Friday 29 December 2017

Reforming the House of Lords

I personally have had enough of the unelected liberals in the upper house. We only have one elected entity in the UK and its the house of Parliament. Not the government, not the PM, nor the house of Lords nor the head of state. 

Its all a historical anacronysm.

Instead we could have a 5 yearly elected upper house. Eligible candidates could be those with a Knighthood for public service or similar. We could have 300 or 400 full time Lords elected via regional list. The largest coalition could form the senior leadership and the lead of the house could be formal head of state.

The Windsors can lose all formal power and access to public funds and assets. 

Monday 18 December 2017

The pain in grain falls mostly on the plain?

I have seen some people pushing agriculture as a theme recently, buying farms, thinking its an inflation hedge or something like that. It's the most basic of basic industries, manual labour and energy are two of the main input costs. So without profitable fixed price long term supply contracts to food brand companies or a significant structural cost advantage, such as being the largest producer in a country, its not a very good business. 

As this blog makes plain.

As an example, there is a pretty good interview with William Chase about how he went from a bankrupt potato farmer with a commoditised, low margin product to a successful Potato Chip producer with the premium Tyrrells brand.

Prices down 25% in Prime London and activity down 70%

Prices down 25% in Prime London and activity down 70%. Prices are still ridiculous though. 

There is a myth of 'all cash' buyers. But having worked in a private bank I can say many prime properties are mortgaged, at least up to a few million, maybe the £5m plus are mostly cash buyers. If you look at CML postcode data mortgage debt in prime areas is up 20-25% in the last 5 years or so, whereas in the West Midlands town I grew up in its actually flat to down despite a lot of houses having been built.

If this guy ends up in No 11 better swap the two up two down in West London for somewhere in the industrial belt.
 Image result for john mcdonnell labour gif

Friday 15 December 2017

NY Fed inflation moves up to almost 3%

NY Fed's Underlying Inflation Guage that in addition to prices uses other macro factors pushed up to almost 3% in November as CPI prices have bounced this year. I think most people would recognise 3% inflation as being closer to the mark more than 1.5% Core PCE. After all smartphones may get 'hedonically' better each year, but they still cost the same.

Friday 8 December 2017

UK trade stats, Brexit and economic rebalancing

UK October trade stats out. If we are running about £120bn trade deficit, mostly with China and the EU, at a 35% tax rate and say an average manufacturing wage of £35k, that is worth 3.4 million good quality jobs and £42bn of direct taxes. You would also get indirect jobs and taxes from the secondary effects of more domestic activity.

Not that surprising Germany doesnt want to change anything in the EU. When elections/ referedum do force the change, Germany will have a final demand crisis. Even 18 months after the Brexit vote it astounds me that politicians like May dont understand how it happened, while others like Corbyn get it but are forced by New labour MPs to argue for a continuation of the status quo. 

A wealthy country with a balanced economy should be running a surplus of a few % of GDP, so the actual delta on a rebalancing would be even bigger than the numbers above. 

It will happen as the economy rebalances to higher wages, high investment and saving and higher exports. Continuing negative real rates, tight employment and an infrastructure/ house building programme should push things in the right direction.

That change also represents a massive rebalancing of economic sectors in the UK, and similarly the US.

Wednesday 6 December 2017

Fourth Turning: oil independence and Jerusalem

US transitions almost to oil independence, doesnt need client regimes in the Middle East and then recognises Jerusalem as Israeli Capital. 

More generally the US turns towards unilateralism and isolationism and rejects the institutional framework that it set up post-WW2.

Into the vacuum steps China with its belt and road plan; a new superpower emerging for a new century.

All of this fits into the Fourth Turning; political actors, geopolitical developments, various instabilities, the international institutional breakdown.

India starts a new credit cycle

Indian M3 growth has bounced up to 8.8% in the latest release. I think the 2011-2016 consolidation in EM ex-China completed in Q2 last year. The demonetisation drive a year ago pushed back the beginning of a new credit cycle, which is now starting. 

The last real credit cycle India had was pretty much 2003-2008. Starting with the equity markets emerging from a 2000-2003 bear market. During that credit cycle, the equity index more than tripled. In fact, from the bottom to the top it was more like a 6x.

Interst rates in India have been cut significantly below nominal GDP growth, and that loose policy should help start a new credit cycle. 

This time around the starting point for equities is following a big post-Modi rally, so less attractive. P/E ratios are relatively high, and P/B value ratios are not super cheap. For example the Nifty index is on about 3.4x P/B value now versus more like 2.1x in Q2-2003.

