US 30-Year Bonds — the Party Is Over


ubcbt-w-12-08-2016

On July 11, 2016, the 30-year bond peaked on the nearest futures at 177110. The 30-year Treasury yield fell to 2.088%, and on that day, the Swiss government actually found some real suckers to buy 50-year bonds at negative yields out to 2076. The buyers will not be around to experience the official default, so why would they really care. This was the end of the bond bubble, and despite all the banter and opinions, this is a major, major, major peak in government. There is NOWHERE to go but down from here on out. If you own any bond fund, you better get out. This is a real game changer, and of course, every bond fund manager will tell you the stock market will crash so buy bonds.

fed-30yr-rate

The yield on the 30-year bonds peaked in 1981 with the precise high in the Economic Confidence Model. This was a perfect 35-year decline (the gap on the chart is when they stopped issuing 30-year bonds). The 2015 closing was 15340. We closed yesterday at 151060. What is the significance of this? A lower closing for 2016 after making a new intraday high will technically be the kiss of death.

ubcbt-y-12-08-2016

Here is the yearly chart of the 30-year using our recreation and extending the data series back to the beginning of the United States. We have important technical resistance at 159610 and 157205 for the closing of 2016.

ubcbt-y-for-12-08-2016

Then 2016 was our target for the high and you can see this was also a Directional Change. We should expect to now see the bonds fall over the course of the next two years going into 2018. This will most likely be accompanied by a rising dollar and stock market with interest rates. We can see that the volatility will start to really become pronounced in 2018.

Freedom of Movement – Four Aspects Under Assault


movement-free

We tend to assume that the freedom of movement is confined solely to migration and travel. There are four aspects to the freedom of movement, and migration or travel is only one. Yes, we warned that the Schengen Agreement would come to an end and the European refugee crisis has enabled that decline. We warned that this agreement, signed in 1985, was reaching the end and would begin to be “overthrown … come 2016.867 or November 12, 2016,” which was pi – 31.415 years from the signing.

There are four facets to the freedom of movement, which people far too often do not look at or understand their vital role in furthering the development of civilization. What truly made Rome a great enduring Empire was more than just might. Roman imperial history cannot ignore the freedom of movement in all four aspects: 1.) translation of texts, practices, and ideas; 2.) communication or the movement of written documents (i.e. today’s internet, phone calls, and texting); 3.) migration (i.e. officials, merchants, students, etc.); and 4.) the free movement of goods and services. The interrelationships among the four aspects of the freedom of movement are critical to the advancement of civilization.

redit-forecaster-banned

1.) The freedom of movement that enabled the translation of concepts and ideas has often been curtailed. For example, Lenin’s book “What is to be Done?” was first published in Germany during 1902, but it was outlawed for publication and distribution in Russia. For my own movie, “The Forecaster,” the distribution rights were bought in the United States and Switzerland, and then they refused to show it. In London, the film was not blocked, but the night of the debut the Evening Standard ran a story about a local headhunter named Martin Armstrong who said the bankers were worth every penny — but they used my picture. The freedom of translation is denied all the time and governments employ such tactics out of their self-interests.

Today, this would include books, movies, and also the internet. Turkey, for example, blocked Facebook, Twitter, and YouTube throughout Turkey on Friday, November 4, 2016. They also blocked the messaging services WhatsApp, Skype, and Instagram. The United States monitors everything through the NSA. Europe has also been looking at restricting the internet (eu-restrict-internet).

2.) The aspect of communication in the freedom of movement involves written documents, phone calls, and texting. The two major inventions that made the Roman empire soar were road and mail service. Yes, the Romans were really the inventors of the pony express. Letters have been discovered at Vindolanda in Britain at Hadrian’s Wall. Discoveries include formal letters of military issue, a letter from Octavius about supplies, the oldest letter from a woman, and even an invite to a birthday party back in Rome. Such letters could be delivered in just seven days.

Restricting this aspect of free movement changes the role of the state as well as relations between individuals and states. The implications of the assault on the free movement of communications are expanding under the pretense that they need to track what people are doing for taxes. This direct assault is altering relations in ways of organizing and thinking among individuals while hampering the expansion of global commerce.

