Holds the stocks of companies involved with malls, shopping centers, and free standing stores. Some of the top holdings in this fund include Simon Property Group, General Growth Properties, and Kimco RealtyCorporation.
Short Equities (Nasdaq / Russell 2000) ONLY if Death Cross Confirmations
Bond Rotation (Falling 10 UST Yield)
Short EURUSD Cross
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MOST CRITICAL TIPPING POINT ARTICLES TODAY
INEQUALITY leads to Economic Adjustments - Especially in a 70% Consumption Economy driven by a weakening middle class
Over a three-week span starting Monday, 72% of the S&P 500's members will report earnings, but some of the early indications about this earnings season, especially from companies highly exposed to the U.S. consumer, have not been encouraging.
On Tuesday afternoon, two companies that are all about consumer spending, Bob Evans and The Container Store, reported earnings that were disappointing.
But even more discouraging were the comments from company executives.
BOB EVANS
Bob Evans, which wrapped up its fiscal year 2014 in its most recent quarter, said its results were impacted by severe weather (an oft heard refrain during the first quarter), as well as high food costs. In the upcoming year, the company's CFO, Mark Hood, said, "consumer confidence continues to be adversely impacted by ongoing macroeconomic headwinds, including health care costs and unemployment which disproportionately affects lower- and middle- income consumers."
CONTAINER STORE
Also on Tuesday afternoon, Container Store CEO Kip Tindell said in the company's earnings release that, "Consistent with so many of our fellow retailers, we are experiencing a retail 'funk.'"
LUMER LIQUIDATORS
Wednesday evening, Lumber Liquidators, a specialty hardwood flooring retailer, said that the consumer demand it experienced following the tough winter didn't carry into May and June. CEO Robert Lynch said, "The improvement in customer demand we experienced beginning in mid-March did not carry into May, and June weakened further. Our reduced customer traffic has coincided with certain weak macroeconomic trends related to residential remodeling, including existing home sales, which have generally been lower in 2014 than the corresponding periods in 2013."
FAMILY DOLLAR
Thursday morning saw more downbeat commentary from a retailer, this time Family Dollar. Following the company's report, which saw that same store sales fell 1.8% during the quarter, CEO Howard Levine said, "Our results continue to reflect the economic challenges facing our core customer and an intense competitive environment."
THE GAP
And then yesterday afternoon, Gap topped off the week of discouraging retail commentary by reporting June same-store sales that fell 2% year-over-year. According to data from Bloomberg, sales were expected increase 0.8%. Gap's management, however, was light on additional color.
This rash of discouraging retail data, however, makes the broader U.S. economic picture seem murky.
The first week of earnings has certainly given us some mixed, if not downright disappointing, signals about the U.S. consumer.
07-12-14
RETAIL CRE
RETAIL CRE - Gallup Highlights Consumers are “straining against rising prices"
Consumers are “straining against rising prices on daily essentials to afford summer travel, dining out, and discretionary household purchases – the kinds of purchases that ordinarily keep an economy humming.” That’s what Gallup found when it used a new survey to dive deeper into consumer spending.
Its regular monthly survey has been mixed. The average dollar amount consumers spent in June swooned to $91 per day from $98 in May, after a crummy January-April period ranging from $78 to $88 per day. The May spurt seems to have been an outlier that had given rise to a lot of speculation consumers would finally hit “escape velocity,” now obviated by events. But from 2012 until late last year, the averages had been rising.
So Gallup dove deeper into the issue with its new survey conducted in mid-June to sort through what consumers are spending more or less money on. And what it found was that
"They’re buying a little more – just not the things they want.
They’re spending more on things they have to buy"
... and in many instances they’re spending more in these categories because prices have jumped. At the top of the list: groceries.
Groceries: 59% spent more, 10% spent less.
Gasoline: 58% spent more, 12% spent less
Utilities: 45% spent more, 10% spent less
Healthcare: 42% spent, 8% spent less
Toilet paper and other household goods: 32% spent more, 5% spent less
Rent, the biggie: 32% spent more, 9% spent less.
These categories are household essentials. They’re on top of the priority list. And in order to meet the requirements of these items, consumers are cutting back where they can. Gallup found that “the increasing cost of essential items is further constraining family budgets already hit hard by the Great Recession and still reeling from a stagnant economy.” Hence, the less essential the expense, the more it got cut. Here is the bottom of the list, which explains part of the recent retail woes:
Leisure activities: 28% spent more, 31% spent less
Clothing: 25% spent more, 30% spent less
Consumer electronics: 20% spent more, 31% spent less
Travel: 26% spent more, 38% spent less
Dining out: 26% spent more, 38% spent less
Then there are summer travel plans, so future spending. They show just how bifurcated the economy has become. On the positive side of the ledger, 69% of American plan to travel this summer, the highest since 2006, and far more than the 52% in 2009 during the depth of the Great Recession. And those travelers intend to spend more on transportation, food, lodging, and entertainment than last year, as Gallup put it, “further pressuring their already-strained budgets.”