The value instead can be found in private credit (NPLs, distressed and new direct lending) and commercial real estate and infrastructure equity.

CNH slides next year as USD rallies?

I am of the view that the USD could rally next year, for a while, as the Fed attempts to withdraw policy and the economy continues to tick along versus massive global short USD funding.

CNH has tracked the inverse of the USD pretty well for the last few years, so if the USD does rally into next year will be interesting to see if CNH/ CNY resumes the slide.

On a REER basis China is pretty expensive and is running large trade deficits with non-US/ EUR trade partners.

As China attempts to pull in the credit cycle, discussed in many other locations, it could drop the FX rate while trying to support nominal wage growth to support final/ aggregate demand and without the inflation it causes hurting competitiveness too much. 

That said we are talking maybe 8-10% annualised deval over several years, so hard to make money from the FX forwards, unless they hold back for a few months as the USD rallies and then get forced to make a more abrupt move in perhaps Q2.

Thursday 30 November 2017

US economy growing 5.5% vs 1.25% Fed funds?

The BEA Q3 GDP release today had the US economy growing 5.5% in USD/ nominal terms, albeit with non-financial profits going sideways since 2013. 

Only in Janet Yellen's mind could there be uncertainty as to whether interest rates should be 1.5% or not. The market has to look for 4 hikes next year, which would take Fed funds to 2.25-2.5%. 

Question is what the 10 year does. With balance sheet reduction I think that should put selling presure on it, however if people sell HY and buy bonds that would offset it. 

So far it looks like the curve has been trying to flatten. If the spread went to 50bps, it would imply a 10 year in a years time at 2.75-3%. With recession/ inflation scares that might give a trading range of 2.5-3.5%. 

Versus perhaps 6% nominal GDP growth its still massively negative in real terms however. So the quesiton would be whether the Fed can hike enough to curtail a wage inflation cycle and risk a recession, or if they stay permanently behind the curve. 

The financial economy is likely to act like its a recession far earlier than the real economy, aggregate asset prices have to fall as QE sees a fall in liquidity and rate hikes push up discount rates.

This Fed being trapped behind the curve vs triggering a real economy recession debte doesnt seem to be a focal point right now. Kashkari yesterday even said they should be able to tolerate 5 years of inflation above target given they have had 5 years below. The problem would be is inflation starts to push to 3 or 3.5% on full employment,  but we definitely need more wage growth in the areas of strength for that to happen and its unlikely to be an issue in the next six months. 

US oil imports and exports

With US domestic oil production growing 1MMbpd YoY and expected by analysts like Goldman to keep growing at this rate for several years, the US net imports of oil have dropped to the 3-4MMbpd range, from 12.5mmbpd pre-shale. With some reduction in demand due to EVs and energy efficiency perhaps in the next 2 years the US can go to being a net exporter. Nevertheless, the global market is tightening.

Tuesday 28 November 2017

Credit growth and asset values

Often one of the hardest things to fathom in finance is the lack of lateral thinking or common sense from finance professionals. 
At the moment the US yield curve vs equity bull markets are puzzling them. 

Casting aside the fact the Fed has manuulated yield curves via QE, the overall answer could be as prosaic as this. ~90% of the actual money supply is debt, so as debt grows faster than GDP there is more money available vs the amount of assets. 

Therefore average valuations rise, hence higher equity and bond prices. Until the credit cycle stops or there is a dash for cash. 

To put it in context from the end of 2008 the US GDP has increased approximately $5Tn, while total US non-financial debt has increased approximately $15Tn, a ratio of 3:1.

So watch out for increasingly narrow bull markets, Fed driven shocks (rates or balance sheet), European banks liquidaing their $600bn Treasury xccy carry trade, or a slowing of the credit cycle.

Finally I am of the view the policy response when there is a recession will be such that the recession is shallow but the outcome wage inflationary; that will be the true end of the 35 asset bubble super cycle we have seen driven by credit.

Monday 27 November 2017

More Fed BS (balance sheet)

Fed managed to buy assets in the week to 22nd Nov (as part of its supposed $50bn a month balance sheet reduction); USD weakened and risky assets like JNK and EMLI bounced. But this week has started off weaker.

Tuesday 21 November 2017

Wages as a % of GDP

Wages as a % of GDP going back to post-war levels would entail almost a 20% rise. Corp profits, FIRE economy size and overall debt levels would have to fall a lot and the CA/ double deficit would need to go to a surplus. The only way to smooth the process will be a Fed staying a long way behind the curve and letting a wage-inflation cycle develop. Wages currently look to be growing 3-3.5% against a tightening labour market. Which comes back to having an inexperienced LBO guy in the Fed.

