Global Financial Analysis - A Number of Key Points as to where we are In the Grand Global Macro Autumn of 2018 by John Jacob Pitera
Monday Morning musings, Technical pattern for the USD, High USD Interest rate differentials acts as a magnet to draw global flow of funds into the USD, and the logical place for much of these funds is in US Equities.
We are experiencing a global flight to quality - rush into the USD since
we are the world's major reserve currency and global investors are so attracted
to our ultra high short term
interest rates... and now the 10 to 30 year portions of the bond yield curve are
providing more yield..... The 2 year note yield is higher than the dividend
yield of the SPX 500...
This demonstrates how global money
shall continue to flow it US dollars and $ denominated asset classes.... for
the near term (balance of 2018?)..
And quite a lot of it will be put to work in the US equities market .... so
it will effectively provide the opportunity for healthy further returns, as we
see it now..... and if enough foreign money is
focused on the USA with lazer like position..... we should have a major
US stock rally from these lofty levels, speculative excesses are rapidly
accumulating, we have seen leveraged loans go back to the lofty levels of 2007,
and Barron's has a lead story regarding what the Biggest Leveraged Buyout of
2018 Says about the credit boom.
to quote the article "
FEATURE
What the Biggest Leveraged Buyout of 2018 Says About the Credit Boom
You could call it the “definitiv” deal of the corporate credit boom.
The $17 billion buyout of Thomson Reuters’ financial data business—soon to be
called “Refinitiv”—by a Blackstone-led group of investors is the biggest
leveraged buyout this year and among the biggest since the financial crisis.
More than two-thirds of the buyout will be financed by debt, which was priced
Tuesday. That may seem reminiscent of 2007 (or perhaps 1989). But many of
the deal’s features are distinctly modern, and the debt was sold on terms,
and at a price, that investors and corporate treasurers may look back on as
characteristic of the zenith of this credit cycle.
and at a price, that investors and corporate treasurers may look
Monday 9/24/2018 8:00AM ---
USD daily chart with Fibonacci price extentions
And the 60 minute Globex chart also from Monday 9/24/2018 @ 5:00 AM
Aug 28th 11:55 pm as posted on LinkedIn
"The excitement is in the air as is the concern of the 2 - 10 year note spread which has been down to 19 basis points recently and as Deutsche Bank noted late last week, The USA 2 - 10 spread fell below the Japanese 2 - 10 spread for the first time since November 2007... and the Great financial crisis went into high gear shortly there after. The FED is going to invert the yield curve when the September rate hike of .25 % occurs.... the reason that the US 10 and 30 year Sovereign debt has rallied this past several weeks is the wise Family offices, the pension funds like Calpers scaled back US stock exposure in Q4 of 2017... Mark Cuban is sitting with more cash than in 10 years... as is Warren Buffett
The really big operators have to scale out of stocks before the final high due to their tremendous size.... Dr. Fleming and Mr. Walker can attest to this truism ."
JJP
-------------------------------------------------------------
This was a brief note posted last Thursday Sept 14th 2018... by Bonds and Loans
and my response to the open ended question which I made on Sunday Sept 15th
As Mohamed El-Erian commented on today (Monday 9-17-18) @ 9:36 A M , Lael Brainard
gave a speech on Sept 12th that is a must read. She is the most dovish of the voting Fed
Governor's ; and even she is saying that the FED will be raising short term interest rates
faster than the market anticipates so that the FED can achieve their objective of getting
to their terminal interest rate level of 2.75% - 3.00% in a more expedient manner.
- The FED is telling US exactly what they are doing and why and the FED's objective is
- to reload their monetary arsenal, and to deleverage and drain liquidity off the $4.6 Trillion off of the Federal Reserve Balance sheet.
They have no reason to be concerned about a 15% or 20 % correction in stock
prices,
as in the bigger picture, the Central Banks have had a culpability
in generating excess monetary liquidity, that has found it's way into the 1%'er
and the FED and other Central Banks ARE NOT in the Business of Creating
NEVER ENDING Bubbles....