But about one-third plan to spend only one night or less away from home. So not exactly a long vacation. And 36% are planning to travel less than last year, even worse than in the terrible year of 2010, when 33% were cutting back from the already terrible year 2009.
And what about “escape velocity” in consumer spending? Despite what Wall Street economists and other hype mongers have been predicting for five years in a row, Gallop soberly puts slams the lid on those speculations:
If there was any doubt that the U.S. economy is still struggling to get back on its feet, the results of this poll reinforce that reality. Because consumer spending is the lifeblood of a healthy economy, these findings suggest that discretionary spending still has a ways to go before it will fuel the kind of economic growth Americans have been hoping for.
Americans who are struggling to make ends meet, and who cut discretionary spending in order to pay for essentials, form a large part of the middle class. But there are others who don’t have these problems, who are doing well. A dichotomy that shows up in “dining out.”
“Dining out” made the bottom of the list: 38% of the people cut back, while only 26% spent more on it. The restaurant industry should be groaning in pain.
But someone must be eating out. The Restaurant Performance Index (RPI) for May, released on June 30, rose again, “driven by stronger sales and traffic levels and an increasingly optimistic outlook among restaurant operators.” May was the third month in a row that the Current Situation Index was above 100, and therefore in expansion mode.
Smell of conundrum? Nope. But a sign of America’s dual-track society. The 26% of consumer who spent more on dining out might well belong to that group whose median household income exceeds $50k a year. They feel flush and their confidence has soared to post-recession highs. But the confidence of consumers making less than $50k a year has barely moved up from the recession bottom. And the gap between the two is at a record high.
Consumer confidence is one of the data points that are used, most often unsuccessfully, to predict what consumers might do, specifically how much money they’re going to spend – because a wallet with legs is what you get boiled down to in our economic system once you’re a “consumer.”
The assumption is that consumers who are feeling good about their present condition and who expect nice things such as pay raises to come their way are more likely to spend more money. Once they pull out their digital form of payment, they’d set off a chain reaction, which would give the government and the Fed something to brag about.
Thing is most Americans are already spending every dime they’re making, and those who have access to credit are spending way beyond what they’re making, and they’re maxing out their credit cards, and they’re getting new credit cards to make minimum payments on their existing but maxed out credit cards, not because they have confidence but because subprime is once again hot, and banks are eager to charge 21% or more in interest though their actual cost of money, thanks to the Fed, is near 0%.
And it isn’t confidence that is going to increase their speeding but even more credit – which they will never be able to pay off, and they know that too [for some additional amusement, read.... Last Time Lenders Did This, They Triggered The Financial Crisis].
However, wage increases, including a minimum wage increase – not confidence – would get them to spend more the minute the extra moolah shows up in their paychecks. And they’d spend all of it. Yet giving the lower 80% or so of the workers a pay raise that exceeds inflation is the most frowned-upon activity in corporate spending these days. Better to buy back a few million shares.
But at the upper echelons of the American consumer pyramid where people have savings and investments, more confidence could actually trigger more spending.
So consumer confidence has been rising. Things are good in the US economy. That relentless message is finally getting through to us boneheads. The most recent reading of the Conference Board’s Consumer Confidence Index rose to 85.2, the highest level since January 2008!
So there!
But look who is feeling confident and who is not. The chart (via OtterWood Capital Management) divides us hapless consumers into two groups – households making more than $50,000 per year, and households making less than that. So we’re not comparing the top 1% to the bottom 20%. We’re cutting a line straight across the American middle class and comparing what is on either side. And the an ugly reality crops up.
Those below $50,000: their confidence dropped to just above 60, a 12-week low. And those lucky ones making over $50,000 were feeling flush, and their confidence level rose to a new post-recession high exceeding 115. That’s nearly twice as high as that of the lower income group. And the gap is at an all-time.
But it’s not by accident. This has been the strategy of the Fed’s monetary policy all along. Fed Chair Janet Yellen and her ilk are glad that these high-income folks – which include Yellen herself – are feeling good. It’s a point of professional pride. These folks are responsible for about two-thirds of consumer spending. If they’re handed in various ways a few trillion dollars in printed money, mainly through asset bubbles, they’ll feel even more confident and smart, and they might sense an urge to splurge and buy things they don’t need, and it temporarily gooses GDP.
But those below, those who already spend every dime they make and can borrow? Fed policymakers don’t care about them. They won’t ever spend more anyway because they don’t earn enough. Though they make up a big part of the population, they can’t contribute much to consumer spending. Their role is to be the low-cost labor force that corporate America wants beyond all else.
Banks are again taking the same risks that triggered the financial crisis, and they’re understating these risks. It wasn’t an edgy blogger that issued this warning but the Office of the Comptroller of the Currency. And it blamed the Fed’s monetary policy.