Monday 20 November 2017

The Fed starts to shrink the balance sheet

As mentioned or aluded to elsewhere in this blog, I think we are on the cusp of many turning points in the political economy, which will open the door to the so called fourth turnign phase. The Fed shrinking their balance sheet is one of the key ones. 

EM is losing money almost every day and the Fed has only just started shrinking its balance sheet, so far a lot less than $50bn a month.

Some other markets showing topping signs. I think EMBI and US high yield total return so far the credit spread widening has been masked by a bond rally.
The floating rate ETFs yield little. 

 Inline images 4

Inline images 5

Inline images 1

Inline images 2
Inline images 3

Friday 10 November 2017

Impact of Fed balance sheet normalisation

Yellen starts selling Treasuries to bank billions of profits for US taxpayers on QE and tighten policy. 

High beta assets like HY and EM sell off, which causes Treasuries to rally. 

Real money which has been forced into high beta assets is left holding the bag. Sovereign and regulated money is left holding a low yield portfolio exposed to duration losses next year. 

I guess it should hold until the market focusses on wage inflation and the back end starts to sell off, but that might be a 2018 story.

Wednesday 8 November 2017

What shoud London finance focus on post Brexit?

Using the concept of individual countries having national competetive advantages what does post-Brexit offer London.

Lots of comments about European banks moving jobs away from UK. My 2c is we need to push the high leverage, low margin, commoditized, systemically risky activities to France/ Germany.

Germany for the lending as they dont get finance anyway and their stock of savings gives them an advantage in commoditised lending. And in post-debt bubble environments its probably not the best business to be 15x leveraged in.

France for the derivatives. You cant compete with an army of engineering PhDs using sovereign backstoped bank balance sheets anyway. 

As luck would have it they seem to be trying to get the business anyway via regulatory measures. 
In my view London needs to reemerge as a merchant banking/ entrepreneurial hub. A nexus of deals and 'at risk' capital. Particularly in credit, there seems to be a lot of opportunities for merchant banking or flexible private credit investments given comemrcial bank retrenchement from anything involved. 

EM always needs funding and is where most of the stable medium term growth and capital formation is.

A mix of merchant banks with access to cheap offshore funding and closed end or other flxible funds/ pooled structures is the most appropriate way to achieve this. 

If we are going to have a wage-inflation-cpaex led cycle over the next 10 years this is especially important.

An update on the Royal Borough

House prices in west London was actually one of the first blog posts post Brexit. Took a while for the new direction to take shape and indeed in the zone 2+ residential boroughs house prices seem to be going sideways or up due to the chronic shortage.  A few rate hikes should put an end to that though.

Over half of todays 38 ads are price reductions. Im even getting email alerts in Surrey where over half the emil is price reductions.

Mouseprice, which is not comprehensive or 100% accurate, has 55 pages of reductions on 122 pages of 15 ads per page in the Royal Borough.

Here is a good example for a 3 bed flat in a period block:

20 Jul 17:   Asking price reduced 9% to £2,950,000
17 Mar 17:   Asking price reduced 6% to £3,250,000
03 Mar 17:   Asking price reduced 10% to £3,450,000
28 Jul 16:   Asking price reduced 9% to £3,850,000
25 Feb 16:   Marketed at £4,250,000

2000sq ft

The same property is listed with at least 5 agents on rigthmove, with one using the innovative sales angle of 'viewing advised'

The property previously sold but with a lease extension the valuation cant be compared. 

Saturday 4 November 2017

Why put an LBO guy in as Fed chair?

My view on LBOs is a large part of the payoff is just the arb between debt costs and nominal GDP growing over time. If GDP grows 5% a year then most companies will have revenue growth of about 5%, so if you hold the LBO for 5, 6, 7 or so years then sales and profits are up big wihtout any value added. And the cheaper the debt is then the bigger the arb....

With US nominal GDP growing 5-6% or so, and Fed funds at 1.25%, its a pretty big subsidy to business/ real asset owning borrowers. Such as LBOs guys or real estate developers...

Last time U6 was 7.9% (Dec 06) Fed funds were 5.25%. 


Financial conditions are very easy. 

