14.1 billion from debt funds, the fifth-largest stretch of redemptions in the week through Feb. 14, according to a Bank of America Merrill Lynch report, citing EPFR data. High-yield bonds lost $10.9 billion alone, the second highest outflow on record. As benchmark Treasury yields traded at a four-year high, it shook the foundations of a key support for risk assets — low rates. ‘Investors don’t sell their cash bonds in a big way until they are forced to, which happens when the outflows start picking up more sustainably,’ Morgan Stanley strategists led by Adam Richmond wrote…”

U.S. junk bond funds suffered outflows of $6.3 billion (from Lipper), the second highest ever. IShares’ high-yield ETF saw outflows of $760 million. U.S. investment-grade bond funds had outflows of $790 million (Lipper), the first outflows since September. This was a big reversal from last week’s $4.73 billion inflow. The iShares investment-grade ETF had outflows of $921 million, the “largest outflow in its 15-year history.” Even muni funds posted outflows ($443 million), along with mortgage and loan funds.

A strong equities rally into option expiration – after a bout of market selling and hedging – is not out of the ordinary. Hedges put on over recent weeks were unwound, creating potent buying power for the rally. Scores of systematic trading strategies that were aggressively selling into market weakness turned aggressive buyers into this week’s advance.

I’m not much interested in sharing my guess as to where markets might head next week. It certainly wouldn’t be surprising if this week’s buyers panic subsides abruptly and selling reemerges. At the same time, I’ve seen enough of short squeeze and derivative melt-up dynamics to take them seriously. They have had a tendency of taking on a life of their own. I’m not, however, shying away from my view that recent developments mark a critical juncture in the markets – and for the world of finance more generally. Markets could find themselves in trouble in a hurry.

My objective for the CBB is to offer (hopefully valuable) perspective. I believe the blowup of the “short vol” and the revelation of how quickly the great bull market can succumb to illiquidity and losses have fundamentally altered the risk-taking and leveraging backdrop. The cost of hedging market risk, while down this week, has risen significantly. Treasuries have revealed themselves as an inadequate hedge against risk assets. Moreover, exceptionally high asset correlations experienced during the recent sharp selloff have illuminated the shortcomings of many so-called “diversified” strategies. There will be ebbs and flows, often wild and intimidating. Yet I believe de-risking/de-leveraging dynamics will gain momentum. Fragilities will be exposed.

I have serious issues with contemporary finance. Unique in history, the world operates with a financial “system” devoid of limits on either the quantity or quality of “money” and Credit. Unlike a gold standard (or other disciplined monetary regimes), there is no mechanism to contain the creation of new finance. As such, traditional supply/demand dynamics have little relevance in the pricing of finance. Today’s contemporary financial apparatus – where central bankers largely dictate the price of Credit – lacks effective regulation of supply and demand. Importantly, the contemporary system fails to self-correct or adjust. Left unchecked, it feeds serial Bubbles and busts.

Early CBBs focused on the instability of this new world of “Wall Street finance.” Unfettered finance, much of it directly targeted to asset markets, had created powerful asset inflation and Bubble Dynamics. Indeed, by the late-nineties the perilous instability of contemporary finance had become abundantly clear. One could point to “portfolio insurance” contributing to the ’87 crash; the role of non-bank finance in late-eighties excess; the 92/93 bond/derivatives Bubble that burst in 1994; the 1995 Mexican collapse; the ’97 Asian Tiger collapses and the spectacular simultaneous 1998 Russia and Long-Term Capital Management debacles.

Somehow, there’s never been a serious and sustained effort to analyze contemporary finance’s shortcomings. Rather than contemplating evident deficiencies, each burst Bubble led immediately to whatever reflationary measures deemed necessary. Structural issued be damned. All along the way, few have been willing to admit the fundamental flaws inherent in various modern forms of risk intermediation. Rather than mitigate risk, structured finance and derivatives tend to distort, disguise and transfer myriad risks. Various risk intermediation mechanisms work to lower the cost of finance, in the process exacerbating Credit excess, risk-taking, speculation and leveraging.

Perhaps most momentous, the experiment in unconstrained finance spurred an experiment in economic structure. The U.S. economy was free to deindustrialize. With newfound access to unlimited finance and inflating asset prices, Americans were to indefinitely trade financial claims for endless cheap imports. The bane of “twin deficits” had been eradicated. Even more miraculously, the flood of finance the U.S. unleashed upon the world would, largely through foreign central banks, be recycled right back into booming American securities markets.

After the burst of the “tech” Bubble – and, importantly, the 2002 dislocation in the corporate debt market – the Fed panicked. Even more than 1987, 1990 and 1998, the Fed feared “the scourge of deflation.” Somehow, the Fed, Wall Street and others found solace in Bernanke’s radical monetary ideas of “helicopter money” and the “government printing press.” The Federal Reserve was willing to slash rates to one percent – and peg them there in the face of several years of double-digit annual mortgage Credit growth.

Let’s call it what it was: reckless. The Fed looked the other way from conspicuous financial and housing-related excess (as they have more recently in the securities markets). Why? Because they had specifically targeted mortgage Credit as their inflationary mechanism of choice. The Bubble was untouchable.

The 2008 crisis marked the failure of a great financial experiment. Fannie, Freddie and GSE risk intermediation failed. Wall Street structured finance failed. Derivatives markets and Wall Street firms failed. Counterparties failed. Across the financial landscape, catastrophic flaws were exposed. In short, contemporary finance failed spectacularly.

The ’08/’09 crisis should have provided an historic inflection point. The greatest upheaval in decades should have marked the beginning of an era of more stable finance – of sounder money and Credit and firmer economic underpinnings. It would have been an arduous process, no doubt. Central bankers had other ideas.

I’ve never been tempted to give up on the analysis. For going on ten years, I’ve chronicled the greatest experiment in the history of central banking. Central bankers have adopted the most extreme rate, “money printing,” and market manipulation measures ever. They have guaranteed abundant cheap (virtually free) finance for going on a decade now. What was meant to be a temporary rescue of fragile private-sector, market-based finance morphed into history’s greatest global Bubble.

The greatest flaw in central banker doctrine/strategy was to believe that after intervening temporarily with reflationary measures the system would stabilize and gravitate right back to normal operations. Central bankers reflated a deeply unsound financial structure, only exacerbating flaws and compounding contemporary finance’s vulnerabilities. In particular, a decade of reflationary measures profoundly inflated risk intermediation distortions and fragilities.

The “Moneyness of Risk Assets” has seen Trillions flow into an untested ETF complex on the assumption that central bankers would ensure ETF holdings remained a safe and liquid store of value. Reflationary measures also incentivized Trillions to flow into sovereign debt, corporate Credit, structured finance and the emerging markets on the belief that central bankers would not tolerate another market crisis. Trillions have flowed into various derivative trading strategies on the view that central bankers would ensure liquid and continuous markets – no matter the degree of market excess.

The upshot has been market distortions and the accumulation of risks on an unprecedented scale. Fragilities have surfaced on occasion (i.e. “flash crash”), spooking the central banker community sufficiently to ensure that “temporary” reflationary measures evolved into Permanent Market Support Operations. Central bankers had slipped fully into the markets’ trap. Cautious measures expected to normalize policy over time only ensured that financial conditions loosened further – and global Bubble inflation accelerated.

Along the way, Permanent Market Support Operations changed the game – in global finance as well as throughout economies. Everyone was free to assume more market risk – savers, investors, pension funds and institutions, and the leveraged speculators. Corporate management could issue more debt and buy back more stock. Easy “money” ensured an easy M&A boom. It took time, but animal spirits in the Financial Sphere eventually manifested in the Real Economy Sphere.

The most aggressive companies, managers, entrepreneurs and swindlers all enjoyed the greatest success. Seemingly any clever idea could attract funding. With finance virtually unlimited and free, almost any investment could be viewed as having merit irrespective of prospects for economic returns. There was abundant “money” to be thrown at everything – the cloud, the Internet of things, AI, robotics, autonomous vehicles and all things tech, pharmaceuticals, alternative energy, all things media and so on. It became New Paradigm 2.0, with the earlier nineties version now such a triviality.

Things just got too crazy. Central bankers were much too complacent as Bubble Dynamics gathered powerful momentum. Booming asset inflation and 4% unemployment weren’t enough to convince the Fed it was time to tighten up the reins. Meanwhile, the ECB and BOJ clung stubbornly to negative rates and massive QE programs. Chinese Credit went nuts. Through it all, wealth disparities only worsened, fueling in the U.S. a populist movement and anti-establishment revolt that placed the Trump administration in power. Despite a massive accumulation of debt and ongoing large deficits – not to mention increasingly overheated late-cycle economic dynamics – the Republicans pushed through historic tax cuts. Next on the President’s agenda: tariffs and trade battles.

Everyone became so transfixed by daily stock market records, historically low volatility and the easiest conditions imaginable throughout corporate Credit. It was easy to ignore pressures percolating on the inflation front. And it became just as easy to disregard the possibility that central bankers might actually raise rates to the point of tightening financial conditions. Heightened uncertainty began to manifest in currency market volatility. Meanwhile, excesses were mounting in the securities markets on a daily basis – including incredible flows into perceived safe and liquid ETFs, rank speculation, “short vol,” derivatives and leverage.

For the most part during this extraordinary cycle, Monetary Disorder has remained conveniently contained within the securities and asset markets, seemingly staying within the purview of global central bank policymaking. Rather suddenly, however, markets are beginning to realize there are unfolding risks not easily resolved by monetary stimulus. Deficit spending has become completely unhinged, while inflation is gaining sufficient momentum to garner concern. As such, central bankers may feel compelled to actually tighten financial conditions. Bond markets are on edge, commencing a long-overdue price adjustment. At the minimum, the Fed and others will likely be less hurried when coming to the defense of unstable equities markets.

The bulls see this week’s quick stock market recovery as confirmation of sound underlying fundamentals. The selloff was a technical market glitch completely detached from the reality of booming corporate earnings, robust economic growth and extraordinary prospects.

I see this week’s big market rally as confirmation of the Bubble thesis. Markets have lost the capacity to self-adjust and correct. Derivatives and speculation rule the markets. Option expiration week certainly provides fertile ground for short squeezes and the crushing of put holders. But it does raise the important question of whether markets at this point can correct without dislocating to the downside. I have serious doubts. The quick recovery has markets again dismissing mounting risks. Perhaps it will also keep the Fed thinking economic risks are tilted to the upside – that they need to ignore market volatility and stay focused on normalization.

My view is that normalization is impossible. Extended global market Bubbles are too fragile to endure a tightening of financial conditions. At the same time, sustaining Bubbles has become perilous. Especially in the U.S., with deficits and a weak currency as far as the eye can see, the risks of allowing inflation to gain a foothold are significant. For the first time in a while, there is pressure on the Fed to tighten financial conditions. This places the great central bank experiment at risk. Bubbles don’t work in reverse.

The world is changing. These flows out of corporate debt ETFs are a significant development – another step toward “Risk Off.” Similar speculative and hedging dynamics that hit equities hold potential to spark major dislocation and illiquidity in corporate Credit. For further evidence of change, look no further than a Tuesday headline from the Wall Street Journal: “White House Considering Cleveland Fed President Mester for Fed’s No. 2 Job.” A central banker I admire considered for a top Fed post? Is this part of a changing of the guard at our central bank, or perhaps administration officials recognize that with years of huge deficits looming on the horizon, along with dollar vulnerability, the Fed will soon be in need of some inflation-fighting credentials.

For the Week:

The S&P500 rallied 4.3% (up 2.2% y-t-d), and the Dow recovered 4.3% (up 2.0%). The Utilities gained 2.8% (down 5.7%). The Banks jumped 5.1% (up 6.6%), and the Broker/Dealers rose 4.8% (up 6.8%). The Transports increased 3.6% (down 1.0%). The S&P 400 Midcaps rallied 4.4% (unchanged), and the small cap Russell 2000 recovered 4.4% (up 0.5%). The Nasdaq100 surged 5.6% (up 5.9%).The Semiconductors rose 5.0% (up 5.2%). The Biotechs jumped 6.0% (up 11.1%). With bullion surging $31, the HUI gold index rallied 6.0% (down 3.8%).

Three-month Treasury bill rates ended the week at 1.56%. Two-year government yields surged 12 bps to 2.12% (up 31bps y-t-d). Five-year T-note yields gained nine bps to 2.63% (up 42bps). Ten-year Treasury yields added two bps to 2.88% (up 47bps). Long bond yields slipped three bps to 3.13% (up 39bps).

Greek 10-year yields jumped 16 bps to 4.24% (up 17bps y-t-d). Ten-year Portuguese yields fell 10 bps to 2.01% (up 6bps). Italian 10-year yields declined six bps to 1.99% (down 3bps). Spain’s 10-year yields dipped two bps to 1.46% (down 11bps). German bund yields fell four bps to 0.71% (up 28bps). French yields declined three bps to 0.95% (up 17bps). The French to German 10-year bond spread widened one to 24 bps. U.K. 10-year gilt yields added a basis point to 1.58% (up 39bps). U.K.’s FTSE equities index rallied 2.9% (down 5.1%).

Japan’s Nikkei 225 equities index increased 1.6% (down 4.6% y-t-d). Japanese 10-year “JGB” yields declined one basis point to 0.06% (up 1bp). France’s CAC40 recovered 4.0% (down 0.6%). The German DAX equities index rallied 2.8% (down 3.6%). Spain’s IBEX 35 equities index gained 2.0% (down 2.1%). Italy’s FTSE MIB index jumped 2.8% (up 4.3%). EM markets were mostly higher. Brazil’s Bovespa index surged 4.5% (up 10.6%), and Mexico’s Bolsa rose 2.3% (down 1.0%). South Korea’s Kospi index bounced 2.5% (down 1.9%). India’s Sensex equities index was little changed (down 0.1%). China’s Shanghai Exchange rose 2.2% (down 3.3%). Turkey’s Borsa Istanbul National 100 index jumped 2.6% (up 1.0%). Russia’s MICEX equities index advanced 2.6% (up 6.9%).

Junk bond mutual funds saw hefty outflows of a staggering $6.036 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates rose six bps to a near four-year high 4.38% (up 23bps y-o-y). Fifteen-year rates jumped seven bps to 3.84% (up 49bps). Five-year hybrid ARM rates gained six bps to 3.63% (up 45bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-yr fixed rates down four bps to 4.55% (up 21bps).

Federal Reserve Credit last week increased $5.6bn to $4.385 TN. Over the past year, Fed Credit contracted $39.4bn, or 0.9%. Fed Credit inflated $1.574 TN, or 56%, over the past 276 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $11.1bn last week to $3.399 TN. “Custody holdings” were up $230bn y-o-y, or 7.2%.

M2 (narrow) “money” supply gained $7.9bn last week to a record $13.858 TN. “Narrow money” expanded $578bn, or 4.3%, over the past year. For the week, Currency slipped $1.2bn. Total Checkable Deposits declined $3.5bn, while savings Deposits rose $14.9bn. Small Time Deposits were little changed. Retail Money Funds dipped $2.2bn.

Total money market fund assets added $2.0bn to $2.829 TN. Money Funds gained $154bn y-o-y, or 5.8%.

Total Commercial Paper fell $12.2bn to $1.118 TN. CP gained $152bn y-o-y, or 15.8%.

Currency Watch:

The U.S. dollar index dropped 1.5% to 89.10 (down 3.3% y-o-y). For the week on the upside, the South African rand increased 3.4%, the Japanese yen 2.4%, the Norwegian krone 2.3%, the Brazilian real 2.2%, the New Zealand dollar 1.8%, the British pound 1.4%, the Swedish krona 1.4%, the South Korean won 1.4%, the Singapore dollar 1.3%, the euro 1.3%, the Swiss franc 1.3%, the Australian dollar 1.2%, the Mexican peso 1.0% and the Canadian dollar 0.2%. The Chinese renminbi declined 0.6% versus the dollar this week (up 2.61% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index rallied 3.5% (up 0.3% y-t-d). Spot Gold jumped 2.4% to $1,347 (up 3.4%). Silver recovered 3.6% to $16.71 (down 2.5%). Crude rallied $2.48 to $61.68 (up 2%). Gasoline jumped 3.0% (down 2.5%), while Natural Gas declined 1.0% (down 13%). Copper surged 7.1% (down 1%). Wheat jumped 5.0% (up 10%). Corn rose 3.6% (up 7%).

Market Dislocation Watch:

February 11 – Bloomberg (Rachel Evans): “You just can’t keep a good trade down. The ProShares Short VIX Short-Term Futures fund, which lost more than 80% of its value on Feb. 6, took in the most cash on record last week. The product, which goes by the ticker SVXY, was the fifth-most popular exchange-traded fund in the U.S., absorbing more than $500 million…”

February 12 – Bloomberg (Luke Kawa): “Brave volatility traders are betting that lightning won’t strike twice. Two of the three most active options tied to the iPath S&P 500 VIX Short-Term Futures exchange-traded note (VXX) on Monday were way out-of-the-money calls. The major explosion of open interest in these options occurred in transactions that took place closer to the bid than to the ask price, which implies that this was motivated selling rather than fresh bets on another volatility spike. Volatility sellers are likely emboldened by signs the market’s fever is breaking. The Cboe Volatility Index… has roughly halved from last week’s peak, and U.S. stocks are up nearly 5% from their Feb. 9 lows.”

February 11 – Bloomberg (Luke Kawa and Joanna Ossinger): “Investors actively abandoned the world’s biggest passive fund during the onset of market mayhem. The SPDR S&P 500 exchange-traded fund (ticker SPY) suffered a record $23.6 billion in outflows last week amid the worst momentum swing in history for the underlying U.S. equity benchmark. Outflows amounted to 8% of the fund’s total assets at the start of the week, a rate of withdrawals not seen since August 2010.”

February 11 – Wall Street Journal (Alistair Gray and Robin Wigglesworth): “Wall Street is pointing the finger at insurance companies as an unlikely but pivotal source of the turbulence that wiped trillions of dollars off stock market values in recent days. While complex volatility-linked funds and algorithmic traders have been widely blamed for the wild price swings, strategists and investors said a significant portion of the selling could be traced to variable annuities, a popular tax-advantaged insurance-company product that offers customers guaranteed returns. US life insurers suffered losses on variable annuities in the financial crisis. Since then, insurers have responded by marketing variable annuities that put customers’ money into ‘managed volatility’ funds. These vehicles, which aim to produce steadier returns, shed risky assets when volatility spikes.”