FINANCIAL REPRESSION - Modern Financial Repression Grounded on a "State Controlled Fiat Currency System"
We had CAPITALISM: SAVINGS was reinvested as CAPITAL INVESTMENT
We have CREDITISM: CREDIT is created and spent on CONSUMPTION
Circulation credit means that banks lend money, and thereby expand money supply, without backing them by real savings (or reduction of consumption). This circulation credit is creation of money “ex nihilo”. Booms as well as busts are damaging because they slow down long-term investments with the consequence that resources in fluctuating economies are lacking.
According to Mises, the problem is not low consumption but low savings.
The Center for Financial Studies in Frankfurt reports on a recent talk given by Thorsten Polleit:
Thorsten Polleit on the “planned chaos” of money
What are the reasons for economic booms and busts and which reforms are necessary to create an economically viable monetary order? On 2 April, Thorsten Polleit addressed these questions in his lecture “Boom & Bust, or: Planned Chaos” referring to the Austrian school of economics. Polleit is Chief Economist of Degussa Goldhandel, President of the Ludwig von Mises Institut Deutschland and Honorary Professor at the Frankfurt School of Finance & Management.
Polleit identified the state-controlled fiat money system as a main cause of the international financial and economic crisis. This system, he said, is based on the ability of banks to create money literally out of nothing. It is, in principle, a “large-scale fraud system” because today’s money is “intrinsically worthless and not redeemable”. This has damaging consequences for the overall economic development.
Circulation credit reason for economic fluctuations
To prove this fundamental critique, Polleit referred to the theoretical principles of the Austrian School of Economics, in particular to Ludwig von Mises. According to Mises, the circulation credit is the cause of economic fluctuations. Circulation credit means that banks lend money, and thereby expand money supply, without backing them by real savings (or reduction of consumption). This circulation credit is creation of money “ex nihilo”. Booms as well as busts are damaging because they slow down long-term investments with the consequence that resources in fluctuating economies are lacking. According to Mises, the problem is not low consumption but low savings. This means that the countercyclical policy in the manner of Keynes is based on a wrong diagnosis. This policy prevents an early market-driven correction with the result of an even bigger bust.
Fiat money system creates failures
Polleit explained, on the basis of the interest theory of Mises, that the market interest rate in a fiat money system was chronically below the natural interest rate. The consequence of adherence to such a system with its too low interest rates is that economic and political mistakes during the bust phase are not completely corrected – and, thus, new failures will arise. One current example for the failure of the low interest rate policy in the industrial countries is the flow of foreign capital into the emerging markets with all its harming effects. Especially since the US Federal Reserve has announced to reduce bond purchases, many investors have withdrawn their money from the emerging markets. As a result, the exchange rates of the emerging market currencies strongly depreciated – with negative consequences for their previously booming economies.
This destabilization in emerging markets will, according to Polleit, result in an even closer cooperation among national central banks – with the objective to counteract the remaining currency competition. Central banks of emerging economies could be forced to join the network of liquidity-swap-agreements in order to receive credits from other central banks more easily. Thereby, they would basically give up their sovereignty over the national money supply. The result would be a world cartel of central banks led by the US Fed. This cartel would extend the boom phases, which are caused by the credit money system, and, as a consequence, amplify the inevitably following busts.
Against the background of this grim scenario, Polleit demanded a reform of the monetary system towards a market-oriented monetary order. This should include, inter alia, disempowering central banks and privatizing money supply.
07-12-14
THESIS
FINANCIAL REPRESSION
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - JULY 6h - JULY 12th, 2014
RISK REVERSAL
1
JAPAN - DEBT DEFLATION
2
BOND BUBBLE
3
EU BANKING CRISIS
4
DRIVER$ - EUR Has Further To Drop As ECB Expands Balance Sheet Relative to Fed
EURUSD drop may have further to go given that the relative policy outlook would push Fed/ECB balance sheet ratio lower before long. Citi's Valentin Marinov believes, relative data surprises as well as forward looking cyclical gauges like bank stocks are starting to favor USD over EUR and he points out that leveraged accounts could start adding to shorts again as real money continue to sell EUR.
Via Citi,
The July ECB meeting underscored the prospect for larger ECB balance sheet from here. The upcoming Fed minutes and speeches as well as Yellen’s semi-annual testimony in coming weeks could highlights that the bank is firmly on course to exit QE before long. The diverging policy outlook should be reflected in falling Fed/ECB balance sheet ratio (Figure 1).
The divergence is further underscored by the growing disparity between positive economic surprises out of the US and disappointments out of the Eurozone (Figure 2).
The data seem to have fuelled concerns about renewed cyclical downturn in the Eurozone while strengthening market belief in the US recovery. Given that bank stocks are a good forward looking gauge of cyclical outlook, the latest development pushed the EZ/US bank stocks ratio lower again (Figure 3).
Last but not least:
Investor positioning seems to suggest that leveraged accounts cut their EUR-shorts and could add again as real money keep selling the euro (Figure 4).