With Trump, a bankruptcy artist, in the White House and an LBO guy in the Fed, we might not see 5.25% for a while though. I mean why would we? What incentive do they have to get to a neutral rate for the real economy in a country where non financial debt is hundreds of % of GDP. The problem will be when the Fed breaches its 2% inflation mandate on a consistent basis. At that point after a rate shock I think we see Fed mandate drift which I believe would need legislation.  
They have also cut corporate taxes to help facilitate the final transfer of the wealth through debt eroding inflation.

As Michael Hudson has said, we have had the asset pump, next comes the inflation that wipes out the debt and middle class savings which in turn forces baby boomers to live off their Gen X children. 

I also think Powell in the Fed and a Fed under Trump's orders is another sign that we are soon to transition from the third to the fourth turning, ie the politics and societal changes are happening now which will trigger it during this Presidential term.

Wednesday 1 November 2017

USD readies to break out?

USD bounced off the 50% retracement of the bull market. The good US data is starting to suggest that the Fed's financial conditions model is not broken, conditions significantly eased this year supported by a flat curve and narrow credit spreads, and the Fed is further and further behind the curve. 

Yellen will hand over a firmly wrapped up pin to her sucessor, I guess it will be Powell now.

Im sure Powell wont be in any rush to aggressively tighten but he will be underpressure to step up the pace as part of his dual mandate as Core PCE rebounds as the drag from manufacturing, retail and durable goods passes and the headline number better reflects where US wage inflation is.
I think there is a good chance the USD index sees highs. Aginst the Yen I dont think that is a problem and Im bearish GBP as well. Question is the Euro. I think for the Euro to see a new low, say parity, we need policial risks to rear their head again as at 1.06 earlier this year the equivalanet of the Deutsche Mark and the French Franc were more or less at all time lows, as previously discussed on this blog. I dont think Catalonia is done and dusted as some market particiapants think. 

China upgrades its vendor financing model via Belt and Road

China is upgrading its vendor financing model from trinkets for Americans to heavy industry and infrastructure for Belt and Road recipients. 

Question is what basic goods will the recipients produce for China? If the answer is more or less zippo, the history of imperial economics is one of eventual default by the borrowers and control by the lenders. 

Its a brilliant geopolitical move by the CCP in my view. And one the China bears usually fail to understand. 

The following was posted on social media by someone to prove that point:

"In September 2016, the Indus Water treaty was threatened by India that would have essentially created food and water riots in Pakistan. Sensing the sensitivity, Pakistan responded by a) calling it as an "act of war" and b) essentially added "water security" to the "national security" scrolls.  

Under President Xi's Belt and Road Initiative (BRI), we have seen barrage of dams being constructed - large, medium and small sized. A $50bn commitment from China's Three Gorges Corporation would finance the dams worth generating 22,300 MW of clean energy. Pakistan's current water storage capacity is 30 days and availability per capita has dwindled to border line 1000 cubic meter per person.  In light of such transformation, the work has commenced on Diamer-Bhasha Dam (4500MW), Dasu (4230MW), Suki Kinari (870MW) and Karot (720MW). Expected to come online within 3-7 years, they would not only reduce the water shortage but would also bring the overall cost of electricity down in Pakistan thereby giving a competitive edge to the industries.  

Amidst the topsy-turvy nature of the equity investors over political uncertainty and widening Current Account Deficit (CAD) in Fiscal Year 2018, what we are seeing is good dividends in years after that!" 

US heading towards oil self sufficiency

Interesting weekly EIA numbers. 

US demand is down YoY, domestic supply up, exports up, net imports collapsed. YoY US inventories down 5%. 2MMbpd more of shale supply would more or less make the US self sufficient if oil demand continues to shrink. 

But globally its the opposite picture with ongoing demand growth and supply slightly less than demand as the capex cutbacks since 2014 dont seem to really have been felt yet in non-OPEC, non-shale production.  

Nevertheless Brent is over $60, more or less doubling from the bottom last year.

A few years ago who would ever have thought that a new technology, combined with demand weakness would almost make the US oil self suffient?!?

Monday 30 October 2017

Wages up, magins downs

Kind of a noisy chart but commercial bank credit is bumping along at under 2% YoY while wages rise and squeeze margins for most companies.

So can consumers prop up final demand if the Fed stays far enough behind the curve in terms of the real economy? If so why would 10 yr bond yields yield 2.4% and not 5 or 6% if the Trumpster is setting the scene for years of wage-inflation cycle? In either scenario why are equities so high still?

Saturday 28 October 2017

Vene's MTNs bounce

Defaulting on your obligations is not the act of a macho, tough guy, revolutionary after all. Also the oil price is recovering which helps.


