Regime Change At The Eccles Building: From Greed To Fear

Posted by Tyler Durden on

Excerpted from Doug Noland's Credit Bubble Bulletin...

Deutsche Bank (DB) dropped 13% this week to a 15-month low. DB is now down 28% y-t-d. European banks (STOXX) sank 5.0% this week. Hong Kong (Hang Seng) Financials were down 4.9%. Japan's TOPIX Bank index fell 3.3%. In the U.S., banks (BKX) were slammed 8.0%, the "worst loss in two years." The Broker/Dealers (XLF) fell 7.3%.

It was also an active week in Washington.

The Powell Federal Reserve raised short-term interest rates, and the new Chairman completed his first news conference. President Trump announced trade sanctions against China. There was more shuffling within the administration, including John Bolton replacing National Security Advisor H.R. McMaster.

Let's start with the FOMC meeting. Analysts - along with the markets - were somewhat split between "hawkish" and "dovish." As expected, the Fed boosted short rates 25 bps. On the dovish side, the Fed's "dot plot" showed a median expectation of three rate increases in 2018 versus pre-meeting average market expectations of 3.5 - and fears of four hikes. The Fed upgraded its view of GDP prospects and lowered its forecast of the expected unemployment rate. Steady as she blows for normalization - markets not so much.

Chairman Powell did nothing overtly to rattle the markets. The message, at least for the near-term, was continuity. He was clear and concise. There were, however, important subtleties.

A couple of headlines worth noting: From the Financial Times: "Jay Powell Plays it Safe in Federal Reserve Debut." From Bloomberg, "Powell Disses Dots Again as He Stresses Limit of Fed's Knowledge" and "Powell Debuts as Show-Me Fed Chair in Shift From Theory, Models."

Jerome Powell faces an extraordinary challenge as Fed Chairman. If he does not move quickly and aggressively to flood the global financial system with liquidity upon the onset of financial crisis, history books will surely have him tarred and feathered. Greenspan, Bernanke and Yellen hold responsibility for history's greatest Bubble. Yet it will be on Powell's watch when the Fed faces the harsh consequences. In the end, he'll be left with little alternative than more QE and zero rates - surely deemed too little too late in hindsight. Winless.

I've been impressed with our new Fed Chairman. For the first time in (at least) a couple decades, I can listen intently to the head of the Federal Reserve (testimony and press conferences) without that recurring urge to roll my eyes. I feel respectful.

Alan Greenspan was the master of obfuscation. His conversations seemed guided by some game theory, and I was too often left pondering what went unsaid - and why. Greenspan's ego, free-market ideology and personal ambitions over time fostered an overly-powerful cult status.


Ben Bernanke had his own issues. Dr. Bernanke's formidable biases revolved around his academic research and unconventional theories. His limited experience with the markets only heightened the insecurities facing anyone replacing "The Maestro."


The Wall Street Journal's Jon Hilzenrath once referred to Bernanke as a "gun slinger." This monetary cowboy was incapable of unbiased analysis and decision-making. As his inflationary experiment mutated beyond short-term crisis management measures, Bernanke increasingly dug in his heels. In the throes of untested monetary doctrine, he turned defensive and "100% certain" of too many things.

For traders, it's seeing a losing short-term trade morph into a long-term "investment." With everything invested in his runaway global experiment, Dr. Bernanke lost touch with reality - not to mention monetary conventions. He turned hostage to the financial markets, somehow promising that he would not tolerate any tightening of financial conditions - let alone a bear market, recession or crisis. What unfolded was a complete breakdown of responsible central banking.

Chair Yellen followed too comfortably in Dr. Bernanke's footsteps. The unassuming market darling that wouldn't dare do anything that might rock the boat; another seasoned academic with a theoretical framework that essentially posed no risk to raging market Bubbles. Gratified that unemployment was declining as core consumer inflation stayed below target, she discerned nothing problematic unfolding in the markets or economy that might risk future crisis. In the final analysis, it was a four-year term notable for a complete failure to tighten financial conditions when the backdrop beckoned for significant tightening measures. No "gun slinger", but a competent and pleasant enabler of vicious "Terminal Phase" Bubble excess.

This history rehash is to emphasize the stark contrast between Chairman Powell and his predecessors. He's from a completely different mold. For the first time in decades, the Fed Chairman is not beholden to ideology, academic theory nor activist monetary doctrine.

This allows straightforward answers to questions. No obfuscation necessary - no extoling nor canonizing. Academic dogma need not eclipse studious observation and common sense. Powell respects the institution. And I believe his leadership will promote a soberer perspective, clearer analysis and sounder policy from our central bank.

