• Tag Archives Fed
  • UBS Reveals The Stunning Reason Behind The 2017 Stock Market Rally

    It’s 2018 forecast time for the big banks. With Goldman unveiling its seven Top Trades for 2018 earlier, overnight it was also UBS’ turn to reveal its price targets for the S&P in the coming year, and not surprisingly, the largest Swiss bank was extremely bullish, so much so in fact that its base case is roughly where Goldman expects the S&P to be some time in the 2020s (at least until David Kostin revises his price forecast shortly).
    So what does UBS expect? The bank’s S&P “base case” is 2900, and notes that its upside target of 3,300 assumes a tax cut is passed, while its downside forecast of 2,200 assumes Fed hikes in the face of slowing growth:
    We target 2900 for the S&P 500 at 2018 YE, based on EPS of $141 (+8%) and modest P/E expansion to 20.6x.
    Our upside case of S&P 500 at 3300 assumes EPS gets a further 10% boost driven by a 25% tax rate (+6.5%), repatriation (+2%) and a GDP lift (+1.6%), while the P/E rises by 1.0x. Downside of 2200 assumes the Fed hikes as growth slows, the P/E contracts by 3x and EPS falls 3%. Congress is motivated to act before midterm elections while the Fed usually reacts to slower growth; so we think our upside case is more likely.

    This post was published at Zero Hedge on Nov 16, 2017.


  • Goldman Reveals Its Top Trade Recommendations For 2018

    It’s that time of the year again when with just a few weeks left in the year, Goldman unveils its top trade recommendations for the year ahead. And while Goldman’s Top trades for 2016 was an abysmal disaster, with the bank getting stopped out with a loss on virtually all trade recos within weeks after the infamous China crash in early 2016, its 2017 “top trade” recos did far better. Which brings us to Thursday morning, when Goldman just unveiled the first seven of its recommended Top Trades for 2018 which “represent some of the highest conviction market expressions of our economic outlook.”
    Without further ado, here are the initial 7 trades (on which Goldman :
    Top Trade #1: Position for more Fed hikes and a rebuild of term premium by shorting 10-year US Treasuries. Top Trade #2: Go long EUR/JPY for continued rotation around a flat Dollar. Top Trade #3: Go long the EM growth cycle via the MSCI EM stock market index. Top Trade #4: Go long inflation risk premium in the Euro area via EUR 5-year 5-year forward inflation. Top Trade #5: Position for ‘early vs. late’ cycle in EM vs the US by going long the EMBI Global Index against short the US High Yield iBoxx Index. Top Trade #6: Own diversifed Asian growth, and the hedge interest rate risk via FX relative value (Long INR, IDR, KRW vs. short SGD and JPY). Top Trade #7: Go long the global growth and non-oil commodity beta through long BRL, CLP, PEN vs. short USD.

    This post was published at Zero Hedge on Nov 16, 2017.


  • Retail Sales (US) Are Exhibit #1

    In January 2016, everything came to a head. The oil price crash (2nd time), currency chaos, global turmoil, and even a second stock market liquidation were all being absorbed by the global economy. The disruptions were far worse overseas, thus the global part of global turmoil, but the US economy, too, was showing clear signs of distress. A manufacturing recession had emerged which would only ever be the case on weak demand.
    But the Fed just the month before had finally ‘raised rates’ for the first time in a decade, though after procrastinating all through 2015. Still, surely these wise, proficient technocrats wouldn’t be so careless and clueless as to act in this way during a serious downturn. After all, what are ‘rate hikes’ but the central bank’s shifting concerns toward a faster economy perhaps reaching the proportions of overheating.
    The dissonance was striking, nowhere more so than at the Federal Reserve itself. On the day the FOMC voted for the first of what was supposed to be (by now) ten to fifteen increases (not just four) the central bank also released estimates on US Industrial Production that were negative year-over-year, a condition that just doesn’t happen outside of either a recession or a condition very close to one.
    The mainstream sided easily and eagerly with the technocrats. Even as the Fed failed to act month after month, the word ‘transitory’ printed prominently in each article rationalizing why a manufacturing recession just wouldn’t matter, the media would claim how ‘strong’ and ‘resilient’ especially US consumers were.

    This post was published at Wall Street Examiner on November 15, 2017.