So a vague and potentially confused statement from Maduro has sent the 2021s from 50c on Thursday down to 30c or so on Friday.

At the end of the day the debt they have is fine in a functioning economy. The problem is Maduro. Question is what if anything will he agree to? With the US sanctions in place a swap to a reprofiled strip would probably have to be via CNH bonds. Which most US and EU investors wont be able to hold or take part in. Which means default and no restructuring and US investors trying to seise oil exports through courts. PdVSA will also struggle to import light oil for its refineries.

One wonders if below the surface the PdVSA production problems are mounting and it is causing cash flow issues. As before Thursday with a rising oil price it looked like the bet was they would pay and try and coerse an amicable reprofiling next year, hence the bonds in question rallying 10 points in a couple of weeks. Clearly the sanctions have caused problems.

I dont see Maduro leaving voluntarily either he and his cronies are big time narco trafficantes. But equally a hard default is not a very likely option.

In short a positively evolving story has been derailed by this weird announcement.

Wednesday 25 October 2017

Puerto Rico GO bonds trading at 26c

Some GO bonds changed hands for 26c yesterday. Almost no liquidity. I think for there to be liquidity they would be trading under 20. Which raises month end valuation questions. The Greek strip which had a 50% haircut traded in mid-20s before the deal and bottomed at 6.5c on a pre-restructure basis/ 13c post restructure after the deal as retail dumped. Seems similar here with retail clinging on to bonds they bought in primary market. Except the haircut could well be more then 50%. 

Seems like bondholders lobbying a bankruptcy artist for a Federal bailout isnt going to plan.

Trump will push I think for the judge to big bath the debt before agreeing a dime of development aid. Any PR GDP warrants may have value though.

Tuesday 24 October 2017

China debt - Y U NO include the assets?

Hardly a day goes by without someone raising the issue of debt in China.

China is a net external creditor so the debt is internal and due to distributional issues. For example a municipality issuing debt to build a bridge instead of taxes. Or an SoE which is loss making covering cash flow needs vs investment targets. CCP are dealing with the loss making/ mal-investment and curtailing asset speculation while ramping up infrastructure.

Secondly real rates are low in China and China is growing 6 or 7% a year, so the borrowers, if they have revenue growth, and the government does have tax growth, are real rate arbitrageurs.

The government also does have a positive net asset position as per several studies. from memory over half over GDP is still from SoEs.

Hope you liked the Y U No guy with a scumbag hat.

Which is not to say CNY wont depreciate over time against the USD/ EUR. Just it will play out over an extended period and the short trade is negative carry and subject to squeezes.

Monday 23 October 2017

USD heading for a final blow off top?

A final blow-off top to the USD bull market that started a few years ago would be contrary to many people's positioning. 

Although only a small amount of movement so far it has started going through some technical levels. 

Shorting CNH is the new shorting JGBs

Shorting CNH must be the modern era's shorting JGBs. 

As the joke goes, you arent a successful macro hedge fund manager until you have lost $1bn doing it.

Nevertheless it makes option commissions for the brokers advising US based managers to place these bets. 

As I have said I think the pressure release valve in China ultimately is 5-10% wage growth inexcess of productivity and driving FX weakness/ negative real rates cycle that would play out over 10 plus years. So the CNY could devalue significantly over say 10 years, but the yield differential with USDCNY will make the trade costly and volatile.  

So there is no real minsky moment, but there is a reflation of GDP up towards debt levels.

Friday 20 October 2017

Thoughts on the next Fed chair, USD, rates

When the bubble is this big, no one dares pop it. Aka the PBoC doctrine... So Powell is the insider front runner.

That said the Fed has a legal mandate and will have to gradually withdraw policy.

So given the market seems to doubt the Fed can hike, the pain trade now is repricing in more hikes and a higher terminal rate.

Trump passing Koch brothers transcribed tax cuts and any evidence of Core PCE rebound or wage inflation would trigger it. This could trigger a risk off, USD final blow off top rotation.

However moving into next year as it becomes painfully clear that the Fed will have to remain negative in real terms for as far as the eye can see and that any wage inflation will basically be let run, within reason, then the Trump administration will set the path for a weak USD regime.

Thursday 19 October 2017

US and European Low Yield/ High Risk bonds

The lowest the European HY option-adjusted spreads went before was approx 1.8%, vs 2.48% now. 

