Surveys suggest that a little more than 80% of the economists expect the Federal Reserve to hike rates in September. The September Fed funds futures, the most direct market instrument, has only about a 50% chance discounted. This week's FOMC meeting is the last one before September. The economy is performing largely in line with the Fed's expectations. Investors may be looking in vain if they expect some hint from the FOMC that it will in fact hike rates in September. It is more reasonable to expect a non-committal statement on the timing of the liftoff, as Yellen was in her recent Congressional testimony.
The Fed diligently worked to shift the focus of the outlook of policy from a date-specific commitment to a data-dependent path. A signal of a September rate hike would bring investors back to thinking about the date and unwind the Fed's efforts. This is unlikely. There are still much economic data to be released, including two employment reports. Also in the coming weeks, there will be a greater sense of the economic performance for the first couple of months of Q3.
The day after the FOMC meets, the US will publish its first estimate of Q2 GDP. The Atlanta Fed says it is tracking about a 2.4% annualized pace. We suspect the risk is on the upside. Economists may take advantage of the June durable goods orders report to tweak their forecast.
We know that Boeing orders jumped to 161 in June from 11 in May. This bodes well for headline orders, which may rise 3.2%-3.5% after a 1.8% decline in May. The details, especially the orders and shipments for nondefense and non-aircraft durable goods, should point improving business investment, and better overall growth.
Annual benchmark GDP revisions will also be announced. With new seasonal adjustments, the biggest impact is likely not to be so much on growth itself, but how it is distributed between the quarters. There is some risk that the first quarter may be revised up, but this may take from Q2. The precise details are unlikely to be particularly salient in considering the trajectory of monetary policy.
The Employment Cost Index (ECI) will be released at the end of the week. It is a measure of labor costs that Fed officials have cited on occasion. Every measure has strengths and weaknesses of course. The ECI uses fixed weights for individual industries and occupations. It has posted a quarterly average increase of 0.65% over the past year. It has averaged 0.51% over the past three years. It is expected to have risen 0.6%-0.7% in Q2, which would keep the year-over-year pace near 2.6% as it was in Q1, which is the fastest since 2008.
Fed officials, including Yellen, who is one of the foremost labor economists, understand that headline inflation converges to core inflation, and core inflation, in turn, is driven by labor costs. They are confident that as the labor market tightens there will be upward pressure on wages. Provided the labor market tightens, the Fed will be "reasonable confident" that its medium-term inflation target will be reached.
Last week, the weekly initial jobless claims fell to new cyclical lows. Not just cyclical lows, but at 255k, it is the lowest in 42-years--since November 1973. If there are many on Wall Street that have not seen the Fed raise rates, there are even fewer that have seen initial filings for unemployment compensation this low. And of course, the population and workforce is much larger. There did not seem to be any distortions or irregularities.
The report has extra significance because it corresponds to the week that the monthly nonfarm payroll survey is conducted. It would be helpful if this week's report confirms the improvement, but in terms of market impact, it may be overshadowed by the GDP report that is released at the same time.
The US is also in the middle of the earnings season. According to FactSet, 187 of the S&P 500 have reported. Three-quarters (76%) have surpassed the mean expectation, and 54% have surpassed revenue expectations. A blended (combines those that have reported and expectations for the others) suggests an earnings decline of 2.2%, which would be the first decline since Q3 2012. It would be about half of what was expected before the earnings season began. Revenues are expected to be 4% lower.
In the week ahead, both Exxon and Chevron report earnings. It is a timely reminder of the drag from that sector. Earnings are expected to be off more than 50% from a year ago, and revenues more than a third lower. If the energy sector were excluded, earnings growth would be 4.1% and revenues up 1.5%. Even if not spectacular, the message is that earnings growth are not as weak as expected, and especially given the concentration of magnitude of the bad news coming from the energy sector.
Four other high income countries report GDP figures. They are all expected to show faster growth. The UK first estimate of Q2 GDP will be reported on Tuesday. Growth accelerated from the 0.4% in Q1. The BOE says it was 0.7%. A strong report will keep the market looking for the hawks to being pushing for a rate hike at next month’s MPC meeting.
Spain and Sweden estimate Q2 GDP on Thursday. Spain's economy enjoys the fastest growth among the high income countries. It is expected to have grown by 1% quarter-over-quarter, slightly faster than the 0.9% reported for Q1. The year-over-year pace would accelerate from 2.7% to 3.2%. Spain's Rajoy is counting on the stronger growth, and the humiliation of Greece, to bolster his support and sap the strength of anti-austerity calls that are beginning to filter through the PSOE, the opposition Socialists. Spain's national election will be held later this year. Portugal's national election will be first (October 4), and polls show a close contest.
The Swedish economy is expected to have grown 0.6%-0.7% in Q2 after 0.4% growth in Q1. Monetary policy, which includes negative repo (-35 bp) and deposit (-1.10%) rates, and bond purchases is a response to deflation, not growth. The 2.6% year-over-year growth is the upper end of growth over the past three years, and most high income countries would be pleased with such a performance.
Canada reports May GDP on Friday. It is expected to snap a streak of four negative monthly prints, but only just barely, The Bloomberg consensus is for a flat report. It will not be sufficient to arrest the slowing year-over-year pace. It was 2.9% in December 2014. It was 1.5% in March 2015. In May, it is expected to have slowed to 0.8%. Additional easing by Canada can be ruled out especially if the economy continues to struggle with the negative terms of trade shock.
Japan does not report its Q2 GDP until mid-August. After 1.0% quarterly growth in Q1, there is much talk of the risk that the economy stagnated or worse in Q2. Even with a 0.3% rise in June industrial output as the consensus expects, it would still have fallen on the quarter, for the first time since Q2 14. Despite relatively full employment (expected unchanged at 3.3% in June), upside pressure on wages is modest. Consumption is soft. Overall household consumption is expected to have risen at a 1.8% year-over-year in June, a considerable slowing in this admittedly volatile series from 4.8% in May. May was the first positive reading since March 2014, just before the sales tax was hiked.