  • The Fed’s Bubblenomics

    The Following is adapted from a preface to a new report by Murray Sabrin, featured in his November 15 presentation, “Bubblenomics” at Ramapo College.]
    If you Google ‘dot com bubble,’ you will get nearly 1.2 million hits, and 3.3 million hits if you Google ‘tech bubble.’ A Google search of ‘housing bubble’ will return nearly 11 million hits. (The searches were conducted on March 29, 2017). And if you search Amazon books for financial crisis 2008 you will get more than 1200 hits.
    Given all the books, monographs, essays, articles, and editorials that have been written about back-to-back bubbles that occurred within two decades, one would think there would be nothing else to write about.
    The purpose of this book is to present to the general public, my fellow academicians and policymakers with an brief account and review of one of the most turbulent periods in United States history without the usual jargon academics are noted for.
    As the two quotes from the Federal Reserve’s website above reveal, the Fed has been given the responsibility by the Congress of the United States to essentially promote sustainable prosperity, stabilize prices and maximize employment. During the past 100 years of the Federal Reserve’s operations, the economy has grown substantially (see Figure 1 for data since 1929), but the path to higher living standards have been interrupted by depressions/ recessions, a few bouts with double-digit price inflation and occasionally widespread unemployment. Although the Congress has expected the Federal Reserve to be a wise and prescient ‘helmsman,’ navigating the economy from becoming overheated or plunging into a recession or worse, the Fed’s track record belies its mandates.

    This post was published at Ludwig von Mises Institute on 11/15/2017.


  • Why Core Inflation is Rising & What it Means for Fed Rate Hikes

    Yellen was right to brush off ‘transitory’ factors of ‘low’ inflation.
    Consumer prices, as measured by CPI for October, rose 2.0% year-over-year. A month ago, CPI increased 2.2%. The Fed’s inflation target is 2%, but it doesn’t use CPI, or even ‘Core CPI’ – which excludes the volatile food and energy items. It uses ‘Core PCE,’ which usually runs lower than CPI, and if there were an accepted measure that shows even less inflation, it would use that. But it does look at CPI, and there was nothing in today’s data to stop the Fed from raising its target rate in December.
    The Core CPI rose 1.8%, up a tad from September’s 1.7% increase. Core CPI has been above 2% for all of 2016 and through March 2017. In the history of the data going back to the 1960s, Core CPI had never experienced ‘deflation.’ But when Core CPI rates retreated in the spring through August, along with other inflation measures, a sort of panic broke out in the media:

    This post was published at Wolf Street on Nov 15, 2017.


  • Desperately Seeking 1995

    The year 1995 wasn’t exact a good year to remember. There was the Oklahoma City bombing, the San Diego tank rampage, the New Jersey Devils winning the Stanley Cup in a lockout shortened NHL season, and some former Buffalo Bills running back named OJ getting into trouble out in LA. Steve Forbes would announce his candidacy to challenge President Clinton that September.
    Despite all that, in 2017 both the bond and stock markets are almost desperate to repeat the year, at least its financial and economic characteristics. To be more precise, it is stock investors who are betting on a 1995 while bond investors are holding out against that scenario – leaving Economists and the media to openly cheer for it and directly against them.
    Though it started in late ’94, the bond ‘massacre’ that year still stings in bond traders’ collective memories. Alan Greenspan’s Fed has begun to raise interest rates after several years of very low federal funds, ‘stimulus’ the central bank judged necessary because of a sluggish, almost jobless recovery (just ask President George H. W. Bush who Clinton defeated on ‘it’s the economy stupid’). That for many people is as compelling a setup as there may ever be.

    This post was published at Wall Street Examiner on November 13, 2017.


  • “We Have Reached A Turning Point”: Trader Explains Why Today’s CPI Could Send Equities Reeling

    From the latest Macro View by Bloomberg commentator and former Lehman trader, Mark Cudmore
    Equities Must Fear CPI Now the Fed Put Era Is Over
    A surprise in either direction from today’s U. S. consumer price index print is likely to hurt global stocks.
    For many years, in the wake of QE, we became used to markets where ‘good data is good for equities and bad data is good for equities.’ The logic was that bad data implied a greater likelihood more liquidity would be pumped into the system, whereas good data inspired confidence that the economic recovery was on track.
    Today might mark a turning point where we more frequently trade the opposite dynamic. The Fed has fought so hard to convince investors that the economy can cope with hikes and balance-sheet reduction that it may have boxed itself into a corner. It can’t retreat from its policy path without seriously undermining its credibility.

    This post was published at Zero Hedge on Nov 15, 2017.


