JAN 13
19 SIT EC y POL
ND denounce Global-neoliberal
debacle y propone State-Social + Capit-compet in Econ
ZERO
HEDGE ECONOMICS
Neoliberal globalization is over.
Financiers know it, they documented with graphics
"SWIMMING
IN AN OCEAN OF DEBT": GUNDLACH SOUNDS THE ALARM OVER $122 TRILLION IN
UNFUNDED LIABILITIES
"If you put enough short-terms together, you get a
long-term..."
A bigger long-term threat to
markets is emanating from the supposedly "safe" market for US
Treasury debt.
As we've warned and Gundlach has
also highlighted, the risks posed by companies that
could soon become "fallen angels" is rising as the US economy is
"swimming in an ocean of debt."
But though the risks posed by corporate debt are serious, during the
round table Gundlach was more focused on the risks
posed by the ever-expanding US debt - which he argued is even bigger than most
Americans realize
See Chart:
Leverage Problems
Meanwhile, Gundlach reiterated his
view that equities have entered a bear market, saying he
expects stocks to continue to weaken before a rebound begins during the second
half of the year.
"So now we are in a bear market, which isn’t
defined by me as stocks being down 20 percent. A bear market is determined by
the way stocks are acting," he said.
Gundlach also warned that, for all
Trump's gloating about a strong economy, most of this growth has been
artificial and fueled by unsustainable debt.
"I'm not looking for a terrible economy, but an artificially
strong one, due to stimulus spending," Gundlach told the panel. "We
have floated incremental debt when we should be doing the opposite if the
economy is so strong."
In other words, Gundlach expects
fiscal policies to overtake monetary policy as the primary locus of concern for
investors.
Watch a
clip from Gundlach's interview below at:
blob:https%3A//video-api.wsj.com/364357fe-388b-4d25-995d-ce3b4cf9eed3
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It's not
Fed tightening that starts an economic contraction: the last three recessions
all took place with 3 months of the first rate cut after a hiking cycle.
With even Morgan
Stanley openly discussing whether the Fed will "make the market happy", it now
appears that the Fed tightening is effectively over
with the Fed Funds rate barely above 2%, and the
only question is whether the Fed will cut rates in 2019 or 2020 -
roughly around the time the next recession is expected to strike - and whether
the balance sheet shrinkage will stop at roughly the same time (and perhaps be
followed by more QE).
To be sure this new consensus was
reflected in both equity and credit markets, both of which cheered the Fed's
recent U-Turn, and recouped all their losses since mid-December. And yet,
market paradoxes quickly emerged: for one, rates markets yawned. On December
31, rates were pricing no Fed hikes over the next two years. Today, after the
Fed’s big ‘change of tone’, expectations are almost exactly the same.
Second, a material disconnect has
emerged between front-end pricing (no hikes) and the level of 10-year real
rates (near seven-year highs). If, as Morgan Stanley's Andrew Sheets notes, "one of these is
right, the other seems hard to justify."
Then there is, of course, the lament about the neutral rate being so low - and the
potential output of the US economy so weak - that it can't sustain nominal rates above 2.25% - incidentally we
explained back in 2015 the very simple reason why r-star, or the real
neutral rate, is stuck at such a low level and is only set to drift even lower:
record amounts of debt are depressing economic output, as the following
sensitivity analysis showed.
See Chart:
US Equilibrium Real Interest Rate
Bank of America touched on this key
concern last week when it said mused rhetorically that "if
the US rates market is right, this
would suggest that potential growth is much, much lower than generally
accepted." Which, to anyone
who read our 2015 analysis, should have been obvious: after all there is too much debt in
the system to be able to sustain material rate increases.
Bank of America continued:
If Fed Funds target rates of
2.00-2.50% are enough to cause the economy to go into recession, with inflation having normalised at around 2%, then potential growth would seem to be less
than 50bp. Alternatively,
when looking at where the USD OIS curve regains positive shape and flattens out
(in the 7-10 year forwards) the market price for neutral rates again seems to
be as low as 2.00-2.50%, leading to the same conclusion. If the above were true, every asset
bar rates is massively mispriced.
And the punchline: "If we
accept market pricing, then there is no shortage of inconsistencies to take
advantage of. If the
world is going into a severe slowdown, then the Fed is unlikely to wait until
next year to cut rate."
The problem is simple: for the Fed,
the sequence of events during past recessions has been: Fed cuts, the SPX crashes, Fed cuts. So, as Citi notes, the SPX crash is a symptom of
greater economic weakness rather than the cause.
Of course, it's a bit more nuanced
than this, because as Citi also shows, for all three slowdown periods the
sequence of events is: Fed
hikes, equity market crashes, Fed cuts.
In other words, traders - who hold
the market hostage (as Powell
first discovered back in 2013) - force the Fed’s hand, a conclusion
supported by the surprisingly short lag time of the Fed reaction function. Indeed, as shown in the chart below, it usually takes 1 month on average - and no
longer than three months - between the first 20% drop and an appropriate Fed
reaction. Then,
once the Fed gives in and cuts, it takes at most 4 months for equities to find
a bottom, as the economic backdrop and Fed are supportive. This story seems to fit fairly well with the current
environment: i.e. the Fed hiked in
December, and then the equity market fell 20%. Meanwhile, current economic
conditions remain relatively robust, and in line with previous slowdowns (and
stronger than prior recessions), so the logical next step is that the Fed
flinches – they have always in the past after all.