Japan reports CPI figures at the end of the week. Even though the BOJ is engaged in the most aggressive quantitative easing ever, it is unable to generate inflation. In fact, in June, headline CPI is expected to slow to 0.3% year-over-year from 0.5% in May. The core, which exclude fresh food, is expected to return to zero from 0.1%. Excluding food and energy leaves prices is only a little better at 0.4% year-over-year.
Tokyo reports July prices, which will not provide much cause for optimism about the national figures. The headline is expected to slow to 0.2% from 0.3%. Tokyo's core rate is expected to have slipped back to zero from 0.1%. Excluding food and energy Tokyo's July CPI is expected to be unchanged at 0.2%.
The eurozone is expected to confirm on Friday its earlier estimate of July CPI at 0.2% year-over-year. The core rate, which excludes food and energy, is unlikely to be unchanged from the 0.8% initial estimate. Recall that before Q2, aggregate inflation in the euro area was negative for four months. The latest drop in oil prices, and commodity prices more generally (foodstuffs, industrial and precious metals, and energy) warn that deflationary forces may reemerge, unless the euro weakens further.
The eurozone will also report money supply and lending figures for June on Monday. The gradual increase in money supply is expected to continue, and both supply and demand for credit is likely to continue to improve. Any interruption may be linked to the Greek turmoil, and regarded as transitory. At the end of the week, the June unemployment rate will be reported. It is expected to slip to a new 3-year low of 11.0%.
Using the similar measures, in October 2009 the US unemployment rate was 10.0%, and the eurozone's was at 10.1%. They have been diverging since. Eurozone unemployment peaked at 12.1% in Q2 13. It has since dropped one percentage point. At the end of Q2 13, US unemployment was at 7.5% and stands at 5.3% now.
An FOMC that does not indicate a September hike is likely, rather than simply possible, may see the US dollar move lower. However, dollar weakness will be corrective in nature, and we expect it to be relatively shallow and short-lived. The prospects of a strong July employment report may encourage the market to price in more than a 50/50 chance of a September hike. While there is some talk of a BOE hike this year, this still seems premature, and we note that implied yield on the December 2015 short-sterling futures contract has fallen seven bp since mid-July.
The central banks of the other major countries are all easing policy. This divergence is significant, and will last several more quarters. Many continue to expect the BOJ to step up its efforts. The ECB's asset purchase program has another full year to run.
Contrary to the speculation of an early exit, the risks are that it may have to be extended. Expanding the central bank's balance sheet does not seem to be an effective way to boost consumer prices, and this is clearly Japan's experience as well. With double-digit unemployment and falling commodity prices, the ECB may find what every other central bank that has tried QE has found, namely the it takes more than an initial round of purchases.
The Federal Reserve's real broad trade-weighted measure of the dollar rose 4.6% in Q4 14 and 4.7% in Q1 15. It rested in Q2, slipping 1.0%. The uptrend appears to be resuming in Q3.
Last week, amid a renewed bout of crude carnage, Morgan Stanley made a rather disconcerting call on oil.
"On current trajectory, this downturn could become worse than 1986: An additional +1.5 mb/d [of OPEC supply] is roughly one year of oil demand growth. If sustained, this could delay the rebalancing of oil markets by a year as well. The forward curve has started to price this in: as the chart shows, the forward curve currently points towards a recovery in prices that is far worse than in 1986. This means the industrial downturn could also be worse. In that case, there would be little in analysable history that could be a guide to this cycle," the bank wrote, presaging even tougher times ahead for the O&G space.
If Morgan Stanley is correct, we’re likely to see tremendous pressure on the sector’s highly indebted names, many of whom have been kept afloat thus far by easy access to capital markets courtesy of ZIRP.
With a rate hike cycle on the horizon, with hedges set to roll off, and with investors less willing to throw good money after bad on secondaries and new HY issuance, banks are likely to rein in credit lines in October when the next assessment is due. At that point, it will be game over in the absence of a sharp recovery in crude prices.
Against this challenging backdrop, we bring you the following commentary from Emanuel Grillo, partner at Baker Botts's bankruptcy and restructuring practice who spoke to Bloomberg Brief last week.
* * *
Via Bloomberg Brief
How does the second half of this year look when it comes to energy bankruptcies?
A: People are coming to realize that the market is not likely to improve. At the end of September, companies will know about their bank loan redeterminations and you’ll see a bunch of restructurings. And, as the last of the hedges start to burn off and you can’t buy them for $80 a barrel any longer, then you’re in a tough place.
The bottom line is that if oil prices don’t increase, it could very well be that the next six months to nine months will be worse than the last six months. Some had an ability to borrow, and you saw other people go out and restructure. But the options are going to become fewer and smaller the longer you wait.
Are there good deals on the horizon for distressed investors?
A: The markets are awash in capital, but you still have a disconnect between buyers and sellers. Sellers, the guys who operate these companies, are hoping they can hang on. Buyers want to pay bargain-basement prices. There’s not enough pressure on the sellers yet. But I think that’s coming.
Banks will be redetermining their borrowing bases again in October. Will they be as lenient this time around as they were in April?
A: I don’t know if you’ll get the same slack in October as in April, absent a turnaround in the market price for oil. It’s going to be that ‘come-to-Jesus’ point in time where it’s about how much longer can they let it play. If the banks get too aggressive, they’re going to hurt the value for themselves and their ability to exit. So they’re playing a balancing act.
They know what pressure they’re facing from a regulatory perspective. At the same time, if they push too far in that direction, toward complying with the regulatory side and getting out, then they’re going to hurt themselves in terms of what their own recovery is going to be. All of the banks have these loans under very close scrutiny right now. They’d all get out tomorrow if they could. That’s the sense they’re giving off to the marketplace, because the numbers are just not supporting what they need to have from a regulatory perspective.