  • Auto-Loan Subprime Blows Up Lehman-Moment-Like

    But there is no Financial Crisis. These are the boom times. Given Americans’ ceaseless urge to borrow and spend, household debt in the third quarter surged by $610 billion, or 5%, from the third quarter last year, to a new record of $13 trillion, according to the New York Fed. If the word ‘surged’ appears a lot, it’s because that’s the kind of debt environment we now have:
    Mortgage debt surged 4.2% year-over-year, to $9.19 trillion, still shy of the all-time record of $10 trillion in 2008 before it all collapsed. Student loans surged by 6.25% year-over-year to a record of $1.36 trillion. Credit card debt surged 8% to $810 billion. ‘Other’ surged 5.4% to $390 billion. And auto loans surged 6.1% to a record $1.21 trillion. And given how the US economy depends on consumer borrowing for life support, that’s all good.
    However, there are some big ugly flies in that ointment: Delinquencies – not everywhere, but in credit cards, and particularly in subprime auto loans, where serious delinquencies have reached Lehman Moment proportions.

    This post was published at Wolf Street on Nov 14, 2017.


  • Claudio Grass Interviews Mark Thornton

    Introduction
    Mark Thornton of the Mises Institute and our good friend Claudio Grass recently discussed a number of key issues, sharing their perspectives on important economic and geopolitical developments that are currently on the minds of many US and European citizens.
    A video of the interview can be found at the end of this post. Claudio provided us with a written summary of the interview which we present below – we have added a few remarks in brackets (we strongly recommend checking the podcast out in its entirety – there is a lot more than is covered by the summary).
    Interview Highlights
    We currently find ourselves in a historically and economically significant transition period. The already overstretched bubble in the markets is still expanding, but we now see bold moves by the Fed to reduce its balance sheet, at the same time the ECB plans to taper, overall presenting us with a fairly deflationary outlook. This reversal of the expansionary policies of the last decade can be seen as the first step toward a potentially ferocious correction in the not-too-distant future.
    The ECB is trapped, as it already holds 40% of euro zone sovereign debt. At the same time, Spain, Italy and Greece continue to potentially present major challenges, as a banking crisis could easily reemerge in these countries [ed note: banks in Europe have managed to boost their capital ratios, but the amount of legacy non-performing loans in the system remains close to EUR 1 trn. Moreover, TARGET-2 imbalances have recently reached new record highs, a strong sign that the underlying systemic imbalances remain as pronounced as ever]. Mario Draghi intends to reduce the ECB’s asset purchases from EUR60 billion to EUR30 billion per month. He may soon realize that if the ECB does not buy euro zone bonds, no-one will.

    This post was published at Acting-Man on November 14, 2017.


  • The Fed Issues A Subprime Warning As Household Debt Hits A New All Time High

    After we first reported last week that US credit card debt once again rose above $1 trillion, despite a recent sharp downward revision to the data, while both student and auto loans rose to a fresh record high…

    … it would probably not come as a surprise that according to the just released latest quarterly household debt and credit report by the NY Fed, Americans’ debt rose to a new record high in the second quarter on the back of an increase in every form of debt: from mortgage, to auto, student and credit card debt. Aggregate household debt increased for the 13th consecutive quarter, rising by $116 billion (0.9%) to a new all time high. As of September 30, 2017, total household indebtedness was $12.96 trillion, an increase of $605 billion from a year ago and equivalent to 66% of US GDP, versus a high of around 87% in early 2009. After years of deleveraging in the wake of the 2007-09 recession, household debt has risen more than 16.2% since the trough hit in the spring of 2013.

    This post was published at Zero Hedge on Nov 14, 2017.


  • White House Considering Mohamed El-Erian For Fed Vice Chair

    In what will come as a big surprise to many Fed watchers, moments ago the WSJ reported that among other candidates, Mohamed El-Erian, former deputy director of the IMF, former head of the Harvard Management Company, Bill Gross’ former partner at Pimco until the duo’s infamous falling out, and one of the few people who – together with John Taylor – actually deserve the nomination, is being considered for the Fed Vice Chairman role. DJ also added that Kansas banking regulator Michelle Bowman is also being considered. From the WSJ:
    The White House is considering economist Mohamed El-Erian as one of several candidates to potentially serve as the Federal Reserve’s vice chairman, according to a person familiar with the matter.
    The process of selecting the Fed’s No. 2 official began this month after President Donald Trump nominated Fed governor Jerome Powell to succeed Fed Chairwoman Janet Yellen when her term expires next February.
    The WSJ adds that there is a broad range of candidates under consideration for post, and that the White House will focus on monetary policy experience for post.

    This post was published at Zero Hedge on Nov 14, 2017.