February 12 – Wall Street Journal (Asjylyn Loder and Dave Michaels): “The recent implosion of two exchange-traded products is renewing questions about the impact of fast-growing passive funds on the markets they are meant to track. While exchange-traded funds have lowered the cost of investing and given individuals access to strategies once reserved for hedge funds and multibillion-dollar pensions, the $5 trillion global industry has ventured into complex strategies, sometimes with disastrous results. The latest example came on the evening of Feb. 5, as ETPs that bet against Wall Street’s fear gauge lost more than 80% of their value. The strategy has been a popular moneymaker in recent years as stocks marched steadily higher, keeping the Cboe Volatility Index, known as the VIX, at near-record lows.”

Trump Administration Watch:

February 13 – Bloomberg (Steven T. Dennis): “President Donald Trump’s budget blueprint doubles the deficits he forecast a year ago with little expectation they’ll shrink anytime soon. As a result, the $20 trillion federal debt that Trump railed against as a candidate is projected to balloon to $30 trillion a decade from now. And that’s despite the healthy dose of economic optimism in Monday’s budget: 3% growth, low inflation, low interest rates and low unemployment each year. It also assumes trillions in spending cuts Congress has already rejected… The prospect of encroaching inflation and higher interest rates contributed to the biggest stock market rout in two years. Investors who spent January celebrating Trump’s tax package with the biggest rally since 1997 watched as those gains dissolved, leaving the S&P 500 back where it was in November.”

February 12 – Politico (Theodoric Meyer): “Deficit spending is officially back in style, leaving Washington’s professional deficit scolds wondering how they’ll manage to persuade lawmakers to care about red ink again. The one-two punch of Republicans’ recent tax cuts and the bipartisan, two-year budget deal Congress passed last week could boost the next fiscal year’s deficit — the difference between what the government spends and what it collects in taxes — to more than $1 trillion, according to projections. That’s caused a mixture of alarm and depression among the think tanks and foundations that have spent years pushing Congress to shrink the annual deficits.”

February 13 – Reuters (Roberta Rampton and David Lawder): “U.S. President Donald Trump said… he was considering a range of options to address steel and aluminum imports that he said were unfairly hurting U.S. producers, including tariffs and quotas. Trump’s comments – his strongest signal in months that he will take at least some action to restrict imports of the two metals – came in a meeting with a bipartisan group of U.S. senators and representatives… Some of the lawmakers urged him to act decisively to save steel and aluminum plants in their states, but others urged caution because higher prices would hurt downstream manufacturers that consume steel and aluminum.”

February 14 – Bloomberg (Joe Light): “Fannie Mae will request an infusion of taxpayer money for the first time since 2012 because of an unintended but anticipated side effect of the corporate tax cut signed into law in December. The mortgage-finance company… said it will need to draw $3.7 billion from the U.S. Treasury in March to keep its net worth from going negative. The deficit was driven by a $6.5 billion loss in the fourth quarter, which came as a result of a drop in the value of assets Fannie can use to offset taxes. The assets became less valuable when Congress cut the corporate tax rate, resulting in a $9.9 billion hit.”

February 13 – Reuters (Katanga Johnson and Susan Cornwell): “The White House budget chief said… that, if he were still a member of Congress, he ‘probably’ would vote against a deficit-financed budget plan he and Trump are proposing. At a U.S. Senate panel hearing where he defended the administration’s new $4.4-trillion, fiscal 2019 spending plan, Mick Mulvaney was asked if he would vote for it, if he were still a lawmaker… ‘I probably would have found enough shortcomings in this to vote against it,’ said Mulvaney, director of the U.S. Office of Management and Budget (OMB)…”

U.S. Bubble Watch:

February 13 – Financial Times (Demetri Sevastopulo): “Dan Coats, the top US intelligence official, urged Congress to tackle the ballooning national debt, saying it posed a ‘dire threat’ to economic and national security. In presenting Congress with the US intelligence community’s annual global threat assessment — which ranged from the nuclear crisis on the Korean peninsula to Russian interference in US elections — Mr Coats called for action to prevent a ‘fiscal crisis … that truly undermines our ability to ensure our national security’. ‘The failure to address our long-term fiscal situation has increased the national debt to over $20tn,’ Mr Coats, the director of national intelligence, told the Senate intelligence committee. ‘This situation is unsustainable … and represents a dire threat to our economic and national security.’ His warning came a day after President Donald Trump released his budget proposal for fiscal 2019, which jettisoned a pledge from a year ago to eliminate the budget deficit over 10 years.”

February 15 – Bloomberg (Katia Dmitrieva): “Three measures of price pressures for American businesses showed they’re facing higher production costs, adding to evidence that inflation is creeping up in the U.S. economy. The Empire State Manufacturing prices-paid index increased 12.4 points to 48.6 in February, the highest level since 2012… A separate index from the Philadelphia Fed showed prices paid in that region also surging in February, reaching the highest since May 2011 … In Washington, … U.S. wholesale prices rose in January on costs of energy and hospital services. The producer-price index increased 0.4% from the prior month…”

February 13 – Bloomberg (Prashant Gopal): “Home prices jumped to all-time highs in almost two-thirds of U.S. cities in the fourth quarter as buyers battled for a record-low supply of listings. Prices for single-family homes, which climbed 5.3% from a year earlier nationally, reached a peak in 64% of metropolitan areas measured, the National Association of Realtors said… Of the 177 regions in the group’s survey, 15% had double-digit price growth, up from 11% in the third quarter… While prices jumped 48% since 2011, incomes have climbed only 15%, putting purchases out of reach for many would-be buyers.”

February 16 – Reuters: “U.S. import prices rose more than expected in January as the cost of imported petroleum and a range of other goods increased, which could boost inflation in the coming months. …Import prices jumped 1.0% last month after an upwardly revised 0.2% rise in December.. In the 12 months through January, import prices increased 3.6%, the largest advance since April 2017, quickening from a 3.2% rise in December.”

February 13 – CNBC (Tae Kim): “The American consumer is loading up on debt. Total household debt rose by $193 billion to an all-time high of $13.15 trillion at year-end 2017 from the previous quarter, according to the Federal Reserve Bank of New York’s Center for Microeconomic Data report… Mortgage debt balances rose the most in the December quarter rising by $139 billion to $8.88 trillion from the previous quarter. Credit card debt had the second largest increase of $26 billion to a total of $834 billion. The report said it was fifth consecutive year of annual household debt growth with increases in the mortgage, student, auto and credit card categories.”

February 13 – Bloomberg (Luzi-Ann Javier): “Optimism among small companies in the U.S. rose more than forecast in January, fueled by a record number of owners who said now was a good time to expand, according to a National Federation of Independent Business survey… Overall index rose by 2 points to 106.9 (est. 105.3), close to November’s 107.5 reading that was highest in monthly data to 1986.”

February 12 – Bloomberg (Matthew Boesler): “U.S. consumers said they expected to see the fastest wage growth in several years when polled in January, according to a monthly Federal Reserve Bank of New York survey. Consumers polled expected earnings to rise 2.73% in the coming year, the most since data collection began in 2013, according to results of the New York Fed’s Survey of Consumer Expectation… January was only the third month in the survey’s 56-month history in which expected wage growth topped expected consumer price inflation, which fell slightly, to 2.71%.”

February 13 – New York Times (Conor Dougherty): “The United States is on track to achieve the second-longest economic expansion in its history. Unemployment is at a 17-year low. And California’s state budget has a multibillion-dollar surplus. So why is its longtime governor, Jerry Brown, issuing prophecies of doom? ‘What’s out there is darkness, uncertainty, decline and recession,’ Mr. Brown said recently after presenting his final budget to legislators. California has accounted for about 20% of the nation’s economic growth since 2010… nBut Mr. Brown, in his final year in office, has raised the question on the minds of those paid to think about the economy: How long can this last? For California and the nation, there is a long list of things that could go wrong. A surging budget deficit could stoke higher interest rates. And if the recent upheaval in stocks signals a longer-term decline, it would hurt California in particular because its budget relies heavily on high earners whose incomes rise and fall with the market… In 2009, as the last recession took hold, California state revenue fell 19%, versus 8% for state revenues nationwide, according to Moody’s Analytics.”

February 14 – Bloomberg (Sho Chandra): “U.S. retail sales unexpectedly declined in January and December receipts were revised lower, indicating consumer demand in the first quarter may cool… Overall sales fell 0.3% (est. 0.2% gain), the most since February 2017, after little change in prior month (prev. 0.4% increase). Purchases at automobile dealers dropped 1.3%, the most since August.”

February 13 – Wall Street Journal (Gunjan Banerji): “A U.S. regulator is looking into whether prices linked to the stock market’s widely watched ‘fear index’ have been manipulated, according to people with knowledge of the matter. The Cboe Volatility Index, known as the VIX, is derived from S&P 500 options prices. The Financial Industry Regulatory Authority is scrutinizing whether traders placed bets on S&P 500 options to influence prices for VIX futures… Separately, a letter from a law firm Monday representing an unidentified client urged U.S. regulators to investigate VIX manipulation, claiming it has cost investors hundreds of millions of dollars in losses each month.”

Federal Reserve Watch:

February 14 – CNBC (Jeff Cox): “U.S. consumer prices rose considerably more than expected in January, fueling fears that inflation is about to turn dangerously higher. The Consumer Price Index rose 0.5% last month against projections of a 0.3% increase… Excluding volatile food and energy prices, the index was up 0.3% against estimates of 0.2%. The report indicated that price pressures were ‘broad-based,’ with rises in gasoline, shelter, clothing, medical care and food. Markets reacted sharply to the news.”

February 13 – Financial Times (Demetri Sevastopulo, Sam Fleming and Robin Wigglesworth): “The White House is considering appointing Loretta Mester, president of the Federal Reserve Bank of Cleveland, as vice-chair of the US Federal Reserve’s board of governors. One person familiar with the selection process for the powerful central banking role said White House officials had discussed the job with Ms Mester and were ‘impressed’ with her. However, the person stressed that there was currently no frontrunner for the position…”

February 13 – Reuters (Howard Schneider): “The recent stock market sell-off and jump in volatility will not damage the economy’s overall strong prospects, Cleveland Fed president Loretta Mester said… in warning against any overreaction to the turbulence in financial markets. ‘While a deeper and more persistent drop in equity markets could dash confidence and lead to a pullback in risk-taking and spending, the movements we have seen are far away from this scenario,’ Mester said of a market rout…”

February 14 – Wall Street Journal (Justin Lahart): “With the economy throwing off more heat, the biggest risk for the Federal Reserve is that it falls behind on raising interest rates. And if investors suffer as a result? So be it. Inflation picked up again last month. The Labor Department on Wednesday reported that consumer prices rose 0.5% in January from December, putting them 2.1% above their year-earlier level. Core prices, which exclude food and energy, rose 0.3% for a 1.8% gain on the year. Both measures were stronger than economists expected.”

China Watch:

February 12 – Reuters (Kevin Yao, Fang Cheng): “China’s banks extended a record 2.9 trillion yuan ($458.3bn) in new yuan loans in January, blowing past expectations and nearly five times the previous month as policymakers aim to sustain solid economic growth while reining in debt risks. While Chinese banks tend to front-load loans early in the year to get higher-quality customers and win market share, the lofty figure was even higher than the most bullish forecast… Net new loans surpassed the previous record of 2.51 trillion yuan in January 2016, which is likely to support growth not only in China but may underpin liquidity globally as major Western central banks begin to withdraw stimulus… Corporate loans surged to 1.78 trillion yuan from 243.2 billion yuan in December, while household loans rose to 901.6 billion yuan in January from 329.4 billion yuan in December…”

February 11 – Wall Street Journal (Manju Dalal, Shen Hong and Chuin-Wei Yap): “An engine of consumer loan growth in China is slowing. But that might not be such a bad thing, at least for regulators and market participants that have fretted about a rise in risky lending practices over the past year. China’s market for asset-backed securities–which bundle up car loans, mortgages, consumer loans and other receivables into bondlike products–surged in 2017, led by issuers including the financial affiliate of Alibaba Group Holding Ltd. and other nonbank lenders. Total issuance of such instruments, which are mostly denominated in yuan, jumped 90% to over $220 billion last year from 2016, according to S&P Global.”

February 13 – Bloomberg (Yuko Takeo and Yoshiaki Nohara): “Debt-laden Chinese conglomerate HNA Group Co. had its credit assessment cut for the second time in less than three months by S&P Global Ratings, which cited significant debt maturities amid deteriorating liquidity. Separately, some HNA directors and top executives have purchased offshore dollar bonds guaranteed by the group… The company is in a ‘very healthy’ financial position, it said. S&P lowered HNA’s credit profile to ccc+ from b.”

February 12 – Bloomberg: “HNA Group Co., the once-voracious hunter of global trophy assets, is seeking to sell more than $6 billion in properties worldwide as pressure intensifies for the Chinese conglomerate to speed up disposals so it can repay its debts. The group… said it agreed to sell two plots of land in Hong Kong it bought less than a year ago for HK$16 billion ($2 billion) to the city’s second-richest man. HNA is also said to have been in talks to sell a pair of office buildings in London’s Canary Wharf district it bought for more than $500 million and offering a raft of properties in the U.S. valued at about $4 billion.”

February 11 – Bloomberg: “Billionaire Hui Ka Yan’s China Evergrande Group, the nation’s number three by sales last year, has started selling homes cheap. A 12% discount will apply to many apartments ahead of a week-long Chinese New Year holiday… Sweeteners include down-payments by installment. The company may see headwinds for the property market amid local governments’ stringent home-buying curbs and the potential for liquidity to tighten. One analyst’s theory: this is a bid to please a government determined to cool housing prices, ahead of a long-standing plan to list a property unit on the mainland.”

February 11 – Wall Street Journal (Scott Patterson and Russell Gold): “Miners push bicycles piled high with bags of a grayish-blue ore along a dusty road to a makeshift market. There, they line up at wholesalers with nicknames such as Crazy Jack and Boss Lee. Most of the buyers are Chinese. Those buyers then sell to Chinese companies that ship the bags, filled with cobalt, to China for processing into rechargeable, lithium-ion batteries that power laptops and smartphones and electric cars. There is a world-wide race to lock up the supply chain for cobalt, which will likely be in even greater demand as electric-car production rises. So far, China is way ahead.”

Central Bank Watch:

February 11 – Reuters (John Miller): “The European Central Bank is concerned that the United States is exerting ‘political influence’ on exchange rates and will make this a theme at upcoming G20 meetings, ECB policymaker Ewald Nowotny said… ‘We in the ECB are certainly concerned about attempts by the United States to politically influence the exchange rate,’ Nowotny told Austrian broadcaster ORF. ‘That was a theme of economic discussions in Davos, where the ECB addressed this, and it will certainly be a theme at the upcoming G20 summit.'”

Global Bubble Watch:

February 12 – Bloomberg (Cecile Gutscher): “Societe Generale SA is telling yield-seeking bond investors to give up the ghost: they can no longer bank on dormant inflation underpinning risk bets, from credit to emerging markets to long-dated government debt. ‘The bear market in rates has started, and with it credit, and eventually emerging markets, should both come under pressure,’ strategists led by Brigitte Richard-Hidden wrote… ‘There has been a regime shift in the market, which implies further increases in yields.'”

February 10 – Financial Times (Chris Flood): “Investors ploughed more than $100bn in new cash into exchange traded funds in January, a record monthly inflow that helped drive assets held in ETFs globally above the $5tn mark for the first time. The surge in January follows four consecutive years of record breaking inflows into ETFs, a tectonic shift that is sending shockwaves across the entire asset management industry… Net new inflows into exchange traded funds and products reached $105.7bn in January, according to… ETFGI…”

February 13 – Financial Times (Joe Rennison and Eric Platt): “The premium investors are demanding to own loans that are packaged into bonds has tumbled to the lowest since the financial crisis, in a sign that the market has not been roiled by the return of volatility in stocks. The market for collateralised debt obligations, as the securities are known, has boomed over the past two years as the juicier yields they offer draws buyers. That, in turn, has driven the issuance of collateralised loan obligations that this year has already eclipsed the record pace of 2017. Barings… priced a $517m CLO — composed of loans made to weaker corporate borrowers — at the lowest spread over a benchmark interest rate since 2008. The safest triple A part of the CLO priced at just 99 bps above Libor…”

February 11 – Reuters (Tom Arnold and Alexander Cornwell): “Sharp swings in global financial markets in the past few days are not worrying since economic growth is strong but reforms are still needed to avert future crises, the managing director of the International Monetary Fund said… ‘I’m reasonably optimistic because of the landscape we have at the moment. But we cannot sit back and wait for growth to continue as normal,’ she said…”

Fixed-Income Bubble Watch:

February 13 – Wall Street Journal (Daniel Kruger and Michael S. Derby): “Bond investors are grappling with concerns that the U.S. government’s decisions to cut taxes and increase spending are stoking an economy that doesn’t need a boost, at the expense of long-term financial health. Selling in government bonds that began after the passage of tax cuts and accelerated amid fears of a pickup in inflation has darkened investors’ outlook in recent weeks. Even as the government boosts its borrowing, the Federal Reserve has stepped away from bond purchases and is now shrinking its holdings, raising worries about the appetite from private investors who will need to make up the difference. Because the 10-year Treasury note is a bedrock of global financial markets, rising yields… can lift borrowing costs, affecting everything from state and local governments to mortgages, credit cards, and corporate loans.”

February 12 – Bloomberg (Netty Idayu Ismail): “Treasury 10-year yields will rise to as high as 3.5% in the next six months as the market prices in a steeper pace of Federal Reserve tightening, according to Goldman Sachs Asset Management. The U.S. central bank will probably raise interest rates four times this year, defying the consensus for around three, said Philip Moffitt, Asia-Pacific head of fixed income…, which oversees more than $1 trillion. Yields will also increase as the Fed trims the holdings of Treasuries it purchased through quantitative easing, he said. ‘As QE gets tapered through this year and into next year, we’ve got a big swing in the supply duration coming,’ Moffitt said… ‘It’s going to put upward pressure on yields. I would think that 3.5% is not a very brave forecast.'”

February 15 – Bloomberg (Sid Verma): “As stocks boogied to the risk-on beat Wednesday, investors in the world’s third-largest fixed-income exchange-traded fund left the party at a frenetic pace. The iShares iBoxx $ Investment Grade Corporate Bond exchange-traded fund (LQD) was hit by a record $921 million outflow, the largest daily redemption since its 2002 inception… At 2.7%, it represents the largest post-crisis withdrawal as a share of total assets at the start of the session for the high-grade, dollar-denominated fund. It now manages $33 billion.”