Appendix
We expect the ratio of ECB/Fed balance sheets to move lower before long. Given the historic correlation between EURUSD and the ratio of Fed/ECB balance sheet - this should underscore the downside risks to EURUSD (Figure 1). We simulate that ECB/Fed balance sheet ratio assuming that:
1/ The ECB's balance sheet would expand by ca 250bn as a result of the two T-LTRO tranches in September and December 2014. This follows on our assumption that about 150bn of T-LTRO would be taken up by banks in the periphery and (mostly) used to repay LTRO loans. The T-LTRO take-up is assumed to increases by 100bn in March and June 2015.
2/ The ECB balance sheet grows by additional EUR1tn of unsterilized ABS and government bond purchases in June 2015;
3/ The Fed's completes taper by October but continues to reinvest proceeds from its portfolio thus keeping the size of its balance sheet.
07-09-14
MACRO MONETARY
4- EU Banking Crisis
DRIVER$ - European Banks Are In Trouble Following Draghi's T-LTRO Announcement
With Austrian bank contagionimpacting European stocks on Friday, we thought it worth a look at the 'recovering-out-of-the-crisis-all-is-well-and-stress-tests-will-prove-it' European banks. It appears, having bid with both hands and feet for Europe's peripheral debt - thus solidifying the very sovereign-financial-system linkages that were the cause of the European crisis contagion - Europe's banks had the jam stolen from their donuts when Mario Draghi did not unveil a massive bond-buying scheme (by which they could offload their modestly haircut collateral at 100c on the euro, raise cash, take profits, and all live happily ever after). A TLTRO is no use to the banks who now know even the first sign of one dumping his domestic bonds will cause this illiquid monstrosity to collapse under its own weight. It is clear - as the following chart shows - that investors are quickly coming to that realization and exiting European bonds in a hurry.
Since Draghi failed to unveil QE, European banks have collapsed to one-year lows relative to world banks...
Of course, some knife-catching Bill-Miller-ite will come to the rescue, buying-the-dip - but as BNP's Ian Richards notes,
"The prospect of supporting material credit growth and better earnings revisions in the banking sector is further down the line than the market had hoped.”
European bank stocks are down over 6% in the last 3 days to 5 month lows - the biggest such drop in 13 months. The combination of Draghi's "no QE", Austrian bank contagion concerns, and rumors of German banks about to be 'BNP'd by US regulators has removed all the exuberant recovery chatter (confirmed by economic data itself collapsing too). Remember all those oh-so-positive PMIs? European peripheral bond spreads surged around 10bps and individual stock markets plunged (Portugal -3% today, Italy -2.5%, Spain -1.8%)
Mario Draghi’s plan to end the euro area’s lending drought risks missing the target.
While the European Central Bank president says a program to hand as much as 1 trillion euros ($1.4 trillion) to banks has built-in incentives to spur lending to the real economy, analysts from Barclays Plc to Commerzbank AG have doubts on how well it will work. In fact, the measure allows banks to borrow cheaply from the ECB even without increasing credit supply.
Draghi has identified weak lending as an obstacle to the euro area’s recovery and is committed to reversing a slump that has eroded more than 600 billion euros in loans to companies and households since 2009. The risk is that if the latest plan fails, the currency bloc slips closer to deflation and to the need for more radical action such as quantitative easing.
“It’s not the silver bullet,” said Philippe Gudin, chief European economist at Barclays in Paris. “Every incentive for banks to lend is a good thing, but I wouldn’t say I’m reassured that credit will pick up.”
The ECB’s latest plan differs from its previous liquidity measures in the way it tries to nudge banks into lending more to the real economy. In contrast, three-year loans issued in late 2011 and early 2012 were used largely to buy higher-yielding government bonds, a practice known as the carry trade.
Attractive Option
T-LTRO => "Targeted Longer Term Refinancing Operations"
Targeted longer-term refinancing operations will offer banks an initial total of as much as 400 billion euros this year that they can hold until 2016 with no strings attached. They can keep it another two years if they meet specific new lending targets set by the ECB, and they can borrow more funds starting in March if they exceed those thresholds. At his monthly press conference on July 3, Draghi said the total take-up could be 1 trillion euros.
“If this sounds a little complicated, I think you’re right,” he told reporters in Frankfurt. “But I’m confident that the banks will quickly understand that even though it’s complicated, it’s also quite attractive.”
Still, to keep the initial batch of funding for the full term, banks aren’t required to expand their loan books. They are only obliged to boost credit if they wish to borrow more cash starting next year, when the ECB will provide as much as 3 euros for every 1 euro of net new lending.
Bank Review
That’s a hindrance while the euro area’s subdued recovery keeps credit demand by companies weak, according to Marco Valli, chief euro-area economist at UniCredit SpA in Milan.
