ECB Decision Day; What you need to know

“The chances of an unexpected ECB “taper” are high, the Street is unanimously calling for a dovish push. Once again, they are off sides.”

The Bear Traps Report, yesterday December 7, 2016

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Wall St. got it wrong again, consensus was expecting a dovish ECB today, more love from the central bank.

– Today, the ECB announced EUR100b less QE in 2017 than Wall St. had expected. However, Mario eased fears with a very dovish press conference.

Yields in Europe Soar

bonds-euGermany 10 Year Bonds: Highest yield since Jan 27, at 0.43%. However since Mario’s more dovish press conference yields have come lower. The removal of the deposit rate cap, allows the ECB to buy more bunds that trade below this -40 bps threshold. 

From July, Our Perspective:

“A BOND SELL OFF in Europe will trigger a SELL OFF in the US.  Markets have spent the last three days pricing this in, “capital key expansion” is trading like a fait accompli. There are many political hurdles left for capital key expansion, the bond market has priced in far too much ECB love for now. This makes us even more bearish on bonds over the near term, 3-6 months.”

The Bear Traps Report, July 11, 2016

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The ECB has decided to extend its QE program until December of 2017. However, the market was offside in their expectation of the amount. The ECB will shift to 60B Euros a month starting in April vs the current run rate of 80B Euros. Draghi  offered himself maximum flexibility by saying the program could go on “beyond” December 2017 if the economic situation required. This language has offset some of the market reaction to the more hawkish stance of “taper” starting in April. Mario has seemingly executed a hawkish ease.

*DRAGHI SAYS RISKS TO EURO-AREA GROWTH REMAIN TILTED TO DOWNSIDE
*DRAGHI SAYS ECB WILL BUY ASSETS YIELDING BELOW DEPOSIT RATE
*ECB SAYS IT MAY INCREASE SIZE OR DURATION OF PROGRAM IF NEEDED

Draghi: “Outlook to inflation is unchanged” from Sept projections, not buying into reflation publicly yet.

European Central Bank’s decision to taper bond purchases is a shot in the arm for the euro.  The decision to extend QE at a slower pace did not spook markets as much as expected as Draghi has reassured markets of ECB presence in the years ahead in his press conference.

Euro Trading like a Biotech Stock Today

euro-recap

If “the outlook becomes less favorable or if financial conditions become inconsistent with further progress toward a sustained adjustment of the path of inflation, the Governing Council intends to increase the program in terms of size and/or duration,” it said in a statement, this is Draghi’s hedge.

Draghi: “Outlook to inflation is unchanged” from Sept projections, not buying into reflation publicly yet. This is a very dovish stance. 

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China’s Cash Bleed, About to Pick Up Steam

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The Fed wants to hike rates after years of keeping them too low for to long.  In a world filled with countries cutting (easing) interest rates, the net result of raising them is a strong U.S. dollar.   The greenback has surged over 9% since May, one of its three most significant six month surges on record.  The ugly part of the strong dollar story is found in its IMPACT on China.  Strong dollar side effects are oozing all over the planet.  We MUST connect these dots……

Breaking: *MACAU LIMITS CHINA ATM CARD TRANSACTIONS; DAILY LIMIT UNCHANGED

Major US Casino’s Rocked by Possible New Regulations trying to Prevent Cash Pouring out of China

mgm-wynn

China’s foreign currency reserves, the world’s largest, fell the most since January after the yuan declined to an eight-year low. Reserves decreased $69.1 billion to $3.05 trillion in November, the People’s Bank of China said in a statement this week.  That compares with the median forecast of $3.06 trillion in a Bloomberg survey of economists.  Decline was biggest since reserves tumbled $99.5 billion in January.  As a result, their are fears around the PBOC implementing new rules focused on cash outflows. 

Macau is the biggest gambling hub on earth.   China moved on Friday to clarify it had not tightened daily cash withdrawal limits for Chinese gamblers, after fears of a crackdown on illicit money outflows sent shares in casino operators tumbling.  The South China Morning Post, citing a finance industry source, reported late on Thursday that the Monetary Authority of Macau would halve the amount of cash that China UnionPay cardholders can withdraw from automated teller machines (ATMs) in the territory.

The paper said this would mean halving the daily cap for clients of China’s largest provider of bank cards to 5,000 patacas ($626).