February 13 – CNBC (Jeff Cox): “Fund managers have sliced their bond allocations to the lowest level in 20 years as fears grow that the sector poses the biggest threat to markets. Along with reducing their fixed income exposure, 60% of professional investors also say inflation and troubles overall in the bond market pose the biggest threat of a ‘cross-asset crash,’ according to the February Bank of America Merrill Lynch Fund Manager Survey. Respondents say they’ve reduced their bond portfolios to a net 69% underweight, the lowest since the survey began two decades ago.”

February 14 – Bloomberg (Danielle Moran): “Bankers say bad loans are made in good times, and the $3.8 trillion municipal-bond market may be no exception. High demand from investors, a dwindling supply of new deals, and historically low yield penalties on the riskiest bonds has created an borrower’s market, Municipal Market Analytics analysts Matt Fabian and Lisa Washburn wrote… This atmosphere has produced a rise in issuance in sectors most ‘prone to impairment,’ they said. ‘Over recent years the mix of defaults has become more diversified than it was previously,’ Washburn wrote. Before the 2008 credit crisis, nearly all defaults were concentrated in the healthcare and housing sectors. Now that trend is expanding into utility districts and tax-based issues, typically known as safe sectors, according to the firm.”

Europe Watch:

February 14 – Reuters (Jan Strupczewski): “Euro zone industrial production jumped more than expected in December…, underlining the fastest economic growth rate in a decade that economists expect to continue in 2018. Eurostat said industrial production in the 19 countries sharing the euro rose 0.4% month-on-month for a 5.2% year-on-year gain.”

February 13 – Financial Times (Robert Smith): “When European bond investors tired of private equity firms and the law firms they employ watering down key protections in junk-rated debt, they turned to the Association for Financial Markets in Europe. Influential asset managers such as AllianceBernstein and Schroders wrote a public letter to the board of AFME’s high-yield division — the closest thing the $400bn European junk bond market has to an industry trade body — expressing their dismay. These investor members of AFME took particular aim at the deteriorating quality of covenants — important clauses that restrict companies from taking reckless actions such as raising too much debt. That was in 2015. Today the quality of these covenants… is even worse. Asset managers such as pension funds are worried that whittling away these safeguards will leave them more exposed to losses when the credit cycle turns.”

Japan Watch:

February 14 – Financial Times (Robin Harding): “The yen’s surge to ¥106.5 against the dollar — a 15-month high — does not require market intervention, said Japan’s finance minister, as nerves grow about the currency’s sharp appreciation this year. Speaking to the budget committee of the Diet’s lower house, Taro Aso said the ‘yen isn’t rising or falling abruptly’ in a way that would justify the finance ministry stepping in and selling the currency. Against a backdrop of strong stock markets and solid global growth, Mr Aso’s remarks suggest the finance ministry does not yet fear a hit to Japan’s economy from the rising currency. His words may encourage markets to push the yen higher.”

February 13 – Financial Times (Hudson Lockett): “Japan’s economy has recorded eight consecutive quarters of economic growth — its longest streak for 28 years — despite the pace of expansion slowing in the final three months of 2017. A preliminary reading on gross domestic product from the Cabinet Office reported annualised growth of 0.5% in the fourth quarter, falling from a pace of 2.5% in the third quarter… However, consumption and business investment were both strong, suggesting that Japan’s economic cycle was not on the wane, with robust expansion set to continue in 2018. The eight quarters of growth mark Japan’s longest streak since a 12-quarter stretch that ended in 1989.”

EM Bubble Watch:

February 13 – Financial Times (Robert Smith): “Should investors worry about debt in emerging markets? The past week’s global market sell-off, and the rise in US interest rates that lies behind it, suggest they should at least keep a very close eye… One of the selling points of EMs during the rally in their stocks and bonds over the past two years has been the improvement in their macroeconomic fundamentals… Indeed, there is much less EM debt today than there was in the crisis years of the 1980s and 1990s. But since the global financial crisis of 2008-09, EM debts have been on the rise again. In dollar terms, in the IIF’s 21 countries, they quintupled from $12tn in March 2005 to $60tn in September last year. In relation to gross domestic product, they rose from 146% to 217%. Significantly, as the chart shows, the amount of debt owed in foreign currencies has also risen over the same period, both in absolute terms and as a share of GDP.”

Leveraged Speculation Watch:

February 13 – Bloomberg (Luzi-Ann Javier): “Billionaire hedge fund manager Ray Dalio boosted his holdings in the two largest gold-backed ETFs last quarter before prices of the metal capped the biggest annual gain in seven years. As of the end of December, Dalio’s Bridgewater Associates, the world’s biggest hedge fund, raised its stake in SPDR Gold Shares, its fifth-largest holding, by 14,091 shares to 3.91 million shares…”

Geopolitical Watch:

February 12 – Bloomberg (Gregory White): “The war in Syria is threatening to embroil the major powers in direct conflict. Russian President Vladimir Putin may have declared victory in his Syrian campaign two months ago, but… a strike by U.S.-led coalition forces in the east of Syria last week killed as many as 200 troops working for Russian military contractors. The raid was likely the first such deadly conflict between the former Cold War rivals since the Vietnam War, according to Russian experts. Both sides so far have tried to keep the details secret to avoid escalating an already volatile situation. Just days later, Israel downed an Iranian drone and struck targets in Syria, raising the ante in its efforts to drive forces backed by Tehran away from its border. Following those strikes, Putin urged ‘avoiding any steps that could lead to a new round of confrontation.'”

February 11 – Wall Street Journal (Rory Jones): “The loss of an Israeli military jet to Syrian fire over the weekend has raised the chances of a more forceful response from Israel to deter Iranian military expansion across its border, which could open up another front line in war-torn Syria. The clash began Saturday morning after Israel said it intercepted an Iranian drone that had infiltrated its airspace from Syria. Israel responded that day with airstrikes on Syrian military positions, and Syria shot down one of the Israeli warplanes, which crashed in Israeli territory. Israel then carried out more-extensive airstrikes on Saturday deep inside Syria targeting what its military said were Syrian and Iranian military positions.”

February 15 – Wall Street Journal (Yaroslav Trofimov): “Here’s what happened in Syria over the past week or so. Try to make out who’s whose friend–and who’s whose foe. The Russian-backed Syrian regime gave free passage through its territory to American-backed Kurdish militias so they could fight against America’s NATO ally Turkey. The Syrian regime at the same time attacked these American-backed Kurdish militias in another part of the country, triggering U.S. strikes that killed more than 100 Syrian troops and a significant number of Russian military contractors. In yet another part of Syria, Turkey threatened to attack American troops embedded with these Kurdish forces, prompting a counterwarning of an American military response.”

February 11 – Reuters (Parisa Hafezi): “Hundreds of thousands of Iranians rallied on Sunday to mark the anniversary of Iran’s 1979 Islamic revolution, denouncing the United States and Israel as oppressors. President Hassan Rouhani, addressing flag-waving crowds on central Tehran’s Azadi (Freedom) Square, made no specific reference to Israel’s air strikes in Syria on Saturday which it said were aimed at air defense and Iranian targets. But he told the crowd: ‘They (U.S. and Israel) wanted to create tension in the region … they wanted to divide Iraq, Syria … They wanted to create long-term chaos in Lebanon but … but with our help their policies failed.'”

Doug Noland

Doug Noland
Credit Bubble Bulletin

Doug Noland

I just wrapped up 25 years (persevering) as a “professional bear.” My lucky
break came in late-1989, when I was hired by Gordon Ringoen to be the trader
for his short-biased hedge fund in San Francisco. Working as a short-side
trader, analyst and portfolio manager during the great nineties bull market
– for one of the most brilliant individuals I’ve met – was an exciting, demanding
and, in the end, a grueling and absolutely invaluable learning experience.
Later in the nineties, I had stints at Fleckenstein Capital and East Shore
Partners. In January 1999, I began my 16 year run with PrudentBear, working
as strategist and portfolio manager with David Tice in Dallas until the bear
funds were sold in December 2008.

In the early-nineties, I became an impassioned reader of The Richebacher Letter.
The great Dr. Richebacher opened my eyes to Austrian economics and solidified
my lifetime passion for economics and macro analysis. I had the good fortune
to assist Dr. Richebacher with his publication from 1996 through 2001.

Prior to my work in investments, I worked as a treasury analyst at Toyota’s
U.S. headquarters. It was working at Toyota during the Japanese Bubble period
and the 1987 stock market crash where I first recognized my love for macro
analysis. Fresh out of college I worked as a Price Waterhouse CPA. I graduated
summa cum laude from the University of Oregon (Accounting and Finance majors,
1984) and later received an MBA from Indiana University (1989).

By late in the nineties, I was convinced that momentous developments were
unfolding in finance, the markets and policymaking that were going unrecognized
by conventional analysis and the media. I was inspired to start my blog,
which became the Credit Bubble Bulletin, by the desire to shed light on these
developments. I believe there is great value in contemporaneous analysis,
and I’ll point to Benjamin Anderson’s brilliant writings in the “Chase Economic
Bulletin” during the Roaring Twenties and Great Depression era. Ben Bernanke
has referred to understanding the forces leading up to the Great Depression
as the “Holy Grail of Economics.” I believe “The Grail” will instead be
discovered through knowledge and understanding of the current extraordinary
global Bubble period.

Disclaimer: Doug Noland is not a financial advisor nor is he providing investment
services. This blog does not provide investment advice and Doug Noland’s comments
are an expression of opinion only and should not be construed in any manner
whatsoever as recommendations to buy or sell a stock, option, future, bond,
commodity or any other financial instrument at any time. The Credit Bubble
Bulletins are copyrighted. Doug’s writings can be reproduced and retransmitted
so long as a link to his blog is provided.

Copyright © 2015-2017 Doug Noland

All Images, XHTML Renderings, and Source Code Copyright ©

Published at Sat, 17 Feb 2018 06:24:32 +0000

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U.S. market gurus who predicted selloff say current calm an illusion

U.S. market gurus who predicted selloff say current calm an illusion

NEW YORK (Reuters) – You ain’t seen nothing yet.

Some veteran investors who were vindicated in calling for a pullback in shares and a spike in volatility could now be cheering. Actually, they’re looking at the risks that still lie ahead in the current relative calm.

The last week’s wild market swings confirmed that the market was in correction territory – falling more than 10 percent from its high. The falls were triggered by higher bond yields and fears of inflation but came against a backdrop of a stretched market that had taken price/earnings levels to as high as 18.9. Adding to downwards pressure was the unwinding of bets that volatility would stay low.

The fall had come after a growing number of strategists and investors said a pullback was in the offing – although the consensus opinion was that the market would then start rising again.

The big question is: what comes now?

“Do you honestly believe today is the bottom?” said Jeffrey Gundlach, known as Wall Street’s Bond King, last week, who had been warning for more than a year that markets were too calm. Gundlach had been particularly vocal in his warnings about the VIX, Wall Street’s “fear gauge,” which tracks the volatility implied by options on the S&P 500.

The sell-off in U.S. stocks derailed some popular short volatility exchange-traded products, which contributed to more downwards pressure on the market. Gundlach in May last year warned that the VIX was “insanely low.”

Hedge fund manager Douglas Kass from Seabreeze Partners Management Inc was short SPDR S&P 500 ETF and said he “took a lot of small losses” last year but says he still sees more stress ahead. He said he is now re-shorting that ETF.

Investors who bet low volatility would continue will need time to unwind their strategies, Kass said.

Dan Fuss, known as Wall Street’s Warren Buffett of bonds, has been warning for years that Treasuries were vulnerable to a vicious sell-off and set for much higher yields and lower prices. “I‘m not trying to be an ‘end of the world person’ here, but it is a possibility,” Fuss told Reuters last November.

In a telephone interview this week, Fuss, the vice chairman of $268-billion Loomis Sayles and one of the world’s longest-serving fund managers with six decades of experience, said he had built cash and cash equivalent reserves to their most extreme levels in his Loomis portfolio and had put some of that money to work last week.

His biggest worry in 2018: “The geopolitical side. Nothing beats peace.”

Veteran short-seller Bill Fleckenstein, who ran a short fund but closed it in 2009, said that “last week’s action was an early indication that the end of bull market is upon us.”

Fleckenstein said there was a lot of money in the market with no conviction behind it, for example, buying index funds and ETFs just “to be part of the party” which was an element of “hot money.”

“Last week was just the preview to the bigger event that we’ll see this year probably,” Fleckenstein said. Fleckenstein said he is not short at the moment – although he did make “a couple of bucks” last week shorting Nasdaq futures. He said he is looking for an opportunity to get short again. He said he has “flirted with the idea of restarting a short fund”.

“I‘m not short at the moment, because the action was such that I covered, but I expect that I’ll be short aggressively at some point this year. It’s not quite time, but it’s pretty close.”

Many strategists have been bullish about the market’s potential to stretch the near-nine-year-old bull market further. Many had said they expected a pullback, but then a resumption of gains.

The drop in the benchmark S&P 500 last week did not dent strategists’ expectations for mild to moderate gains in the U.S. stock market by the end of the year, as they cited strength in corporate earnings and interest rates not expected to derail equities.

Byron Wien, longtime Wall Street strategist who is vice chairman in the Private Wealth Solutions group at Blackstone, said in his predictions for 2018 that this year the S&P 500 would have a 10-percent correction.

“I don’t think we’re done,” said Wien, who ultimately thinks the bull run will continue some more and that the S&P would end the year above 3,000. But the path there could be bumpy. Wien thinks the correction “did not cleanse the optimism sufficiently” and sees further downside beyond the 10-percent fall – which has since been partially recouped.

“Everyone says: ‘Oh, well, now we’ve had the 10 percent correction that everyone was waiting for, then we go back up again’,” said Wien. “But it’s not as simple as that.”

(This version of the story was refiled to remove the erroneous “percent” from P/E level in paragraph 3)

Reporting by Jennifer Ablan and Megan Davies; Editing by Nick Zieminski

Published at Fri, 16 Feb 2018 11:38:15 +0000

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‘Main Street is roaring’: Wages are rising, survey says

by geralt from Pixabay

‘Main Street is roaring’: Wages are rising, survey says

Small business owners across the United States say this is the best time in decades to expand.

Nearly a third of Main Street businesses say it’s a good time to expand, the highest since the National Federation of Independent Business began asking in 1973.

“Main Street is roaring,” said NFIB CEO Juanita Duggan. “The record level of enthusiasm for expansion follows a year of record-breaking optimism among small businesses.”

Wages and prices are going up, too.

About 31% of small businesses reported paying employees more, the highest since 2000. The share of owners raising prices rose to 11%, the highest in the NFIB surveyin three and a half years.

Overall, small business optimism rose in January to one of its highest readings ever. The NFIB attributed that to the passage of the Republican tax package in late December.

That’s all good news for American workers and businesses, but it gave Wall Street a slight chill.

Global markets have whipsawed for two weeks because of investors’ fears about inflation and faster interest rate hikes. The Dow opened down more than 150 points on Tuesday.

News of higher wages on Main Street comes a day before a government report on U.S. inflation, which could soothe or further concern investors.

In the big picture, higher wages mean the economy is healthier, and the small business survey reflects that trend.

In January, average U.S. hourly wages rose 2.9% from the year before, the best increase since 2009. Two-thirds of small businesses plan to raise pay this year, according to a survey published Monday by the National Small Business Association and ZipRecruiter, a job recruitment site.

More broadly, unemployment is the lowest since 2000, and the United States has added jobs every month for more than seven years,the longest streak on record. The economy has been growing, albeit slowly, since 2009, making this expansion the third-longest in U.S. history.

For the past eight years, the Federal Reserve has kept interest rates historically low to help the economy while wages and inflation showed little signs of life.

But the hot job market and a shortage of workers are increasingly forcing employers to pay more to retain and recruit employees. That competition for workers could in turn boost inflation.

Published at Tue, 13 Feb 2018 14:49:31 +0000

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U.S. stock market chill threatens to ‘put IPOs on ice’

U.S. stock market chill threatens to ‘put IPOs on ice’

NEW YORK (Reuters) – Wide swings in the U.S. stock market has blunted initial public offering (IPO) activity on Wall Street in what was set to be the busiest week for new listings in more than two-and-a-half years.

All signs points to the disruption to IPOs continuing.

Ten companies had planned U.S. stock market debuts for this week, according to Renaissance Capital, a manager of IPO-focused exchange traded funds. It would have followed the biggest January haul of IPO proceeds on record, and would have been the most active IPO week since June 2015, Thomson Reuters data showed.

Only six companies went ahead with their IPO due to the volatile stock market, which has sapped much of the investor demand for new listings.

This bodes poorly for companies looking to pull the IPO trigger in the short term.

Forty companies have filed for an IPO with the U.S. Securities and Exchange Commission in the past year, aiming to raise an aggregate $9.2 billion, according to data from Renaissance Capital. This does not include so-called confidential IPO filings which are not yet visible on the SEC’s website.

“This volatility has the potential to put IPOs on ice,” said Kathleen Smith, principal at Renaissance Capital.

A saving grace for the IPO market is that mid-February typically sees a lull period for new listings. This is because the year-end financial information necessary for filing an IPO by a calendar-year company with the Securities and Exchange Commission (SEC) goes stale in the middle of this month. After that, companies will need to compile and audit a new set of quarterly earnings. Only three IPOs are currently scheduled for next week.

“When stability does come back to the market, the IPO market should benefit from a growing domestic and global economy with heightened consumer confidence,” said Lear Beyer, co-head of Equity Capital Markets Origination and head of Financial Institutions Group Origination at Wells Fargo & Co.

U.S. stocks see-sawed this week, demonstrating swings Wall Street has not seen in years. The S&P 500 closed down 3.75 percent on Thursday and was on track for its biggest weekly percentage drop since 2011.

IPO postponements included a $500-million listing of IPSCO Tubulars, the U.S. subsidiary of Russian oil and gas pipe maker TMK; the $220-million flotation of Turkish fast-food chain operator TFI Tab Food Investments; and a $130-million listing by Argentine biotechnology firm Bioceres.

Medical technology company Motus GI, scheduled to list on Thursday, also did not price its IPO this week.

The biggest IPO to go ahead was the $437-million listing for Cactus Inc, which supplies wellheads and pressure control equipment.

