Why Traders Are Now Selling Insurance To Protect Against Volatility: A “Feedback Loop” Theory

Over the past several months, one of the proposals floated on this website to explain the strange collapse in volatility at a time when uncertainty has soared, was the so-called “negative convexity” gamma trade, demonstrated best by the Catalyst Funds’ Hedged Futures Strategy Fund in mid-February, according to which traders buying vol has led to dealers offsetting these purchases with more than proportional purchases of offsetting underlying assets as a hedge, in the process pushing sending realized – and thus implied – volatility even lower.
Today, the WSJ picks up on this idea, and looks at a possible “feedback loop” scenario in which selling of volatility leads to even more selling of volatility, resulting in a market in which the VIX appears oddly disconnected from prevailing nervous sentiment. According to the WSJ’s Jon Sindreau, the theory, advanced by several money managers, bankers and analysts, “describes a type of feedback loop in which calm markets make selling insurance against sharp swings in asset prices profitable, which makes the markets more calm, which then makes selling insurance yet more attractive. And on and on.”

This post was published at Zero Hedge on Apr 7, 2017.

Italy’s Target2 Deficit Hits Fresh All Time High, Above 25% Of Italian GDP

This morning, the Bank of Italy reported that Italy’s Target 2 deficit rose to new highs in March at 420bn, from 386bn in February. As a way of comparison, during the peak of the EU Sovereign crisis in 2012 crisis, Italy’s liabilities stood at Eur 290bn.

As Francesco Filia of Fasanara Capital notes, while we are told that record T2 balances are pure accounting values and should be viewed as a benign by-product of the decentralized implementation of the asset purchase program (APP) rather than renewed capital flight, and while Draghi refers to them as a form of solidarity within the European system, in a letter to Italian EU politicians Draghi also maintained that such debts should be settled in full should Italy decide to leave the euro. So, the number matters and represents a liability.

This post was published at Zero Hedge on Apr 7, 2017.

April Macro Update: Employment Growth Continues to Decelerate

Summary: The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.
One concern in recent months had been housing, but revised data shows housing starts breaking above the flattening level that has existed over the past two years. A resumption in growth appears to be starting.
That leaves employment growth as the main watch out: employment growth is decelerating, from over 2% last year to 1.5% now. It’s not alarming but it is noteworthy that expansions weaken before they end, and slowing employment growth is a sign of some weakening that bears monitoring.
A second watch out is demand growth. Real retail sales excluding gas is in a decelerating trend. In February, growth was just 1.8%. Personal consumption accounts for about 70% of GDP so weakening retail sales bears watching closely.


This post was published at FinancialSense on 04/07/2017.

Atlanta Fed Slashes Q1 GDP To Just 0.6%, Lowest In Three Years

Remember when the Fed was “data dependent”? Well, if the Atlanta Fed is right, Janet Yellen will have hiked the Fed’s interest rate in a quarter in which GDP has grown by a paltry 0.6%, down from 1.2% as of its latest estimate. If confirmed, this would be the lowest quarterly GDP growth in three years, since Q1 of 2014.
Incidentally, just over two months ago, the same forecast stood at 3.4%, it has since fallen by over 80%.

From the source:

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2017 is 0.6 percent on April 7, down from 1.2 percent on April 4. The forecast for first-quarter real GDP growth fell 0.4 percentage points after the light vehicle sales release from the U. S. Bureau of Economic Analysis and the ISM Non-Manufacturing Report On Business from the Institute for Supply Management on Wednesday and 0.2 percentage points after the employment release from the U. S. Bureau of Labor Statistics and the wholesale trade release from the U. S. Census Bureau this morning. Since April 4, the forecasts for first-quarter real consumer spending growth and real nonresidential equipment investment growth have fallen from 1.2 percent and 9.7 percent to 0.6 percent and 5.6 percent, respectively.

This post was published at Zero Hedge on Apr 7, 2017.

If The Fed Sells Treasuries… Who Will Be Buying? Answer: “Other” (Seriously)!