While pundits underscore "continuity," the markets must contemplate what this means for the Greenspan/Bernanke/Yellen "market put". Of course, the Powell Fed's support will be there in the event of crisis. But the timing: how much time - and market value - will pass before central banks come to the rescue? Does Powell appreciate how previous Fed policies nurtured dangerous securities market excess? Would the Chairman prefer to return to more traditional central bank management - hesitant to resort to QE, rate cuts and other tools of market intervention? Would he rather let markets deal with volatility without members of the Fed jumping to render vocal support?


I believe Chairman Powell understands the dangerous role the "Fed put" has played over the years. His bias would be to wean the markets off central bank liquidity, excessively low interest rates and aggressive "activist" market intervention.

Markets would be healthier standing on their own - to reacquaint themselves with risk and prudence.


The Libor/OIS interbank Credit spread widened further this week, indicative of tightening liquidity conditions. It's my view that risk premiums are now generally rising partially on concerns for the Fed and global central bank liquidity backstops.

For years, the implied central bank market backstop worked to depress the cost of all varieties of market "insurance" - from the VIX in U.S. equities, to hedging costs in global equities, corporate Credit, sovereign debt and, last but certainly not least, the currencies. The scope of Bubbles has inflated tremendously, while confidence in the future efficacy of central bank support measures has just begun to wane. The cost of market protection is now rising rapidly, with profound ramifications for myriad interrelated global Bubbles.


The rising cost of hedging, widening Credit spreads, waning demand for corporate Credit and abating general market liquidity now pose a major challenge for vulnerable global markets. No longer will it be so easy to dismiss risk. And with various risks now coming into clearer view on a daily basis, markets must confront the harsh reality of significantly higher hedging costs across the spectrum of risk markets.

The Washington spectacle has finally become a major market issue. Tariffs and trade wars do matter, at this point more from a financial standpoint than economic. Members of the Trump cabinet matter. The composition of Trump's foreign policy team matters. The nature and strategies of his advisors and attorneys matter. The mid-terms will matter, perhaps profoundly. It is said that the President is becoming more comfortable in the job - and ready to call the shots. Markets are increasingly uncomfortable.

With fragilities surfacing, global markets have turned increasingly vulnerable. The threat of foreign selling of U.S. Treasuries, corporate debt, equities and dollar balances is now real and consequential - just as liquidity becomes a festering issue. The stock market is sliding - prices along with its standing on the President's priority list.


There's a general complacency deeply embedded in U.S. financial markets. No toxic securities Bubble at the brink. There is no Lehman vulnerable to a run and swift collapse. Interestingly, however, from the global financial markets Bubble perspective, there is Deutsche Bank and its double-digit stock decline this week. It seems to be the first place global players look when risk begins to be an issue, financial conditions start to tighten and risk premiums escalate. DB operates, after all, in the core of global derivatives markets and securities finance.

Derivatives lurk at the epicenter of global financial crisis risk. It's right here where global central bank policies have fomented the greatest distortions and associated fragilities: The perception - the implied guarantees - of liquid and continuous markets. And when DB's stock is sinking (down 13%) and its CDS is blowing out (33bps this week!), then the issue of counterparty risk and derivative market dislocation begins to creep into market psychology (and positioning).

Greed to Fear. "Risk On" shifting to "Risk Off." This week had the feel of de-risking/de-leveraging dynamics gathering important momentum. This was no VIX (24.87 close) accident. It was a general widening of Credit spreads, waning liquidity and overall market instability. Dollar weakness reemerged this week, which sparked a nice safe haven bid in gold and the precious metals. Crude surged. Curiously, it also awakened a bit of safe haven buying for Treasuries (pushing corporate Credit spreads wider).

I couldn't help but to ponder the possibility that the rising cost of hedging dollar risk is a game changer for U.S. corporate debt. There's a huge amount of leverage there, along with big foreign ownership. It's certainly not a strong position for instigating tariffs and risking trade wars. It's instead a backdrop increasingly susceptible to panic selling, liquidity shocks and derivative issues.

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David Rosenberg: "It Was Black Friday Before Black Monday"

Posted by Tyler Durden on

"It could never happen again..." is the constant refrain of the asset-gatherers and commission-takers around the world as they prepare to defend their livelihoods from yet another delusion-clarifying plunge back to reality for stock prices.

Well, after this week's bloodbathery - and tearing down of the social-media-will-remake-the-global-economy narrative - many are starting to recognize that all is not well... and perhaps, just perhaps, the support pillars of this flimsy potemkin village we call 'the stock market' have already crumbled...

Dollar funding markets are extremely stressed and The Fed's balance sheet contraction (and its implicit tightening of liquidity) is not helping...