Other listings included Victory Capital Holdings and Chinese wearable technology company Huami, although the Victory IPO priced at $13 per share, below its $17 to $19 indicated price range. Cardlytics priced on Thursday in a $70-million listing.

Listings for blank-check company Mudrick Capital and medical aesthetics provider Evolus Inc went ahead, while Quintana Energy Services sold shares at $10, below its $12-$15 target range.

Of the seven listings this week, four were trading below their IPO prices on Friday.

“Investors will be looking at what companies and sectors will benefit from the impact of the recent tax reform and a higher interest rate environment relative to inflation fears that have disrupted the market,” said Beyer.

Reporting by Joshua Franklin in New York; Editing by Nick Zieminski

Published at Fri, 09 Feb 2018 20:22:44 +0000

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The biggest losers: Global stock market edition

How high-speed trading causes market turmoil
How high-speed trading causes market turmoil

The biggest losers: Global stock market edition

Sure, the Dow and S&P 500 have been in sell-off mode lately. But the losses are way worse in places like China and Argentina.

The Dow Jones industrial average and S&P 500 plunged just over 10% after hitting all-time highs in late January. The Nasdaq dropped by 9.7% too, though the indexes are now staging a small bounce back on Friday.

Concern about rising inflation, interest rates and bond yields in the United States helped trigger the selling around the world.

“Whilst the recent declines in the U.S. have attracted the lion’s share of attention, the major benchmarks have actually [performed] relatively well compared to several other international indices in recent sessions,” said David Cheetham, chief market analyst at the U.K. brokerage, XTB.

The biggest companies in the world — in both developed and emerging markets — lost $5.2 trillion in market capitalization since recent market peaks at the end of January, according to S&P Dow Jones Indices estimates.

Here are some of the markets that did particularly poorly this week:


The Shanghai Composite has dropped by 14.6% since hitting a two-year high in late January. The Hang Seng in Hong Kong has lost 13% over the same period.

Niklas Hageback, founder of Hong Kong hedge fund Valkyria Kapital, said he believed the Hang Seng in particular had been “severely overextended.” It rallied by 36% in 2017 and kept surging to all-time highs in January.

“This has been the most overbought situation since the financial crisis 10 years back,” he said. “A correction was imminent, and once the U.S. market started to show weakness, the fall has been extensive, especially for mainland financials and property stocks,” he said.

The Shenzhen A-Share index — which was left out of the global stock market rally in 2017 — sold off the most. The index is down 15.4% since hitting a recent peak in late January.

“Chinese domestic markets do show some correlation to other markets in terms of sentiment during these extreme bouts of volatility, however … they still represent an attractive investment case,” said Francois Perrin, a portfolio manager at East Capital. He said now is a good time to “start bottom-fishing” and pick up certain stocks for cheap.


Argentina’s Merval index has dropped the most of all the global indexes. It’s fallen by as much as 16% after setting an all-time high on February 1. It has since recovered a bit.

The index surged by 110% since the start of 2017 to its peak this month, so it’s no surprise that this star performer fell along with the rest of world.

Edward Glossop, an emerging market economist at Capital Economics, said the drop isn’t anything to be concerned about following a long-running rally. But he suggested the fall may have been exacerbated by concerns about recent central bank policy related to inflation.


Japan’s Nikkei index was swept up in the selling this week. It hit its highest level in late January since the early 1990s but has since dropped by 12.6%.

“In a market like this with such an abundance of liquidity, sector diversification and stock picking are almost meaningless, and sell-offs tend to be across sectors and markets,” noted Hageback.


European markets have also fallen this week, but some have fared worse than others.

Specifically, the Dax 30 in Germany has lost 11.7% since hitting an all-time high in late January. And the Stockholm 30 lost as much as 11.5% since a recent peak in early November.

Many other European indexes have dropped by roughly 9% and 10%.


The FTSE JSE All-Share index in Johannesburg, South Africa, fared poorly over the past few days, down by as much as 11% since hitting an all-time high in late January.

“Even though the epicentre of the sell-off appeared to be developments in the U.S., it is not surprising that South African equities have been hit hard too,” said Oliver Jones, an economist at Capital Economics.

“Historically, equities in emerging markets have always tumbled when the U.S. stock market has experienced a correction, even when the cause of the correction has had little or nothing to do with emerging markets. This reflects investors around the world retreating from ‘risky’ assets,” he said.

Published at Fri, 09 Feb 2018 15:53:32 +0000

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381-point Dow surge disappears as bond jitters return

Why stocks roared back after nosedive
Why stocks roared back after nosedive

 381-point Dow surge disappears as bond jitters return


Wall Street’s bond market headache won’t go away.

A 381-point surge on the Dow disappeared by Wednesday’s closing bell as concerns about rising Treasury yields returned. The Nasdaq slumped almost 1%, while the S&P 500 fell modestly.

The stock market appeared to be making a comeback after historic plunges on Friday and Monday. The Dow surged 567 points higher on Tuesday, and at one point Wednesday it was poised for a two-day gain of almost 1,000 points.

But Wall Street is still nervously watching the bond market, where the trouble started last week.

U.S. stocks pulled back on Wednesday after heavy selling lifted the 10-year Treasury yield back to 2.85%, matching a four-year high. The jump came after an auction of 10-year Treasury notes drew less than stellar demand.

Investors fear the rapid rise in Treasury yields this year could signal inflation and faster rate hikes from the Federal Reserve. Higher bond yields also make stocks look less attractive by comparison.

“The global bond bubble is leaking air,” Peter Boockvar, chief investment officer at Bleakley Advisory Group, wrote in a note to clients after the Treasury auction. He said assets like stocks that are valued off of bonds are “vulnerable too.”

While the market failed to hold on to the early gains, the mood has calmed significantly. Extreme fear drove the Dow down by a record 1,175 points on Monday. The VIX(VIX) volatility index fell about 15% on Wednesday after exploding during the market turmoil.

Despite the volatility, analysts believe the fundamental backdrop is solid. Corporate earnings have never been higher, and U.S. and global economic growth has gathered momentum.

“We believe the recent sell-off is a correction rather than the start of a bear market,” Pierre Blanchet, head of multi asset strategy at HSBC, wrote in a report on Wednesday.

Overseas market jitters mostly eased after plunging earlier this week. European markets raced higher, while stocks in Asia were mixed.

The question now is whether “this draws a line under the recent stock market correction or whether this is merely a dead cat bounce,” currency analysts at ING wrote in a report on Wednesday.

Published at Wed, 07 Feb 2018 21:34:14 +0000

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Trump breaks his silence on market chaos

Trump used to brag about stocks. Now he's quiet
Trump used to brag about stocks. Now he’s quiet

Trump breaks his silence on market chaos


He broke his silence Wednesday about the market turmoil: “In the ‘old days,’ when good news was reported, the Stock Market would go up,” he wrote on Twitter.

He added, “Today, when good news is reported, the Stock Market goes down. Big mistake, and we have so much good (Great) news about the economy!”

Trump’s complaints came two days after an awkward split-screen moment: The Dow was plunging more than 1,000 points just as he was giving a televised speech touting the economic benefits of his tax plan.

Wall Street’s darkest day since 2011 put the president in a tough spot because he took so much credit for the market’s big gains after he was elected.

So what is Trump talking about?

He has a point about good news and bad news: The market did indeed plunge in recent days after positive economic news. Though that’s not a new thing — it happens from time to time. And there is some logic behind it, even if it’s frustrating to presidents and everyday investors alike.

Consider the rude reaction on Wall Street to Friday’s jobs report, whichshowed that wages grew at the fastest pace since 2009. That’s a clear win for Main Street after years of weak pay increases for workers.

Yet the stock market had a hellish day. The Dow plunged 666 points, or 2.5%, its worst day in more than a year.

Wall Street was focused on the short term. Investors worried that wages could grow so quickly that they will put a dent in record corporate profits and make the Federal Reserve nervous about inflation.

“We’re back in this perplexing phase where good news for the economy is treated as bad news for financial markets,” said Candice Bangsund, portfolio manager at Fiera Capital.

If the Fed aggressively raises interest rates to fight inflation, it will remove one of the drivers of the bull market. Because of that fear, investors sold bonds, which drove yields to four-year highs. Higher yields make risky stocks look less attractive by comparison. Thus the sell-off.

So in that sense, Trump was right: Good news for Main Street was viewed as bad news by Wall Street.

But this happened under Trump’s predecessors, too.

More than once underPresident Barack Obama, Wall Street became nervous that good economic news would force the Fed to raise rates. And in other cases, the opposite happened: Bad jobs news drove stocks higher because it meant theeasy money wasn’t going anywhere.

This inverse reaction was so common that sometimes, as with a strong jobs report in August 2016, it was noteworthy that good news was treated as good news.

Of course, the recent market turbulence is about more than the good news/bad news situation Trump alluded to.

The stock market boom since Trump’s election became overheated. Euphoria set in, making the market more vulnerable to sharp setbacks. A cool-off period was long overdue — and may prove to be a healthy thing.

“Markets do better over the long term when they experience corrections periodically,” Capital Group CEO Tim Armour said in a recent report. “They can’t go up all the time.”

In the past, Trump himself loudly cheered for the market to keep rallying. After the Dow hit 20,000 in early 2017, he said “Now we have to go up, up, up.” It was a big reversal from during the 2016 campaign when he called the market a “big, fat, ugly bubble.”

Published at Wed, 07 Feb 2018 18:54:06 +0000


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Fed seen staying on rate-hike path after stock market plunge

Flags fly over the Federal Reserve Headquarters on a windy day in Washington, U.S., May 26, 2017. REUTERS/Kevin Lamarque

Fed seen staying on rate-hike path after stock market plunge

NEW YORK (Reuters) – Monday’s rout on Wall Street frayed investors’ nerves, but it is not enough to knock the Federal Reserve off course from its intended path to further raise interest rates in 2018 as the economy continues to hum along, analysts say.

The worldwide market sell-off in equities wiped out $4 trillion in value from record peaks eight days ago, raising concerns such a swift loss of wealth would hurt corporate investments and consumer spending just when many economies in addition to the United States are on a synchronized growth path.

Stocks recovered on Tuesday a fraction of what they lost over the prior two trading sessions, but the price declines and rise in bond yields does relieve a bit of the pressure on the Fed to raise rates.

While investors are smarting from the sell-off, financial conditions, or levels of wealth and borrowing costs, remain at their strongest in almost 25 years. They, together with the major tax cuts enacted in December, would support the economy to grow 2.5 to 3.0 percent, analysts said on Tuesday.

Unless the market plunge intensifies and damages the economy, Fed policy-makers will unlikely budge from their plan to lift key short-term interest rates three times this year, analysts said.

“I don’t think what we have seen would change their view on their path of rate hikes,” said Daragh Maher, U.S. head of FX strategy at HSBC Securities USA Inc. in New York.

(Graphic: Traders See Less Aggressive Fed after Wall Street Plunge –


Still, traders dialed back bets the U.S. central bank would ratchet up the pace on rate increases on Monday to between two to three hikes from three to four hikes, according to interest rates futures.

Last Friday, traders added to their positions for a faster pace of rate hikes when a robust payrolls report showed wage pressure grew to 2.9 percent in January, the fastest annual rate since June 2009.

Anxiety that inflation is accelerating due to bigger paychecks propelled benchmark 10-year yields to a four-year high at 2.88 percent.

Concerns that rising wage pressure would eat into corporate profits and the Fed would raise rates more quickly to raise borrowing costs led to a stampede out of stocks.

Wall Street’s three major indexes rebounded following Monday’s drop.

But the S&P 500’s gains so far in 2018 evaporated, while the Dow was in negative territory for the year. The Nasdaq clung to a 2.8 percent rise but was well below an 8.7 percent increase on Jan. 26.


In addition to signs of rising inflation, loose financial conditions will be a key factor for the Fed policy-makers to raise short-term rates further.

Rates futures suggested traders expected the Fed would raise rates by a quarter point at its March 20-21 meeting. It raised rates back in December to a target range of 1.25-1.50 percent.

“Financial market conditions are part of that calculus,” said Kristina Hooper, chief global market strategist at Invesco in New York. “Nothing I have seen so far would cause the Fed to change.”

The Chicago Federal Reserve’s index on financial conditions, which account for the state of money, debt and stock markets as well as borrowing costs, slipped to -0.94 in the week ended Jan. 26, which was the lowest level since August 1993 and signaling extremely easy market conditions.

For now, the Fed will likely monitor whether inflation is indeed accelerating toward its 2-percent goal, or just a specter that induces a short-lived market sell-off.

“The Fed will keep their eye on the prize – which is inflation,” Hooper said.

(Graphic: U.S. Financial Conditions Still Loose after Wall Street Rout –

Reporting by Richard Leong; Editing by Daniel Bases and Susan Thomas

Published at Wed, 07 Feb 2018 00:00:17 +0000

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Wall Street recovers after historic falls

Wall Street recovers after historic falls

(Reuters) – U.S. stock markets bounced after a torrid opening on Tuesday, bargain-hunters and gains for Apple pushing the tech-heavy Nasdaq and the Dow Jones Industrial Average into positive territory after two days of heavy losses.

Both the S&P 500 and the Dow sank more than 4 percent on Monday, their biggest falls since August 2011, as concerns over rising U.S. interest rates and government bond yields hit record-high valuations of stocks.

New York’s three main indexes sank as much as 2 percent on the opening bell but they quickly moved back into positive territory.

Slideshow (2 Images)

An almost 2 percent gain for Apple was at the heart of an almost half percent gain for the Nasdaq Composite .IXIC.

“Daily drops of 3 percent or more have been buying opportunities for the S&P 500 post financial crisis,” said Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets.

At 9:49 a.m. ET (1449 GMT), the Dow Jones Industrial Average .DJI gained 0.25 percent to 24,406.14. The S&P 500 .SPX rose 0.2 percent to 2,654.25 and the Nasdaq 0.4 percent to 6,993.47.

Reporting by Tanya Agrawal; Editing by Arun Koyyur and Patrick Graham

Published at Tue, 06 Feb 2018 15:04:50 +0000

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What Monday’s Stock Sell-off Had You Searching for

What Monday’s Stock Sell-off Had You Searching for

By Caleb Silver | Updated February 6, 2018 — 4:17 AM EST

By recent historical standards, Monday’s sell-off was rather extreme. The DJIA and S&P 500 suffered their largest daily declines since August 2011, as fears about, well….just about everything, prompted investors to sell just about everything. That’s not true, of course. Apple (AAPL) did manage to eke out a gain after officially falling into a correction last week. However, the Dow did see its biggest intraday point drop in history, as 1600 points were wiped off the big board after 3 p.m. Wall Street time. Some of that came back by the closing bell, but the damage was done. So much for January’s jump start as we are now 0.9% lower in 2018 than the good old days of 2017. By now, you know all this.

What we find fascinating is what our readers and those who find us through Google and other search engines seek in times of intense market volatility. The human need for knowledge, especially in times of fear, is primal and fierce. We know this by looking at our own Investopedia Anxiety Index, which measures search volume against fear-based terms like short selling and volatility. As I wrote last week, the markets-based terms that make up the index finally woke up after a very long nap and started screaming like a hungry infant on Thursday and into Friday. By Monday afternoon, it was in full tantrum, throwing toys, bottles, dirty diapers and shluffys out of the crib and threatening war. Indeed, it was the intense search traffic to key terms and articles that tipped the Index into the “Extreme Anxiety” zone.

Here are the top terms that were spiking on Investopedia as the market was selling off:

  • VIX – CBOE Volatility Index: Experienced investors know what is often referred to as “The Fear Index” quite well, but many others may have heard about it for the first time in recent days since it has been extremely quiet for nearly a year. Anyone trading the VIX, or ETFs like VXX, SVYX, which is the inverse of the VIX, has been on a wild ride since last week, and betting against volatility has been a crowded and painful experience of late.
  • Circuit Breaker: Kind of like the breaker box in your basement, except this one can shut off the juice at the major securities exchanges. As the DJIA was free-falling into its biggest daily point decline ever, investors were waiting to see if the exchange was going to flip the switch and halt trading to let humans catch up with the computer-driven sell orders. That didn’t happen today, but many people thought it might.
  • Bond Yield: Don’t blame the rising long-term bond yields for the sell-off, although many people might. They’ve arguably been artificially low since the financial crisis, but the Fed’s steady increases in the overnight lending rate and whispers of inflation are pushing the 10-year bond yield higher. It’s finally providing investors a reasonable alternative to stocks. Readers were trying to understand this dynamic and came to us for answers.
  • Correction: We are not there yet, but we’ll see what the rest of this week brings. A 10% decline from a security or index’s high represents a correction, which is halfway to a crash. Corrections are fairly common, albeit not lately. They present good opportunities to re-position and potentially reload. Crashes are not nearly as gentle.
  • Short Selling: The bearish bet on future declines has been parading around in full fur lately. It’s a very risky maneuver for those new to the markets, but highly tempting given the potential payoffs. We recommend you study up before going short, and that’s likely what our visitors to this term were doing.

We write a lot of articles and FAQs as well, and those give an even more nuanced look at our readers’ curiosity. Here are five of the most popular articles on our site from Monday:

As they used to say on Wall Street, the market rises like a staircase and falls like an elevator. Extreme sell-offs can be rattling, especially when it’s hard to find a distinct catalyst for them. There have been many that had the potential to do so over the past year and throughout this long bull market, but nothing or nobody can take exclusive credit for this one. We are not here to make predictions about what might happen and when. You don’t come to us for that, thankfully. You and millions of others come to our site to try to demystify the financial and investing world in good times and bad. We do our best to give you what you need and more, and that’s our great honor and responsibility. No matter what happens Tuesday or for the next 10,000 Tuesdays, we’ll be here for you.

Caleb Silver – Editor in Chief

Published at Tue, 06 Feb 2018 09:17:00 +0000

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Tuesday: Trade Deficit, Job Openings

Tuesday: Trade Deficit, Job Openings

by Bill McBride on 2/05/2018 07:14:00 PM

From Matthew Graham at Mortgage News Daily: Mortgage Rates Catch a Break After Stock Market Rout

Mortgage rates caught a break today, moving back near last Thursday’s levels as bonds (which underlie rates) benefited from today’s extreme market volatility. …

Unfortunately, the scope of the improvement in rates was nowhere near that of the stock market rout. The average lender is back in line with last Thursday afternoon in terms of today’s mortgage rate quotes. Last Thursday afternoon–at the time–was still the worst day in several years. [30YR FIXED – 4.375-4.5%] emphasis added

• At 8:30 AM ET, Trade Balance report for December from the Census Bureau. The consensus is for the U.S. trade deficit to be at $51.9 billion in December from $50.5 billion in November.