“It is unlikely that companies that had no intention of investing will start to do so now,” he said. “It isn’t clear that banks in peripheral countries where private sector debt needs to be reduced further will be capable of returning to flat or positive net lending in about a year. This could restrain the impact of this facility.”
The attitude of banks toward the TLTROs may become clearer after the ECB finishes its health check of their balance sheets. The asset quality review and stress tests are designed to strengthen the banking system by identifying any capital shortfalls before the ECB becomes the euro-area bank supervisor in November.
The final take-up of the TLTROs “could be significantly higher than the initial allowance of 400 billion euros,” said Christian Schulz, senior economist at Berenberg Bank in London. “That could provide a significant boost to lending after the completion of the asset quality review.”
Deflation Threat
The TLTRO program is the newest attempt by policy makers to strengthen a fragile recovery and avert the threat of deflation. Consumer prices rose an annual 0.5 percent last month, compared with the ECB’s goal of just under 2 percent.
Officials are also waiting to see the broader impact of the stimulus they announced in June, which included an unprecedented negative deposit rate and a commitment to providing unlimited short-term liquidity for at least another two years.
Executive Board member Benoit Coeure said on BFM Radio today that it will take time to evaluate the effect of the measures. Governing Council member Ewald Nowotny said in Vienna that the package has already had a “considerable impact” and markets have “understood” it.
The euro has declined 0.5 percent against the dollar since the June 5 meeting and traded at $1.3598 at 12:58 p.m. Frankfurt time. The three-month Euribor declined to 0.203 percent from 0.292 percent over the same period.
“They have too high expectations” of the TLTRO, said Jan Von Gerich, a fixed-income analyst at Nordea Bank AB in Helsinki. “The program will support the euro-area economy but it falls short of what would be required to tackle low inflation. There’s scope for more aggressive measures.”
Asset Purchases
That could eventually mean broad-based asset purchases, an option that Draghi has said is available should the outlook for inflation worsen. The ECB has already said it is intensifying preparations for a smaller program that could see it buy asset-backed securities.
For banks, the temptation at least until the euro-area revival is entrenched is to continue their practice of using funds borrowed cheaply from the ECB to invest in sovereign debt. While that prevents the money reaching the real economy directly, the Dutch central bank says it still has the benefit of reducing broad borrowing costs.
Carry Trade
“Banks may increase lending but can also use the funding for purchases of other assets, such as corporate bonds, commercial paper and government paper, which will help bring down rates across the board,” the bank said on its website last month.
Debt markets are reflecting the possibility of more carry trades. Spanish two-year yields and Irish 10-year yields dropped to records last week. German one-year rates fell below zero for the first time since June 2013.
“The ECB is helping finance ministers in the periphery as much as it is helping borrowers, maybe even more,” said Joerg Kraemer, chief economist at Commerzbank in Frankfurt. “The TLTROs are much less targeted than the name suggests. Of course, you could use the funds to boost credit supply, but you can also use them to buy government bonds.”
In the relative calm that is the market for U.S. Treasuries, a sense of unease over a vital cog in the financial system’s plumbing is beginning to rise.
The Federal Reserve’s bond purchases combined with demand from banks to meet tightened regulatory requirements is making it harder for traders to easily borrow and lend certain desired securities in the $1.6 trillion-a-day market for repurchase agreements. That’s causing such trades to go uncompleted at some of the highest rates since the financial crisis.
Disruptions in so-called repos, which Wall Street’s biggest banks rely on for their day-to-day financing needs, are another unintended consequence of extraordinary central-bank policies that pulled the economy out of the worst financial crisis since the Great Depression. They also belie the stability projected by bond yields at about record lows.
“You have a little bit of a perfect storm here,” said Stanley Sun, a New York-based interest-rate strategist at Nomura Holdings Inc., one of the 22 primary dealers that bid at Treasury auctions, in a telephone interview June 30.
A smoothly functioning repo market is vital to the health of markets. The fall of Bear Stearns Cos., which was taken over by JPMorgan Chase & Co. in 2008 after an emergency bailout orchestrated by the Fed, and collapse of Lehman Brothers Holdings Inc., whose bankruptcy in September of that year plunged markets into a crisis, was hastened after they lost access to such financing.
Cash Transaction
In a typical repo, a dealer needing short-term cash often borrows money from another dealer, a hedge fund or a money-market fund, putting up Treasuries as collateral. The cash lender can then use the securities to complete other trades, such as to close out short positions where it needs to deliver bonds.
Negative rates happen when certain Treasuries are in such high demand or short supply that lenders of cash are actually paying collateral providers interest so they can obtain the needed securities. Traders said that is a big reason why repo rates on desired Treasuries have recently gotten as low as negative 3 percent.
Now, more repo trades are going uncompleted, or failing, because it’s either too difficult or expensive for the borrower to obtain and deliver Treasuries. Such failures to deliver Treasuries have averaged $65.6 billion a week this year, reaching as much as $197.6 billion in the week ended June 18, Fed data show.