Gluskin Sheff's David Rosenberg has been very vocal  about his fears that market participants are blindly ignoring the similarities - fundamentally, geopolitically, and technically - to 1987.

He previously tweeted..."Hmmm. Let's see. Tariffs. Sharp bond selloff. Weak dollar policy. Massive twin deficits. New Fed Chairman. Cyclical inflationary pressures. Overvalued stock markets. Heightened volatility. Sounds eerily familiar (from someone who started his career on October 19th, 1987!)."

And in his latest tweet, Rosie warns..."It was Black Friday before Black Monday."

Suggesting investors "Look at this memorable clip from the legendary Louis Rukeyser’s Wall Street Week from October 16, 1987.  Focus on what Marty Zweig had to say, and pour yourself a strong one as you do!"

Marty starts around 6 minutes in...

David may be on to something... "you are here"...


All of which confirms our recent note that JPM continues to view 1987 as an important analog for 2018, "as we anticipated a similar cross-market dynamic heading into the year whereby interest rate and curve volatility could be a primary driver for volatility in the equity market."

To underscore this, the technician notes a surprising similarity namely that to date, the 2018 pullback has traced out a similar trajectory as both the Apr-May and Aug-Oct 1987 corrections:

"In 1987, both correction periods traced out a remarkably similar path up until about day 35 from the peak. In the Apr-May period, the S&P 500 had established a well-defined range support zone with the initial pullback. The market had gone on to retest and hold that support in late May ahead of a powerful 20%+ rally to the Aug peak. The initial drop from that peak into Sep 1987 established range support in Sep, just as the market did in spring. Except the mid-Oct retest of that support failed to hold."

In other words, in 1987 it was roughly 40 days past the prior peak that the S&P decided whether to keep going higher, or crash. If indeed the current market is an analog, the S&P faces a similar choice now.

Some further observations from JPM:

We suspect that a confluence of stop orders through that support and the 10% peak to trough correction threshold triggered or at least contributed to the market dynamic that defined the three-day crash event. It is also worth  noting that the aggressive trend to higher Treasury yields and curve steepening reinforced the equity weakness until  the May and Oct 1987 bottoms. Even during the brief crash episode, the trend to higher rates reinforced equity weakness up until the last day of the meltdown. As far as that cross-market driver goes, the aggressive trend to higher yields and early-2018 curve steepening moves have in part reversed, so we see a low probability that the  equity weakness resumes with the same momentum it had in early Feb.

Unless, of course, it does... which is why JPM urges to keep a very close eye on which way the S&P will break next. And while another ramp higher obviously removes the risk of another "1987" event, a move below the 2,610-2,637 support confluence would leave the market susceptible to a retest of the key support in the 2,500s that held in Feb, according to JPM. Hunter's recommendation: "we suggest at least partially reducing the new long exposure accumulated during the Feb turn and on the early-Mar pullback if the market breaks below 2,610."

The 200- day MA has risen to 2,585, which sits just above the 2,541-2,557 Oct-Nov 2017 range lows and 2,533 Feb 15 trough. That area also roughly lines up with the 10% peak to trough threshold, an area that marked a floor for the majority of late-cycle drawdowns. Even if further weakness materializes, we think the market will hold that area, but would wait for a reversal pattern to set up before suggesting re-entering any long exposure reduced on the break below 2,610. Longer-term support rests at the 2,463 Jan-Mar equal swings objective, 2,417 Aug 2017 low, and 2,400, which marked a key inflection in 2017 – first as resistance and then support.

All this is summarized in the chart below:

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Central Banks Have Killed Free Trade

Posted by Tyler Durden on

Authored by Charles Hugh Smith via The Daily Reckoning,

Defenders and critics of “free trade” and globalization tend to present the issue as either/or: It’s inherently good or bad.

In the real world, it’s not that simple. The confusion starts with defining free trade (and by extension, globalization).

In the classical definition of free trade espoused by 18th century British economist David Ricardo, trade is generally thought of as goods being shipped from one nation to another to take advantage of what Ricardo termed comparative advantage:

Nations would benefit by exporting whatever they produced efficiently and importing what they did not produce efficiently.

While Ricardo’s concept of free trade is intuitively appealing because it is win-win for importer and exporter, it doesn’t describe the consequences of the mobility of capital.

Capital - cash, credit, tools and the intangible capital of expertise - moves freely around the globe seeking the highest possible return, pursuing the prime directive of capital: expand or die.

Capital that fails to expand will stagnate or shrink. If the contraction continues unchecked, the capital eventually vanishes.

