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LIBOR Pains

Authored by Pater Tenebrarum via Acting-Man.com,
Wrong Focus
If one searches for news on LIBOR (=London Interbank Offered Rate, i.e., the rate at which banks lend dollars to each other in the euro-dollar market), they are currently dominated by Deutsch…

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“Manias, Panics And Crashes”: A Stunning Warning From Bank Of America

Bank of America’s Michael Hartnett is back with another controversial note overnight, reminding readers that “it ain’t a normal cycle” for one overarching reason: central banks.

As Hartnett explains, the catalyst for bull in equity and credit markets since 2009 was the “revolutionary monetary policy of central banks” who, since Lehman, “have cut rates 679 times and bought $14.2tn of financial assets.” And, once again, he warns that this central bank “liquidity supernova” is coming to an end, as is “the period of excess returns in equities and corporate bonds, as is the period of suppressed volatility.”

With an entire generation of traders having grown up “trading” in centrally-planned markets, few can make sense of the fundamentals that accompany the market. As a result, Harnett writes that “risk markets continue to climb a wall of worry, defying bearish structural trends in the financial industry, taunting skittish skeptics by paraphrasing Margaret Thatcher…”You turn if you want to. The market’s not for turning.”

Demonstrating how insane just the past year has been in markets, Hartnett reminds us that just eight months ago belief in debt deflation & secular stagnation induced lowest interest rates in 5000 years.

  • On July 11th 2016 Swiss government could have issued 50- year debt out to 2076 at a negative yield (of -0.035%)…
  • …and in 1989 the Imperial Palace in Tokyo worth more than all real estate in California…
  • …and in March’2000 the market cap of Yahoo was 25X greater than market cap of Chinese equity market (MSCI)…
  • …and in 2008 the combined assets of Iceland’s three biggest banks were 14 times the size of the nation’s GDP…
  • …all manias, all over now.

While the current mania almost ended in early 2016, it was once again China that was responsible for the latest leg higher:

  • The current rally was kick-started by China, commodities and credit (the “3C’s”) in February 2016: since then stocks are up 31%, commodities 27% and HY bonds 23%.
  • Watch the 3C’s…China, commodities, credit.
  • We believe commodity prices must rise to maintain equity outperformance versus bonds; BofAML forecast oil at $57/b in Q2. Note commodity/claims driver hooked lower last month or two.

And yet, this period of great confusion is slowly coming to an end: what happens next is split into two phases – the famous “Icarus Trade” popularized by Hartnett several months ago, which the BOFA strategist believes will send the S&P above 2,500 and the yield on the 30Y to 3.5%, before the next “Great Fall” trade emerges.

First, a look at the near-term forecast:

We believe we are closer to the highs than lows in risk markets. But tops are a process; lows are a moment. The hubris, monetary tightening and macro peak that normally ends a strong bull trend feels H2 not Q2. So our base case unchanged heading into spring:

  • Long stocks, commodities, US dollar; short bonds; we see double digit returns for Japan, Europe, UK stocks, oil in 2017, single digit returns for US stocks, commodities, US$ and EM, and low/negative returns for bonds
  • Q2 combo of bullish but light Positioning, fiscal Policy expectations, “hard” Profit data keeps our Icarus Trade targets alive…SPX 2500, GT30 3.5%, DXY 110

For those who wish to trade this last, marketwide blow-off top, Hartnett has several “favorite Q2 trades”: the US$, sterling, oil and banks.

We think Q2 driver will be stronger growth expectations; tactical contrarians would play via long US dollar, long sterling-short EM FX, long oil, long EAFE banks-short US tech.

 

The risk to our bullish Q2 call is the price action of 3C’s (China, commodities, credit) deteriorates and signals synchronized global Profit top, on back of PBoC tightening. Commodity prices must rise to maintain equity outperformance versus bonds: BofAML forecast oil @ $57/b in Q2. EPS resilience required for stocks to continue to outperform bonds.