In the US the option adjustedspread is about 3.5%, the lowest it got in the last 20 years is about 2.4%. The lowest nominal yields got was about 5.2% in 2014 vs 5.5% now as the Fed continues hiking. 

However, in Q2 2007 HY yields were over 6% vs 2 and change now. Nominal yields are higher in the US but the Fed is also hiking, the US is further ahead in the cycle and defaults should rise sooner in the US than EU. 

To put it into perspective long run default rates could average 2-3% and can spike into the teens in the aftermath of a recession. 

There is also nothing there for risk emanating from the political economy, of which there is plenty in dysfunctional Europe.

Truthfully if nothing much happens then technicals could tighten spreads to record lows, but that is just a game of picking up pennies infront of a freight train. 

Wednesday 18 October 2017

Chinese credit leakage

QE has leaked everywhere, mostly into assets. With Japanese, Chinese and European QE it leaked across borders. But the the spiot is being reduced. I think Fed tightening has not been felt so far, at least in part, as the other major blocs were still easing. 

In fact US financial conditions have loosened as yields have fallen:

 Which brings US to the latest statement of intent by President Xi:

"housing is for living rather than speculation"

This could not be a clearer signal to get away from the assets that Chinese credit leakage has pumped up. Most notably prime real estate.

Some people are unaware of just how much money has leaked out. But Hong Kong prime commercial real estate yields 1-1.5% to give an example of the impact at the margin a tidal wave of capital has. The bear market Hong Kong experienced last time it went through a proper tightening cycle was brutal.

The thing about porosity, is the flow can go in both directions.

Sunday 15 October 2017

Flailing Tories reactionary policy initiatives

May by all accounts is an excellent administrator. But she is no leader and her 'flagship' housing policy at the Tory conference this month was to finance a pathetic 5000 more houses a year. It's hard to believe how the leadership could have considered that to not have been a joke.

Now a Chancellor facing calls to resign is rejigging a new budget.

Corbyn is describing the career Tories as offering failing managerial politics, frankly, I struggle to see any actual management. At least Tony Blair tried to dream up policies by focus group. This final group of career politicoes are doing by crisis reaction. Truly pathetic.

Corby promising change, even if they havent figured out the details should win the next election. The pressure from Europe to make unreasonable payments is likely to split the Tories, with most Brexiteers not wanting to pay anything, particularly when there is an economic case for the EU to pay us to access our market.

One wonders how long a truly failing Tory government can last if it cant push through legislation. Breitbart are also planning to reinfiltrate UKIP supporters into grassroots Tory constituencies to change the MP selection.

Tuesday 10 October 2017

UK's worst ever trade deficit

UK ran a record trade deficit of £15.5bn in August of which over £8bn was with the EU. Germany and China being the main culprits. 

When these countries have expropriated millions of UK jobs, why would any government pay tens of billions to maintain the same trade arrangements after Brexit? Just shows the economic ignorance of career politicos. 

Friday 6 October 2017

Unicorn down rounds

Seems concept may be giving away to reality with the unicorns. 

Tesla loses money on every product it sells and now faces mainstream competition. 

Most online companies reliant on Ad revenue models that don't add any value for the advertisers, for example, products like new cars being advertised on toddler cartoons on youtube. 

Now a marketing based mail order diaper company that loses $1m a week doing a down round.

Wednesday 4 October 2017

Puerto Rico GO bonds crash

Puerto Rico GO bonds traded down to 44c yesterday on almost zero liquidity, and a 34c buy today, the smartest guys in the room buying at 80c 2 years ago and demanding a par bailout funded by US tax payers can't be happy. 

Trump taking a lot of heat on PR as well, so torching Wall Street represents 'multiple ways to win' as the morons' saying goes. 

“We are going to work something out. We have to look at their whole debt structure,” Trump said during an interview on Fox News Tuesday. “You know they owe a lot of money to your friends on Wall Street. We’re gonna have to wipe that out. That’s gonna have to be - you know, you can say goodbye to that. I don’t know if it’s Goldman Sachs but whoever it is, you can wave good-bye to that.”

Most finance guys dont get politics, or at least a changes in it. Most of them have a very simple world outlook and have had very insular upbringings and life experiences.

Friday 29 September 2017

Catalonia's context within the EU and the Fourth Turning

One of my main passions if you like in finance is the political economy. So the intersection of markets, politics, economics.

I would hardly say that regional debt yielding 2% is 'dislocated' but its more the spread vs Madrid that counts.