Authored by Chris Hamilton via Econimica blog,
From 1776 through 2007, the US issued just over $9 trillion in US Treasury debt to pay for stuff which “we” wanted but “we” were unwilling to tax ourselves to pay for. The buyers during that period are depicted in the first column of the chart below. During that time, the majority buyer of that debt was the Intra-Governmental Surplus funds (primarily Social Security) as depicted by the green area in the first column below. These funds were mandated to buy “governmental accounting series” non-marketable debt. The remainder of the issuance and holdings were fairly evenly split between foreigners and domestic buyers (primarily institutional buying) with a minor portion of primarily short term Notes and Bills held by the Federal Reserve.
From 2008–>2014, the US Treasury nearly issued as much debt as it had in the previous 230 years. But the proportions bought and held by these creditors significantly changed (depicted by middle column in the chart below). Intra-Governmental surplus funds were dwindling so the buyer of nearly half of all Treasury debt up to that point took a back seat, buying only 8% of the new issuance. No surprise, it was the Federal Reserve and Foreigners that bought 2/3rds of the issuance, maintaining a strong bid. The Fed sold all it’s short term bills and notes and went large and long. And foreigners apparently just couldn’t get enough.
But since QE ended in late 2014, the make-up of the new buyers / holders of US Treasury debt is totally different (depicted in the right column of the chart below). Obviously, the Fed Reserve has purchased nothing (on a net new basis…of course they have been buying to replace bonds rolling off, but no net new buying) and since the Fed ceased buying, Foreigners (net) have sworn off US Treasury debt and sold $200 billion. So the only buyers for the continuing issuance and the portion not rolled over by foreigners is the domestic public (with an assist by the dwindling Intra-Governmental surplus).

This post was published at Zero Hedge on Apr 7, 2017.

Atlanta Fed GDPNow Forecast Spirals Toward Zero

I hope the model is wrong.
The Atlanta Fed’s GDPNow model, which forecasts GDP growth in the US, dropped to 0.6% seasonally adjusted annualized GDP growth for the first quarter. This means, if economic growth at this rate continues for an entire year, the US economy would edge up only 0.6% for the year.
As more data for the quarter is released, the model becomes a more accurate predictor of GDP growth, as measured in the first estimate for that quarter by the Bureau of Economic Analysis (BEA). So now the first quarter is over, and more data for the quarter is piling up, and the GDPNow forecast is spiraling down in direction of zero.
The forecast dropped by half from April 4, when it was still 1.2%. I added the red arrow to the chart to show just how fast and how far it fell in the past seven weeks, from 2.5% to 0.6%.

This post was published at Wolf Street by Wolf Richter ‘ Apr 7, 2017.

US Stock Funds Suffer Biggest Outflow Since 2015 As Bond Inflows Soar

According to Bank of America’s Michael Hartnett, citing EPFR data, in the latest week through April 5, there were $7.4BN in outflows from equities, the largest in 40 weeks. This consisted of $3.6bn in ETF outflows – largest in 40 weeks & first outflows YTD vs. $3.8bn mutual fund outflows.

By size & style: 3rd straight week of outflows from US value funds ($1.7bn), largest outflows from US growth in 10 weeks ($2.0bn); $0.9bn outflows from US small caps & chunky $10.3bn outflows from US large caps (largest in 82 weeks)
By sector: inflows to tech ($0.8bn, 5 straight weeks), materials ($0.2bn), utilities ($0.3bn), real estate ($0.2bn), infrastructure ($0.1bn); outflows from energy ($0.6bn, largest in 29 weeks),
financials ($0.3bn), consumer ($0.2bn), healthcare ($0.1bn)

This post was published at Zero Hedge on Apr 7, 2017.

War on Cash Puts ECB, EU on Collision Course with Germany

Bundesbank: It’s a war on personal freedom and choice.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Relations between Germany, and the ECB have curdled in recent times over a key issue: the role of cash. Germans have a soft spot for physical lucre while the ECB and Europe’s executive branch, the European Commission, have openly expressed their desire to suppress, or even punish, its use.
For Germany’s central bank, the Bundesbank, the war on cash is a war on personal freedom and choice, in the name of saving a financial system and its absurd negative interest rates. Last year Bundesbank president Jens Weidmann warned that it would be ‘disastrous’ if people started to believe cash would be abolished – an oblique reference to the risk of negative interest rates and the escalating war on cash triggering a run on cash.
In Germany, trust in Europe’s financial institutions is already at a historic low, with only one in three Germans saying they have confidence in the ECB. That was before ECB president Mario Draghi gave an infamous speech in May last year laying much of the blame for the Eurozone’s weak economy on Germans’ proclivity to save, rather than splash out on foreign imports or invest in the stock market.

This post was published at Wolf Street by Don Quijones ‘ Apr 7, 2017.