The Macau authority, however, said it limited withdrawals to 5,000 patacas per transaction, effective Friday, but had not changed its daily limit. – Reuters

Why Should a U.S. Equity Investor Care about China’s Currency?

cnh-vol-4

Over the last 15 months, U.S. dollar surges have led to rapid currency devaluations in China and emerging markets.  The only problem?  Since 2008, there’s $13T of new dollar denominated debt on earth tied to emerging markets, oil and commodities.  U.S. dollar surges make this debt worth less, each time since 2014 we’ve seen global credit risk impact U.S. stocks.   The rising cost of CNH vol (above) is an expression of hedge funds betting on a weaker yuan in China.  Since 2014, each time CNH vol has surged in a meaningful way, U.S. equities have fallen more than 10%. 

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There’s just one problem with a surging dollar, China’s yuan and their $11T economy is pegged to her.   China has to dramatically weaken the yuan just to stay competitive with global trading partners, the currency has depreciated nearly 7% since May.

A Quick Trillion has Fled

china-forex-new
If you’re a millionaire in China and you know your currency is on a sharp depreciation path, what do you do?  You move your cash OFF shore as quick as you can.   China’s foreign exchange reserves, down from a record $4 trillion in mid-2014, are forecast to have fallen in November to $3.06 trillion from $3.12 trillion a month earlier when the figures come Wednesday. Some of the downward move is due to a weaker yuan, which fell 1.6 percent against the dollar last month, but some of it also reflects valuation effects. As the yen and euro weaken, so too does the headline value of China’s reserves, probably by as much as $35 billion. – Bloomberg

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Trump, Italian Style

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“Donald J. Trump announced his candidacy for President in June 2015, to criticism, mockery, and doubt by the media and political class. Trump’s candidacy and campaign have been called a joke by many since Trump’s announcement.  Beware of clueless media elites who spend more time talking to each other at Manhattan cocktail parties than listening to the American people.  Trump has come this far against all odds, so is winning the general election really that farfetched?  No, it’s not. Trump can win, here’s how and the best trades to prepare for the unexpected.”

Bear Traps Report Election Playbook, July 2016

Breaking: *RENZI SAYS HE WILL OFFER HIS RESIGNATION TO PRESIDENT

And then there Were Two

leaders

A global populism tsunami: Hillary Clinton’s November loss was a rejection of President Obama’s policy direction.  Cameron stepped a side post Brexit’s defeat.  Holland in France has announced he will not run next year.  Renzi to offer is resignation, after Referendum defeat.  The dominos keep falling.

What do Marie Antoinette in 1788 and the U.S. political establishment of 2016 have in common? Everything.  Ten years from now the establishment media and global political class will look back and say, “how did we miss that.”  When too many people have a vested interest in a certain political outcome, they live in a strange state of confusion.

As Mark Twain once said, “denial ain’t just a river in Egypt.”  As we learned with Lehman Brothers, after a long state of hubris, the unthinkable can happen.  The global media intelligencia, as well as the entire political (globalization) establishment have spent the last 15 months trying to mislead investors as to the true lay of the political land.

After Italy, France could possibly be the NEXT Domino to Fall this coming April-May 2017, stay tuned.

Breaking: Monte Paschi, Advisers to Meet Soon as Monday on Rescue Plan.  Renzi’s loss in Italy put the plan at risk, please see our report.

After Trump’s surge in the U.S., follow on populism in Europe is yet another blow to China.  The anti-globalization trade is in its middle innings.  China has been eating Italy’s lunch for more than ten years, those days are coming to an end.  Middle class working families have made a stand in the UK, USA and now Italy.

*ITALY REFERENDUM: ‘NO’ AT 56%-60% IN RAI WEIGHTED EXIT POLL

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Italian Banks Have Been Saying “No” is Coming for Weeks

italian-stocks-v-unicredit

Italian banks will wear the brunt of tonight’s ‘No’ victory during the trading day tomorrow.  The downside in the euro will be limited as much has already been priced in. In the short run, an Italian bond sell-off will be contained given how much has already been priced in and a potential backstop from the ECB.

Globalism is Under Siege

Establishment media has had its head in the sand for 15 months as a tsunami of populism sweeps across the world.