PRICES ARE SET ON THE MARGIN; 5% of the holders of a stock can sell the stock at
$100 a share and if all the buyers are already into the stock.... the 5 % who
sell @ $100 can drive the stock price down to $75 a share... resulting in a 25% reduction in Asset value for the remaining
95% of the shareholders, and there is not a short position for every long share of stock in any
company. where does the $25 loss of asset value sustained by 95% of the rest of the holders
go?...... It "Goes OFF to Money Heaven" this is a very little understood concept by investors
and when the history is written on 2016-2019..... the huge explosion of hot money new wealth
in the Cryptocurrencies that occurred in 2016 and became a champagne SuperNova in 2017
created well in excess of a Trillion dollars of Hot money that has now left the system and there
was an insane amount of leverage in the global cryptocurrency market....
so the Global Cryptocurrency liquidation bear market is right there in front
of us and few are connecting these dots in a cohesive fashion.....
Everyone has been doing 10 year retrospectives on what exactly happened that
created the collapse of Lehman Brothers, Bear Sterns, Merrill, AIG... etc..
and the prevailing view is one of shock at the Leverage that Lehman and Bear
had at 35 to 40 times working capital...
We have watched Several Trillion dollars of emerging market currency, EM debt market,
and EM equity Market asset value also head "OFF to Money Heaven"
as my
never ending series of articles since the late Summer of 2016 have discussed
short term moneyrates, LIBOR as well as the Fed Funds rate have moved massively
higher in a continuous upward trajectory...... The short term cost of Funds IS
the funding cost for all businesses....
If you had ever been in a Global Money Center Bank and watched the Bond and Bill and Notes Desks,
and looked over at the Swaps and distribution desks.... and then watched on a
daily basis how
Management would always have the head of the Funding desk ... (team... which was
much, much bigger than you I would ever suspect...... Working on a funding desk
is not sexy like bond, currency,
swaps, FX, FX forwards, Long dated FX, corporate sales..... Floating rate notes...
but the entire balance sheet of every desk and every department has to be
FUNDED.... and THE COST of those FUNDS predicate the prices and viability of
engaging in all of these other activities.....
Just like in your family house hold.... you have to fund last little financial
item you spend money on.....and when your funding costs go up..... it's like
getting a cut in your weekly or monthly income.... and
so you spend less..... it is a Macro and a Micro Economic Fact.......
by the way El Erian also commented that the spread on the 10 year US note and
the 10 year German bund is way stretched at 248 basis points.... which is
historically super high... it continues to pull global
money into the USD and that had been what was making our equity market
levitate.... the Supertanker Market... HIS KEY comment was that We can not have
this TNX - German bund spread continue to expand without it breaking something
in the financial system and he is most assuredly correct.
JJP Monday evening 9/17/2018........ my fantasy football team had a winning week,
and while I may not receive total consciousness on my deathbed.... at least I
have the the winning week in fantasy going for me, which is nice --- a wink
and a nod to Bill Murray, the late great Harold Ramis and Joe Kernen.... who
so nicely works that little gem into his morning show every show often.....
------------------
Goldman Bear-Market Risk Indicator at Highest Since 1969: Chart
By Cormac Mullen
September 10, 2018, 2:40 AM EDT
A Goldman Sachs Group Inc. indicator designed to provide a “reasonable signal for future bear-market risk” has risen to the highest in almost 50 years. The firm’s Bull/Bear Index, which is based on measures of equity valuation, growth momentum, unemployment, inflation and the yield curve, is now at levels last seen in 1969. While the gauge is at levels that have historically preceded a bear market, Goldman strategists including Peter Oppenheimer wrote in anote last week that a long period of relatively low returns from stocks is a more likely alternative.
---------------------------------------------------------------------------
on 04/25/2018 the spread was 113 basis points.... the spread shot all the way up
290.5 basis points by 05/29/2018... clearly there is concern that the ItalianGovernment has some issues about the ability and / or the willingness to pay off
the Italian Govt debt in Euro's..... why not leave the Eurozone
currency and go back to the Italian Lira.... after all if the UK can leave the EU
what, pray tell, is keeping
a right wing .. Italy first populists, who are looking askance at all of the MuslimRefugees that are over whelming several countries in Europe;especially Germany,
France,Sweden; there is significant blow-back
How long is the the EURO currency going to continue to exist??? especially since
European banks have a fair bit of exposure to Turkish Lira loans that will b defaulted on. and the defaults are coming on
South African Rand loans, Argentinian peso loans, ......