In a surprising development ahead of today's final stage of the Tour de France, earlier today Paris police opened fire on a car that tried to crash a barricade set up on Place de la Concorde ahead of the final arrival of the Tour de France cycling race, France 24 reports citing a police official.
The shooting incident took place as the French capital is on maximum alert to welcome the final stage of the Tour de France.
Luc Poignant, a spokesman with the SGP police union, said officers were finishing setting up the barricades for the race when the car tried to crash through the barriers. Officers opened fire on the car, which ultimately drove away.
The Place de la Concorde is located near several key official buildings, such as the Élysee palace or the US embassy in Paris.
According to French BFMTV, the car was traveling at a high speed when crashed into another vehicle before smashing the protection fences installed on the Place de la Concorde for the final leg of the Tour de France race, according to the broadcaster. French police then opened fire on the car, but failed to stop the vehicle.
The French media further adds that the incident took place around 10am BST, while the car driven by the suspects was a black Renault.
The car escaped with its two occupants apparently unharmed, according to Poignant. A search is underway for the suspects and a warrant has been issued for the driver's arrest.
The Guardian adds that according to the French police the incident was neither aimed at the cycling race nor was terror-related. At least that is the narrative as of this moment. It may well change in the coming hours.
The final stage of the Tour de France is due to begin at 4:35 pm (14:35 GMT), leaving from Sevres, a town southwest of Paris. The riders are then due to arrive in the French capital at around 5:30 pm (15:30 GMT and do 10 laps around the Champs-Elysees before finishing at Place de la Concorde at about 7 pm (17:00 GMT).
Murray Energy CEO Robert Murray, who spoke to Republicans at the Lincoln Day Dinner on Wednesday, is "righteously mad" at President Barack Obama, who Murray says is to blame for the downturn in the coal industry.
The President, you see, is on a "bizarre personal and political" quest to destroy not only the coal industry, but the entire country and according to Murray, "radical environmentalists, liberal elitists, [and] Hollywood characters" aren’t doing anything to help the situation.
And make no mistake, this isn’t about money for Murray, this is all about the people. "Mr. Obama's actions are a human issue to me, as I know the names of many of the Americans whose jobs and family livelihoods are being destroyed," Murray said, adding that "these Americans are my employees."
Or at least they were his employees. Murray laid off 21% of his company back in May, with the majority of the cuts coming in West Virginia, which is staring down a $195 million budget gap thanks to the slide in coal prices.
Murray believes these job cuts are the fault of the Obama administration and, thankfully, he’s got some concrete arguments to support his contention that the President is colluding with Hollywood characters and certain "contributors" in an effort to "get control of the availability, reliability and cost of electricity."
[Murray] said President Barack Obama's administration has issued regulations that illegally bypass the states and their utility commissions, the U.S. Congress and the Constitution in favor of putting the U.S. EPA in charge of the nation's electric grid. Murray, speaking at a Republican gathering at the July 22 Lincoln Day Dinner, touted his company's four lawsuits being brought against the administration's Clean Power Plan, an effort to rein in carbon dioxide emissions.
Murray continued, saying that the coal workers affected by Obama's policies are among the highest paid in the regions where they live, but also have no one to sell their homes to when they lose their jobs.
"Thus, these people are prohibited from working and fall to the negative side of the economic ledger for the rest of their lives," Murray said. "This is not the America that I have always cherished. Well, I am obviously not giving up. Nor should you. We have the law, science, economics, cold hard energy facts and the Constitution on our side. Our cause is right. It is right for the coal industry and our communities and America. … We must continue to do whatever we can to overcome the insanity of our current government."
Murray goes on to say that the scope of EPA guidelines on coal boarders on the absurd. In support of this contention, he cites the fact that the agency's regulations are 38 times longer than the universally accepted standard for modern enviornmental law - the Bible: "EPA regulations alone total 25 million words, 38 times more than those in the holy Bible."
So who, you might ask, can fix the problem?
Well, Abraham Lincoln for one, but because that seems unlikely, Murray says West Virginia Republicans will have to do. Here's SNL again:
The CEO's plan to fix the problems he says fall on the shoulders of the Obama administration is to elect more Republicans. Calling Abraham Lincoln, the namesake of the event where he was speaking, the best president in U.S. history, Murray said Obama was 'by far, the worst.' In 2014, West Virginia's House and Senate both flipped to a Republican majority after decades of Democrats holding control of both chambers. Murray said the Democrat-led state Legislature provided 'huge opposition,' and he specifically called out some Democrats, including former Senate President Jeff Kessler, former House Speaker Timothy Miley and State Sen. Michael Romano, who was elected to represent Harrison County in 2014."
Murray said with Democrats out of the way in West Virginia, the Legislature was able to proceed with needed coal mining, tort law and other legislation. However, he said there is unfinished business in the form of changes to lower the coal industry's tax burden in the state.
"Currently, the coal industry accounts for 7% of the gross business product of the state, but our industry pays 60% of the business taxes in West Virginia," Murray said. "Oil and gas producers are not taxed to this extent. Relief must be given to the coal industry as our coal cannot compete with that from other states, all of which have lower coal severance taxes, or none at all."
Finally, Murray says that "most coal companies are cash-flow negative and many are approaching financial default. The result is that we will see the greatest restructuring of the coal industry in its history." In this regard, things haven't been all bad for Murray who, while laying of 1,400 employees has simultaneously spent at least $4.6 billion (enough to pay the annual salaries of 54,120 West Virginia coal miners, according to data from the National Mining Association) in the past two years acquiring competitors.
In any event, not everyone thinks the blame lies solely with Obama. Bo Webb (who is admittedly biased given that he's a campaign director for the Appalachian Community Health Emergency Campaign) suggests that Murray should blame cheap and abundant natural gas and by extension, free market forces: "Murray is not dealing with reality. It's not the Obama administration or Democrats. It's capitalism. It's the free market. It's that simple."