3.) The third aspect of the freedom of movement is migrating one’s actual person. The saying, “All roads lead to Rome” was indicative of Rome’s vast road network that facilitated this free movement of people and trade. This restriction is expanding once again insofar as restrictions on carrying anything of value due to taxes. There are already visa requirements for many states that are typically used when there are concerns of migration.

4.) Finally, the fourth aspect of the freedom of movement is goods and services. The Roman Empire facilitated free trade, which was the foundation of the Roman economy. True, Donald Trump soared to the White House on the back of middle class America who were forgotten when they lost their jobs to foreign imports. Yes, you can put up barriers and tariffs to protect local jobs in every political state. However, this is a losing battle and it only looks at labor in the same manner as Karl Marx who took the position that nothing has value except for the labor to produce it. Keeping overvalued jobs may bring cheers from displaced workers, but it also imposes higher costs to the consumer.

Why are jobs leaving the country? It is not due exclusively to cheaper labor. That is total nonsense. It is the huge cost of regulation and taxes. The higher government raises taxes, the more overvalued the cost of labor. When I helped restructure companies looking to set up plants inside Europe, I had to weigh all costs. I placed manufacturing jobs in Britain because 1.) they had the skilled labor force, and 2.) they had 40% less in taxation from the corporate aspect compared to Germany and certainly France. It they needed the best tax deal without the skilled labor for manufacturing, I placed those companies in Ireland. It was not the cost of labor that was the deciding factor, but the taxation.

The United States is the most unstable country when it comes to taxes. You cannot set out a business plan for 25 years because the tax rates may change every four years. Companies leave the U.S., not because of the price of labor, but to have a safe and secure place to do business without the rules changing. Therefore, restricting the free movement of goods and services denies the ability of the economy to grow and adapt. Shall we ban computers because they can do your taxes faster and cheaper than an accountant? How many accountants were denied a job because of TurboTax?

If government restricts the freedom of movement with respect to people, trade, ideas, communication, and good and services, the world economy cannot possibly survive and this places us at risk of a frightening Dark Age all because governments fear losing power and are desperate to hunt money for confiscation. The first thing we must do to save all four aspects of the freedom of movement is to sharply reduce government’s invasion into every possible aspect of our lives.

All Roads Lead to the Dollar


dollar-all-roads

COMMENT: Marty; I have attended every conference since 2011. You have really opened my eyes and you have to be blind to not see that you have called everything trend from the decline in gold, rally in the Dow, collapse of Europe, the rise in the dollar, and the uptick in war/civil unrest not to mention your political forecasting. You should be hailed from every podium and the reason you are not is obvious. The conclusions you force upon the rest to see is against their own self-interest. All roads lead only to the dollar as you have said.

Thanks for a spectacular conference. You have done far more than just made me money. You opened my eyes, saved my future, and saved my marriage. I feel truly enlightened and see the world as never before.

Thank you so very much

CE

REPLY: It is gratifying that you can see the world in a connected manner. We do not stand a chance of taking a step forward to a new economic reality until the majority sees the world for what it really is. The majority believes the conspiracy that government and big banks have the power to manipulate the world economy to force gold down to create the illusion that gold is not a safe-haven to hide your wealth.

By attributing everything to powerful conspiracies, they are endorsing Karl Marx and John Maynard Keynes who advocated that government could manipulate society. If you cannot see that we are on the brink of a collapse because of central planning, exactly as a communist state, then you will continue to look for conspiracies rather than understanding that the system, which is crumbling before our eyes, cannot be manipulated. This is why BREXIT, Trump, and now Hollande in France are stepping out. The cycle has changed and all of this is beyond government or banks to control the outcome. They are not intentionally doing this, for they cannot even understand human behavior no less manipulate it.

The dollar is on the rise after the victory of Donald Trump in the U.S. presidential election. Investors are betting on an economic boom in the U.S. and rising U.S. interest rates that will attract even more capital to the dollar. This also weighs very heavily on emerging market currencies and commodities prices in dollars. As the dollar rises, those commodities will decline unless there is a real shortage in supply that dips below demand. It is all coming together and you better understand the trend or you will not survive. Indeed, all roads lead to the dollar.