Uncompleted trades averaged $51.6 billion in 2013, and $28.8 billion in 2012, according to the Fed. In those cases, the borrower pays a 3 percent penalty.
Liquidity Issues
“The effect of all the collateral issues we see now is an indication of not so much how things are, but how bad things will be when you really need liquidity,” said Jeffrey Snider, chief investment strategist at West Palm Beach, Florida-based Alhambra Investment Partners LLC, in a telephone interview June 30. “That’s when you get into potentially dire situations.”
The conditions for repo stress were on display last month. The 2.5 percent note due in May 2024 reached negative 3 percentage points in repo in the days preceding a June 11 Treasury auction of $21 billion in notes to finance government operations.
Dealer Constraints
Repo rates have been most prone to go negative, a situation known as specials in the market, in the days preceding an auction as traders who previously sold the debt seek to buy the securities to cover those positions.
In this week’s note and bond sales, the U.S. plans to auction $27 billion of three-year Treasuries tomorrow, $21 billion of 10-year debt on July 9 and $13 billion of 30-year securities July 10.
Signs of dysfunction are coming at a sensitive time for markets. The Fed is paring its stimulus and futures show traders expect the central bank may start raising interest rates in the middle of next year.
The concern is that dealers, which have pared inventories to meet more-stringent capital requirements required by the 2010 Dodd-Frank Act mandated by the Volcker Rule and Basel III, won’t have as much capacity to handle any surge in volumes or volatility.
Securities Industry and Financial Markets Association data show the average daily trading volume in Treasuries has fallen to $504 billion this year from $570 billion in 2007, even though the amount outstanding has risen to more than $12 trillion from $4.34 trillion.
Available Securities
Bank of America Merrill Lynch’s MOVE Index, a measure of expectations for swings in bond yields based on volatility in over-the-counter options on Treasuries maturing in two to 30 years, reached 52.7 percent on June 30, almost a record low.
The Fed is partly to blame. Through its policy of quantitative easing,
Fed owns about 20 percent of all Treasuries, or $2.39 trillion.
Banks hold $547 billion of Treasury and agency-related debt.
In addition, the Fed’s holdings have shifted in ways that leave fewer central-bank-owned Treasuries available to be borrowed. The shifts were caused by Operation Twist during the November 2011 to December 2012 period when the Fed sold shorter-dated Treasuries and bought more bonds, plus self-imposed central-bank restrictions on holdings of specific maturities.
Stimulus Withdrawal
The Fed’s lack of certain holdings “appears to be driving the surge in fails, which has been concentrated in the on-the-run five- and 10-year notes,” Joe Abate, a money-market strategist in New York at primary dealer Barclays Plc, wrote in a note to clients on June 27. On-the-run refers to the most recently issued Treasuries of a specific maturity.
While the Fed has sought to cut risk in the repo market since the crisis, it still sees the chance that rapid sales of securities, known as fire sales, could disrupt the financial system. Fails reached a record $2.7 trillion in October 2008.
Repos are also important to the Fed because it has been testing a program in the market that is seen as a potential tool to withdraw some of its unprecedented monetary stimulus.
Eric Pajonk, a spokesman at the New York Fed, decline to comment on the Fed’s reaction to the movements in recent weeks in the repo market.
The amount of securities financed daily in the tri-party repo market has declined 18 percent an average $1.60 trillion May, from $1.96 trillion in December 2012, data compiled by the Fed show. In a tri-party agreement, one of two clearing banks functions as the agent for the transaction and holds the security as collateral. JPMorgan Chase & Co. and Bank of New York Mellon Corp. serve as the industry’s clearing banks.
Supply Falls
Another difficulty in the repo market has been the decline in Treasury bill supply, with the U.S. having sold $264 billion fewer short-term bills in the April-through-June period than those that matured, according to John Canavan, a fixed-income strategist at Stone & McCarthy Research Associates in Princeton, New Jersey.
“The repo market itself provides lubricant to the entire Treasury market,” Canavan said in a July 3 telephone interview. “Bills are a key lubricant to the repo market, and the supply of bills has fallen sharply. If this situation were to continue longer-term, it would be a more substantial problem.”
07-08-14
BONDS
5- Sovereign Debt Crisis
CHINA BUBBLE
6
SENTIMENT - Reaching Historically Extremes
Market correlation, Low VIX & a market extreme - Historically have often marked an “event” catalyst in sentiment!
07-10-14
SENTIMENT
BRIEF
22 - Public Sentiment & Confidence
TO TOP
MACRO News Items of Importance - This Week
GLOBAL MACRO REPORTS & ANALYSIS
US ECONOMIC REPORTS & ANALYSIS
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES
FOOD INLFLATION - Showing in the Stores and Restaurant Loses
Central Bank Officials Sometimes Look Past Food-Cost Increases
U.S. food prices are on the rise, raising a sensitive question: When the cost of a hamburger patty soars, does it count as inflation?