Minority Report, eat your heart out. The real system is worse than anyone could have imagined.
By now, everybody knows that the NSA and a host of other alphabet agencies are spying on Americans, collecting virtually every piece of communications data they exchange, regardless of whether or not they are “doing anything wrong.”
But what are they doing with it?
Apart from its value in consumer and marketing fields, the data is used to create “threat assessments” and put a black mark on the record of anyone who the authorities deem troublesome that will follow them throughout their career, and make it harder for individuals to get a job, qualify for a loan, travel, or enjoy the rights of a (now once) free society.
Our government want us to believe that EVERY student is a potential threat and we need threat to stop them.
Every student is given a “THREAT ASSESSMENT” by police and school administrators!
Schools and police are using V-STAG to assess a ‘threat level:
“The Virginia Student Threat Assessment Guidelines (V-STAG) is a school-based manualized process designed to help school administrators, mental health staff, and law enforcement officers assess and respond to threat incidents involving students in kindergarten through 12th grade and prevent student violence.”
The war on terror is out of control! Watch out that kindergarten kid could be a threat!
This program and others like it have been developed at the federal level, with FBI involvement, and coordinated across local, state and private organizations. The idea, unfortunately, is to implement this watch-and-flag surveillance grid across the system at every level, and with every institution that people must participate in.
Hey, if it works for prisoners, it would be great for a once free society.
The intent of schools to nurture children and help them to learn and grow into responsible adults has been subverted by an intrusive and paranoid surveillance system that considers every mistake to be a warning of crimes and misdeeds to come.
And by treating everyone as a criminal before they even do anything, it probably creates a self-fulfilling prophecy.
The Secret Service has the audacity to call threat assessing of kindergarten students a safety concern. “The Final Report And Findings Of The Safe School Initiative.”
“The Safe School Initiative” was implemented through the Secret Service’s National Threat Assessment Center and the Department of Education’s Safe and Drug-Free Schools Program.
Every student is being PROFILED and given a risk assessment rating, according to the Secret Services article titled “Evaluating Risk For Targeted Violence In Schools: Comparing Risk Assessment, Threat Assessment and Other Approaches.”
What’s really being said is police and school administrators can put your kid(s) into mental health counseling which will follow them throughout their adult lives! Oddly there isn’t any mention of the school-to-prison pipeline!
Meanwhile, this system is designed to expand throughout a student’s life and merge with other emerging “threat assessment” systems that follow adults in the general population as well.
Colleges nationwide are using ‘Campus Teams’ to give their students sexual threat assessments, there is a “Legal Compliance and Sexual Violence Prevention Training” being held in Boston this July 27, 28th.
“This training will address the critical intersection between compliance with federal laws to address sexual and intimate partner violence, and the role that threat assessment can play in effectively addressing these issues.”
In adulthood, police departments and private employers are now also using threat assessment scores to profile and target against individuals who have raised red flags.
Think it’s just those have committed crimes and demonstrated what bad people they can be? Think again. Dissidents, outspoken critics, competitors and opponents will all get flagged as the system is abused by its controllers and used to hammer down any nail that dares to stick up.
This system will create a society of compliance and fearful people, not a free society free of crime and trouble.
Whether or not this system can actually prevent crime remains unproven, but its ability to tarnish the record of individuals and place entire populations under preemptive suspicion is certain… and likely dangerous.
Presented with no comment...
Examining the reasons to buy a house today may give us some idea where the housing market is heading in the future.
There are three reasons to buy a house:
Reason 1 – Utility
A house (any dwelling) is a shelter. It provides enjoyment, a home to raise one’s family, or just a place to watch that big screen TV. Utility is not quantifiable and it differs from household to household.
Reason 2 – Savings
If financed, a mortgage is a way of saving something every month until the mortgage is paid in full. If paid for, the savings come in the form of “owners’ equivalent rent”, which is what the census bureau uses to measure inflation in housing.
Reason 3 – Asset appreciation
At 5% appreciation per year, a $100k house today will be worth $412k in 30 years. Even a more modest 3% appreciation would result in better than a double.
Why Not to Buy a House
Based on the reasons above, it appears to be a slam dunk decision. Why would anyone not want to buy a house? There are three obstacles:
Obstacle 1 – Affordability
Housing, as a percentage of household income, is too expensive. A decade of ill-conceived government intervention and Federal Reserve accommodations prevented natural economic forces from driving house prices to equilibrium. As a result, not only is entry difficult, but many are struggling and are stuck in dire housing traps. Corelogic estimated that as of the 1st quarter of 2015, 10.2% of mortgages are still under water while 9.7 million households have less than 20% equity.
Obstacle 2 – High Risk
Say you are young couple that purchased a home two years ago, using minimal down financing. The wife is now pregnant and the husband has an excellent career opportunity in another city. The couple has insufficient savings and the house has not appreciated enough to facilitate a sale, which results in negative equity after selling expenses. The house can become a trap that diminishes a life time of income stream.
Obstacle 3 – “Dead zones”
Say you live in the middle of the country, in Kane County Illinois. For the privilege of living there, you pay 3% in property taxes. That is like adding 3% to a mortgage that never gets paid down. Your property would have to appreciate 3% per year just to break even. By the way, “appreciation” is unheard of in Kane County, good times or bad. There are many Kane Counties in the US. Real estate in these counties should be named something else and should not be co-mingled with other housing statistics. Employment is continuing to trend away from these areas. What is going to happen to real estate in these markets?
The Kane County court house: where real estate goes to vegetate
The factors listed above are nothing new. They provide some perspective as to where are are heading. Looking at each of the reasons and obstacles, they are all trending negatively.
The country is spending too much on housing, a luxury that is made possible by irresponsible Fed policies. 50% debt to income ratios are just insane and Ms. Yellen has the gall to call mortgage lending restrictive. Can we not see what is happening to Greece?