Hartnett also presents “a nice Icarus stat”: “should the S&P500 exceed 2540 in conjunction with a 3% yield on the 10-year Treasury bond then US stocks will reach an all-time high versus US bonds, exceeding the prior tech bubble peak reached in March 2000”

Still, all great – if abnormal and fake – bull markets and manias come to an end eventually, and Hartnett warns that what follows the final, Q2 “Icarus” rally will be far less enjoyable, because that’s when the infamous “great fall” is set to take place.

Great Fall” potentially comes in H2 as hubris, synchronized monetary tightening, EPS peak coincide; buy long-dated puts in anticipation; we believe best time to sell would likely be after a pop induced by a US tax reform bill (March Fund Managers Survey showed only 10% of institutions expect US tax reform passed before summer recess).

And yes, the Fed will likely try to step in again with more rate cuts to prevent a crash, although this time it won’t work at least according to Hartnett, because after the “Great Fall” comes the Long View, which Bank of America describes simply as: Manias, Panics, Crashes

Longer-term, we continue to remind ourselves it’s not a normal cycle. “Normalization” from 5,000-year low in rates, 70-year low in G7 fiscal stimulus, 35-year high in US-German rate differential, all-time high US stocks vs. EAFE, 75-year low in bank stocks is unlikely to be peaceful.

  • Humiliation remains one of the best assets to buy.
  • In Feb 2009 the 10-year rolling return from US large-cap stocks humiliatingly dropped to -3.4%, lowest since 1930s.
  • Since then S&P 500 up from 676 to 2368; now second longest bull ever (longest ever if runs past August 22nd 2018), and becomes 3rd largest ever at 2467.

His conclusion is two fold.

On one hand, “our Longest Pictures argue for a treacherous period of potential manias, panics or crashes as policy makers try to normalize policy.

On the other, the response will be the same one we have said since day one will ultimately take place: runaway inflation as central banks literally throw everything at the next mega crash, or as Hartnett calls it, “further outperformance of inflation assets versus deflation assets.”

And this is how to trade it:

  • The beneficiaries of rising inflation and rates are many.
    • The long-run price relative of real assets (real estate, commodities, and collectibles) to financial assets (stocks and bonds) is at its lowest level since 1926.
    • Bull markets in real assets have coincided with war and fiscal stimulus programs in 1940s, rise of inflation in 1960s and 1970s, and 9/11 & China accession to WTO in the early years of this century.
    • Higher inflation and interest rates are consistent with real assets outperforming financial assets: since 1970, relative performance of real assets 83% correlated with inflation.

His best trade recommendation?

“Buy gold.”

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NBC Confirms Obama Administration Officials Saved Trump-Russia Probe Docs

Seemingly confirming the incriminating remarks from former Obama Deputy Assistant Secretary of Defense, Evelyn Farkas, on the mad scramble by the Obama administration to collect and preserve intelligence on alleged Russian election hacking before Obama left office, NBC News reports that a former Obama official admits they made a list of Russia probe documents to keep them safe.

While most of the mainstrem media has conveniently dismissed the remarks from Evenlyn Farkas that accidentally implicated the Obama White House in the surveillance of Trump’s campaign staff:

The Trump folks, if they found out how we knew what we knew about the Trump staff dealing with Russians, that they would try to compromise those sources and methods, meaning we would not longer have access to that intelligence.

 

Former Obama DoD Deputy Evelyn Farkas reveals White House gathered intel on Trump campaign staff and then leaked it! https://t.co/W6FG4IFe5Q pic.twitter.com/VwaF2CnZzn

— ZeroPointNow (@ZeroPointNow) March 29, 2017

It seems now NBC News is confirming parts of her story…

Obama administration officials were so concerned about what would happen to key classified documents related to the Russia probe once President Trump took office that they created a list of document serial numbers to give to senior members of the Senate Intelligence Committee, a former Obama official told NBC News.

 

The official said that after the list of documents related to the probe into Russian interference in the U.S. election was created in early January, he hand-carried it to the committee members. The numbers themselves were not classified, said the official.

 

The purpose, said the official, was to make it “harder to bury” the information, “to share it with those on the Hill who could lawfully see the documents,” and to make sure it could reside in an Intelligence committee safe, “not just at Langley [CIA hq].”