It does to everyone who eats and especially poorer Americans, whose food costs absorb a larger portion of their income. But central bankers take a more nuanced view. They sometimes look past food-price increases that appear temporary or isolated while trying to control broad and long-term inflation trends, not blips that might soon reverse.
The Federal Reserve faces an especially important challenge now as it mulls the long-standing dilemma of what to make of the price of a pork chop.
As Fed officials debate when to start raising short-term interest rates to prevent the economy from overheating and causing inflation, Fed Chairwoman Janet Yellen has signaled she wants to take her time.
Broad measures of inflation have been running below the Fed's 2% target for more than two years, but show signs of picking up. And the unemployment rate has fallen to 6.1% from 7.5% a year ago, which suggests that slack in the labor market is diminishing and the risk of overheating is gradually rising.
A broad rise in inflation would be an added signal that the time to move on rates is nearing. That is putting pressure on the Fed to separate food inflation signals from noise.
The consumer price of ground beef in May rose 10.4% from a year earlier while pork chop prices climbed 12.7%. The price of fresh fruit rose 7.3% and oranges 17.1%. But prices for cereals and bakery products were up just 0.1% and vegetable prices inched up only 0.5%.
The U.S. Department of Agriculture predicts overall food prices will increase 2.5% to 3.5% this year after rising 1.4% in 2013, as measured by the Labor Department's consumer-price index.
In a typical supermarket, shoppers are seeing higher prices around the store's periphery, in the produce section and at the meat counter.
"Your center aisles, more of the nonperishable goods, are seeing below-average inflation because commodities and the factors that go into producing them haven't been increasing the same way," USDA economist Annemarie Kuhns said.
The uneven rise points to disparate forces affecting food prices. Drought in Oklahoma and Texas is driving up cattle prices. A disease known as porcine epidemic diarrhea virus has killed millions of piglets and contributed to higher hog prices. A disease known as citrus greening is killing Florida's orange and grapefruit trees, driving up citrus prices. Most of the shrimp eaten in the U.S. comes from Southeast Asia, where a bacterial infection has devastated stocks. Coffee prices have risen this year due to a drought in Brazil.
These factors suggest recent food inflation springs from special factors constraining supplies in a few areas, as opposed to broad increases in demand, which might propel the kind of across-the-board consumer prices increases that the Fed tries to stem.
The Fed's official statement of objectives targets 2% inflation over the medium term as measured by a broad index of inflation called the personal consumption expenditure price index, which includes measures of food and energy. Though the Fed focuses on this broad measure, it also watches measures that exclude food and energy movements, since those sectors are volatile and sometimes send misleading signals about broader trends.
The broad PCE index was 1.8% higher in May than a year earlier, its 25th straight month below the Fed's target. Still, it has accelerated from a 0.8% rise as recently as February. Excluding food and energy the index has picked up to 1.5% from 1.1%, suggesting that broader factors are starting to drive inflation higher.
Ms. Yellen noted in her most recent news conference that inflation readings have been "a bit on the high side" lately, but warned "the data that we're seeing is noisy."
But divisions are emerging on this question. "I don't think the past few months are entirely noise," Richmond Fed President Jeffrey Lacker retorted after a June 26 speech in Lynchburg, Va.
If food-price inflation were spreading more broadly, it might first show up at restaurants, but so far that isn't happening. The cost of eating at full-service restaurants was 2.2% higher in May than a year earlier, in line with its trend of the past year, according to Labor Department statistics. Grocery costs, by contrast, were up 2.7% in June, accelerating from increases of less than 1% for much of 2013.
Some restaurants are reluctant to pass on higher food cost to diners. Low prices "are what our customers are counting on," said Jamie Richardson, a vice president for government and shareholder relations at White Castle Management Co. "People are dining out more frequently and we're encouraged by that," he said. "At the same time we're cautious because a recovery could be killed in the crib by higher food costs.
PREVENT YOU FROM EXITING YOUR MONEY MARKETS (CASH) AT TIME OF TURMOIL
SEC Vote Could Come as Early as This Month
U.S. regulators are poised to complete long-awaited rules intended to prevent a repeat of the investor stampede out of money-market mutual funds that threatened to freeze corporate lending during the 2008 financial crisis.
The Securities and Exchange Commission is expected to vote on a plan as early as this month that would require certain money funds catering to large, institutional investors to abandon their fixed $1 share price and float in value like other mutual funds, these people said.
The plan also would allow money funds to temporarily block investors from withdrawing their money in times of stress, or require a fee to redeem shares. Other regulators, including members of the Financial Stability Oversight Council, have said such redemption restrictions could spur, rather than curb, investor stampedes.
The rules are aimed at making the $2.6 trillion money-fund industry less prone to investor runs during periods of market tumult by training investors to accept fluctuations in the value of their investments, and by ensuring funds could stop a trickle of outflows from turning into a flood.