Mortgage backed securities held by the Federal Reserve System, a non-market central economic planning institution that is the chief instigator of house price inflation. Still growing, in spite of QE having officially ended – via Saint Louis Federal Reserve Research, click to enlarge.
Real estate is an investment that matures over time. The first few years are the toughest, until equity can be built up. With appreciation slowing, not to mention the possibility of depreciation, it is taking much longer to reach financial safety. The current base is weak, with too high a percentage of low equity and no equity ownership. The stress of a recession, or just a few years of a flat market, can impact the economy beyond expectations. The risks that might have been negligible once upon a time are much higher today. Many who purchased ten years ago are still living with the consequences of that ill-timed decision today.
By stepping back and looking at the big picture, we can see that real estate should be correcting and trending down. The reasons why our grandparents bought their homes have changed. Government intervention cannot last forever. It will change from accommodation to devastation, when they finally run out of ideas.
In summary, my working life had its origins in real estate and I am not trying to bite the hand that fed me. However, the reality is that the circumstances that prevailed when I entered the market are non-existent today. I seriously doubt that I would chose real estate as a career, or as an investment avenue, if I were starting over. As for buying a house, I would consider it more of a luxury as opposed to an investment, and one has to be prepared for the possibility of it being a depreciating asset, especially if one decides to move.
Despite the protestations of an indignant Ben Bernanke, seven years of global QE have not only failed to ignite the illusory "trickle down" wealth effect but have in fact served to widen the gap between the rich and the poor the world over.
The explanation for this phenomenon is simple: when you deliberately inflate the value of the assets most likely to be concentrated in the hands of the wealthy, the class divide will grow in lockstep.
Perhaps the best evidence of the above can be found on Wall Street where Jamie Dimon and Lloyd Blankfein have now become billionaires. Because we wanted to do our part to help Jamie and Lloyd decide what to buy now that their wealth is virtually inexhaustible, we present the following video which counts down the 10 most absurd examples of conspicuous consumption in modern history.
With almost everything turning lower this week under “dollar” pressure, it is imperative to keep in mind the apex asset class. In 2007, it was the ABX indices and various mortgage related structures that signified the how far along everything was; in this cycle it is clearly corporate credit. The disarray starts in the riskiest pieces and then moves inward and eventually, if left unchecked, eroding too much underneath with which to support what was once believed perfectly safe. Once there is no place to hide, the turn really begins.
Leveraged loan pricing, among the riskiest of the corporate bubble, had been somewhat tame, even unexpectedly so, as commodities ran aground under the weight of global “dollar” funding.
In the past few days, however, leveraged loans (at least what is visible and represented by the index; it is very likely that less liquid issues are faring far more poorly) have been sold as have junk bonds. The market value portion of the S&P/LSTA US Leveraged Loan 100 fell 5 points just in the past two days, all the way to 965.
Both junk bonds and leveraged loans are back down to prices far too close to the nadir of the last selloff in mid-December. That would seem to suggest, as UST’s (and the fast again flattening UST curve), that the broad credit and funding environment has turned far more toward that which prevailed in early December than the more benign mid-March to early May “pause.”
Undoubtedly, there are economic concerns playing a significant part of the selloff but it may be liquidity that is the proximate catalyst (which is just another expression of those economic concerns combined with perceptions about the Fed’s proclivity to make it worse).
The combined trend in liquidity and the apparently persistent impulse toward selling is a dangerous combination, as systemic capacity is extremely poor and the incongruence of corporate pricing to actual, non-QE delivered risk is as extreme. The divergence between this heightened form of “reach for yield” and what bearishness that beset the treasury market is beyond remarkable, as if there was open bifurcation in overall credit back in 2013. Dating to right around November 20 that year, all bonds were bid but for very different reasons.
Corporate spreads, especially junk, compressed until the middle of last year – what a difference two years makes, as the corporate bubble is belatedly catching the warning of UST trading.
The rising “dollar” has meant rising spreads, as the junk “curve” has actually retraced the entire taper euphoria. That is certainly a measure of the ongoing systemic reset for risk perceptions, but in the wider context there is perhaps a long way yet to go.
In absolute terms, this move under the “dollar” is almost as severe as that in the middle of 2011...
which triggered the renewed eurodollar decay and eventually two new QE’s: in 2011, this measure of risk spreads jumped 90 bps from February 2011 until the end of that September and the Fed’s renewed “dollar” swaps. The current decompression is already 74 bps dating back to July 2014.
Again, it is the combination of liquidity (restrained and getting worse) and constant selling that ends up taking the next step.
The real danger is if this continues past some unknown critical mass the entire herd will turn and there won’t be much at that point to offer support – the dealers are already out as are banks more generally.
As a reminder, the size of the “herd” really escapes imagination:
On Thursday, we previewed a critical court ruling involving Chicago mayor Rahm Emanuel’s effort to cut pension expenses and plug a yawning budget gap. Here’s a brief recap of the story so far:
Back in May, the Illinois Supreme Court set a de facto precedent for lawmakers across the country when a bid to cut pension benefits was struck down in a unanimous ruling. Anyone who might have been confused as to the significance of the decision got a wake up call from Moody’s when the ratings agency, citing the read-through for Chicago’s fiscal situation, downgraded the city to junk. This is part of a larger fiscal crisis in the country which has left almost half of US states facing funding gaps for the upcoming fiscal year. All told, the total pension shortfall across states and cities is anywhere between $1.5 trillion and $2.4 trillion depending on who you ask.
And here’s a recap of what was at stake in Friday’s ruling, courtesy of the Illinois Policy Institute:
A Cook County judge will rule on the legality of a 2014 pension law aimed at reforming two of Chicago’s underfunded city retirement systems. While the pension law included some much-needed reforms, such as an increase in the retirement age, if upheld the law ultimately would put Chicago residents on the hook for millions of dollars of tax increases.