The mobility of capital radically alters the simplistic 18th century view of free trade.

In today’s world, trade can not be coherently measured as goods moving between nations, because capital from the importing nation owns the productive assets in the exporting nation.

If Apple owns a factory (or joint venture) in China and collects virtually all the profits from the iGadgets produced there, this reality cannot be captured by the models of simple trade described by Ricardo.

In today’s globalized version of “free trade,” mobile capital can skim labor, currencies, interest rates, regulatory burdens and political favors by shifting between nations and assets.

Trying to account for trade in the 18th century manner of goods shipped between nations is nonsensical when components come from a number of nations and profits flow not to the nation of origin but to the owners of capital.

This was recently described in a Foreign Affairs article, (Mis)leading Indicators:

If trade numbers more accurately accounted for how products are made, it is possible that the United States would not have any trade deficit at all with China.

The problem, in short, is that trade figures are currently calculated based on the assumption that each product has a single country of origin and that the declared value of that product goes to that country.

Thus, every time an iPhone or an iPad rolls off the factory floors of Foxconn (Apple’s main contractor in China) and travels to the port of Long Beach, California, it is counted as an import from China, since that is where it undergoes its final “substantial transformation.”

That is the criterion the World Trade Organization (WTO) uses to determine which goods to assign to which countries.

Every iPhone that Apple sells in the United States adds roughly $200 to the U.S.-Chinese trade deficit, according to the calculations of three economists who looked at the issue in 2010.

That means that by 2013, Apple’s U.S. iPhone sales alone were adding $6-$8 billion to the trade deficit with China every year, if not more.

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Trump To Expel "Dozens Of Russian Diplomats" In Response To Skripal Poisoning

Posted by Tyler Durden on

On Friday, French President Emmanuel Macron and German leader Angela Merkel said that following a meeting of the European Council, that UK PM Theresa May had shared "proof" of Russia's involvement in the assassination attempt against former Russian spy Sergei Skripal and his daughter, "convincing" the two leaders that Russia was behind the attack. And yet, despite the "convincing" evidence, no "proof" has yet been publicly disclosed. Furthermore, even as all leaders said they are in agreement that Russia was "the only reasonable culprit", the EC opted not to take any immediate action against Moscow, except issue a harshly worded statement.

Here things get even more bizarre because the EC statement issued said that it "agrees with the United Kingdom government's assessment that it is highly likely that the Russian Federation is responsible and that there is no plausible alternative explanation."

Wait, there is either proof that Russia did (or did not do) the attack, or there isn't.

Claiming that something is "highly likely" and that "there is no plausible alternative explanation" is what you say when there is no proof, and when you send in Colin Powell to the United Nations to lie to the world that a vial of sand is really anthrax and one should immediately launch a war to crush an evil regime just because, well, a vial of sand.

United States using "fake evidence" to launch military operation

It also explains why on Saturday, the Russian Embassy in the UK once again demanded that London produce the complete UK info on "Skripal's Case" and disclose details on a program to produce weapons-grade toxic substances in Porton Down. The UK has so far refused to comply.

* * *

In any event, with the UK yet to publicly present proof that Russia was behind the attack, and as Boris Johnson claimed, Putin himself that was behind the nerve agent attack on the former Russian double agent, on Saturday morning Bloomberg reported that President Donald Trump is "preparing to expel dozens of Russian diplomats from the U.S." in response to the nerve-agent poisoning of a former Russian spy in the U.K..

Quoting two people "familiar with the matter", Bloomberg reports that Trump agreed with the recommendation of advisers and the expulsions are likely to be announced on Monday. And while the aides said that Trump is prepared to act, he wants to be sure European allies will take similar steps against Russia before he does so, which could be prolematic since Russia controls roughly a third of Europe's natural gas supplies and thus the volume of any potential response (and also why despite "proof", Europe responded with nothing more than a harshly-worded statement).

The advisers reached recommendations for a U.S. response to the U.K. attack at a National Security Council meeting on Wednesday and honed the proposals on Friday.

Among the advisors that Trump approached on Friday to discuss the matter were U.S. Ambassador to Russia Jon Huntsman, Treasury Secretary Steven Mnuchin, Commerce Secretary Wilbur Ross, Attorney General Jeff Sessions, Defense Secretary James Mattis, Director of National Intelligence Dan Coats, outgoing National Security Adviser H.R. McMaster and others.

In other words, virtually everyone in Trump's inner circle is desperate for the president to engage in damage control for last week's gaffe in which he congratulated Putin on his election victory despite being ordered by his anti-Russian wing "do not congratulate."