• At 10:00 AM, Job Openings and Labor Turnover Survey for December from the BLS. Jobs openings decreased in November to 5.879 million from 5.925 in October. The number of job openings were up 4.4% year-over-year, and Quits were up 3.1% year-over-year.

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Wall Street plunges, S&P 500 erases 2018’s gains

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., November 22, 2016. REUTERS/Brendan McDermid

Wall Street plunges, S&P 500 erases 2018’s gains

(Reuters) – U.S. stocks plunged in highly volatile trading on Monday, with both the S&P 500 and Dow Industrials indices slumping more than 4.0 percent, as the Dow notched its biggest intraday decline in history with a nearly 1,600-point drop and Wall Street erased its gains for the year.

The declines for the benchmark S&P 500 index and the Dow Jones Industrial Average were the biggest single-day percentage drops since August 2011, a period of stock-market volatility marked by the downgrade of the United States’ credit rating and the euro zone debt crisis.

The question now for investors, who have ridden a nearly nine-year bull run, is whether this is the long-awaited pullback that paves the way for stocks to again keep rising after finding some value, or the start of a decline that leads to a bear market.

”A lot of people who have been in this market for the past three or four years have never seen this before,” said Dennis Dick, a proprietary trader at Bright Trading LLC in Las Vegas. “The psychology of the market changed today. It’ll take a while to get that psychology back.”

After regular trading hours on Monday, S&P 500 E-mini stock futures rose 0.73 percent, suggesting some traders expect Wall Street to open with a gain on Tuesday.

Bulls argue that strong U.S. corporate earnings, including a boost from the Trump administration’s tax cuts, will ultimately support market valuations. Bears, including short sellers that bet on the market decline, say that the market is over-stretched in the context of rising bond yields as central banks withdraw their easy money policies of recent years.

The U.S. stock market has climbed to record peaks since President Donald Trump’s election, on the prospect of tax cuts, corporate deregulation and infrastructure spending, and it remains up 23.8 percent since his victory. Trump has frequently taken credit for the rise of the stock market during his presidency, though the rally and economic recovery was well underway during the Obama administration.

As the stock market fell on Monday, the White House said the fundamentals of the U.S. economy are strong. U.S. economic growth was running at a 2.6 annualized rate in the fourth quarter last year and the unemployment rate is at a 17-year low of 4.1 percent.

On Monday, the financial, healthcare and industrial sectors fell the most, but declines were spread broadly as all major 11 S&P sectors dropped at least 1.7 percent. All 30 of the blue-chip Dow industrial components finished negative.

With Monday’s declines, the S&P 500 erased its gains for 2018 and is now down 0.9 percent in 2018. The Dow is down 1.5 percent for the year.

The market’s pullback comes amid concerns about rising bond yields and higher inflation which were reinforced by Friday’s January U.S. jobs report that prompted worries the Federal Reserve will raise rates at a faster pace than expected this year.

“The market has had an incredible run,” said Michael O’Rourke, chief market strategist At JonesTrading In Greenwich, Connecticut.

“We have an environment where interest rates are rising. We have a stronger economy so the Fed should continue to tighten … You’re seeing real changes occur and different investments are adjusting to that,” O‘Rourke said.

The Dow Jones Industrial Average fell 1,175.21 points, or 4.6 percent, to 24,345.75, the S&P 500 lost 113.19 points, or 4.10 percent, to 2,648.94 and the Nasdaq Composite dropped 273.42 points, or 3.78 percent, to 6,967.53.

On Monday, the S&P 500 ended 7.8 percent down from its record high on Jan. 26, with the Dow down 8.5 percent over that time. The declines come after the Dow and S&P posted their biggest weekly percentage drops since January 2016 last week, and the Nasdaq posted its biggest weekly drop since February 2016.

At one point, the Dow fell 6.3 percent or 1,597 points, the biggest one-day points loss ever. Even with the sharp declines, stocks finished above their lows touched during the session.

“It doesn’t look like people are working their orders – the programs are trading this,” Dan Ryan, who works on the New York Stock Exchange floor for E&J Securities, said as he was leaving work for the day.

Investors also unloaded riskier corporate bonds during the Wall Street stock market rout. Exchange-traded funds that focus on junk bonds suffered a third day of losses. BlackRock’s iShares iBoxx High Yield Corporate Bond ETF, which has about $16 billion in assets, fell 0.6 percent to its lowest share price since December 2016.

The CBOE Volatility index, the closely followed measure of expected near-term stock market volatility, jumped 20 points to 30.71, its highest level since August 2015.

“One thing is that going into the last week or so, investor bullishness was in the top decile of its historical range, which suggests that investors were pretty optimistic, with high expectations and largely complacent,“ said Jack Ablin, chief investment officer with Cresset Wealth Advisors in Chicago. ”There’s kind of an emotional reversal that’s going on.”

About 11.5 billion shares changed hands in U.S. exchanges on Monday, well above the 7.6 billion daily average over the last 20 sessions.

Declining issues outnumbered advancing ones on the NYSE by a 8.64-to-1 ratio; on Nasdaq, a 6.92-to-1 ratio favored decliners.

The S&P 500 posted 1 new 52-week highs and 38 new lows; the Nasdaq Composite recorded 17 new highs and 164 new lows.

Additional reporting by Michael Erman, Richard Leong, Kate Duguid, Megan Davies, Sinead Carew, Caroline Valetkevitch, and Chuck Mikolajczak in New York, Noel Randewich in San Francisco and Tanya Agrawal in Bengaluru; Editing by Arun Koyyur, Nick Zieminski and Clive McKeef

Published at Tue, 06 Feb 2018 00:06:22 +0000

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Strong Crude Oil No Help for Chevron, Exxon Mobil

Strong Crude Oil No Help for Chevron, Exxon Mobil

By Richard Suttmeier | February 5, 2018 — 11:29 AM EST

Nymex crude oil ended last week at $65.45 per barrel, up 8.9% year to date, outperforming the gain of 3.2% for the Dow Jones Industrial Average. Chevron Corporation (CVX) and Exxon Mobil Corporation (XOM) are two “Dogs of the Dow” for 2018, and they ended last week with Chevron shares down 5.3% and Exxon Mobil shares up just 1.1% year to date.

Chevron and Exxon Mobil both reported quarterly earnings on Friday, and both companies missed analysts’ expectations. As “Dogs of the Dow,” what’s more important than earnings is the strategy to buy weakness on brand-name dividend stocks. Chevron has a dividend yield of 3.78%, and Exxon Mobil has a dividend yield of 3.71%, which make these stocks too cheap to ignore based on dividends. However, the oil giants are not cheap looking at their P/E ratios. Chevron’s P/E is 34.52, and Exxon Mobil’s is 27.60. The P/E for the Dow 30 is 26.85. (See also: How the Oil and Gas Industry Works.)

The Weekly Chart for Crude Oil

Weekly technical chart showing the performance of crude oilCourtesy of MetaStock Xenith

The weekly chart for crude oil is positive but overbought, with oil above its five-week modified moving average of $62.67. Oil is also above its 200-week simple moving average at $56.28 and has been above this “reversion to the mean” since the week of Dec. 29, when the average was $57.34. The 12 x 3 x 3 weekly slow stochastic reading ended last week at 91.97, above the overbought threshold of 80.00 and above 90.00 as an “inflating parabolic bubble.”

Given this chart and analysis, my strategy is to buy oil on weakness to my monthly value level of $61.69 and to reduce holdings on strength to my weekly risky level of $67.60. I show annual and quarterly pivots of $63.81 and $64.53, respectively. (For more, see: How Can I Buy Oil as an Investment?)

The Weekly Chart for Chevron

Weekly technical chart showing the performance of Chevron Corporation (CVX) stockCourtesy of MetaStock Xenith

The weekly chart for Chevron is negative, with the stock below its five-week modified moving average of $123.50 and above its 200-week simple moving average of $106.95, which is the “reversion to the mean,” last tested during the week of Aug. 25, when the average was $107.13. The 12 x 3 x 3 weekly slow stochastic reading is projected to slide to 68.49 this week, falling below the overbought threshold of 80.00.

Given this chart and analysis, I recommend buying Chevron shares on weakness to my semiannual value level of $98.73 and reducing holdings on strength to my monthly risky level of $129.72. (See also: Chevron Shares Continue Slump After Poor Earnings.)

The weekly chart for Exxon Mobil

Weekly technical chart showing the performance of Exxon Mobil Corporation (XOM) stockCourtesy of MetaStock Xenith

The weekly chart for Exxon Mobil is projected to be negative at the end of this week if the stock closes the week below its five-week modified moving average of $84.90 and below its 200-week simple moving average of $86.35, which is the “reversion to the mean.” The 12 x 3 x 3 weekly slow stochastic reading is projected to end this week at 76.40, falling below the overbought threshold of 80.00.

Given this chart and analysis, my strategy is to buy Exxon Mobil shares on weakness to my semiannual value level of $73.53 and to reduce holdings on strength to my quarterly and annual risky levels of $92.47 and $103.71, respectively. My monthly pivot is $84.82. (For additional reading, check out: Exxon, Chevron Shares Plunge After Weak Results Spook Street.)

Published at Mon, 05 Feb 2018 16:29:00 +0000

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Markets are off to an ugly start this week

The Dow had its worst week in two years. Why?
The Dow had its worst week in two years. Why?

Markets are off to an ugly start this week


Global stock markets have picked up where Wall Street left off, plunging into negative territory.

Major indexes in Asia and Europe were in the red on Monday. The losses follow the 2.5% drop in the Dow on Friday, its biggest percentage decline since the Brexit turmoil in June 2016.

“Panic sentiment is spreading globally,” said Margaret Yang Yan, an analyst at CMC Markets in Singapore.

The sell-off hit Japanese stocks hard: the Nikkei fell 2.6%.

Other major markets in retreat included Hong Kong’s Hang Seng index, which sank 1.1%. European markets, which posted significant losses on Friday, were off by over 1% in early trading.

U.S. stock futures were also pointing lower, with the Dow expected to open down about 0.6%.

Wall Street’s plunge Friday came after U.S. jobs data showed wage growth is finally beginning to strengthen. That’s a sign of a health American economy, but investors freaked out because it suggests inflation, which has stayed puzzlingly low for a long time, may be starting to pick up.

Higher inflation brings a host of worries for markets because it means the Fed could raise interest rates faster than previously expected. That could dent corporate profits and cause chaos in bond markets.

Former Fed Chairman Alan Greenspan said last week that both stocks and bonds were in a “bubble.”

But experts point out that the latest declines are still modest compared with the hefty gains of recent months. Many stock markets around the world have been trading near record highs.

Traders are now wondering if “last week’s reversal in U.S. stocks and the ugly close Friday … is likely the start of something bigger,” said Greg McKenna, chief market strategist at currency trading platform AxiTrader.

He noted that some assets that investors typically turn to during periods of market panic — such as gold and the Japanese yen — haven’t seen big gains so far.

“Markets haven’t really kicked off yet,” McKenna said. “Not in the way they might.”

— Charles Riley contributed reporting.

Published at Mon, 05 Feb 2018 06:55:10 +0000

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Dow slump extends into its second day

Analysis: Yes, President Trump gets credit for the economy
Analysis: Yes, President Trump gets credit for the economy

Dow slump extends into its second day


Dow futures fell 175 points early Tuesday, continuing a rare stock market slump.

Jeff Bezos, Warren Buffett and Jamie Dimon’s plan to get into the health insurance business sent health care companies tumbling. UnitedHealth(UNH) dropped 7%, CVS(CVS) was off 6%, and Walgreens(WBA) shed 3%.

The Wall Street Journal also reported that Apple will make 20 million fewer iPhone X’s this coming quarter than it had originally planned. The iPhone X, Apple’s newest and most expensive phone, hit stores in November. Apple will give investors an update on sales Thursday during its year-end earnings report.

Apple(AAPL) dropped 1% early Tuesday.

The market selloff so far is just minor turbulence in a relentless market climb. The Dow fell 177 points Monday, its worst day since September.

But the Dow is up 8,000 points since President Trump’s election. A growing global economy, strong corporate earnings and a wave of consumer confidence are pushing stocks higher. Congress’ tax cuts and Trump’s deregulation agenda have investors and CEOs feeling optimistic.

There are still warning signs that the market could be entering a long-overdue correction. The VIX(VIX), Wall Street’s fear gauge, hit its highest level since August on Monday.

The bond market is unnerving stock investors. On Monday, the 10-year Treasury yield climbed above 2.7% to the highest level in nearly four years. Yields move in the opposite direction of price.

While bond rates remain historically low, a rapid rise above 3% could spook Wall Street.

If trouble comes to the market, many analysts think it will start in bonds. If investors sell bonds, their interest rates will rise sharply from their current historic lows. And when investors can get better returns from bonds, risky stocks start to look less attractive.

The Federal Reserve’s planned interest rate hikes are also at play.

“We have become an asset price dependent economy and one addicted to artificially low rates,” Bleakley Advisory Group’s Peter Boockvar wrote in a note Tuesday.

Published at Tue, 30 Jan 2018 13:57:20 +0000

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VIX Hits 5-month High As Bonds, Stocks Wobble

VIX Hits 5-month High As Bonds, Stocks Wobble

By Aaron Hankin | January 30, 2018 — 9:23 AM EST

The volatility index (VIX) hit a 5-month high Tuesday trading above 14 for the first time since August 2017, as global equities and bond markets continued their rocky start to the week.

After finishing at record highs Friday, all three major U.S. indices fell more than 0.5% Monday, and have extended losses in pre-market trading Tuesday, with the Dow Jones Industrial Average (DJIA) leading the sell-off, down over 200 points at the time of writing. For bondholders, the slide began January 9, when the benchmark 10-year Treasury yield traded through 2.5% for the first time since March 2017 and has since added 20 basis points to trade above 2.7% for the first time in nearly four years (bond prices move inversely with yields).

The spike in volatility comes as investors are getting set for a busy week on the economic calendar headlined by Wednesday’s Federal Reserve meeting, where officials are set to leave the fed funds rate unchanged, but with the bond market sell-off gaining pace, pundits will be eyeing forward guidance from the committee.

Stacked either side of the Fed meeting is President Donald Trump’s State of The Union speech, manufacturing and confidence data, and Fridays’s all-important nonfarm payrolls report.

The Investopedia Anxiety Index (IAI) that is typically in line with the movement in the VIX, also currently reveals high levels of investor apprehension with an ‘extreme anxiety’ reading on the market indicators. The IAI is constructed by analyzing which topics generate the most reader interest at a given time and comparing that with actual events in the financial markets. It breaks down investor anxiety into three distinct categories – 1) macroeconomic; 2) market; and 3) debit and credit.

The pickup in volatility has flown through to other markets with most major cryptocurrencies beginning the week on the back foot. Bitcoin prices are back below $11,000, down over 8% since Monday’s open, and have lost close of half their value since December’s spike above $19,000. While Ethereum has moved back below $1,150. (See also: Fraudulent Trading Drove Bitcoin’s $150-to-$1000 Rise in 2013: Paper)

For safe haven investors the news is a little brighter with Gold prices continuing to climb, trading back above $1,350 an ounce, up more than $50 since the beginning of 2018, while oil prices continue to surge, making a three-year high Monday, trading above $65 a barrel. (See also: The Bond Market is Trying to Warn Us of Trouble)

Published at Tue, 30 Jan 2018 14:23:00 +0000

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Current Position of the Market – Jan 29, 2018

Current Position of the Market – Jan 29, 2018

By: Andre Gratian | Mon, Jan 29, 2018

January 29, 2017 – Current Position of the Market

SPX: Long-term trend – The bull market is continuing with a top expected in the low 3000s.

Intermediate trend –  A new surge  of buying has moved ahead the forecast for an intermediate term top.

Analysis of the short-term trend is done on a daily basis with the help of hourly charts. It is an important adjunct to the analysis of daily and weekly charts which discusses the course of longer market trends

Still Strong!

Market Overview

I have seriously underestimated the extent of the uptrend which started with the low of the 7-year cycle at 1810.  I was looking for a phase count to take us to a 2660 top, but that turned out to be a short-term stop with SPX only pausing briefly at the end of 2017 and, re-invigorated by the tax bill, it shot up another 200 points in less than a month.  An eventual move to the low 3000s had been anticipated and posted under “Long-term trend”, (above), but I did not expect it to be approximated this quickly.  In spite of its near exponential trajectory, SPX appears to be building the normal staircase pattern to its next significant projection target.  This means that driven by minor cycles, the index forms a re-accumulation pattern which gives us a good idea of what level will be reached at the next minor cycle high, and this process is repeated until it nears the next important price projection, begins to break uptrend lines and eventually reverses its trend.

Currently, we are coming to the end of such a process.  Last Wednesday, SPX started to build a new base after the minor cycle made its low, and it rapidly formed an impressive re-accumulation pattern which ended late Thursday with the start of a new short-term uptrend that has quickly reached the vicinity of the new price target (given in Thursday’s Market Summary).  Friday’s close fell a little shy of the stated projection but it is expected to be filled on Monday Morning.  A minor reversal should then take us to the next cycle low ideally due on Tuesday.  This is expected to be a very short correction following the partial completion of the total base count.  The next upside target will be included in Monday morning’s update.

Chart Analysis  (These charts and subsequent ones courtesy of QCharts)

SPX daily chart

About two months ago, expecting SPX to top at about 2700, I mentioned that we would have a confirmed reversal when trend line #1 was broken.  At the end of December, the trend line was tested, held, and instead of giving a sell signal, the index started an accelerated rally away from the trend line.  This has brought the price above several top channel lines which should have contained prices – and there are higher projections directly ahead!  It’s clear that SPX has a definite objective in mind for this intermediate top .  After doing a thorough review of the 1810 base on the long-term P&F chart, I have a better idea of what it should be.  Only minor cycles lie ahead for the immediate future, and SPX is taking advantage of this favorable cyclic condition to reach its objective before a more important cycle threatens to reverse it course.

If you look at the chart below, you will see that a new trend line has formed which is much steeper than trend line #1.  This is obviously the one on which we must focus for an indication that we are near the top.  But a break of this trend line will probably not yet signal the beginning of the expected intermediate correction.  After it is broken, another will form at a less steep angle, and this process may have to be repeated once or twice more before we are in a position to break trend line #1 and to – finally –  start an intermediate downtrend.