Payroll Report: 98k (ROFL!)

Oh this is amusing…
The unemployment rate declined to 4.5 percent in March, and total nonfarm payroll employment edged up by 98,000, the U. S. Bureau of Labor Statistics reported today. Employment increased in professional and business services and in mining, while retail trade lost jobs.

The household survey says something different entirely; it was 1,034 (1.034 million), statistically identical to last month’s 1.067.
262,000 people came back into the workforce and the employment:population ratio ticked up 4 ticks.

This post was published at Market-Ticker on 2017-04-07.

March Payrolls Crumble: Only 98K Jobs Added Despite Slide In Unemployment Rate

And so the reflation trade is dead once again.
So much for that blockbuster ADP report. As we cautioned previously in our payrolls preview, the big risk to today’s payrolls report was to the downside, mostly as a result of the unseasonably cold March weather, and moments ago the BLS confirmed that indeed something snapped in March when only 98K jobs were added, roughly half of the 180K expected. This was the lowest monthly jobs number since May of 2016.
Worse, both prior months were revised lower. The change in total nonfarm payroll employment for January was revised down from 238,000 to 216,000, and the change for February was revised down from 235,000 to 219,000. With these revisions, employment gains in January and February combined were 38,000 less than previously reported.

What is surprising is that the poor Establishment Survey number was on the back of a very strong Household Survey, which saw employment rise by 472,000 to 153 million, while the number of unemployed Americans reportedly declined by 326K to a seasonally adjusted 7,202K.

This post was published at Zero Hedge on Apr 7, 2017.

Gold-Stock Breakouts Near

The gold-mining stocks’ usual volatility has proven outsized so far this year, spooking investors. A fast initial surge in a new upleg was soon fully reversed by a sharp major correction, which spawned much bearish sentiment. That combined with the great distraction from the Trumphoria stock-market rally has left gold stocks unloved and overlooked. But their outlook is very bullish, and major upside breakouts near.
It’s hard to find bargains in today’s extreme stock markets. They’ve been radically distorted by the post-election euphoria centered on universal hopes for big tax cuts soon. Nearly every sector has been bid up to dizzying valuations. Except gold stocks, which everyone still hates. They may very well be the last remaining contrarian sector in these crazy markets, and thus a great buying opportunity for smart traders.
Gold stocks have been left behind by the wild Trumphoria stock-market rally over the past 5 months. As of the middle of this week, the benchmark S&P 500 stock index is up 10.0% since Election Day. But the gold stocks as measured by their flagship HUI index are down 1.1% over that span. The gold stocks have really suffered since the election, which explains the stubbornly-bearish sentiment plaguing them today.
But perspective is everything in the markets, and that post-election snapshot is very misleading. So far in 2017, the HUI has rallied 12.5% to easily best the S&P 500’s 5.1% gain. And despite the post-election gold-stock carnage, the HUI still rocketed 64.0% higher in full-year 2016! That trounced the S&P 500’s mere 9.5% gain. Gold stocks stealthily remain one of the top-performing sectors in all the stock markets.

This post was published at ZEAL LLC on April 7, 2017.

Where The March Jobs Were: Plunging Retail Workers Offset By Doormen Hiring Surge

March was a month of giving back: after a very strong, if downward revised start to the year, with both January and February payrolls revised lower by a total of 38,000 jobs, March saw the worst job gains since May 2016, with only 98,000 jobs added. While many have claimed it was the weather’s fault, the BLS reported that 164K people said they were unable to work in March due to poor weather conditions. This was just fractionally more than the 143K long-term average.
This is where the job gains, and losses, were:
While most job sectors performed in line with recent trends, there were three major outliers: growth in the Education and Health jobs category tumbled from 66K to 16K; Construction jobs dropped from 59K to 6K, while the big detractor was Retail Trade, where for the second month in a row, 30K jobs were lost. Worse, employment in general merchandise stores declined by 35,000 in March and
has declined by 89,000 since a recent high in October 2016, which confirms the recent speculation that “bricks and mortar” stores and malls in general may be the next big short.

This post was published at Zero Hedge on Apr 7, 2017.