re is a 7 year chart of the Italy 10 year vs Germany 10 year spread, as you can
see we are moving rapidly and are getting close to the spread differential
from the Crisis years of 2011-2012 which was really a continuation
of the Great Financial Crisis of 2008-2009, as the European banks had purchases
fully 1/3 of the insolvent asset backed securities, Credit Default Swaps, CDO's
and CLO's and the banks of Europe needed the FED
to reopen the FX swaps lines that were first used in the 1960's and the
ECB ended up borrowing almost 10 Trillion of FX swaps through the swap lines
that the FED had established.
The FED is telling US exactly what they are doing and why and the FED's objective is to
reload their monetary arsenal, and to deleverage and drain liquidity off the $4.6 Trillion
Federal Reserve Balance sheet.
They have no reason to be concerned about a 15% or 20 % correction in stock prices,
as in the bigger picture, the Central Banks have had a culpability
in generating excess monetary liquidity, that has found it's way into the 1%'er and the FED
and other Central Banks ARE NOT in the Business of Creating NEVER ENDING Bubbles....
PRICES ARE SET ON THE MARGIN; 5% of the holders of a stock can sell the stock at $100
a share and if all the buyers are already into the stock.... the 5 % who sell @ $100 can drive the
stock price down to $75 a share... resulting in a 25% reduction in Asset value for the remaining
95% of the shareholders, and there is not a short position for every long share of stock in any
company. where does the $25 loss of asset value sustained by 95% of the rest of the holders
go?...... It "Goes OFF to Money Heaven" this is a very little understood concept by investors
and when the history is written on 2016-2019..... the huge explosion of hot money new wealth
in the Cryptocurrencies that occurred in 2016 and became a champagne SuperNova in 2017
created well in excess of a Trillion dollars of Hot money that has now left the system and there
was an insane amount of leverage in the global cryptocurrency market....
so the Global Cryptocurrency liquidation bear market is right there in front of us and No one
is connecting these dots in a cohesive fashion.....
Everyone has been doing 10 year retrospectives on what exactly happened that created the
collapse of Lehman Brothers, Bear Sterns, Merrill, AIG... etc.. and the prevailing view is one
of shock at the Leverage that Lehman and Bear had at 35 to 40 times working capital...
We have watched A Several Trillion dollars of emerging market currency, EM debt market,and EM equity Market asset value also head "OFF to Money Heaven"
as my never ending series of articles since the late Summer of 2016 have discussed short term money rates, LIBOR as well as the Fed Funds rate have moved massively higher in a continuous upward trajectory...... The short term cost of Funds IS the funding cost for all businesses....
If you had ever been in a Global Money Center Bank and watched the Bond and Bill and Notes Desks, and looked over at the Swaps and distribution desks.... and then watched on a daily basis how Management would always have the head of the Funding desk ... (team... hich was much, much bigger than you I would ever suspect...... Working on a funding desk is not sexy like bond, currency,swaps, FX, FX forwards, Long dated FX, corporate sales..... Floating rate notes.... but the entirebalance sheet of every desk and every department has to be FUNDED.... and THE COST of thoseFUNDS predicate the prices and viability of engaging in all of these other activities.....
Just like in your family house hold.... you have to fund last little financial item you spend money on.....and when your funding costs go up..... it's like getting a cut in your weekly or monthly income.... and
so you spend less..... it is a Macro and a Micro Economic Fact.......
by the way El Erian also commented that the spread on the 10 year US note and the 10 year German bund is way stretched at 248 basis points.... which is historically super high... it continues to pull global money into the USD and that had been what was making our equity market levitate.... the Supertanker Market... HIS KEY comment was that We can not have this TNX - German bund spread continue to expand without it breaking something in the financial system and he is most assuredly correct.
JJP Monday evening 9/17/2018........ my fantasy football team had a winning week, and while I may not receive total consciousness on my deathbed.... at least I have the the winning week in fantasy going for me, which is nice --- a wink and a nod to Bill Murray, the late great Harold Ramis and Joe Kernen.... who so nicely works that little gem into his morning show every show often....
--------------------------------------------------------------------------------------------------------
- Summary
- Emerging market countries might be facing an economic crisis.