  • Precious Metals: Patience Is Golden

    Without growth in Western gold ETF holdings, the ‘decent but not spectacular’ demand from China and India is not strong enough to move the gold price higher. Please click here now. The SPDR (GLD-nyse) fund gold holdings currently sit at about 843 tonnes. There has been very little change in the total tonnage for several months. That’s neutral for the gold price. Governments don’t like their citizens to own much gold. Restrictions they impose (like India’s import duty as a recent example) dampen demand enough so that the price rises very slowly most of the time. Economic growth in China and India are increasing demand (the love trade) and mine supply is contracting, but the process is essentially ‘Chindian water torture’ for investors who want to see the price skyrocket like it did in the late 1970s. Investors that want ‘big action’ in the gold price need to wait patiently for the US business cycle to peak. For the price of gold to really sizzle, the business cycle needs to have aninflationary peak. That hasn’t happened since the 1970s. Many gold price analysts have used overlap charts that suggest the gold market now is akin to the 1976-1978 period. I look at fundamentals first, and charts second. From an inflationary standpoint, the US economy looks more akin to the late 1960s than the late 1970s. The winds of inflation are beginning to blow, but they won’t become a hurricane for some time. Having said that, I’ve noted that the St. Louis Fed has calculated that the QE program would have sent the US inflation rate above 30% if money velocity had been at normal levels.

    This post was published at GoldSeek on 14 November 2017.


  • It’s A ‘Turkey’ Market

    With Thanksgiving week rapidly approaching, I thought it was an apropos time to discuss what I am now calling a ‘Turkey’ market.
    What’s a ‘Turkey’ market? Nassim Taleb summed it up well in his 2007 book ‘The Black Swan.’
    ‘Consider a turkey that is fed every day. Every single feeding will firm up the bird’s belief that it is the general rule of life to be fed every day by friendly members of the human race ‘looking out for its best interests,’ as a politician would say.
    On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey. It will incur a revision of belief.’
    Such is the market we live in currently.
    In a market that is excessively bullish and overly complacent, investors are ‘willfully blind’ to the relevant ‘risks’ of excessive equity exposure. The level of bullishness, by many measures, is extremely optimistic, as this chart from Tiho Krkan (@Tihobrkan) shows.

    This post was published at Zero Hedge on Nov 14, 2017.


  • Philly Fed President Unconvincing As He “Lightly” Pencils In December Hike

    Speaking in at a conference in Tokyo, the head of the Philly Fed, Patrick Harker said that he has penciled in a further rate hike by the Fed at its December meeting on 12-13 December 2017. However, his use of the word ‘lightly’ suggested that there may be a degree of wavering on his part. According to Reuters.
    A Federal Reserve official said on Monday he expects to back an interest rate hike next month despite caution over low-inflation, as U. S. central bank policy needs to be positioned to deal with future economic shocks.
    Philadelphia Fed President Patrick Harker said he has ‘lightly penciled in’ a December rate hike. However, he flagged he had slightly less conviction about the policy decision than he had last month as he ‘continues to elicit caution’ about weak inflation and also about the way in which it is measured. Harker said he expects the Fed to raise rates three times next year as long as inflation remains on track, and the projected tightening could take policy to what he would describe as a neutral stance. Harker, a centrist voter on the Fed’s monetary policy committee this year under an internal rotation, said the Fed must continue normalizing policy as the economy is ‘more or less at full strength’ and there remains ‘very little slack’ in the labor market. ‘Removing accommodation is the right next step for a few reasons,’ he said in prepared remarks to a Global Interdependence Center conference in Tokyo…

    This post was published at Zero Hedge on Nov 13, 2017.


  • P2P Loans are ‘Predatory,’ Have Delinquency Characteristics of pre-2007 Subprime Mortgages, Could Impact Financial Stability: Cleveland Fed

    They get debt slaves deeper into high-cost debts they can’t handle.
    Peer-to-peer lending commenced in the US a decade ago when investors – now mostly hedge funds, banks, insurers, etc. – could lend directly to consumers via online platforms. LendingClub, the dominant player, went public in December 2014. Shares shot up to nearly $30 over the first few days, but are currently at $4.20, after a 23% plunge last Wednesday when it slashed guidance, and after a 2.4% dive this morning.
    Now the Cleveland Fed came out with an analysis that focused on the consumer end of the business, called the loans ‘predatory,’ compared them to pre-Financial-Crisis subprime mortgages because they’re now showing very similar delinquency characteristics, and fretted what these P2P loans, given their double-digit growth rates, could mean for financial stability:
    Based on our findings, one can argue that P2P loans resemble predatory loans in terms of the segment of the consumer market they serve and their effect on individual borrowers’ financial stability. The 2007 financial crisis illustrated the importance of consumer finance and the stability of consumer balance sheets.