Well, those residents can relax for now, because as expected, Emanuel’s plan was determined to be unconstitutional by Rita M. Novak of the Cook County Circuit Court. The New York Times has more:
A judge in Chicago ruled on Friday that a plan to change city workers’ pensions was unconstitutional. The case is being closely watched for its effect on the city’s uncertain finances.
"This principle is particularly compelling where the Supreme Court’s decision is so recent, deals with such closely parallel issues and provides crystal-clear direction on the proper interpretation of the law," Judge Novak wrote. The Constitution of Illinois provides that public pensions "shall not be diminished or impaired."
Pension costs in many American states and cities are growing much faster than the money available to pay them, causing a painful squeeze. Officials who try to restore balance by reducing pensions in some way are almost always sued; outcomes of these lawsuits vary widely from state to state.
Some of the worst problems have been brewing for years in Illinois, particularly in Chicago, where the city’s pension contributions have long been set artificially low by lawmakers in Springfield, the state capital. With more and more city workers now retiring, a $20 billion deficit has materialized, and Friday’s ruling is seen as a setback to Mayor Rahm Emanuel’s efforts to close this gap and rescue Chicago’s credit rating.
Officials in the mayor’s office said the city would appeal.
“While we are disappointed by the trial court’s ruling, we have always recognized that this matter will ultimately be resolved by the Illinois Supreme Court," said Chicago’s legal counsel, Stephen Patton, in a statement. "We now look forward to having our arguments heard there."
While we certainly understand the idea that cutting pension benefits amounts a breach of the so-called "implicit contract" between public sector employees and state and local governments, it seems as though the logic employed both by the workers and by the courts suffers from the same myopia and denial of economic realities that has helped saddle the world with a combined $19 trillion in debt. Put simply: if the pension system isn't reformed, it will run out of money and no one will get anything. Here's The Times again:
"All city residents can be reassured that the Constitution — our state’s highest law — means what it says and will be respected, while city employees and retirees can be assured that their modest retirement income is protected," said Ms. Lynch, the executive director of Afscme’s Council 31 in Chicago.
Chicago said its pension overhaul would provide "massive net benefits" to workers if allowed to proceed. That was because the two pension funds at issue — one for laborers and one for general city workers — were heading toward certain insolvency. An insolvent system would be able to pay retirees only about 30 percent of their benefits.
So for now, delay-and-pray wins and in all likelihood, Chicago will lose on appeal, meaning the city will sink further into insolvency while those that will be most affected when the pension ponzi finally collapses continue to object to the very reform measures that might save them.
Full decision below.
Presented with no comment...
US president has said he could knock out Iran’s military. We welcome no war, nor do we initiate any war, but.. pic.twitter.com/D4Co7fVuVg
— Khamenei.ir (@khamenei_ir) July 25, 2015
Abenomics End Game: Thousands Protest In Downtown Tokyo, Demand Abe's Resignation As PM Disapproval Soars
Considering that Shinzo Abe's first reign as prime minister of Japan lasted precisely one year from September 26, 2006 until September 26 of the following year, when he voluntarily resigned due to diarrhea, the fact that he has managed to stay in power for nearly 3 years since ascending to power for the second time in December 2012 and unleashing the currency-crushing and market-surging policy of unprecedented debt and deficit monetization known as "Abenomics" is quite impressive.
It also confirms that as long as the stock market keeps going higher politicians have nothing to fear even if it means a total collapse in living standards for the rest of the population.
Yet even with the Nikkei pushing on 18 years highs, it appears that Abe may have reached his rigged market rating benefit cap, because even as the Nikkei was soaring, Abe's approval rating was plunging.
As we reported a month ago, "Abe Cabinet's approval rating plunged to 39%, matching a record low, as more than half of voters oppose the new US-sanctioned military/security legislation being debated in the Diet.... As his popularity has waned, Abe has become more and more desperate to keep support and has, for the first time in 70- years, lower the minimum voting age from 21 to 18."
The overall decline in support was apparently attributable to the fact that 53 percent of the respondents oppose the security bills being deliberated in the Lower House. Only 29 percent support the legislation, the survey showed.
Three constitutional law scholars said in the Lower House Commission on the Constitution on June 4 that the security legislation is unconstitutional. The Abe Cabinet countered their stance by releasing an opinion paper that said the bills do not violate the Constitution.
Since then things have gone from bad to worse for Abe, whose popularity rating last week plunged to a record low, while the number of Japanese citizens who disapprove of his policies has finally surpassed 50%, and rose to 52.6% in a Sankei poll, while the 47news.com poll shown below shows approval at just under 38% while dispparoval at 52%.
It spilled over last night when after years of growing resentment to their premier who panders to the rich, to big exporters, to the Japanese military-industrial complex, and of course, to the US government and Goldman Sachs (whose idea Abenomics was from the very beginning) thousands of protestors rallied Friday night in downtown Tokyo in a campaign of "Say no to the Abe government," targeting Japanese Prime Minister Shinzo Abe's "runaway" policy. The protestors gathered at the Hibiya Park, Diet building and the prime minister's official residence, shouting "Abe step down," "definitely oppose war" and "protect constitution."
People hold up signs saying "No to the Abe administration" in a gathering at Hibiya Park in Tokyo on July 24, 2015. They expressed opposition to Prime Minister Shinzo Abe's policies on a wide range of issues such as national security bills, the Trans-Pacific Partnership free trade initiative and the planned relocation of a U.S. military base within Okinawa Prefecture.
[Photos: Imagine China]
According to CRI, the anger of the Japanese population was sparked ever since the Abe administration started to push forward a series of controversial security-related bills in parliament debates.
On Friday, the Japanese bicameral Diet decided to set up a special panel at the upper house to debate the security bills. The legislation package was rammed through the lower house last week.
The bills, if enacted, will allow Japan's Self-Defense Forces (SDF) to exercise the right to collective self-defense, but Japan's war-renouncing constitution bans the SDF from doing so.