- 16 emerging market countries borrowed $3.4 trillion from foreign lenders, but their foreign exchange reserves amounted to $1.3 trillion.
- The currencies of Argentina, Ukraine, Egypt, Turkey, and Brazil have depreciated against dollar by 80.3%, 69.0%, 60.9%, 60.5%, and 42.5%, respectively, over 5-year period.
- The percentage of exports per GDP of Vietnam, Malaysia, Belarus, Brazil, Ukraine, Mexico, and Morocco were 98.6%, 75.2%, 65.0%, 57.8%, 47.9%, 37.4%, and 35.7%, respectively, in 2017.
- Emerging market countries would be facing high currency, liquidity, inflation, interest rate, default, and emerging market risks due to the shortage of foreign exchange reserves, strong dollar trend, and trade war.
- Foreign Exchange ReservesEmerging market (EM) countries are facing an economic crisis. The EM countries on the above chart do not have sufficient amount of foreign exchange reserves to pay off external debts. The 16 EM countries borrowed total of $3.4 trillion from the foreign lenders. The 16 EM countries' foreign exchange reserves amounted to $1.3 trillion, which is short by $2.1 trillion to pay off the external debts.
----------------------------------------------------------------------------------------------------
Memories are very long on Wall Street... Lehman Brothers and Bear Sterns, not being team players in
the 1998 LTCM bailout resulted in them being severely punished for their intransigence when the next
big financial crisis occurred a decade later....
Lehman Brothers was liquidated..... and Bear Sterns was paid a few cents on the dollar a token amount by JPM
September 15, 2008
The filing for Chapter 11 bankruptcy protection by financial services firm Lehman Brothers on September 15, 2008, remains the largest bankruptcy filing in U.S. history, with Lehman holding over US$600,000,000,000 in assets.
Bankruptcy of Lehman Brothers - Wikipedia
Search for: When did Lehman Brothers go under?
Who was responsible for Lehman Brothers collapse?
Dick Fuld, the chief executive who led Lehman Brothers to the largest corporate collapse in modern times, has defended the failed investment bank's culture, insisting that it was a victim of wider market excesses and regulatory failings in his first public speech since the banking crash of 2008.May 28, 2015
Lehman Brothers' former CEO blames bad regulations for bank's ...
theguardian.com.
Why the Fed had to bail out Bear Stearns. ... Now Bear is being bailed out by the Fed via JPMorgan Chase, which is buying the troubled firm for $2 a share. And as one might expect, the finger-pointing and recriminations have already begun.Mar 18, 2008
Why the Fed had to bail out Bear Stearns.
www.slate.com/articles/business/moneybox/2008/03/bear_run.html
1998 bailout[ edit]
On September 23, 1998, the chiefs of some of the largest investment firms of Wall Street— Bankers Trust, Bear Stearns, Chase Manhattan, Goldman Sachs, J.P. Morgan, Lehman Brothers, Merrill Lynch, Morgan Stanley Dean Witter, andSalomon Smith Barney—met on the 10th floor conference room of the Federal Reserve Bank of New York (pictured) to rescue LTCM.
Long-Term Capital Management did business with nearly everyone important on Wall Street. Indeed, much of LTCM's capital was composed of funds from the same financial professionals with whom it traded. As LTCM teetered, Wall Street feared that Long-Term's failure could cause a chain reaction in numerous markets, causing catastrophic losses throughout the financial system.
After LTCM failed to raise more money on its own, it became clear it was running out of options. On September 23, 1998, Goldman Sachs, AIG, and Berkshire Hathaway offered then to buy out the fund's partners for $250 million, to inject $3.75 billion and to operate LTCM within Goldman's own trading division.