See Charts:
Bear Market Slowdown or Recession
The obvious problem is that the Fed is cutting because the economy is indeed entering a
recession, even as market have already rebounded by over 10% from the recent
"bear market" low, effectively
cutting the drop in half expecting the Fed to react precisely to this drop,
while ignoring the potential underlying economic reality (the
one noted above by the bizarrely low neutral rate, suggesting that the US
economy is far weaker than most expect). Ultimately,
what this all boils down to is whether the economy is entering a recession,
and - some reflexively - whether
the suddenly dovish Fed, trapped by the market, has started a chain of events that inevitably ends with a
recession.
But the real reason why the Fed is
now trapped, whether Powell knows it or not, is also the result of the most
troubling observation of all: while many analysts will caution that it is the
Fed's rate hikes that ultimately catalyze the next recession and the every Fed
tightening ends with a financial "event", the
truth is that there is one step missing from this analysis, and it may come as
a surprise to many that the last
three recessions all took place with 3 months of the first rate cut after
a hiking cycle!
See Chart:
Fed
tightening ends with a “financial” event
In other words, one can argue that
it was the Fed's official admission of economic weakness - by cutting rates -
that triggered the economic contraction that was gathering pace as a result of
higher rates and tighter financial conditions. If that
is indeed the case, then the next US recession will begin just a few months
after the Fed cuts rates.
There is
still a tiny chance that Powell will attempt to escape this trap, and instead
of cutting rates will resume hiking, but the odds of that happening are tiny: as
Bloomberg calculates, if the Fed does resume rate tightening later this
year, it will be the first time in
the recent history it did so after a drop in stocks this large.
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"Whether words,
and that’s all there has been so far, are enough remains to be seen..."
Markets have returned to the scene of the crime and participants act like
nothing’s happened. After an 11 day rally propelling $ES futures
nearly 11% off of the December lows happy days are here again.
The lows are in, any retest will be bought,
the Fed’s turned dovish, slashed earnings projections are the basis for future
gains, get a China deal and there’s nothing but blue skies ahead. I put myself at the mercy of readers and correct
me if I’m wrong, but this is generally the current consensus of analysts and
pundits that did not see the Q4 2018 drubbing coming in the first place. And,
to be fair, that is an acknowledged possibility I outlined myself in my 2019 Market Outlook.
And frankly I can’t blame them for
taking this view, indeed, if you take a linear view of markets, then we’re just simply repeating
the same script we’ve become accustomed to over the last 10 years. Markets
tank and the systemic rescue patrol gets active at just the right time and the
bull market trend gets saved again:
See Chart:
Treasury Secretary Mnuchin’s
emergency calls just before the lows followed up by over a dozen dovish
speeches and appearances by FOMC members on the heels of the now famous Powell
cave on January 4th had an immediate and violent reaction in credit and stock
markets.
No chart
probably better highlights this point than that of high yield credit:
See Chart:
Whether words, and that’s all there has been so far, are enough remains
to be seen. After all QT remains on
schedule although the Fed’s rate hike schedule is over for now. Again. And
right at this moment in time:
See Chart:
This is a view that suggests that this market is technically broken and that markets have
topped and look to pursue a historical path with a recession and a larger bear
market to emerge.
And this view is not only supported
by the break of log trend lines, but also by the
concurrent rejection of the 10 year yield at its multi decade trend line
See Chart:
…
See more charts at
SOURCE: https://www.zerohedge.com/news/2019-01-13/markets-have-returned-scene-crime-what-happens-next
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"The
outlook for earnings has taken center stage for equity investors" because
weak guidance from several notable companies such as Apple and Macy’s
"have heightened the focus on S&P 500 earnings growth."
See Chart:
Prices have moved alongside
negative EPS revisions
…
SOURCE: https://www.zerohedge.com/news/2019-01-13/goldman-warns-earnings-growth-2019-could-collapse-85
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US DOMESTIC POLITICS
Seudo democ duopolico in US is
obsolete; it’s full of frauds & corruption. Urge cambio
"What we are watching...
is essentially a coup. We had a financial coup, and now we are
watching a legal coup to
consolidate that financial coup..."
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US-W ISSUES
(Geo Econ, Geo Pol & global Wars)
Global depression is on…China, RU,
Iran search for State socialis+K-, D rest in limbo
"Deploying to Hawaii enables us to showcase that the B-2 is on watch 24 hours a day, seven
days a week" — US Air
Force
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A wise decision is
greeted by denunciations,obstructionism,
imperial thinking, and more
Russia-bashing...
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SPUTNIK and
RT SHOWS
GEO-POL n GEO-ECO ..Focus on neoliberal expansion via wars
& danger of WW3
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NOTICIAS IN
SPANISH
Lat Am search f alternatives to
neo-fascist regimes & terrorist imperial chaos
VIENTO SUR
Una lenta
impaciencia de Daniel
Bensaïd Francisco Louçã
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Cárceles, leyes y derechos humanos
Ramón Zallo
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RT EN ESPAÑOL
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GLOBAL
RESEARCH
Geopolitics & Econ-Pol crisis
that leads to more business-wars from US-NATO
allies
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PRESS TV
Resume of Global News described by
Iranian observers..
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