Visualizing The “Tectonic Shift” In The Markets’ Narrative


Tyler Durden's picture

RBC’s head of US cross-asset strategy, Charlie McElligott wants to “bang you over the head in order to expose the tectonic shift being experienced in markets on the narrative / regime shift.”

After a succinct and clarifying commentary:

We’re at a phase in this UST / developed sovereign bond trade where previously acceptable conditioning (‘buy dips’; ‘get long-er duration because it just keeps working’; ‘never-ending bond inflows will always pause selloffs’ etc) are all being reset in real-time, and this behavioral shift is painful.

In the micro, on top of the oil explosion yesterday (taking inflation expectations with it), we saw further pile-on from the incoming administration which idiosyncratically weighed further on the long-end.  Trump’s Treasury Secretary nominee Steven Mnuchin’s “mention” of the possibility of issuing ultra-long bonds (50Y, 100Y) to extend the maturity of the debt certainly isn’t helping the already overwhelmed and under-water duration trade.  RBC Rates Strategist Mike Cloherty with some quality tactical thoughts: “While we think that 50s or 100s would be a uniquely bad idea for the Treasury, we’d assign 50-50 odds on it happening. If we get ultras, we would expect the volatility of that ultra-long to spill down into the 30yr sector. Higher 30yr vol would make extending from 10s to 30s look like a worse trade from a Sharpe ratio perspective. The potential for issuance changes is another thing that makes the recent flattening of 10s30s seem like it has gone too far.”

Haha, I’d say so – look at the USTs curves today, with 2s30s +6bps, 2s10s +5bps.

So add:

1) larger and longer (maturity) sovereign borrowing needs to the list of bond paper-cuts too.  In conjunction with the ‘already in motion’…

2) inflation impulse (energy ‘base effect’ and wage growth in US);

3) global growth ‘pick-up’ (G10 economic surprise index at 3 yr highs, global manufacturing PMI index at 2.5 yr highs);

4) pro-growth domestic US policies from the new administration (tax cuts, deregulation THEN infrastructure in that order);

5) new administration ‘more hawkish’ tilt;

6) general fiscal stimulus shift and data escape velocity driving an accelerated normalization period;

7) the global CB / political shift from monetary policy to fiscal policy (flatter to steeper); and finally

8) outright lazy legacy / crowded positioning (driven by the ‘old CB regime’) which has to be unwound…

And these factors are now forming a ‘fact pattern’ which is helping crystalize the concept of a “paradigm shift” towards a “new normal” markets regime / construct.

The fact that it is ‘getting sticky’ with regards to price-action is obviously ‘spooking’ many in the market who simply are not positioned for said ‘new world order.’  Unfortunately for them, as the aforementioned ‘old conditioning’ ceases to work, the cynicism has come at the expense of portfolio duress.

We have operated in a world since the crisis which saw the narrative set at ‘deflation,’ ‘secular stagnation,’ ZIRP / NIRP and QEternity, which collectively had conspired to drive rates lower / flatter in perpetuity…or so it was assumed.  The lazy positioning we’ve discussed for a year now with regards to ‘long duration,’ or strategy constructs based upon leveraging ‘low volatility’ assets like bonds (when built during a 30-year bond bull market!) are too being reset.  “Slow growth / slow-flation was the reality—how could you own cyclicals / value / high beta equities?” was the muscle-memory.  Retail investors and their wealth management folks lapped-it-up: ‘up’your fixed-income / bond allocation, and lever that up with ‘low vol’ equities—INCOME AT ALL COSTS!

Obviously things went peak insanity this year off the back of the failed NIRP experiment, forcing “the world’s real $”–asset liability managers—to pile into duration for ‘funding survival.’  The whole picture peaked in July with the ‘yield grab’ at its max-bizarro: equities for yield / income, fixed income for capital appreciation.

That is why this is a move that will take longer than weeks to ‘wash out,’ as the slower-moving mega allocators within the global investment community has to position for reflation and growth.  It just happened too violently for them to have moved yet.