The Final Solution: ‘De-Cashing’ The System

‘De-cashing is defined as the gradual phasing out of currency from circulation and its replacement with convertible deposits… At least at the level of major countries and their currencies, the authorities could coordinate their de-cashing efforts. Such coordinated efforts are, in particular, important in the decisions to phase out large denomination bills for all major currencies, to use ceilings and other restrictions on cash transactions, and to introduce the reporting requirements for cash transactions or their taxation. For currency areas, a single de-cashing policy would be clearly preferable to a national one.’
The above text is a direct excerpt from an IMF Working Paper titled, ‘The Macroeconomics of De-Cashing’ (LINK). Web-sleuthing by Rory Hall at The Daily Coin brought this to my attention. You can read his analysis here: ‘De-Cashing – Soft-Selling Financial Enslavement.’
In short, the IMF is now publishing working papers papers advising Governments how to ‘de-cash’ their system in a way that produces the least amount of resistance from the populace: ‘In any case, the tempting attempts to impose de-cashing by a decree should be avoided, given the popular personal attachment to cash. A targeted outreach program is needed to alleviate suspicions related to de-cashing; in particular, that by de-cashing the authorities are trying to control all aspects of peoples’ lives, including their use of money, or push personal savings into banks.’

This post was published at Investment Research Dynamics on April 7, 2017.

RBC Explains Today’s Rush To BTFD

After plunging 150 points on Syria airstrike headlines overnight, Dow futures have retraced much of the losses this morning as any shift in the investing landscape towards ‘risk-off’ appears to have been dismissed as the Buy-The-F**king-Tomahawk-Missile-Launch-Dip’ers are back in force betting on the success of the administration’s tax reform, or stimulus, or earnings, or hope. However, Gold prices remain elevated leaving some trace of doubt about President Trump’s actions.

This post was published at Zero Hedge on Apr 7, 2017.

Gold Standard Challenges

Scattered recent analysis has centered upon the Gold Standard and its viability within the global financial system. The topic is certainly very blurred and at times confusing. Consider a recent article by a competent analyst Charles Hugh Smith of the site OfTwoMinds on the practicality of gold used as a standard. The article is entitled ‘The Problem With Gold-Backed Currencies’ (which is found HERE and also on Lew Rockwell site HERE). He makes several points, many good ones. In the Jackass opinion, his analysis avoids many potential solution features, is premature on focus of the currency (and not trade), and is unfortunately backwards in the logic. The main criticism to put on the work is that he confuses the extreme difficulties created from decades of fiat currencies, with the supposed problems of installation of gold-backed currency. The entire article is not well developed, seems sketchy, and misses numerous very important features which are being considered. He does put many critical issues on the table, valuable for discussion. He offers no solution to his stated problems. In modern parlance, the logic put forth would indicate that since a heroin addict has so much difficulty with kicking the deadly habit, ravaged by delirious tremens, beset by extreme health problems, that one should conclude movement toward a clean sober life would have problems and simply would not work. Thus the backwards logic. Unfortunately, CHSmith produces straw dogs in the face of absent solutions. Let us examine the points made.
The Gold Standard is near perfect, provides sound money, and requires modern tweaking to make it work. The transition period will not be six months, but more like six years. The transition is possible, is workable, but with tremendous disruption and arduous adjustment. The victim nations would be many, but they hold much of the banking and military power. The Global Currency RESET is essentially referred to, which will render deadbeat economic nations as extremely vulnerable to systemic breakdown. The definition of deadbeat is tied to huge trade deficits and oversized current account deficits, coupled by extremely unmanageable national debt. They tend to have bloated welfare states and diminished industry. The United States qualifies as the most at risk, the most out of balance, and the worst from a debt and an industrial standpoint.

This post was published at GoldSeek on Friday, 7 April 2017.

Day 77: Trump’s Building Bridges for Health Care

This week, Trump began a new approach to Trumpcare and hosted Chinese President Xi Jinping at a Mar-a-Lago retreat. The Fed minutes from their March meeting were also released, revealing doubts about continued surges in the economy.
Trumpcare May Now Be Part of New Infrastructure Bill
Trump makes a traditional political move appealing to Dems Health care and tax reform may be included in infrastructure plan The President looks to push massive spending along with tax cuts On the heels of his failed heal health care reform bill, Trump is now trading in his business negotiation skills for traditional political maneuvers. The President is now considering attaching health care or tax reform as a rider onto his $1 trillion infrastructure bills, according to Fortune. The idea is to appeal to opponents like Democrats and Freedom Caucus members who may be enticed to support such a bill given its economic impact on their districts.

This post was published at Schiffgold on APRIL 7, 2017.