Trump has agreed to adopt increasingly tough policy stances on Russia, but - infuriating the Military-Industrial Complex, after all the stock price of Boeing must go up not down, and the neocons - the president places a priority on maintaining a personal relationship with the Russian president, refuses to publicly attack him, and doesn’t see any benefit to the U.S. in confronting Putin in one-on-one encounters, one administration official told Bloomberg on Thursday.

Trump defended his call with Putin on Twitter Wednesday, dismissing those who “wanted me to excoriate him.”

“They are wrong!” Trump wrote. “Getting along with Russia (and others) is a good thing, not a bad thing.”

We can assume that if Trump again refuses to do as his advisors urge him to demonstrate just how opposed to Russia he is, that his new National Security Advisor, John Bolton - with the full blessing of the US establishment - will demand nothing less than a nuclear strike somewhere in Siberia to finally prove to Mueller, and the world, that Trump is not a Russian operative.

"And then we got him to expel the Russians..." Image source: @pierpont_morgan


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"We're Going To Start A Revolution": 500,000 People Storm Washington To Protest Guns

Posted by Tyler Durden on

Survivors of the deadly Valentine's Day shooting at Marjory Stoneman Douglas High School in Parkland, Fla. (along with numerous celebrities such as Oprah, George and Amal Clooney, Steven Spielberg, Chrissy Teigen and a handful of other celebrities) are leading some 500,000 high school students Saturday during the "March for our Lives" anti-gun protest in Washington, DC.

The march was organized to build on the momentum of last week's National School Walkout and put further pressure on lawmakers to ban assault weapons after shooter Nikolas Cruz killed 17 students and faculty with an AR-15.

Participants gathered on Pennsylvania Avenue near the US Capitol on Saturday morning ahead of the march, which was slated to begin at noon.

Watch live:

Hundreds of sister marches also are planned across the country and around the world, according to CNN.

Parkland survivor David Hogg has given dozens of interviews, often controversial, as part of his "gun-control advocacy" effort that started roughly one month ago after the shooting at his high school. In one particularly foul-mouthed interview, Hogg compared marching for gun control to teaching his luddite parents how to use iMessage.

Speaking to The Outline, Hogg, 17, tried to explain why he feels its important for young people to take things into their own hands.

''When your old-ass parent is like "I don’t know how to send an iMessage" and you’re just like, "Give me the f---ing phone and let me handle it," Sadly, that’s what we have to do with our government.

"Our parents don’t know how to use a f---ing democracy, so we have to."

In a separate interview with Good Morning America, Hogg declared that "today we are going to start a revolution."

"We are sick and tired of the inaction here in Washington and around the country" by politicians who are "owned by the NRA. Today we are going to start a revolution," Hogg said.

Hogg added that gun violence has multiple causes, including mental illness, per ABC.

Lin-Manuel Miranda, Ariana Grande, Jennifer Hudson, Miley Cyrus, Demi Lovato, Common, Andra Day, Vic Mensa and Ben Platt will all perform in DC and there will be speeches from 20 young people, both from Stoneman Douglas and other schools around the country that have been affected by gun violence.


The Clooneys and Oprah each donated half a million dollars to the event, as did Spielberg and several other celebrities. Joshua Kushner, Ivanka Trump's brother-in-law, has also promised to attend the march, the Daily Mail reported.

Others, including President Trump's friend, Patriots owner Bob Kraft, lent their support in other ways. Kraft gave the teenagers from Parkland his football team's private plane to shuttle them to DC on Friday.


Delta also donated two of its aircraft to fly protesters to the city from Florida. The event will wreak havoc on local transportation and officials are on high alert for any security threats.

Hours before the march had even started, the crowds of students that had gathered on the mall were chanting "This is what democracy looks like."


Attending the march Saturday, Isabel Kaegi, a 16-year-old student at Palatine High School in a suburb outside Chicago, said her school recently faced a false school shooting threat, prompting parents to pull their children out of class. Four teenagers were arrested for the threats.


"We need common sense gun laws," Kaegi said. "No one should be able to buy a military gun."

As Politico described it, people began streaming toward Pennsylvania Avenue early. Police were everywhere along the route. Signs were posted along the route notifying marchers that firearms aren’t allowed in the area, even with a license to carry.


At 9 am, the area in front of the stage, erected near the base of the US Capitol, had already filled up. Signs criticized the Trump administration’s support for training and arming teachers and school staff.

The demonstration comes shortly after a shooting at Great Mills High School in southern Maryland, which killed two students, one of whom was taken off life support on Thursday.

The route for the march stretches down Pennsylvania Avenue, past the Trump International Hotel and stopping short of the White House. The march will be followed by mass school walkouts across the country on April 20.

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