This shift in rates—and knock-ons into inflation (under-owned), credit (loans and HY over IG), FX (EM issues but there are carry opportunities) and equities (rotation to cyclicality) has room to run.

McElligott unleashes his chartfest exposing the way the world has changed in the last 3 weeks…

G10 ECONOMIC DATA SURPRISE INDEX AT 3 YEAR HIGHS:

G10 INFLATION SURPRISE INDEX AT 4+ YEAR HIGHS:

REFLATING–GLOBAL MANUFACTURING PMI INDEX AND U.S. 10Y BREAKEVEN YIELDS: This was already in motion before Trump…it’s now just accelerating on top due to the fiscal stim shift.

ATLANTA FED WAGE GROWTH TRACKER = JAMMIN’:

RANGE ON THE BOND BULL MARKET (BACK TO ’86) IS NEARING A ‘TEST’: 10Y UST yield (quarterly) bumping up at the extremes.

EURODOLLAR FUTS 6-10 CURVE BREAKOUT HOLDS:

UST 10Y YIELD TREND LINE GOES ‘BYE-BYE’:

UST 5Y BREAKS FOUR YEAR RESISTANCE:

LONG DURATION GOODNIGHT: From +31% YTD at start of July to now down on the year.

GOLD AND DURATION / ‘REAL RATES’: Gold suffering under the weight of higher real rates / the duration beat-down, which simply makes it an unattractive asset to hold in a world where yield has suddenly reappeared.

YUAN DEVALUATION AND THE DESTRUCTION OF THE 30Y UST GO HAND-IN-HAND: But signs of a decoupling after PBoC potential interventions prior to touching the 7.00 level.

DOW JONES INDUSTRIAL AVERAGE AND EMERGING MARKET BOND ETF:

U.S. EQUITIES THEMES FOR NOVEMBER % RETURN—LOL: Value > Growth, Cyclicals > Defensives, High Beta > Low Beta.  REFLATION.

EQUITY FACTOR MKT NEUTRAL PERFORMANCE SHOWS ENORMOUS DISPERSION AND ACTIVE MANAGEMENT OPPORTUNITIES ABOUND: Make Active Management Great Again!

Euro v Dollar for Hoarding


 

Euro-US$
QUESTION:

Hello Martin,

A year ago or so you said ‘ I highly recommend Europeans to hoard
Dollars instead of Euros.

I suppose that hasn’t changed. Do you see in the meanwhile a risk
for hoarding Dollars here in Europe ?

Are we even facing the Dollar Cash to be cancelled soon ?

Thank you very much for an answer.

Best regards
JB / Germany

ANSWER: The dollar is used globally. When they changed the $100 bill, they took advertisements on international flights to reassure people the old bills were still valid. US currency has never been cancelled so this is a cultural issue. It would be extremely difficult to cancel the dollar because it is the reserve currency. Now with Trump in town, we will see this potential to cancel the currency even less likely in the United States at least until 2018.

So my recommendation has not changed. Anyone hoarding cash should do so in dollars. To be safe, $20 bills would probably be best.

German Government’s Plan to Seize All Farms in Crisis


Merkel-Forcing Refugees

Merkel’s Federal Cabinet has decided on new plans to supply the population in disasters, reports the Reuters news agency. The draft law adopted on Wednesday according to participant data provides inter alia new powers of the authorities. According to this, farms or other foodstuffs can be confiscated in order to ensure the nutrition of the population. The emergency plans are to take effect if a large number of Germans can no longer cover the free market with food. Examples of catastrophes are martial conflicts, a large-area power failure, a pandemic or a stop with large-area radioactive radiation.

In the event of a supply crisis caused by natural catastrophes, power plant accidents or military incidents, the Ministry can only prescribe that only large retail outlets are opened. As a measure against looting, the law provides the submission of food under state supervision. In addition, usury prices should be avoided by means of fixed quantities or fixed prices. Prices were frozen in the USA during World War II whereas that was not the case during World War I.