One thing that I have found misleading has been the behavior of the breadth index.  I have never seen it show such a lack of support for prices for this length of time!  If you look at the lowest oscillator, you will understand why I say this.  It has been showing relative weakness to the price chart for a long period of time; once again proving the old adage that “Price is King”!

(Click to enlarge)

SPX hourly chart: 

I have often mentioned some of the advantages of the P&F charts over bar charts.  Here we have a good  example of this!  I have highlighted in green two consolidation patterns.  The one on the left  took two weeks to form.  The one on the right, a day and a half.  And yet, when converted into P&F charts, they are almost equal in length; which means that they have nearly the same projection count.  One could not realize this simply by looking at the bar chart.  We will compare the length of the two uptrends next week after the one on the right has been fully extended.

On the hourly chart, we can see that the newly formed, steeper trendline has five contact points, making it a very valid trend line, and warning us to pay attention when it is broken.  It also has five touch points on its top channel line; plus one which went above it about half way through the trend.  This gives us some good parameters to follow for each short-term move.  The one currently underway is close to the preferred top channel line.  If we did not know that the next minor cycle low is due on Tuesday and that the move has almost reached its initial target, we could still expect some resistance to occur slightly above Friday’s close which has the potential of turning the price back down.

On Thursday, the CCI dipped slightly into the red, but since it reversed immediately and had a good thrust into the green instead of giving a sell signal, it told us that the correction ended.  The bottom indicator (A-D plot) shows that the pattern of selling into first hour strength (which has been taking place for over a month) continues.  I thought that it was an indication that large holders were selling into the opening strength in expectation of having reached the proximity of an important top, but the market action has nullified this hypothesis.

(Click to enlarge)

An overview of some important indexes (daily charts)

Last week, Apple was out of sync with the rest of the FAANGs, but until they all stop making new highs and show a propensity for correcting, it‘s likely that we are not yet ready for a significant market correction.

There was a little more uniformity in the lower tier with all four indexes failing to make new highs, but with the market expected to push higher next week, this may be only a head fake.

(Click to enlarge)

UUP (dollar ETF)

Last week, UUP was buffeted by comments from the treasury secretary — who prefers a weak dollar — and the president — who now likes a strong dollar.  The net result was that the dollar ended significantly lower probably on its way to eventually re-test the 2011 low 

(Click to enlarge)

GDX (Gold miners ETF) 

With the dollar taking a plunge, GDX made a new high but obediently stopped at a former resistance level.  With its 6-wk cycle low due in just a few more days, it is likely that the current pull-back will continue until then. 

(Click to enlarge)

USO (United States Oil Fund)

USO is most likely ready for a minor pull-back, after which it should push at least to 14.50-15 before undertaking a more protracted consolidation.  Longer-term, 18-21 is not unconceivable and probably likely.

(Click to enlarge)


A new pattern of re-accumulation has formed which projects higher prices over the near-term.

Andre Gratian

Andre Gratian

The above comments about the financial markets are based purely on what I
consider to be sound technical analysis principles uncompromised by fundamental
considerations. They represent my own opinion and are not meant to be construed
as trading or investment advice, but are offered as an analytical point of
view which might be of interest to those who follow stock market cycles and
technical analysis.

I encourage your questions and comments. Please contact me at:

Copyright © 2004-2017 Andre Gratian

All Images, XHTML Renderings, and Source Code Copyright ©

Published at Mon, 29 Jan 2018 16:19:22 +0000

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America First and the Decapitation of King Dollar

America First and the Decapitation of King Dollar

By: Doug Noland | Sat, Jan 27, 2018

The U.S. ran a $71.6 billion Goods Trade Deficit in December, the largest goods deficit since July 2008’s $76.88 billion. The U.S. likely accumulated a near $550 billion Current Account Deficit in 2017, also near the biggest since before the crisis. Going all the way back to 1982, the U.S. has posted only two quarterly surpluses (Q1, Q2 1991) in the Current Account. Since 1990, the U.S has run cumulative Current Account Deficits of $10.177 TN. From the Fed’s Z.1 report, Rest of World holdings of U.S. financial asset began the nineties at $1.738 TN; closed out 2008 at $13.699 TN; and ended Q3 2017 at $26.347 TN. It’s gone rather parabolic – with a curiously similar trajectory to equities markets.

For better than three decades, the U.S. has been in an enviable position of trading new financial claims for foreign manufactured goods. The U.S. has literally flooded the world with dollar balances. In the process, the U.S. exported Credit Bubble Dynamics (including financial innovation and central bank doctrine) to the world. When the central bank to the world’s reserve currency actively inflates, the entire world is welcome to inflate. The resulting global monetary disorder ensured a world of fundamentally vulnerable currencies.

Despite unrelenting Current Account Deficits, there have been two distinct “king dollar” episodes. There was the “king dollar” period of the late-nineties, fueled by global financial instability, a U.S. edge in technology and, importantly, the Greenspan Fed’s competitive advantage in sustaining U.S. securities markets inflation. More recently, a resurgent “king dollar” was winning by default in 2013-2016, as the ECB, BOJ and others implemented massive “whatever it takes” QE and rate programs. Moreover, the shale revolution and a dramatic reduction in oil imports was to improve the U.S. trade position. Oil imports did shrink dramatically, but this was easily offset by American consumers’ insatiable appetite for imported goods.

It’s an intriguing case of parallel analytical universes. There’s the bullish – U.S. as the world’s invincible superpower – view. America is blessed with superior systems – economic, governmental, market and technological. The world’s best and brightest still yearn to come to the land of opportunity. And with a few notable exceptions, this view has received almost constant affirmation from booming equities, debt securities and asset markets. Robust bond markets, in particular, ensured insatiable international demand for dollars. Surely, concern for U.S. Trade and Current Account Deficits is archaic, at best.

The opposing view holds that the U.S. financial situation is unsound and untenable. A deindustrialized “services” and finance-based economy is dependent upon unending Credit expansion, with the vast majority of new Credit non-productive in nature. The U.S. boom is again financed by unsound leveraging, this time generated chiefly by global central banks and foreign-sourced speculative finance. The perpetual outflow of U.S. currency balances internationally ensures at some point a crisis of confidence in the dollar. What’s more, extreme monetary inflation by the other major central banks since 2012 only increases the likelihood of a more systemic crisis of confidence throughout global markets and currencies. The resulting unprecedented looseness in global monetary conditions over recent years has promoted a degree and scope of excess sufficient for a deep and prolonged global crisis.

It’s been my long-hold expectation that the world at some point would discipline U.S. profligacy. The world instead followed in our footsteps. Global central banks accommodated unfettered finance, adopted inflationism and, without protest, recycled trade surpluses right back into U.S. financial markets.

There was Greenspan’s “conundrum” and Bernanke’s “global savings glut.” The reality is that U.S. trade deficits have been at the heart of a runaway expansion of market-based finance around the world. This dysfunctional and precarious financial backdrop was interrupted temporarily in 2008. Zero/negative rates along with $14 TN (and counting) of central bank liquidity fueled a much more systemic Bubble of unprecedented dimensions. Importantly, central bankers came together to support a common goal: reflation of markets and economies. Concerted policymaking – from Washington to Ottawa, London, Frankfurt, Zurich, Tokyo, Sydney, Beijing and beyond – has been fundamental to the synchronized global surge in risk-taking, over-liquefied market Bubbles and economic recovery.

January 24 – New York Times (Jack Ewing): “Mario Draghi… directed unusually sharp criticism at Steven Mnuchin, the United States Treasury secretary…, effectively accusing Mr. Mnuchin of violating agreements among nations against starting currency wars. Mr. Draghi… said he objected to ‘the use of language in discussing exchange rate developments that doesn’t reflect the terms of reference that have been agreed.’ He then quoted from an agreement reached in Washington in October under which countries promised to ‘refrain from competitive devaluations.’ …Mr. Draghi portrayed Mr. Mnuchin’s comments as part of a broader deterioration in international etiquette. At a meeting of the central bank’s Governing Council that preceded the news conference, Mr. Draghi said, ‘Several members expressed concern and this concern was broader than simply the exchange rate. It was about the overall status of international relations right now.'”

January 25 – Reuters (Doina Chiacu): “U.S. President Donald Trump said on Thursday he ultimately wants the dollar to be strong, contradicting comments made by Treasury Secretary Steven Mnuchin one day earlier. ‘The dollar is going to get stronger and stronger and ultimately I want to see a strong dollar,’ Trump said…, adding that Mnuchin’s comments had been misinterpreted.”

January 25 – CNBC (Sam Meredith): “Treasury Secretary Steven Mnuchin said Thursday he spends little time thinking about dollar weakness over the short term, walking back his comments that sent the U.S. currency reeling amid fears of a trade war. Speaking during a CNBC-moderated panel at the World Economic Forum in Davos, Mnuchin said dollar weakness in the short term was ‘not a concern of mine,’ before adding: ‘In the longer term, we fundamentally believe in the strength of the dollar.'”

After the dramatic cut in corporate tax rates and myriad measures seen as benefiting the wealthy, some argue that Trump populism is a ruse. But now we see a 2018 push on tariffs, aggressive trade negotiation, U.S. capital investment and higher wages meant to rebuild our manufacturing base to the benefit of the American worker. Rather than the rich continuing to build wealth at the expense of the lowly worker, they can now grow wealth together. Is such a radical change even possible? Where are the losers?

January 24 – CNBC (Matt Clinch): “Treasury Secretary Steven Mnuchin said the U.S. is open for business and welcomed a weaker dollar, saying that it would benefit the country. Speaking at a press conference at the World Economic Forum…, he made a bid for investment into the U.S., saying the government was committed to growth of 3% or higher. ‘Obviously a weaker dollar is good for us as it relates to trade and opportunities,’ Mnuchin told reporters…, adding that the currency’s short term value is ‘not a concern of ours at all.’ ‘Longer term, the strength of the dollar is a reflection of the strength of the U.S. economy and the fact that it is and will continue to be the primary currency in terms of the reserve currency,’ he said.”

Surprisingly candid comments from our Treasury Secretary. And as much as he, the President and other administration officials work to “walk back” Wednesday’s comment, “obviously a weaker dollar is good for us” confirms what many had suspected. “America First” has a “beggar-thy-neighbor” currency devaluation component. A revitalized U.S. manufacturing sector will come at the expense of our trade partners and the holders of our debt.

I’ve posited in past CBBs that it would have been easier to implement the Trump agenda in a crisis backdrop. This requires revision: it would have been less risky to implement… Huge tax cuts at this late stage in the Bubble come with unexpected consequences, including those associated with stoking acutely speculative risk markets. There are major risks in feeding an investment boom now, following years of extraordinarily loose financial conditions and today’s 4.1% unemployment rate. It’s reckless running huge fiscal deficits at this late stage of a boom cycle – with federal debt having already inflated from $6.074 TN to $16.463 TN in less than ten years. And, this week, openly lauding the benefits of a weaker dollar with foreign holdings of U.S. debt securities at $11.370 TN (up 57% since the crisis!).

Mario Draghi’s rebuke was as swift as it was stern. The ECB’s Maestro well-appreciates that Mnuchin and the Trump folks are playing with fire. Global central bankers in concert have cultivated the perception that everything is well under control. No need to fret market liquidity, at least not in equities and bond markets. Currencies, well, that’s a whole different animal.

There are few matters that keep central bankers awake at night like the prospect of dislocation in the currency markets. These are massive markets, generally well-behaved but not easily controlled when they’re not. Disorderly selling of the dollar – with all the leveraged currency trades and unfathomable derivative exposures that have accumulated for decades and mushroomed since the crisis – now that’s lush habitat for the proverbial black swan.

The Dow gained another 545 points this week, bring 2018 gains (17 sessions) to 1,897 points. The S&P500 jumped 2.2%, as the dollar index declined 1.7%. Clearly, U.S. and global risk markets are fine with dollar devaluation. Heck, they’re delighted with the notion of concerted global currency devaluation. The sickly dollar will only pressure the ECB, BOJ and others to stay looser for even longer. What country these days feels comfortable with a strong currency? What could go wrong?

Does dollar weakness and attendant securities market froth pressure the Fed to pick up the pace of rate increases? Heaven forbid, might they actually come to the realization that they need to actually tighten monetary conditions. Beyond stock market Bubbles, the weakening dollar bolsters the case for an uptick in inflationary pressures. WTI crude is up a quick 9.5% y-t-d to $66.14. The GSCI commodities index has gained 4.7% in the first four weeks of the year. Heightened dollar vulnerability might also engender a consensus view within the global central bank community supportive of tighter U.S. monetary policy.

“Beggar-thy-neighbor” – not desperate depression-era measures, but amid economic/financial boom and record stock prices. Uncharted territory. Trapped in concerted reflationary monetary policymaking, global central bankers may be tempted to disregard ramifications of “America First.” This will unlikely be the case with foreign governments. And when do anxious governments begin to pressure their central banks against accommodating Team Trump ambitions? Beijing has already reminded the world of their prerogative to liquidate China’s Treasury hoard. Global markets remain confident that central banks have no option other than recycling dollars back into U.S. securities markets. Perhaps this is too complacent.

Crisis-period QE and zero rates evolved over years into “whatever it takes” open-ended QE, negative rates and egregious market manipulation. Global central bankers took control – and today have things fully under control. This market perception has been instrumental in the historic collapse in market volatility. Resulting readily available cheap market risk protection has incentivized historic risk-taking and today’s speculative melt-up market dynamic.

Historians may look back at Team Trump’s jaunt to chilly Davos as a pivotal juncture in global finance. Was it naivety, gall or a combination – or just typical of today’s overabundance of complacency? The U.S. Treasury Secretary – facing enormous fiscal deficits, rising rates, $16.5 TN of federal debt, a nervous bond market and suspicious foreign officials – openly advocating a weaker dollar.

There are certainly plenty of dollars in the world available to sell or hedge. What is the likelihood of dollar selling turning disorderly? One might look at several years of incredible ECB and BOJ “whatever it takes” liquidity creation and rate suppression (and interest-rate differentials you could drive a truck through) and ponder Friday’s closing prices of 1.24 for the euro and 108.58 for the dollar/yen. Those are two flashing warning signs of dollar vulnerability.

In all the euphoria, markets can be excused for presuming dollar weakness ensures a further delay in global rate normalization. Yet things turn quite interesting the day unruly currency markets begin indicating disorderly trading. The almighty central bankers might have little to offer. What if they intervene to no avail? This could prove the juncture when markets begin questioning the Indomitable Central Banks in Control thesis. The price of market “insurance” would begin to creep (or, not unlikely, spike) higher, and the availability of cheap risk protection would wane (possibly abruptly). In such a development, I would expect the more sophisticated market operators to begin (aggressively) pulling back on risk and leverage. Such a dynamic, especially after such a spectacular melt-up, would mark an important inflection point for market liquidity.

Ten-year Treasury yields were little changed on the week at 2.66%. Yet two-year yields rose five bps to 2.12% and five-year yields rose two bps to 2.47%. Global yields are on the move. German 10-year yields jumped six bps to a 13-month high 0.63%, and French yields gained seven bps to 0.91%. UK yields jumped 11 bps to 1.44%.

The dollar’s worst start to a year since 1987. Wildly speculative stock markets, rising bond yields, Fed rate hikes, dollar weakness and acrimony, and general currency market instability. Today’s backdrop recalls 1987, though with some important differences. The world has so much more debt these days. Global equities markets are so much bigger and interconnected – derivatives markets incredibly so. Did China even have a stock market in ’87?

Today’s central bank balance sheets would be unimaginable back in 1987. Markets certainly had much less faith in central bank liquidity backstops. 1987 had this exciting new financial product, “portfolio insurance.” 2017 has the continuation of this enchanting New Age notion that central banks insure all portfolios. The Great Irony of Contemporary Finance: years of extreme central bank inflationary measures ensured that global finance outgrew the capacity of central bank liquidity backstops.

January 25 – Wall Street Journal (Richard Barely): “Only a select few people can move foreign-exchange markets with a handful of words. U.S. Treasury Secretary Steven Mnuchin and European Central Bank President Mario Draghi are two of them. Thursday they clashed, and the ECB clearly has a fight on its hands. The euro had already been rising against the dollar before Mr. Mnuchin’s comments in Davos Wednesday, that a weak dollar was helpful for trade, sent it even higher. Mr. Mnuchin’s apparent attempt Thursday to play down that comment didn’t reverse the trend. Mr. Draghi’s first-round defense proved insufficient.”

January 21 – Bloomberg: “China’s bad-loan data, which analysts and investors have long regarded to be understated, was thrown into question again after the banking regulator uncovered faked reporting at a local lender. Shanghai Pudong Development Bank Co., the nation’s ninth-largest lender, illegally lent 77.5 billion yuan ($12bn) over many years to 1,493 shell companies to take over bad loans at its Chengdu branch, the China Banking Regulatory Commission said… The branch, which had reported zero bad loans, inflated its earnings and faked other operational data to improve performance and evade compliance, the CBRC found.”

January 21 – Bloomberg: “For years, a branch of a mid-sized Chinese bank outshone rivals by reporting zero bad loans at a time others were struggling with rising soured debt. Financial indicators at Shanghai Pudong Development Bank Co..’s branch in the western Chengdu city were healthy, officials raised no red flags, and Fitch Ratings upgraded the parent last July citing tighter support and supervision by local authorities. Unknown to most, however, regulators had been probing the lender for a fraud that may reverberate across China’s financial industry. ‘It is not just about Pudong Bank,’ analysts at Guangfa Securities Co., led by Ni Jun, wrote… ‘The underlying issue is that the market may conduct a systemic review and re-rating on the bad loan ratios of those highly-leveraged Chinese banks that had gone through a round of balance-sheet expansion.'”

For the Week:

The S&P500 jumped 2.2% (up 7.5% y-t-d), and the Dow rose 2.1% (up 7.7%). The Utilities rallied 2.3% (down 3.4%). The Banks gained 2.0% (up 9.1%), while the Broker/Dealers slipped 0.2% (up 6.3%). The Transports dropped 1.6% (up 4.8%). The S&P 400 Midcaps gained 0.8% (up 5.0%), and the small cap Russell 2000 added 0.7% (up 4.7%). The Nasdaq100 surged 2.8% (up 9.8%). The Semiconductors increased 0.7% (up 10.2%). The Biotechs surged 9.2% (up 16.7%). With bullion up $18, the HUI gold index jumped 3.3% (up 5.7%).