The offer was stunningly low to LTCM's partners because at the start of the year their firm had been worth $4.7 billion. Warren Buffett gave Meriwether less than one hour to accept the deal; the time lapsed before a deal could be worked out. [25]
Seeing no options left, the Federal Reserve Bank of New York organized a bailout of $3.625 billion by the major creditors to avoid a wider collapse in the financial markets. [26] The principal negotiator for LTCM was general counselJames G. Rickards. [27] The contributions from the various institutions were as follows: [28] [29]00 million:
$125 million: Société Générale
$100 million: Paribas, Crédit Agricole [30]
**** Bear Stearns and Lehman Brothers [30] declined to participate. ****
In return, the participating banks got a 90% share in the fund and a promise that a supervisory board would be established. LTCM's partners received a 10% stake, still worth about $400 million, but this money was completely consumed by their debts. The partners once had $1.9 billion of their own money invested in LTCM, all of which was wiped out. [31]
The fear was that there would be a chain reaction as the company liquidated its securities to cover its debt, leading to a drop in prices, which would force other companies to liquidate their own debt in a vicious cycle.
The total losses were found to be $4.6 billion. The losses in the major investment categories were (ordered by magnitude): [21]
1) $1.6 bn in swaps
2) $1.3 bn in equity volatility
3) $430 mn in Russia and other emerging markets
4)$371 mn in directional trades in developed countries
5) $286 mn in Dual-listed company pairs (such as VW, Shell)
6) $215 mn in yield curve arbitrage
7) $203 mn in S&P 500 stocks
8) $100 mn in junk bond arbitrage
- no substantial losses in merger arbitrage
Long-Term Capital was audited by Price Waterhouse LLP.
After the bailout by the other investors, the panic abated, and the positions formerly held by LTCM were eventually liquidated at a small profit to the rescuers. Although termed a bailout, the transaction effectively amounted to an orderly liquidation of the positions held by LTCM with creditor involvement and supervision by the Federal Reserve Bank.
No public money was injected or directly at risk, and the companies involved in providing support to LTCM were also those that stood to lose from its failure. The creditors themselves did not lose money from being involved in the transaction.
Some industry officials said that Federal Reserve Bank of New York involvement in the rescue, however benign, would encourage large financial institutions to assume more risk, in the belief that the Federal Reserve would intervene on their behalf in the event of trouble. Federal Reserve Bank of New York actions raised concerns among some market observers that it could create moral hazard since even though the Fed had not directly injected capital, its use of moral suasion to encourage creditor involvement emphasized its interest in supporting the financial system . [32]
LTCM's strategies were compared (a contrast with the market efficiency aphorism that there are no $100 bills lying on the street, as someone else has already picked them up) to "picking up nickels in front of a bulldozer" [33]—a likely small gain balanced against a small chance of a large loss,
like the payouts from selling an out-of-the-money naked call option.
--------------------------------------------------------------------------------------------------------------
The Credit SuperCycle as presented on the World Economic Forum website
---------------------------------------------------------------------------------------------------------------
The GFA proprietary Weekly 14 week and 200 week ATR on the EUR/JPY:$WTIC ratio
is still in caution mode (the red flag is still out indicating there are rip currents in the waters.)
The Model which is longer term in Nature has been indicating abnormally high
volatility in the 4 deepest markets in the world, the EUR, JPY, WTIC and
USD index.
The markets go into a risk off mode when the 14 week
ATR Average True Range of my global liquidity model ( which is constructed by taking the EUR/JPY crossrate and taking a ratio of it against $WTIC.) crossed
above it's 200 week ATR of the same indicator.
It's completely logical as to why risk assets and the SPX sell off / or at least
stop going up when the 14 week ATR crosses above the long term 200 week ATR.
Since my / our model is looking at 4 of the deepest markets in the world....
The Euro, The Yen, $WTIC and the USD by default since Crude oil is
denominated in US dollars. The Global Currency markets are the deepest in the
world with 6 to 7 Trilliondollars of Foreign Exchange spot currency trading
every day. When you add in Long dated
FX, Global Currency Swaps, Credit Default Swaps, CLO's and other derivatives
an extremely deep market.
The Size and Magnitude of the Global Energy market.... even using just the Crude
oil and distillate portion is Extraordinarily Massive and thus we are dealing
with the Beating Heart of Global capitalism.
It goes without saying that the US Dollar is the global Key Currency and it is
directly reflected in the price of Crude.
Thus .........
What is occurring is that global asset prices are fluctuating more dramatically
and it creates a risk off
environment for the entire world, where Companies, Governments, Individuals;
indeed all sectors of the
economy do not have as much viability as to what there costs and cash flows
are going to be, there is more
uncertainty as to whether assets are correctly priced....
the ability to judge whether capital expenditure
and other fundamental economic factors can be properly calculated loses way
to much visibility.