Catalonia is one of the richest and most productive parts of Spain (, and similarly, the Basque country in the north near France is rich and has even less cultural similarities to Spain (the Basque language may be derived from an army of Attila the Hun, ie Turks from the Mongolian steppe most of whom eventually settled in modern-day Hungary). If Catalonia gets full fiscal devolution or even independence it will hit Madrid hard which already has 100% debt to GDP. The Basques may also demand a similar deal. The two regions combined are over 40% of Spanish GDP. This would be like the west coast separating from the USA.

I think its hard to predict these outcomes ahead of time and often such important votes are near run things. In fact we have had 'near misses' in the Netherlands, France and Germany this year. So you just have to get out of the way or hedge any existing positions as best you can. Once the dust settles, if Catalonia is cheap vs Madrid, in the end its probably a better credit than Madrid is going forwards.

There is political discord stirring in other parts of the EU and Draghi has successfully papered over the problems from a financial markets standpoint. His policies mean also that problems and dislocations are likely to be localised. France and Germany are probably the only two economies big enough to drive a systemic problem at the moment. Italy has an election next year with three of the four leading parties being Eurosceptic. However one of those is Berlusconi and the likely outcome of the election is a centrist coalition of Renzi and Berlusconi.

I think more generally we are at the turning point of many long run trends. Decentralisation in Europe is one new trend (Brexit, Catalonia, Poland and Hungary refusing some EU edicts). Wage-inflation is another (Trump, Sanders, Corbyn, Le Pen etc). Huge credit super cycles topping out (eg the US credit cycle that started in the mid-1980s), Germany's intra-EU labour arbitrage which has crushed southern European and French industry is seeing some pushback from Macron.

Neil Howe, with respect to his book the Fourth Turning could describe these as classical signs that we are coming towards the end of the third turning, the unravelling of the institutional framework that was set up post-WWII. Howe I believe thinks the Fourth Turning started in 2008, I, on the other hand, think the 3rd Turning started in 1997 and is still underway.

There are many distortions in European fixed income. For example last year I looked at AFL, Agence France Locale. It had a negative yield at the time. Its effectively a 1% equity, 99% debt CDO/ ponzi scheme to finance/ refinance the local municipalities in France who have in many cases taken on CHF and Yen debt and then set up AFL to lower their EUR interest rates. It traded down towards the French election but partially recovered since. Any threat of impairment, ie enough defaults to burn the equity tranche, it will trade off quite a few points. The current yield on it is about 20bps annualised to maturity.

Thursday 28 September 2017

PREPA bondholders try to use DIP financing to squeeze out minorities

PREPA bondholders trying to swipe the assets via a DIP loan and FEMA funding and squeeze out minority bondholders at no doubt knocked down pricing and with cheap FEMA funds to support the recovery.

Wednesday 27 September 2017

Where should the US 10 year Treasury be trading?

Outside of a recession is there any reason the US 10 year cant be pushed over 3% by Fed hikes? Any sign of wage inflaiton starting to take hold should do it. Most sub-sectors of Core PCE have over 3% inflation underpinned by wages already. 

If you exclude the over 55s where there is some element of people taking part time jobs before fully retiring then wage growth is probably over 4% already.

Obviously when a recession does strike at some point then Albert Edwards will be celebrating his sub-1% yield target. 


Wednesday 20 September 2017

The left are now the establishment censors and the right is the counter culture

Why do I have to keep paying for the BBC left wing propaganda machine?

More pics in the link

Monday 18 September 2017

West London house prices off 10%

Prices down 8-10% in west London YoY but still barely a 3% gross rental yield if fully occupied.

Unwinding George Osbourne is going to be painful for those left high and dry. Havent seen Brexit repatriated related selling and only the cusp of Buy to Let exiters. Carney is also threatening a rate hiking cycle to cool off the real economy which will pressure the financial and asset economy here.

Is the USD bull market really over?

I wonder if the USD bull market is really over, the Fed is far from a neutral rate setting for the real economy if you believe there is some strength in the US economy and that strength should support a gradual wage-inflation cycle. That said with the amount of leverage out there neutral rates for the financial economy are much lower than the real economy. Potentially 2-3% lower. The world is still very short USD and the EZ problems are plastered over rather than rectified.

If the Fed looks set to be on autopilot to the dot plot neutral rate of 3-4%, or if they are forced to walk the terminal rates higher in the dot plot, it could put a real squeeze on the financial economy and the USD shorts. 

Thursday 14 September 2017

Let them serve cake! Some wage growth charts

Many service jobs created, but public sector pay well ahead of average and service jobs

Recent weakness two sectors: retail/ restaurants and construction.