Three-month Treasury bill rates ended the week at 139 bps. Two-year government yield rose five bps to 2.12% (up 23bps y-t-d). Five-year T-note yields gained two bps to 2.47% (up 26bps). Ten-year Treasury yields were unchanged at 2.66% (up 25bps). Long bond yields slipped two bps to 2.91% (up 17bps).

Greek 10-year yields dropped 17 bps to 3.63% (down 44bps y-t-d). Ten-year Portuguese yields declined three bps to 1.95% (unchanged). Italian 10-year yields gained four bps to 2.01% (down 1bp). Spain’s 10-year yields dipped three bps to 1.41% (down 16bps). German bund yields jumped six bps to 0.63% (up 20bps). French yields rose seven bps to 0.91% (up 13bps). The French to German 10-year bond spread widened one to 28 bps. U.K. 10-year gilt yields jumped 11 bps to 1.44% (up 25bps). U.K.’s FTSE equities index declined 0.8% (down 0.3%).

Japan’s Nikkei 225 equities index declined 0.7% (up 3.8% y-o-y). Japanese 10-year “JGB” yields slipped one basis point to 0.078% (up 3bps). France’s CAC40 was little changed (up 4.1%). The German DAX equities index fell 0.7% (up 3.3%). Spain’s IBEX 35 equities index gained 1.1% (up 5.5%). Italy’s FTSE MIB index added 0.5% (up 9.2%). EM markets marched higher. Brazil’s Bovespa index surged 5.3% (up 11.9%), and Mexico’s Bolsa jumped 2.8% (up 3.5%). South Korea’s Kospi index gained 2.2% (up 4.3%). India’s Sensex equities index rose 1.5% (up 5.9%). China’s Shanghai Exchange jumped 2.0% (up 7.6%). Turkey’s Borsa Istanbul National 100 index surged 4.8% (up 4.7%). Russia’s MICEX equities index added 0.4% (up 8.8%).

Junk bond mutual funds saw outflows of $1.131 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates jumped 11 bps to a 10-month high 4.11% (down 4bps y-o-y). Fifteen-year rates surged 13 bps to 3.62% (up 22bps). Five-year hybrid ARM rates gained six bps to 3.52% (up 32bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-yr fixed rates up a basis point to 4.29% (down 2bps).

Federal Reserve Credit last week declined $3.9bn to $4.400 TN. Over the past year, Fed Credit contracted $18.9bn, or 0.4%. Fed Credit inflated $1.590 TN, or 57%, over the past 273 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $3.7bn last week to $3.352 TN. “Custody holdings” were up $181bn y-o-y, or 5.8%.

M2 (narrow) “money” supply jumped $20.9bn last week to $13.842 TN. “Narrow money” expanded $570bn, or 4.3%, over the past year. For the week, Currency increased $3.8bn. Total Checkable Deposits surged $53.2bn, while Savings Deposits fell $34.7bn. Small Time Deposits added $2.8bn. Retail Money Funds declined $3.3bn.

Total money market fund assets increased $8.4bn to $2.824 TN. Money Funds gained $139bn y-o-y, or 5.2%.

Total Commercial Paper rose another $10.0bn to a five-year high $1.29 TN. CP gained $165bn y-o-y, or 17.9%.

Currency Watch:

January 24 – Bloomberg (Cecile Gutscher and John Ainger): “Whether or not the White House choreographed the dollar’s slide to its lowest level in three years, the U.S. administration is certainly providing ammunition for those betting that the greenback will continue to weaken. The U.S. currency is caught in the rhetorical cross hairs after Treasury Secretary Steven Mnuchin laid out the benefits of a weaker dollar for the American economy at Davos on Wednesday. The comments came days after U.S. President Donald Trump stepped up his protectionist push by slapping of tariffs on solar panels and washing machines. Subsequent remarks by Commerce Secretary Wilbur Ross that Mnuchin has not shifted America’s long-standing strong-dollar policy did little to slow the currency’s depreciation.”

The U.S. dollar index sank 1.7% to $89.067 (down 3.3% y-o-y). For the week on the upside, the Swiss franc increased 3.3%, the South African rand 2.8%, the Swedish krona 2.4%, the Norwegian krone 2.3%, the British pound 2.2%, the Japanese yen 2.0%, the euro 1.7%, the Brazilian real 1.5%, the Canadian dollar 1.5%, the Australian dollar 1.4%, the Singapore dollar 1.0%, the New Zealand dollar 1.0%, the Mexican peso 0.8% and the South Korean won 0.2%. The Chinese renminbi increased 1.2% versus the dollar this week (up 2.8% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index jumped 2.9% (up 4.7% y-t-d). Spot Gold gained 1.3% to $1,350 (up 3.6%). Silver rose 2.4% to $17.441 (up 1.7%). Crude surged $2.77 to $66.14 (up 9.5%). Gasoline jumped 4.0% (up 8%), and Natural Gas surged 10.0% (up 19%). Copper increased 0.4% (down 3%). Wheat jumped 4.3% (up 3%). Corn gained 1.1% (up 2%).

Trump Administration Watch:

January 22 – Politico (Rachael Bade): “Washington will be back on the brink in less than three weeks. Lawmakers may have pulled themselves out of a debilitating government shutdown Monday, but the fight over immigration and spending that’s ground virtually all congressional business to a halt is far from over. And the fundamentals of the debate haven’t changed at all. Republican leaders are under increasing pressure from their own members to reach a long-term budget agreement by Feb. 8, when the government next runs out of money. Their defense hawks are desperate to increase defense spending, a key 2018 priority for President Donald Trump. And their members are sick of voting on short-term funding bills that they say cripple the military. But in order to strike any long-term budget accord, at least nine Senate Democrats are needed for passage. And while Democrats’ strategy of shuttering the government until securing relief for Dreamers blew up in their faces Monday, they can still withhold support for a long-term budget deal to get what they want on immigration.”

January 24 – CNBC (Dan Mangan): “The federal deficit could rise by a whopping $154 billion over the next eight years if just five states adopt measures to protect residents from the impact of the recently passed Trump tax law… California and New York alone could spark an increase of more than $110 billion in the deficit if they take such actions, the Bloomberg report… estimated. Those two states and three other Democratic-leaning ones examined in the report are actively considering the moves because the tax legislation passed in December will eliminate billions of dollars in deductions that their residents have been able to claim on federal income tax returns. The actions being eyed include ending state income taxes and having the same amount of revenue collected by the state through employer-paid payroll taxes.”

January 23 – Reuters (Ayesha Rascoe and Nichola Groom): “U.S. President Donald Trump signed into law a steep tariff on imported solar panels on Tuesday, a move billed as a way to protect American jobs but which the solar industry said would lead to thousands of layoffs and raise consumer prices. The 30% tariff on solar panels is among the first unilateral trade restrictions imposed by the administration as part of a broader protectionist agenda to help U.S. manufacturers, but which has alarmed Asian trading partners… The administration also introduced a tariff on imported washing machines. ‘You’re going to have people getting jobs again and we’re going to make our own product again. It’s been a long time,’ Trump said… But the solar industry countered that the move will raise the cost of installing panels, quash billions of dollars of investment, and kill tens of thousands of jobs, raising questions about whether Trump’s move will backfire by triggering mass layoffs.”

January 22 – Wall Street Journal (Jacob M. Schlesinger and Erin Ailworth): “President Donald Trump slapped steep tariffs on imports of solar panels and washing machines, kicking off his second year in office by showing he is ready to start implementing his long-promised ‘America First’ trade policy. The moves were announced… in response to U.S. industry pleas for relief from a recent flood of cheap imports and are the first of what administration officials said would be a series of trade-enforcement actions in the coming months. The tariffs are aimed mainly at Asian manufacturers–Chinese makers of solar panels and South Korean producers of washing machines.”

January 23 – Reuters (Ju-min Park and Stella Qiu): “China and South Korea condemned steep import tariffs on washing machines and solar panels imposed by U.S. President Donald Trump, with Seoul set to complain to the World Trade Organization (WTO) over the ‘excessive’ move. Europe also said on Tuesday it regretted the U.S. decision and would react ‘firmly and proportionately’ if EU exports were hit by the tariffs, which Asia fears could be the start of greater protectionism and stall a revival in global trade.”

January 24 – Bloomberg (Kathleen Hunter and Enda Curran): “Trade wars ‘are fought every single day,’ and the U.S. has been engaged in one ‘for quite a little while,’ Commerce Secretary Wilbur Ross said in comments that diverge from President Donald Trump.”

January 19 – Wall Street Journal (Jacob M. Schlesinger): “President Donald Trump’s ‘America First’ trade policy will be more focused in the coming year on countering China, after a first year tangling with allies ranging from North America to Europe and Asia, a White House economic official said… ‘There’s a lot of consensus around the viewpoint that China does need to be the focal point, because China’s behaviors are causing significant problems for the U.S. economy and for the global trading system,’ said the official… ‘I’m not going to minimize Nafta and Korus,’ the official said, referring to the North American Free Trade Agreement with Canada and Mexico, and the U.S.-South Korea free-trade agreement. Mr. Trump has threatened to end them. ‘I do think everyone realizes that even if Nafta and Korus aren’t working as well as they could, they are only part of the broader concerns we have,’ he added.”

January 22 – Reuters (Ben Blanchard and Michael Martina): “The United States, not China, threatens the global trade system, China’s foreign ministry said…, after U.S. President Donald Trump’s administration called U.S. support for Beijing’s joining the World Trade Organization in 2001 a mistake. WTO rules have proved ineffective in making China embrace a market-oriented trade regime, and the United States ‘erred’ in backing China’s entry to the trade body on such terms, the office of the U.S. Trade Representative said last week.”

January 21 – Reuters (Ben Blanchard): “China’s top newspaper, decrying Washington as a trouble-maker, said on Monday U.S. moves in the South China Sea like last week’s freedom of navigation operation will only cause China to strengthen its deployments in the disputed waterway.”

U.S. Bubble Watch:

January 24 – Reuters (Lucia Mutikani): “U.S. home sales fell more than expected in December as the supply of houses on the market dropped to a record low, pushing up prices and sidelining some potential first-time buyers. The decline in home sales… followed three straight months of strong increases… Existing home sales declined 3.6% to a seasonally adjusted annual rate of 5.57 million units last month… Unseasonably cold weather probably accounted for some of the weakness as sales in the Northeast and Midwest fell sharply… The number of previously owned homes on the market tumbled 11.4% to 1.48 million units in December, the lowest since January 1999 when the Realtors group started tracking the series… Housing inventory was down 10.3% from a year ago. It has declined for 31 straight months on a year-on-year basis. At December’s sales pace, it would take a record-low 3.2 months to exhaust the current inventory…”

January 22 – Reuters (Ben Hirschler, Sudip Kar-Gupta and Michael Erman): “Biotech deal activity exploded on Monday with French drugmaker Sanofi and U.S.-based Celgene spending a combined total of more than $20 billion to add new products for hemophilia and cancer to their medicine cabinets. The acquisitions will fuel expectations for a busy year of mergers and acquisitions (M&A) as large drugmakers snap up promising assets from smaller rivals to help revive growth… The two cash deals were agreed at a prices of $105 and $87 per share respectively. Shares in Bioverativ leaped 63% in early U.S. trading and Juno jumped 27%.”

January 22 – Financial Times (Javier Espinoza): “The investment industry usually operates on a simple piece of logic: money managers pitch to their clients and persuade them to stump up cash. But when CVC Capital Partners, the private equity group best known for the 2005 takeover of Formula One, set out to raise a new fund last year, the investors were the ones begging to gain access… Treated more like celebrities than investment managers, CVC’s star dealmakers were on display for investors wishing to buy into the heavily oversubscribed fund. ‘Every 45 minutes we would swap over,’ says a long-time investor in CVC funds, each time meeting a different executive in the hope that they would let them in their fund. ‘We make sure managers like us and keep us. It’s hard to get [our] money in the door these days.’ …Buyout volumes were up 27% year on year in 2017, according to Thomson Reuters, and are expected to accelerate this year, propelled by a record $1.1tn of cash pledged by investors last year.”

January 24 – Reuters (Richard Leong): “U.S. mortgage application activity climbed to their loftiest level in over four months despite 30-year home borrowing costs rising to their highest levels since March, the Mortgage Bankers Association said…”

January 24 – Bloomberg (Michelle Kaske and Yalixa Rivera): “Puerto Rico said it will have virtually no money to cover debt payments for the next five years as the bankrupt island deals with the crippling blow of Hurricane Maria, which caused tens of thousands of residents to leave and pushed the economy into its deepest contraction in more than a decade. The forecast… shows that the government expects to have a shortfall, before any debt service is paid, of $3.4 billion through 2022. That marks a significant shift from the proposal released before the storm that would have left hundreds of millions of dollars a year to cover its debts.”

January 21 – Financial Times (Alistair Gray): “The big four US retail banks sustained a near 20% jump in losses from credit cards in 2017, raising doubts about the ability of consumers to fuel economic expansion. ‘People are using their cards to get from pay cheque to pay cheque,’ said Charles Peabody, managing director at… Compass Point. ‘There’s an underlying deterioration in the ability of the consumer to keep up with their debt service burden.’ Recently disclosed results showed Citigroup, JPMorgan Chase, Bank of America and Wells Fargo took a combined $12.5bn hit from soured card loans last year, about $2bn more than a year ago.”

January 25 – Bloomberg (Claire Boston): “A growing share of the trade-ins that U.S. auto dealers and lenders accept for car-purchase financing are worthless on paper, a sign that banks and finance companies are making riskier loans to keep up revenue as vehicle sales slow. Almost a third of cars traded in last year were worth less than the loans that had been financing them… That’s up from about a quarter a decade earlier, said Edmunds, which looked at cars traded in as part of financing packages for new auto purchases in the U.S. The growing proportion of underwater trade-ins means that at least some borrowers are getting deeper and deeper in debt with every car they buy…”

January 25 – Bloomberg (Dani Burger): “Here’s one more piece of evidence that something’s amiss in the U.S. stock market: A usually reliable strategy used by quants is suddenly on the fritz. Quantitative investors have long used liquidity signals to strengthen their automated models. Simply put, bets on the least traded stocks should, in theory, outperform the market because there’s a reward for taking on the extra liquidity risk. But since December the opposite has been occurring, with the most liquid stocks rewarding investors to the greatest degree in nine years.”

January 21 – The Atlantic (Uria Friedman): “‘In God We Trust,’ goes the motto of the United States. In God, and apparently little else. Only a third of Americans now trust their government ‘to do what is right’–a decline of 14 percentage points from last year, according to a new report by the communications marketing firm Edelman. 42% trust the media, relative to 47% a year ago. Trust in business and non-governmental organizations… decreased by 10 and nine percentage points… Edelman, which for 18 years has been asking people around the world about their level of trust in various institutions, has never before recorded such steep drops in trust in the United States. ‘This is the first time that a massive drop in trust has not been linked to a pressing economic issue or catastrophe like [Japan’s 2011] Fukushima nuclear disaster,’ Richard Edelman, the head of the firm, noted… ‘In fact, it’s the ultimate irony that it’s happening at a time of prosperity, with the stock market and employment rates in the U.S. at record highs.”

January 22 – Reuters (Anna Irrera): “More than 10% of funds raised through ‘initial coin offerings’ are lost or stolen in hacker attacks, according to new research by Ernst & Young that delves into the risks of investing in cryptocurrency projects online. The professional services firm analyzed more than 372 ICOs, in which new digital currencies are distributed to buyers, and found that roughly $400 million of the total $3.7 billion funds raised to date had been stolen, according to research…”

China Watch:

January 22 – Bloomberg (Keith Bradsher): “China has tried just about everything to tame a property market in which home prices sometimes jump around like the value of Bitcoin. Over the years, in one city or another, it has limited mortgage lending. It has tried to halt purchases of homes by people who already own one. It has plowed billions of dollars into building new homes that regular Chinese people can afford. Now the Chinese government is considering adopting something that, while familiar to homeowners in the United States and elsewhere… a property tax. Living in a place without property taxes may sound appealing, but a growing number of experts and policymakers in China say the absence of one has helped destabilize a vast and crucial part of the Chinese economy. Many investors snap up homes — in China, they are mostly apartments — hoping to ride a price surge. In the biggest cities, property prices on average have at least doubled over the past eight years. But vast numbers of apartments in many cities lie empty, either because the buyers have no intention of moving in or renting out, or because speculators built homes that nobody wants.”

January 23 – Bloomberg: “Strains are spreading in China’s $15 trillion shadow banking industry as investors pull back from the debt-like savings products that helped drive leverage to dangerous levels. Most affected are some $3.8 trillion of so-called trust products, until now the fastest-growing shadow banking segment and a popular way for debt-ridden property developers and local governments to raise funds from millions of ordinary Chinese. In recent weeks, at least two of the products have been forced to delay payments as the market started to freeze up, making it harder to refinance maturing issues with new ones. ‘On the one hand you have cash-strapped borrowers scrambling for refinancing; on the other you have cash-rich investors not knowing where to put their money for fear of getting burned,’ said James Yang, a sales manager at Shanghai Xiangyi Asset Management Co.”

January 23 – Bloomberg (Lianting Tu): “Struggling Chinese conglomerate HNA Group Co. faces rising bond maturities later this year even if it’s able to navigate current difficulties in repaying debt to banks. HNA is under mounting pressure as several banks are said to have frozen some unused credit lines to its units after missed payments. That follows a $40-billion-plus buying spree that saw the conglomerate emerge from obscurity to take large stakes in companies including Deutsche Bank AG and Hilton Worldwide… The bill on maturing offshore and onshore notes for the group and its units will swell to more than 12 billion yuan ($1.88bn) in both the third and fourth quarters, from 1 billion yuan this quarter…”

January 24 – New York Times (Keith Bradsher): “A reclusive and influential senior adviser to President Xi Jinping of China emerged… with a public message that many in the financial world have been eager to hear: The country has a timetable for curbing its vast appetite for debt. Speaking to attendees at the World Economic Forum, the adviser, Liu He, said that the Chinese government planned to bring its debt under control within three years. Mr. Liu said Beijing intended to focus on reining in the growth of debt among local governments and companies. ‘We have full confidence and a clear plan to get the job done,’ he said. Mr. Liu did not offer details of the government’s plans…”

January 21 – Bloomberg (Prudence Ho): “Shares of HNA Group Co. units fell in Shanghai and Shenzhen trading after more of the conglomerate’s subsidiaries halted their stock from trading, pending ‘major’ announcements. Hainan HNA Infrastructure Investment Group Co. fell by the 10% daily limit…, while HNA Innovation Co. slumped more than 9%. HNA Investment Group Co. sank as much as 5.4%. Four HNA units — HNA-Caissa Travel Group Co., Bohai Capital Holding Co., Tianjin Tianhai Investment Co. and flagship Hainan Airlines Holding Co. — suspended their shares from trading this month ahead of unspecified announcements.”