    This post was published at Wolf Street on Nov 13, 2017.


  • The Coming Pension Rehabilitation Administration

    Remember the S&L Crisis, well welcome to the Pension Crisis. It is becoming well known behind the curtain that we have a global pension crisis. I first reported this event more than 15 years ago. This at the WEC, we had more than 10 major pension funds attending from around the world. The crisis has been set in motion by the lowering of interest rates with the Crash of 2007. This is why the Fed Char Yellon has been talking about the need to ‘normalize’ interest rates. The crisis in Europe is reaching catastrophic proportions.

    This post was published at Armstrong Economics on Nov 13, 2017.


  • The Cycle of Falling Interest

    Over the past few weeks, we have looked at the effects of falling interest rates: falling discount applied to future cash flows (and hence rising stock and bond prices), and especially falling marginal productivity of debt (MPoD). Falling MPoD means that we get less and less GDP ‘juice’ for each new dollar of borrowing ‘squeeze’.
    Last week, we proposed an economic law: if MPoD < 1 then the economy is unsustainable.
    MPoD has been falling since at least 1950, and is currently well under 0.4 (having had a temporary boost in the wake of the crisis of 2008). 0.4 means a new borrowed dollar adds 40 cents to GDP.
    Under irredeemable paper currency, debt cannot be extinguished. So that dollar of debt – which bought a shrinking and temporary shot of GDP – lingers forever in the system. That is the very meaning of the word irredeemable.
    This is one reason why MPoD is falling. Each time that a bond is rolled, the amount is increased by the accumulated interest. This incremental debt is not productive and does not add to GDP. And also, all that debt accumulated over many decades has to be serviced, which reduces debtors’ capacity to borrow for productive purposes.
    And this leads us to a discussion of the trend of falling interest. Has the cause ceased? Have we, as many say, entered a new era of rising rates? Does the Fed have the power to make it so? Is there going to be a resurgence of inflation?

    This post was published at GoldSeek on Monday, 13 November 2017.


  • Morgan Stanley: “If Central Banks Push Back, Asset Prices Face A Severe Challenge”

    As increasingly more analysts and Fed-watchers have suggested in recent months, the one catalyst that could send the market into a tailspin is for the Fed to get what it has so long wanted: a sudden spike in inflation. From Albert Edwards (who looks at record U. S. vacation plans as an ominous sign of rising wages), to Eric Peters (who warned that pent up inflation could unleash a “nightmare scenario” for the next Fed chair), to Aleksandar Kocic (who yesterday explained why the market is vulnerable to bear steepening of the curve with the Fed “massively negatively convex to inflation risk”), on Sunday Morgan Stanley’s chief cross-asset strategist, Andrew Sheets joins the warning and observes that at a time when things are finally starting to look up for the global economy, “this puts central banks in a challenging position. Inflation remains below target. But current policy means some of the easiest financial conditions ever observed, just as growth is picking back up, regulation is backing down and memories of the last crisis fade.”
    As a result, Sheets believes that “current policy rates and financial conditions look unsustainably easy relative to the strength of global growth.” Which means that the response is once again in the hands of Central banks, who hold the key to determining when to push back. “If they do, asset prices face a severe challenge” Morgan Stanley warns, but maybe not yet: “until they do, we should be willing to accept that prices can persist above ‘fair value’.”
    Andrew Sheets’ full note is below:

    This post was published at Zero Hedge on Nov 12, 2017.


  • Gresham’s Law meets its Minsky Moment

    There’s a reason that the Fed pursues these actions and it’s not a conspiracy theory. When unlimited cash hits a limited supply of assets, whether paper or hard, this inflationary deluge boosts taxable asset values by 100-1000%, fattening the coffers of the tax collectors.
    While it’s no secret that the Fed, along all global Central Banks, are supporting their respective financial systems by capping interest rates with ‘QE’ (also known as ‘money printing’), the yield on the 10-yr Treasury has risen 36 basis points in two months from 2.04% in September to 2.40% currently. There have not been any Fed rate hikes during that time period. The yield on the 2-yr Treasury has jumped from 1.26% in early September to 1.66% currently. A 40 basis point jump, 32% increase, in rates in two months.
    This is not due to a ‘reversal’ in QE. Why? Because through this past Thursday, the Fed’s balance sheet has increased in size by over $7 billion since the Fed ‘threatened’ to unwind QE starting in October. The bond market is sniffing hints of an acceleration in the general price level of goods and services, aka ‘inflation.’

    This post was published at Investment Research Dynamics on November 12, 2017.