Venezuelan Hyperinflation


venezulea-hyperinflation

The Venezuelean hyperinflation is the direct result of what happens when the general population loses all confidence in the government. The current hyperinflation is reminiscent of Germany’s hyperinflation following World War I, which was also the result of a Communist Revolution and the overthrow of the government giving birth to the Weimar Republic.  Venezuela’s currency has become virtually worthless as was the case in Japan when the people simply refused to accept any coins issued by the Japanese government. In that instance, each new emperor devalued the outstanding money supply to 10% of his new issues. This led to Japanese accepting Chinese coins, but not Japanese.

In just two months, the bolivar plummeted 50% in value after dropping beneath the psychological 2000 level for the first time. Where the Japanese relied upon Chinese coins, in Venezuela they are using U.S. dollars.  The same is starting to emerge in India after the government demonetized the large denomination notes.

Oil accounts for nearly 95% of Venezuela’s exports and composes 25% of the country’s overall economy. Many economists are blaming Venezuela’s socialist government for mismanaging budgets and over relying on oil-related industries. Acting as a typical politician, President Maduro will not take responsibility for the state of his country and is choosing to place the blame on an “economic war” being waged by overseas businesses predominantly in the U.S.

Venezuela’s troubles began in 2014 when the price of oil took a nosedive. Instead of moving to separate the country from its dependence on oil, the Venezuelan government lost the confidence of the people and was compelled to issue more money to pay its bills lacking revenue flow.

As the prices of goods continue to soar, shopkeepers in Venezuela have taken to weighing bolivars and the black market for alternative currencies – namely U.S. dollars — is becoming prevalent.

The key to hyperinflation is NOT the issue of money, but the collapse in public confidence. The drop in confidence then causes the government to print more to meet its expenses. The assumption it is the increase in money supply assumes people blindly just look at the quantity of money. It is the fact people ANTICIPATE the collapse and act accordingly, which then causes the government to increase the money supply.

Horseman Capital Asks “Is China Running Out Of Money”


Tyler Durden's picture

At the start of 2016, many financial pundits mocked Kyle Bass and a handful of other China skeptics for predicting that China’s economic difficulties, and accelerating capital outflows, would translate into a continued devaluation for the Yuan. Less than a year later, with the Yuan plunging to all time lows, just shy of USDCNH 7.00, they were right.

And, as Horseman Capital’s Russell Clark writes in his latest Market Views note, in which he asks if “China is running out of money”, adding that “if Chinese foreign reserves continue to fall and the PBOC wants to maintain control of the exchange rate, they will need to face some difficult choices,” the one most difficult choice facing Beijing may be the one which assures far more weakness for the Yuan in the near future: a devaluation.

Here are Clarke’s thoughts.

IS CHINA RUNNING OUT OF MONEY?

Since the global financial crisis, China has had a very strong currency, even with the recent devaluation of the Chinese Yuan.

China has a managed exchange rate. The People’s Bank of China (PBOC) has had to step in to the exchange market to buy any USD coming into China. To buy the USD coming into China, the PBOC has had to create CNY for this purpose. Typically, to soak up these new CNY, the PBOC has issued CNY bonds, as well as having very high reserve requirements on the banks to control the supply of CNY.

The PBOC is like any other bank, and it needs to match assets with liabilities. On the asset side, by far its biggest assets are foreign reserves. On the liability side are domestic deposits. For many years, foreign reserves were much larger than deposits, but now the gap is shrinking rapidly as foreign currency assets fall.

If Chinese foreign reserves continue to fall and the PBOC wants to maintain control of the exchange rate, they will need to face some difficult choices. First of all, it could raise interest rates to try and make the Yuan more attractive and reduce outflows. This however would be negative for growth, a priority of the Chinese Communist Party. The other option is to reduce the holdings of deposits at the PBOC. The large holdings of deposits at PBOC is driven by the very high reserve requirements of the Chinese banking system, and previous cuts in the reserve requirements have reduced deposits at least temporarily.