January 24 – Bloomberg: “Just as the U.S. throws up new barriers to cross-border commerce, its largest trading partner China is redoubling its efforts to seal free-trade agreements. From deals with blocs including the Association of Southeast Asian Nations to bilaterals with tiny countries like Maldives, China’s FTAs already cover 21 countries. That compares with the 20 countries covered by U.S. agreements. More than a dozen additional pacts are being negotiated or studied… While President Donald Trump this week imposed tariffs…, underscoring his America first outlook, China is hoping for a ‘bumper year’ for new trade deals, according to the Commerce Ministry.”

Central Bank Watch:

January 25 – Reuters (Balazs Koranyi and Francesco Canepa): “European Central Bank chief Mario Draghi took a swipe at Washington on Thursday for talking down the dollar, a move he said threatened a decades-old pact not to target the currency and might force his bank to change its own policy. Singling out the euro’s surge as a source of uncertainty, Draghi said any unjustified move could force the ECB to rethink its strategy as a strong currency could put a lid on inflation, thwarting its efforts to lift prices.”

January 25 – Bloomberg (Carolynn Look): “Mario Draghi expressed conviction that euro-area inflation will pick up, pushing the euro even higher despite his warning that the exchange rate is a renewed concern. The European Central Bank president said the strengthening economy justifies some currency appreciation, while reviving a warning on volatility that hasn’t been used since September… Improving economic momentum has ‘strengthened further our confidence that inflation will converge to close to but below 2%,” the European Central Bank president told reporters…, adding that domestic price pressures remain muted. ‘Against this background, recent volatility in the exchange rate represents a source of uncertainty which requires monitoring with regard to its possible implications for the medium term outlook of price stability.'”

January 21 – Financial Times (Jim Brunsden, Claire Jones and Arthur Beesley): “Euro area governments will kick off the process on Monday of finding a successor to Vítor Constâncio as vice-president of the European Central Bank with Spain well placed to secure the role for its economy minister Luis de Guindos. The opening of nominations for the new vice-president will be the first move in a complex chess game of ECB appointments with two-thirds of the central bank’s six-member executive board set to depart during the next two years. This includes the bank’s president, Mario Draghi, whose term ends in October 2019. A complex set of political and other considerations will underlie the appointments process — including the unwritten rule that the currency bloc’s biggest countries should always have a seat, and the need for better gender balance at the highest levels of ECB decision-making.”

Global Bubble Watch:

January 22 – Wall Street Journal (Asjylyn Loder): “The first exchange-traded fund was born 25 years ago this week, enabling investors for the first time to buy or sell the S&P 500 index in a single publicly traded share. Over the years since then, ETFs have come to dominate the financial landscape. Today, there are almost 7,200 exchange-traded products world-wide with $4.8 trillion in assets… Growth is accelerating as investors forsake active money managers in favor of passive, index-tracking funds. Last year, U.S. ETFs raked in a record $466 billion, a 61% increase over 2016 inflows…”

January 22 – Bloomberg (Sarah Ponczek and Carolina Wilson): “Mohamed El-Erian, chief economic adviser at Allianz SE, reiterated his concerns about liquidity in exchange-traded funds. In front of an audience filled with financial advisers during a keynote address at the ‘Inside ETFs’ conference in Hollywood, Florida, the economist… listed some geopolitical and market risks for 2018. And ETFs didn’t escape the short list. ‘Some ETFs, it’s a small proportion, but some of them have inadvertently over-promised liquidity to users,’ he said. ‘The users have assumed much more liquidity than what the underlying asset class can serve.’ El-Erian is talking about the problems that arise as investors move even more money into passive investing products, ‘some of which venture quite far from highly liquid market segments,’ he wrote…”

January 23 – Bloomberg (Sid Verma): “Global stocks and U.S. Treasuries are in the throes of their most ‘extreme’ start to the year ever as bullish sentiment engulfs markets, according to Goldman Sachs… The bank’s cross-asset measure of risk appetite around the world is the highest since it started the gauge in 1991. Euphoria is turbo-charging global equities while 10-year U.S. government bonds are suffering their worst performance in risk-adjusted terms, according to Goldman. ‘Risk appetite is now at its highest level on record, which leads to the question of what future returns can be,’ strategists including Ian Wright wrote…”

January 22 – Bloomberg (Andrew Mayeda): “The International Monetary Fund warned policymakers to be on guard for the next recession even as it predicted global growth will accelerate to the fastest pace in seven years as U.S. tax cuts spur businesses to invest. The fund raised its forecast for world expansion to 3.9% this year and next, up 0.2 percentage point both years from its projection in October. That would be the fastest rate since 2011, when the world was bouncing back from the financial crisis. The strengthening recovery offers a ‘perfect opportunity now for world leaders to repair their roof,’ IMF Managing Director Christine Lagarde told reporters…”

January 21 – Bloomberg (Shelly Hagan): “The global economy created a record number of billionaires last year, exacerbating inequality amid a weakening of workers’ rights and a corporate push to maximize shareholder returns, charity organization Oxfam International said… The world now has 2,043 billionaires, after a new one emerged every two days in the past year… The group of mostly men saw its wealth surge by $762 billion, which is enough money to end extreme poverty seven times over, according to Oxfam. According to separate data compiled by Bloomberg, the top 500 billionaires’ net worth grew 24% to $5.38 trillion in 2017…”

Fixed-Income Bubble Watch:

January 21 – Wall Street Journal (Nick Timiraos): “In enacting a tax cut that is projected to raise annual federal-budget deficits to nearly $1 trillion in the coming years, Washington could be trading more growth now for the risk of more pain down the road. The U.S. government has traditionally reduced interest rates, boosted spending or cut taxes when the economy contracts. Budget analysts warn that future policy makers would have less ammunition to take such actions during the next recession because tax changes are projected to push already-rising national debt levels even higher. That could make the next downturn more severe than it would otherwise be and put added pressure on the Federal Reserve to respond to future crises. ‘While I’m always for reforming the tax code, the timing of this thing doesn’t make any sense,’ said William Hoagland, a former budget adviser to Senate Republicans now at the Bipartisan Policy Center…”

January 21 – Financial Times (Chris Flood): “The supply of US Treasury bonds is set to almost double to $1tn this year, a dramatic increase that could pose a significant risk for the high-flying US stock market as well as for fixed-income investors. The US government’s rising budget deficit, President Donald Trump’s tax cuts and the Federal Reserve’s push to shrink its balance sheet as it reverses the post-financial crisis bond-buying programme are some of the reasons behind the expected increase. This could drive 10-year Treasury bond yields up from their level of 2.6% to 3% by the end of this year and to 3.5% by the end of next year, according to Deutsche Bank. In addition, the amount of investment grade and high-yield bonds issued by US companies that will mature and require refinancing is forecast to increase significantly over the next two years. As a result, total US fixed-income supply could rise from $1tn last year to just over $2tn in 2019…”

January 22 – Bloomberg (Dani Burger and Sid Verma): “U.S. corporate debt exchange-traded funds have bled a near-historic sum of assets over the past two weeks, but holders of the underlying securities are paying little heed. U.S.-listed corporate bond ETFs are headed for a second consecutive month of outflows, the first time that’s occurred in at least seven years. The pain is across ratings. The iShares iBoxx Investment Grade Corporate Bond ETF, LQD, had the biggest day of losses last week since 2016, while BlackRock’s high-yield equivalent, HYG, is in the midst of its biggest two-month outflows on record.”

January 25 – Financial Times (Joe Rennison): “A profit warning… from Swiss baker Aryzta, whose customers include McDonald’s, would not ordinarily be of interest to bond investors. Except the company pointed to faster than expected wage growth in its US business as one of the culprits. The prospect of American workers receiving bigger pay rises taps into a growing anxiety among fixed-income investors: that 2018 may be the year in which inflation finally accelerates, posing a fundamental challenge for holders of long-term bonds that pay ultra low fixed-rate coupons. Signs that a broad-based global economic recovery is gathering pace, rising oil prices and a sweeping US tax cut are raising a red flag for the bond market.”

Europe Watch:

January 23 – Stratfor (Adriano Bosoni): “Italy’s general election will be one of the most important political events for the European Union this year. Italian voters will head to the polls March 4 dissatisfied with their current leaders and with the state of the economy. What’s more, they will find no shortage of anti-establishment candidates on the ballot. The rise of the Five Star Movement, a protest party made up mostly of political outsiders that lambastes Italy’s traditional leaders, has pushed mainstream parties to espouse populist and Euroskeptic views. The right-wing Northern League, for example, has called for stronger immigration controls and proposed a referendum on Italy’s membership in the eurozone. Former Prime Minister Silvio Berlusconi’s center-right Forza Italia, meanwhile, has suggested introducing a parallel currency to coexist with the euro and ignoring EU rules that limit state intervention to rescue troubled banks. Even the center-left Democratic Party, while still pro-European Union, has criticized Brussels for its focus on austerity measures.”

Japan Watch:

January 22 – Bloomberg (Toru Fujioka and Masahiro Hidaka): “Governor Haruhiko Kuroda delivered a message to investors speculating that the Bank of Japan might be nearing the start of policy normalization: Not so fast. Kuroda said the BOJ wasn’t in a position to even consider exiting its current policy, after it maintained its massive stimulus program and kept its inflation and economic forecasts unchanged… ‘Given there is still a distance to the achievement of the 2% price stability target, I don’t think that we are at a stage where we consider the timing for a so-called exit or how to deal with it,’ Kuroda said… ‘The Bank of Japan thinks it’s necessary to continue tenaciously with the current powerful easing for the sake of the economy.'”

January 23 – Bloomberg (Connor Cislo): “Japan closed out its best year for exports since the financial crisis with solid growth again in December, as the global economic recovery looks set to continue well into 2018. The value of exports rose 9.3% in December from a year earlier. Exports for the full year 2017 grew 11.8%, the most since 2010.”

Leveraged Speculation Watch:

January 24 – Bloomberg (Nishant Kumar and Erik Schatzker): “Billionaire hedge-fund manager Ray Dalio said that the bond market has slipped into a bear phase and warned that a rise in yields could spark the biggest crisis for fixed-income investors in almost 40 years. ‘A 1% rise in bond yields will produce the largest bear market in bonds that we have seen since 1980 to 1981,’ Bridgewater Associates founder Dalio said in a Bloomberg TV interview in Davos… We’re in a bear market, he said.”

Geopolitical Watch:

January 25 – Reuters (Doina Chiacu): “Turkey urged the United States… to halt its support for Kurdish YPG fighters or risk confronting Turkish forces on the ground in Syria, some of Ankara’s strongest comments yet about a potential clash with its NATO ally. The remarks, from the spokesman for President Tayyip Erdogan’s government, underscored the growing bilateral tensions…”

January 22 – Reuters (Mert Ozkan): “Turkey shelled targets in northwest Syria on Monday and said it would swiftly crush U.S.-backed Kurdish YPG fighters in an air and ground offensive on the Afrin region beyond its border. The three-day-old campaign has opened a new front in Syria’s multi-sided civil war, realigning a battlefield where outside powers are supporting local combatants.”

January 24 – Reuters (Tuvan Gumrukcu and Tom Perry): “President Tayyip Erdogan said… Turkey would extend its military operation in Syria to the town of Manbij, a move that could potentially bring Turkish forces into confrontation with those of their NATO ally the United States. Turkey’s air and ground ‘Operation Olive Branch’ in the Afrin region of northern Syria is now in its fifth day, targeting Kurdish YPG fighters and opening a new front in Syria’s multi-sided civil war. A push towards Manbij, in a separate Kurdish-held enclave some 100 km (60 miles) east of Afrin, could threaten U.S. plans to stabilize a swath of northeast Syria.”

Doug Noland

Doug Noland
Credit Bubble Bulletin

Doug Noland

I just wrapped up 25 years (persevering) as a “professional bear.” My lucky
break came in late-1989, when I was hired by Gordon Ringoen to be the trader
for his short-biased hedge fund in San Francisco. Working as a short-side
trader, analyst and portfolio manager during the great nineties bull market
– for one of the most brilliant individuals I’ve met – was an exciting, demanding
and, in the end, a grueling and absolutely invaluable learning experience.
Later in the nineties, I had stints at Fleckenstein Capital and East Shore
Partners. In January 1999, I began my 16 year run with PrudentBear, working
as strategist and portfolio manager with David Tice in Dallas until the bear
funds were sold in December 2008.

In the early-nineties, I became an impassioned reader of The Richebacher Letter.
The great Dr. Richebacher opened my eyes to Austrian economics and solidified
my lifetime passion for economics and macro analysis. I had the good fortune
to assist Dr. Richebacher with his publication from 1996 through 2001.

Prior to my work in investments, I worked as a treasury analyst at Toyota’s
U.S. headquarters. It was working at Toyota during the Japanese Bubble period
and the 1987 stock market crash where I first recognized my love for macro
analysis. Fresh out of college I worked as a Price Waterhouse CPA. I graduated
summa cum laude from the University of Oregon (Accounting and Finance majors,
1984) and later received an MBA from Indiana University (1989).

By late in the nineties, I was convinced that momentous developments were
unfolding in finance, the markets and policymaking that were going unrecognized
by conventional analysis and the media. I was inspired to start my blog,
which became the Credit Bubble Bulletin, by the desire to shed light on these
developments. I believe there is great value in contemporaneous analysis,
and I’ll point to Benjamin Anderson’s brilliant writings in the “Chase Economic
Bulletin” during the Roaring Twenties and Great Depression era. Ben Bernanke
has referred to understanding the forces leading up to the Great Depression
as the “Holy Grail of Economics.” I believe “The Grail” will instead be
discovered through knowledge and understanding of the current extraordinary
global Bubble period.

Disclaimer: Doug Noland is not a financial advisor nor is he providing investment
services. This blog does not provide investment advice and Doug Noland’s comments
are an expression of opinion only and should not be construed in any manner
whatsoever as recommendations to buy or sell a stock, option, future, bond,
commodity or any other financial instrument at any time. The Credit Bubble
Bulletins are copyrighted. Doug’s writings can be reproduced and retransmitted
so long as a link to his blog is provided.

Copyright © 2015-2017 Doug Noland

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Published at Sat, 27 Jan 2018 07:24:36 +0000

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State of the Union more likely to raise eyebrows than stocks


State of the Union more likely to raise eyebrows than stocks

(Reuters) – Anybody hoping for a replay of the stock market advance that followed U.S. President Donald Trump’s first address to Congress may be disappointed. This time around, shares could suffer if Trump does not tread carefully on hot-button issues.

The S&P 500 jumped 1.4 percent the day after Trump’s speech last February, as an unexpectedly measured tone from the notoriously abrasive president boosted investor optimism that he would be able to deliver on pro-business campaign promises.

But with a new tax law under his belt, Trump is expected to use his late-night State of the Union speech on Tuesday to applaud that victory and broach topics including trade agreements, immigration reform and infrastructure spending.

That may not be enough to inspire investors further, after enthusiasm about corporate tax cuts helped push the S&P 500 up more than 19 percent in 2017 and close to 7 percent so far this year.

“Nothing is going to trump tax reform,” said Michael O’Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut. “Since I expect the president to do a victory lap, the typical market reaction would be a sell-the-news reaction in contrast to last year.”

The S&P 500 has had only 4 daily declines so far this year, and the chances of a Jan. 31 selloff are higher if the market does not take a breather before then, O‘Rourke said.

Investors could be rattled by tough talk from Trump on issues including U.S. immigration policy, which has already divided lawmakers in a Republican-controlled Congress and led to a three-day government shutdown.

“He’s got to tread carefully on the hot-button items,” said Phil Blancato, chief executive of Ladenburg Thalmann Asset Management in New York, citing immigration and trade talks.

He noted that a “pro-immigration agenda” could be the easiest way to expand the U.S. workforce to boost an economy with a tight labor market.

Congress agreed to extend funding to Feb. 8 and the White House is expected to unveil an immigration legislation framework a day before the speech.

Strategists also are wary about how Trump will approach international trade, including the North American Free Trade Agreement (NAFTA) in his speech due to his tendency for “America First” rhetoric.

“We know historically protectionism is bad for the economy. It’s bad for markets. You open a great deal of uncertainty if you hone in on that,” said JonesTrading’s O‘Rourke.

U.S. officials on Thursday probed Canadian proposals for unblocking talks on NAFTA but there were few signs of progress, raising questions about whether any real movement is happening at the penultimate round of negotiations on the treaty.

Any trade comments would also come on the heels of Trump approving a steep tariff on solar panels and washing machines, moves those industries have warned could raise prices and endanger jobs.

To be sure, Trump could boost sentiment with details on a plan to rebuild U.S. infrastructure. On Wednesday he promised $1.7 trillion in investments over the next 10 years. But any related gains may be limited to sectors like industrials and materials.

And in general, big moves like the one seen last year are relatively rare.

The market moved more than 1 percent in either direction just 15 times the day after the annual U.S. presidential address since 1965, when it was first televised at night. By comparison, it had a 1 percent or more move 13 times in the session before the speech.

Retail investors may be more likely than professional fund managers to let policy comments influence their trading, said Blancato, who is not planning to make any asset allocation changes based on the speech.

Investors may also be less sensitive to the speech’s message this time around. Many now say they largely ignore politics after a tumultuous year with a divided Republican party, heated exchanges with nuclear-armed North Korea, a probe of possible collusion between Trump’s election campaign and Russia and the government shutdown.

Traders have instead focused on economic data and earnings, which continue to look strong. Analysts expect the S&P 500’s fourth-quarter earnings per share to rise by 12.7 percent from a year earlier, according to Thomson Reuters data.

“Short of something truly stupid like a trade war with China or a withdrawal from NAFTA, or something horrific like a nuclear conflict with North Korea, we don’t see a scenario where investors are likely to elevate politics to the same level of importance as the global recovery and improving earnings,” said Robert Phipps, a director at Per Stirling Capital Management in Austin, Texas.

Additional reporting by Lewis Krauskopf; Editing by Alden Bentley and Meredith Mazzilli

Published at Sat, 27 Jan 2018 00:36:38 +0000

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