Furthermore, as we previously noted, Farkas effectively corroborated a New York Times article from early March which cited “Former American officials” as their anonymous source regarding efforts to leak this surveillance on the Trump team to Democrats across Washington DC.

I became very worried because not enough was coming out into the open and I knew that there was more. We have very good intelligence on Russia. So then I had talked to some of my former colleagues and I knew they were trying to also get information to the hill.

 

That’s why you have the leaking.

In other words; the Obama administration was concerned about spoliation of evidence gathered through various “sources and methods” of surveillance, so a plan was hatched to leak this information to congress – also known as “The Hill.”

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Snyder Warns Of The Ticking Time Bomb That Could Wipe Out Virtually Every Pension Fund In America

Authored by Michael Snyder via The Economic Collapse blog,
Are millions of Americans about to see the big, juicy pensions that they were counting on to fund their golden years go up in flames in the biggest financial disaster in U.S. history? When Bloo…

The post Snyder Warns Of The Ticking Time Bomb That Could Wipe Out Virtually Every Pension Fund In America appeared first on crude-oil.news.


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Elusive Taq Taq reserves cut by two thirds

The partnership operating Taq Taq oil field in the Kurdistan region of Iraq is drilling a well to test northern reach of the free-water level after an independent study cut proved and probable reserves by two thirds.


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BHI: US rig count gains 15 units, reaches 824

The US count of active drilling rigs jumped 15 units to 824 during the week ended Mar. 31, according to data from Baker Hughes Inc. This count is up 374 units from a year ago.


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U.S. Shale Ignores OPEC’s Warning: Oil Rig Count Soars By 21

The United States oil and gas rig count jumped by 15 this week, to its highest level since September 25, 2015, according to Baker Hughes’ latest report on domestic drilling activity. The number of oil and gas rigs currently active in the United States now sits at 824, which is an increase of 374 year over year. The steady and sizeable jump in rigs signals an indifference by American shale producers towards warnings issued by the Saudi Arabian leadership against increased production. The KSA, which serves as the de facto leader of the Organization…


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Why China Is About To Bring The Global Reflation Rally To A Halt

Previously we reported that iron ore prices – having almost doubled in the past year and launching a global reflationary wave – are on the verge of tumbling as the world becomes increasingly aware that China has a “13,000 Eiffel Tower” record inventory problem.

 

And while we previously discussed the immediate adverse implications for iron ore bulls, the conseqences for the global economy could be far more material.

Conveniently, in a note this morning, BMO’s Mark Steel looked at the same issue, focusing on the big picture implications.

His note titled “China’s greatest gift to the US” – a “gift” which will become clear in moments – takes aim at the latest overnight selloff in iron ore, when prices fell 1.7% on Friday.

“Iron has already broken below its 50d MA, the BMO analyst writes, and has already broken below trade support, and it is now poised at the bottom of the channel, so, yes, here is another potential “pre-breakdown” view – Exhibit 1.”

He then notes that “that kinda looks a lot like inflation expectations, which if anything are just a tad ahead, as they have already broken to the downside in the US, and also in Canada, and also in Germany, and also in France, and also in Japan, and also in Mexico. You get the picture, the inflation trade like a fifty-year-old doing the breakdance for the first time. For the reflationists, it’s not a pretty picture – Exhibit 2.

The conclusion is troubling for the global reflation rally:

We don’t want to make up any new theory, about what drives asset prices. Oh wait, yes we do, and indeed did, with the record-setting Trump disapproval rating looking a lot like the contracting yield curve, but we digress. We are saying that the decent, albeit worsening fit of movements of inflation expectations and commodity house driven oil, is currently improved upon by looking at long term poor, yet currently superior fit of inflation expectations and iron ore – Exhibits 3, 4.

 

 

Amusingly, Trump just gifted Mexico $17bn (two minutes in). We are not sure what the POTUS will inadvertently offer China this weekend, but according to the CBO, China’s greatest gift to the US would probably be lower inflation. Just sayin…

Recall: it was China, whose gargantuan credit expansion, monetary easing and “Shanghai Accord” in early 2016 unleashed the global reflationary wave which central banks are currently mistaking for “growth.” It is only appropriate that China will be the catalyst that ends it.

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