This leaves the PBOC with a dilemma. Raising rates will restrict growth but defend the currency, while cutting rates or reserve rates for banks will encourage more currency weakness. One way to think about how high interest rates need to rise to stop a currency from falling is to look at how weak a currency has been over the last twelve months. You then compare this to the difference in 10 year bond rates, and the movement in the exchange rate over the last 12 months to get an idea of the interest rates increase needed to attract US dollars. The idea is that if a currency has been weak, but interest rates are relatively high, then you are being adequately compensated. Conversely, if the currency has been weak, and the interest rates are relatively low, then rates will need to rise. Currently, it suggests Chinese 10 year rates need to be 6.5% higher, to halt currency weakness.

Given the large increase in rates needed to slow Chinese Yuan devaluation, devaluation must start to look like the more likely move. South Korea faced a very similar situation in 1997. In the mid-90s, Korean foreign reserves began to fall, like they are in China today. We have added Japanese foreign reserves to show that the fall in reserves was a Korean specific issue.

Like the Chinese Yuan, the Korean Won was a managed exchange rate that began to depreciate slowly then quickly.

Below we produce the same graphs, but replace Korea with China.

Given the huge increase in debt in China in recent years, such a rate increase seems very unlikely to me. Investors should be prepared for bigger falls in the Chinese Yuan.

Is Larry Summers One of the Four Horseman of the Economic Apocalypse?


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The major bonus to Hillary losing the elections is that Larry Summers will not be the chief economic adviser. Larry Summers is Hillary’s top choice for Fed Chairman or the Chief Economic Adviser in the White House. Treasury Secretary, was a position he held under Bill Clinton in the 90s, but that was going to go to Laurence Douglas “Larry” Fink  the chairman and chief executive officer of BlackRock who is the largest asset management firm in the world, controlling $4.6 trillion in investor funds. That’s about a trillion dollars more than the annual federal budget, and five times the assets of Goldman Sachs. Fink’s ties to Hillary are extensive. He even hired Cheryl Mills, Hillary’s notorious legal adviser, on the Board of Blackrock in 2013. Fink would then get to cash out of Blackrock TAX FREE, as did Robert Rubin and Hank Paulson of Goldman Sachs.

US GDP Annual Growth Rate 1947 - 2016

USA GDP 1960 - 2012

Larry Summers is the father of NEGATIVE interest rates. He is absolutely perhaps one of the most dangerous men on the chess board up there with Dick Cheney. A speech delivered by Larry Summers at the IMF Research Conference on Nov. 8, 2013 had caused a real stir and was being hailed as brilliant, succinct, and a ground-breaking presentation that explained what many said was the most pressing economic matter of our time.

With all the lies of Hillary and people like Summers saying how trickle-down economics failed, the highest economic growth came during the Reagan Administration. We are languishing below 2% and a 6 year moving average is even worse. But people like Summers think they can force GDP growth by punishing people with NEGATIVE interest rates if they do not spend money. Summers and Hillary believe in manipulating people to accomplish their goals. The problem is, neither understands anything about economic forecasting.

four-horsemanSummers may be one of the four horseman of the economic apocalypse laying waste to Western society and our economy. He believes in total control of society and he is the one who first floated the NEGATIVE interest rates. He is a linear thinker and a fool. He will never admit a mistake and since his NEGATIVE interest rates has not destroyed deflation but encouraged more with people hoarding cash, he is now advocating ending cash to prevent hoarding and then hopefully his idea of NEGATIVE interest rates might work.

Summers has admitted he cannot forecast the economy claiming it’s just like weather and too complex. Yet that does not stop him from trying to suppress the economy exactly as Karl Marx.

We should rejoice in Trump winning even if you do not like him. The team behind the curtain supporting Hillary would absolutely devastate our future in the blink of an eye. Just look how negative interest rates has devastated the European economy and has failed to reverse the deflation. Summers will NEVER concede defeat so he now advocates eliminating cash to prevent hoarding he sees as defeating his theory of negative interest rates. Of course, who published his latest article to end the $100 bill? The Democratic Marxist Propaganda rag – Washington Post.

Gold Price Skyrockets in India after Currency Ban – Part III


There has never been a society that didn’t have cash, is this the end of India!