SEC Chairman Mary Jo White is under pressure from U.S. and global regulators to fix structural vulnerabilities posed by the funds. Last week, Federal Reserve Chairwoman Janet Yellen said in a speech the pace of implementing tighter rules for short-term funding markets, including money funds, "has, at times, been frustratingly slow."
Ms. White's plan is expected to gain support from a majority of the agency's five commissioners, overcoming years of internal debate about how best to address money-fund vulnerabilities. Ms. White, Democrat Luis Aguilar and Republican Daniel Gallagher are expected to support the plan, these people said.
Money funds are cash-like instruments used by millions of individuals, businesses and municipalities to safely park cash. In 2008, Reserve Primary, a $62 billion fund, "broke the buck" by falling under the price of $1 a share that money funds seek to maintain. Exposure to the debt of bankrupt Lehman Brothers Holdings Inc. caused losses for Reserve Primary and sparked a run on other money funds that eased only after the U.S. government stepped in to backstop the industry.
The SEC implemented broad changes in 2010 designed to make the industry more resilient, including tighter rules on the kinds of securities that funds could hold. But the SEC left unresolved structural features that critics say encourage investors to bolt at the first sign of trouble.
Concerns about money funds have increased in recent years as regulators worry about a sudden rise in interest rates, which could depress the value of the funds' holdings. An International Monetary Fund report this spring outlined such a scenario and the Financial Stability Oversight Council, for the fourth year in a row, cited money funds as a source of systemic risk.
Ms. White's approach would combine two options the agency presented last summer when it voted to propose tighter rules: a floating share price for prime institutional funds, which are considered riskier than other money funds and invest in short-term corporate debt, coupled with redemption "gates" and fees.
Because floating share prices would apply only to prime institutional funds—which comprise about 37% of the industry—mom-and-pop retail investors aren't expected to be directly affected.
A date for the vote hasn't yet been made public and the contours of the plan could change.
Ms. White still is seeking support from a fourth commissioner, Democrat Kara Stein, who has expressed reservations about redemption limits but is developing her views, these people said. Commissioner Michael Piwowar, a Republican, doesn't support a combined approach, and isn't expected to support the plan, according to people familiar with the matter.
A deal is partly contingent on the Treasury Department agreeing to ease tax rules on the small gains and losses for investors in floating-rate funds, requirements that funds say would be too burdensome. A person familiar with the matter said Treasury is close to an agreement with the SEC on the issue. A Treasury spokeswoman declined to comment.
Ms. White's inclusion of redemption restrictions comes despite the concerns of other regulators who have said limits would encourage investors to bolt over fears they wouldn't be able to withdraw money.
SEC economists believe new disclosure requirements, including the amount of assets in funds that can be quickly turned into cash, will mitigate the risk of runs because investors will have information about the health of the funds. It remained unclear how broadly the SEC would authorize redemption limits. They could apply to all types of funds or to only a slice of the industry.
The SEC's move comes after a proposal championed by former SEC Chairman Mary Schapiro faltered two years ago amid industry lobbying and internal SEC bickering. Ms. Schapiro proposed requiring all money funds to either float their share price or post bank-like capital to ensure they could make good on redemptions when asset holdings suddenly drop in value.
The Fed has pulled a new rabbit out of its hat: Reverse Repos.
By using reverse repos, the Fed has found a way to deal with its two most pressing challenges of 2014:
1) preventing the high levels of excess liquidity during the second quarter from creating a stock market boom and bubble, and
2) preventing a Liquidity Drain in the second half of the year from causing a stock market crash and recession.
By taking some of the Liquidity from the second quarter and spreading it out across the second half, the Fed may manage to push back the Liquidity Drain by a few months. Reverse Repos will only take them so far however.
Without an extension of Quantitative Easing or some new kind of liquidity-injecting trick, the Liquidity Drain will strike by early next year and, when it does, asset prices are likely to take a tumble.
SEE RICHARD'S EXTENSIVE CHARTS ON WHAT THIS MEANS TO STOCK & BOND MARKETS
Credit: How Much Does It Take?
I’ve begun to roll out Macro Watch: Third Quarter 2014.
The first video, Credit: How Much Does It Take?, has been uploaded and is ready to watch.
In this video, we consider how much credit growth it would take to restore solid economic growth in the United States. Looking at this sector by sector, it becomes clear that it will be next to impossible for credit to start growing enough to drive the economy forward again any time soon. That means, without more Quantitative Easing or some other kind of monetary or fiscal stimulus, the economy is very likely to plunge back into recession.
SEE RICHARD'S EXTENSIVE CHARTS ON WHAT THIS MEANS TO STOCK & BOND MARKETS
A note to subscribers: Rather than uploading all the videos at the beginning of the quarter, as I have done in the past, this time I will upload one new video approximately every two weeks during the quarter. Six videos at once seemed to be too much. So I’m going to spread them out. When a new video has been uploaded, I will announce it on this blog.
Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.
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