NRA member Trumpets vs smashed avocado on toast loving Massholes?

Companies forced to give payrises to the least productive workers, while senile Boomers retiring at peak productivity with little savings are having to step down to part time service jobs

The tea party states

Much of the weakness in headline numbers in Q2 and into Q3 has been a function of disasters in a few sectors (autos, retail, some areas of industry), but by definition these can only be temporary, are partly down to structural shifts, and elsewhere there is tightness.

Companies have been reluctant to pay up for more staff, but we need the stronger companies to pay more and squeeze the weak ones. If that starts to happen and the July bouce continues it will squeeze margins into year end and underpin a pick up in defaults in 2018.

One fly in the ointment is the collapse in credit growth this year, which has continued through August.

Tuesday 5 September 2017

Could CAT bond yields reset into next year

I wonder how the CAT bond funds will do this year. 

Most of them had been running at about a 4-4.5% gross spread. Florida hurricanes are often the no. 1 risk and Texas hurricanes often in top 5. 

Would just need a Japanese or Californian payout or another hurricane to travel up the east coast to round the year off and perhaps reset premiums back to attractive levels for next year.

The space is interesting as it offers a reasonably liquid credit spread but is economically insensitive. Spreads normally reset wider after big payout years and its been several years since there was a big payout. 

August UK car sales weak

August sales weak again in both cars and commercial vehicles vs a year ago. Van sales down about 3% YoY. Autos faring worse.

Plug-in hybrids growing strongly though. Petrol hybrids up 75% to 2200 YoY.

Monday 4 September 2017

North Korea's miscalculation

North Korea's miscalculation as it continues to escalate.

Why is the US even interested in North Korea?

Because its a bellicose dictatorship and like many others creates an external enemy/ supposed aggressor to enable domestic martial law and internal control. The calculus of this has led North Korea to progressively escalate to the point of creating nuke bombs and ICBMs while still threatening the US.

If the US does nothing with North Korea escalating, the pain is felt in Washington, while if the US strikes and it goes wrong, the pain is felt in Seoul. If the US strikes successfully the upside is felt in Washington and lots of contracts for US companies.

If the US opts for stockade-like sanctions, North Korea pretty much has to escalate. 

Hopefully the situation wont escalate but North Korea seems determined to do so and perhaps they are miscalculating the willingness of the people around Trump to act.

Wednesday 23 August 2017

Bank credit shrinks so far in August

Bank credit went back to shrinking in early August. Since Trump was elected it pretty much stalled through to April, grew again for a few months, slowed in June/ July and has shrunk so far in August.

Clearly there is a spread of phases across the sectors with some like Autos probably in recession, others slowing, but many service sectors still going strong and driving some wage-inflation pressures and, in my view, oil is recovering.

If the overall economy continues to grow while a few sectors crash, like oil did 2014-2016, the Fed will be under pressure to hike rates. On the other hand a transmission mechanism like overall credit shrinkage or corporates starting an inventory liquidation cycle, could cause a few sectors contracting to morph into an overall recession.

I suspect either scenario (Fed hikes or recession) is USD positive.

Latest number was slightly positive, but so far this year its drastically slowed. 

Tuesday 22 August 2017

UK subprime - another US/ UK/ Canadian sectors is crashing

The crashes are now happening in multiple US/ UK/ Canadian sectors and are getting ever closer to the core of the post-08 monetary/ fiscal stimulus; namely US and Chinese FIRE economy assets.

Counting the dead canary's: 
  • US/ UK autos
  • Bricks and mortar retail
  • Global super prime residential
  • US CRE (is now falling)
  • Canadian mortgage lending
  • UK sub-prime lending. 
What's next, companies reliant on low wages and an import supply chain?

Sunday 20 August 2017

Employers paying up for workers while the Fed remains massively behind the curve

Last time companies paid up this much for the least productive workers, the Fed had already finished its hiking cycle. 

I suspect the headline number is being subdued by baby boomers retiring at their peak earnings/ productivity or taking on some part time lower pay work prior to fully retiring. 

Eitherway the $ wage bill grew faster in H1 than $s of GDP, so we have a sectoral rebalancing already underway.

As the Fed gets forced into catch up the USD should rally and bond yields rise, which pushes back my EURUSD at 1.30 forecast for a while. It will also squeeze corporate margins even more, which low market breadth is perhaps hinting at despite the gap between GAAP and non-GAAP earnings already being almost 10%.