Japan's former prime minister Tomiichi Murayama, who delivered a speech Thursday evening during a rally near the Diet, again participated in Friday's demonstration, criticizing Prime Minister Abe for carrying out an autocratic politics and defying Japan's democratic system.
The former prime minister, who is famous for his 1995 statement offering an apology to countries that suffered Japan's wartime atrocities, stressed that it is very proud for Japan to renounce war under the pacifism constitution.
The security bills will be discussed at the upper house special panel from Monday. Latest polls showed that majority of Japanese people opposed the bills and about 90 percent of Japanese constitutional experts said the bills are unconstitutional.
In the immediate aftermath of the forced passage the controversial bills in the lower house Abe's approval rate tumbled 10 percentage points immediately while the disapproval rate surged to over 50 percent.
So what happens next? Unless Abe relents and pockets his military expansion ambitions, it is very likely that another massive, and career ending, blast of diarrhea is in the prime minister's immediate future.
But first, as we said one month ago, and now as others admit, Abe will do everything in his power to, well, stay in power. Which is quite limited, i.e., print more.
As Bloomberg reports, expectations for further BOJ easing may increase amid a falling approval rating of PM Abe’s Cabinet, says Daisaku Ueno, Tokyo-based chief currency strategist at Mitsubishi UFJ Morgan Stanley Securities, in an interview. Uen adds that market participants are focusing on whether Cabinet’s approval rating can maintain key 30% level amid possible passage by upper house of security bills this summer and ahead of upper house elections in July 2016.
His assessment: there is rising risk that BOJ will be pressured to ease policy further in autumn when govt is likely to struggle to find funding sources for its budgets.
Which reveals one more important aspect of QE: in addition to being the only catalyst pushing stocks to record highs even as the global economy slides into recession if not outright depression, it has become the new normal politicians' favorite and only means of holding on to power: if ratings plunge, print; if they continue plunging, print some more.
By the time Abe is finally booted out of power, peacefully or otherwise, the Yen may well be at 200 which in turn will be the catalyst that finally destroys the already careening Japanese economy. But destroyed cataclysm and demographic disaster aside, at least the Nikkei will have hit all time record highs.
Historically, it has always been the Republican Party that splits. It has been a odd mixture of liberalism from the viewpoint of citizen rights before those of the government and the original constitutional goal of preserving the sovereignty of the states v the the Federalists. This liberal view has often taken the position of Libertarian whereas the so called “liberal” view of the Democrats is not liberal at all, it is liberal with other people’s money in the battle-cry of Marxism. This Republican “libertarian-ism” is what Trump is tapping into as is Bernie Sanders in the Democratic party. Both the traditional Republicans are owned by the NY banks as is Hillary Clinton, in who more people now distrust Hilary than trust her.
This Republican “libertarian-ism” actually traces back to Thomas Jefferson – the ultimate anti-Federalist. Jefferson championed the Bill of Rights that both the Republicans and the Democrats no longer respect as demonstrated by Obama’s actions being indistinguishable from Bush regarding the NSA and both sides called Snowden a traitor.
The humility of Jefferson further showing his Libertarian views can be demonstrated simply by reading his tombstone. There is no mention of him being President of the United States. His accomplishments regarding liberty and for his home state are duly noted. He omitted any mention of being President since he was an anti-Federalist.
The Party Republicans are dreaming of chasing Donald Trump away since he is dominating the agenda and they want this to be politics as usual. What they fail to grasp is the rising resentment of politicians is the resurgence of Jeffersonian Libertarian-ism. Personally, I seriously doubt that mainstream Republicans will even allow Trump to take their ticket. I cannot imagine John Bohner not engaging in some covert action to try to prevent a Republican Trump ticket.
The Republicans keep publicly rebuking the Trump for his inflammatory comments, yet he climbs in the polls. The very reason the majority of Democrats distrust Hillary Clinton is the foundation as to why Trump is so popular. They at least know he is not beholding to Goldman Sachs as both Bush and Hillary are most assuredly. There is no doubt that a Bush or Hillary victory in 2016 will be indistinguishable for both will represent business as usual.
Where Rand Paul could have been a real contender, he seems to have lost his appeal for he too is trying to stay within the party and play politics as usual. The Republicans could chase Trump out and we could end up with a Trump third-party Libertarian surge. That would be the potential nightmare scenario for the GOP which our computer has been warning about for decades into 2016. NO, we are not advising Trump to answer the questions on this topic.
A populist outsider with unlimited resources attacking the Republican and Democrat nominees in the general election will be perhaps the most interesting presidential election of all time. This will be really raising political hell and our computer has been projecting just that but at the same time a rise in the people voting for 2016 attracting votes from both Democrats fed up with Hillary and Republicans tired of politics as usual.
The Republican Party mainstream establishment are out of touch and are not in tune with what is really happening. They cannot grasp they the emperor has no clothes. They are playing with disaster by trying to go after Donald Trump minimizing him and excluding him. They cannot see that times are changing – out with the old and in with the new.
Trump has become a their favorite punching bag since launching his White House campaign. Questioning Sen. John McCain as a war hero was really spot on. He said:
- Trump: “He’s not a war hero.”
- Frank Luntz, interjecting: “He IS a war hero.”
- Trump, chewing on his words, speaking quickly, with annoyance: “He is a war hero because he was captured. I like people that weren’t captured, OK?”
A person who was a true War Hero did something magnanimous. McCain himself has acknowledged that he was a less-than-stellar Skyhawk pilot. He was a bit too reckless, and, had he made better decisions, might have avoided his shoot-down in 1967. Being captured does NOT make someone a war hero. If that is the standard, then it diminishes all those who received the Congressional Medal of Honor for being a real hero. So Trump was actually very correct and any Vet who respects those who went beyond the call of duty to save their fellow soldiers would agree calling McCain a war hero tarnishes the memory those who died saving their comrades by placing McCain in the same category. Sorry – Trump was right on that one.