And thus in the aggregate there is morecaution and less business,
government and consumer confidence
Risk appetite is dramatically reduced.. This logically shows up in the global equity markets and is
typified by the price action of the S&P 500.
we need to see a bit more stabilization in the EUR/JPY crossrate and crude to get the 14 Week Averager True Range back below the 200 week ATR, which would be very constructive for forward planning by corporate, government, and truly all sectors of the global economy.
-----------------------------------------------------------------
The 72 year master cycle in the US 30 year Treasury bond --- The US entered a
secular bull market in yield (interest rates are going higher) and bear market
in bond prices on July 8 2016. We are now in the
wave of advance that the general Wall street and global financial community comes
to the mass realization that interest rates are going up.
THE 30 YEAR US TREASURY BOND WEEKLY CHART FROM LATE 1979 TO SEPTEMBER 1982
THE High in Yield was 14.59% on Oct 12 1981.
we have a number of global central banks taking steps to normalize interest
rates, which means to raise them and since we have had 8 years of global Zero
interest rate policy, on short rates in the US, the ECB, the BOJ, the SNB -
swiss national bank, the swedish Riskbank, the BOE was very accomodative...
and so it's a brave new world of the reduction of monetary stimulus and we have
already had 5 Fed Fund increases here in the US.... with number 6 occurring
this week? We have another coming in Dec.
and we have never seen the global central banks in this position, We have the
FED, the Bank of England, the Reserve Bank of Australia, the central bank of
Canada, and the European Central bank all in tightening
mode....... .. they have never been in this position and in central
banking land.... mistakes in the movement of the short term borrowing rates
can occur, especially when you have multiple countries doing the same thing...
It sets up uncertainty in the Long dated FX market.... creates uncertainty
for Banking, Insurance, Reinsurance companies as to how to hedge and value
their long dated commitments.
Endowments, pension funds , soverign wealth funds are also all impacted by
this grand experiment. As is the vastly expanded global shadow banking system......
as Hyman Minsky famously said "stability is Destabilizing" that has always been
the case and will always be the case...we have been through a long period of
stability which has let lots of all of the bove market participants, companies,
hedge funds.... take advantage of very cheap credit by issuing a vast
ocean of it.... we shall find out who is over levered..... and then their are
exogenous shocks and black swan events.
John Jacob Pitera
---------------------------------------------------------------------------------------------------------------------------------------------
The 72 year master cycle in the US 30 year Treasury bond --- The US entered a secular bull market in yield (interest rates are going higher) and bear market in bond prices on July 8 2016. We are now in the
wave of advance that the general Wall street and global financial community comes to the mass realization
that interest rates are going up.
THE 30 YEAR US TREASURY BOND WEEKLY CHART FROM LATE 1979 TO SEPTEMBER 1982
THE High in Yield was 14.59% on Oct 12 1981.
we have a number of global central banks taking steps to normalize interest rates, which means to raise them and since we have had 8 years of global Zero interest rate policy, on short rates in the US, the ECB, the BOJ, the SNB - swiss national bank, the swedish Riskbank, the BOE was very accomodative...
and so it's a brave new world of the reduction of monetary stimulus and we have already had 3 or 3 Fed Fund increases here in the US.... are we up to 4 already? We have another coming in Dec.
and we have never seen the global central banks in this position, We have the FED, the Bank of England, the Reserve Bank of Australia, the central bank of Canada, and the European Central bank all in tightening
mode....... .. they have never been in this position and in central banking land.... mistakes in the movement of the short term borrowing rates can occur, especially when you have multiple countries doing the same thing... It sets up uncertainty in the Long dated FX market.... creates uncertainty for Banking, Insurance, Reinsurance companies as to how to hedge and value their long dated commitments.
Endowments, pension funds , soverign wealth funds are also all impacted by this grand experiment.
as Hyman Minsky famously said "stability is Destabilizing" that has always been the case and
will always be the case...we have been through a long period of stability which has let lots of all of the
above market participants, companies, hedge funds.... take advantage of very cheap credit by issuing a vast
ocean of it.... we shall find out who is over levered..... and then their are exogenous shocks and black swan
events.
--------------------------------------------