Prime Minister Matteo Renzi has lost a referendum on constitutional reform by a wide margin, exit polls show, throwing his future into doubt and opening the door to renewed political instability in Italy.

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The Road to Populism

1. Trump defeats Jeb Bush and 15 others in the GOP Primary
2. Brexit vote stuns the UK establishment
3. AfD’s Rise in Germany, embarrassing Merkel in her home district elections
4. Trump wins 30 of 50 States in the U.S. Presidential election, 309 Electoral Votes, most for a Republican since 1988
5. Italy: Renzi’s “Line in the Sand” Referendum, points to “No”
6. Le Pen’s surge in France, the most significant far right threat in decades, April-May 2017 Elections

Three exit polls showing ‘No’ vote ahead in Italy referendum spurs decline in EUR/USD, drives up yen on haven flows.

Euro: Right on its Lowest Level Since 2003

no-vote

Italians have voted in a referendum on constitutional reforms that is being closely watched abroad to see if Italy becomes the next country to reject the political status quo.  An exit poll by the Piepoli Institute/IPR for state television station RAI, estimated the ‘No’ vote at 54-58 per cent against 42-46 per cent for ‘Yes’. Two other polls gave ‘No’ a similar lead of at least 10 points.

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What it Means?

– No vote is yet another anti-establishment “get lost” to Renzi.
– He has stated he would resign in defeat, a major center left establishment loss.
– New elections are possible, with Euro skeptic party “5Star” possibly coming to power, a Euro exit is more real than ever now for Italy.
– After Trump’s surge in the U.S., follow on populism in Europe is yet another blow to China.  The anti-globalization trade is in its middle innings.  China has been eating Italy’s lunch for more than ten years, those days are coming to an end.  Middle class working families have made a stand in the UK, USA and now Italy.
The margin of victory is the most important thing to watch.  A 60-40 “No” vote speaks to a ItalExit from the Euro.

Matteo Renzi, the prime minister, has said he will resign if the reforms are rejected, and opposition politicians have vowed to press for a new government if voters reject the proposed constitutional changes.

The risk of political instability in Italy, Europe’s fourth largest economy, has triggered market reaction before the vote, with bank stocks sinking and the borrowing costs on sovereign debt rising.

European partners were closely monitoring the vote. A headline in the Frankfurter Allgemeine Zeitung said Renzi’s “arrogance is his shortcoming,” noting that “Europe is at stake” in the vote.

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Jobs, What’s Behind Secular Stagnation?

What do Marie Antoinette in 1788 and the U.S. political establishment of 2016 have in common?  Everything.

They couldn’t see an historic, social revolution staring them right in the face?  The establishment has had it dead wrong for 15 months, take their advice today with extreme skepticism.

Pure Comedy, Better than Seinfeld

Price of the 30 Year Bond

2016-bonds

Going against conventional wisdom has been the trade of 2016.  In December of 2015, the entirety of Wall St.’s economists told us to sell bonds.  “We must prepare for life after liftoff, expect 3-4 rate hikes in 2016.”  In June after the Brexit, Wall St. fell back in love with bonds, “they must be bought for capital appreciation, deflation is here to stay.”  In September, they assured us Donald Trump and the GOP are dead, look for “an insurmountable Hillary Clinton Blue Wall in the electoral college.  There’s a real risk of the House and Senate flipping to the Dems.”  After the Trump near landslide of 309 electoral college votes, the most for a Republican since 1988, Wall St. has spent three weeks playing desperate catch up.   Nearly 4 years of “reflation” has been priced in, in 20 days. 

U.S. Wage Growth*

2010s: 2.4%
2000s: 4.2%
1990s: 4.5%

*3m moving average, cycle peak, BLS, Bloomberg data

The answer to the Pennsylvania, Michigan and Wisconsin Trump Presidential election wins is right here in wage growth.  In the end, China will be the big loser in the populist revolution sweeping the globe.   From the UK (Brexit), to the USA (Trump) on to Italy (Renzi’s Referendum defeat); this movement is only in the middle innings.  Protectionist trade policies are here to stay, the net result will be found in higher priced goods as inflation’s side effect comes to the table.  Manufacturers have been chasing low wages around the world for 20 years in disinflationary chairs, the music has stopped. 

UK Wage Growth Plunge = Brexit
US Wage Growth Plunge = