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.