Trump has repeatedly declined to rule out a third-party White House run, saying in an interview with CNN’s Anderson Cooper earlier this month that he’s constantly being asked to run as an independent. He has said that his decision to run as an Independent will depend on “how I’m being treated by the Republicans.”
If Trump took up a Third-Party, it might be the biggest shot we have at saving the country insofar as it would at least turn Capitol Hill into a new playing field. It really would not matter who the Third-Party candidate would be, Washington needs to be shaken and stirred vigorously to let these people know being a “representative” is supposed to be OF THE PEOPLE, not of yourself, the Party, and government. Whatever it takes to upset the apple-cart, at this point, we need rather desperately for we are headed in a direction that will destroy our future and these morons are demonstrating that they do not get it and are pissed off at Trump for not playing their game of never telling anything the way it is, sugar coat everything, promise the moon, and deliver nothing.
Barron's just now, some 4+ years after Zero Hedge first called it out, presented with no further comment:
ZH Note: From "fringe bloggers" in August 2011
I had to read it twice because I thought I must be seeing things.
Last week, the Houston Chronicle had an article that touched on the fact that the quality of real-time oil data is, shall we say… less than superb.
The jaw-dropping part of the article involves a direct quote from an U.S. Energy Information Administration (EIA) employed engineer who is directly involved the EIA’s data compiling.
I have to share it in its entirety (my emphasis added):
“‘If you’re using the weekly production numbers to do trades on Wall Street, you’re dumb,’ said Gary Long, a petroleum engineer who compiles numbers for the EIA. ‘This is not going to work out for you. Don’t do that. We’ve actually had people call us and be very angry with us because they’ve lost a lot of money.’”
So there you have it.
The people who actually produce the most widely followed oil production data think that it is so unreliable that you are a fool to make any decisions based off of them.
I’m coming to the realization that the whole world is in the dark as to the real-time state of supply and demand in the oil market.
I covered the fact that the EIA real-time production data were lacking back on June 17 for our Outstanding Investment subscribers. The core of the EIA’s problem is that they themselves don’t have access to anything that is real-time, so their reports actually incorporate a lot of estimation, which is notoriously weak when it comes to figuring out turns in the market.
I believe that the EIA weekly reports have been slow to figure out that U.S. shale production is now in decline. I also believe that the EIA was underestimating how fast production had been growing prior to the crash.
That would make them wrong on both ends of the cycle.
Strangely, while the real-time EIA data continue to report U.S. production is not in decline, the EIA’s monthly Drilling Productivity Report keeps forecasting that U.S. shale production is now in decline… significant decline.
Yes, the EIA is telling us completely different things about the same subject. They should schedule a meeting and get these two departments in the same room to compare notes.
Here is the August version of the report, which predicts a 91,000 barrel-per-day decline in U.S. shale production in the month of August based on the number of rigs drilling today.
The publication of this August Drilling Productivity Report means that the last four reports are calling for shale production declines of:
- May — down 57,000 barrels per day
- June — down 86,000 barrels per day
- July — down 91,000 barrels per day
- August — down 91,000 barrels per day.
That is a total decline of 325,000 barrels per day of production over just a four-month period.
So where to from here? What numbers can we trust?
Well, the shale companies that we watch in Outstanding Investments are seeing a decline in production. This drop is a direct result of reduced drilling.
I would expect this reflects what is really going on across the industry.
Time will tell, of course, and I’m sure the EIA will get its numbers straight in due time. But it’s important to realize that even the big data agencies and experts are having trouble keeping up with the fast-moving production stats. Stay tuned.
There are, of course, two sides to the oil story. In addition to supply, we must consider demand.
For that, I’m going to defer to two pretty well-respected oil market observers.
The first is Andrew Hall, whom I’ve written about before. His oil trading colleagues refer to him simply as “God.” Needless to say, they think he knows what he is talking about.
Hall has generally been very long-term bullish, but he has also been able to get out of the way of oil price downturns. He is not a one-trick pony; he is a rational thinker.
Last fall, he actually made money while oil was plummeting. His viewpoint is more credible than most.
In his July 1 letter to his Astenbeck Capital investors, he made the following observation, according to Bloomberg:
“Oil’s collapse is sending demand in the U.S. and Asia ‘on a tear’ that will push prices up this year and into 2016.”
Hall referred to oil demand in the U.S. specifically being up a “whopping” 1.34 million barrels per day over the past four weeks year on year.
Another very well-respected oil market strategist, Mike Rothman at Cornerstone Analytics, also believes that demand is very strong and very much underreported by the EIA and IEA.
Cornerstone is hard data-driven oil market intelligence firm (they do the onerous barrel counting that nobody else is able to do), and usually we don’t get access to their viewpoints. Last week, one of Cornerstone’s reports was leaked online. It showed that Cornerstone believes that global oil demand is currently being underreported by an incredible 2.5 million barrels per day.
If that is true, the supply and demand fundamentals are much, much tighter than pretty much anyone believes.
How do we know whom to believe?
Well, what I try to do is independently come up with my own view based on data that I think are reliable. For me, the reliable data are the production guidance from the E&P industry as a whole, not the EIA data.
In addition to my own work, I listen to the experienced investors/strategists who have a track record for being right. I try to be aware of confirmation bias (seeking out only the opinions that are in line with mine) while doing this, which is more difficult than it may seem.
So what do I think?
At this point in time, I feel pretty strongly that the rate of U.S. production decline is going to surprise pretty much everyone.
On the demand side of the equation, I’m not entirely sure what to believe, but if I were a betting man, I’d follow the most successful oil trader that I’m aware of, that being Andrew Hall.
This last down leg in oil prices has not been a lot of fun, but considering the fact that we have Iranian sanctions lifted, distress over Greece and a rising U.S. dollar, we likely shouldn’t be surprised by a short-term dip.
Over the long term, I still believe oil prices need to head higher (substantially so), with the most likely near-term catalyst being the EIA real-time data finally catching up to the fact that production is in decline (assuming it is).
Keep looking through the windshield,
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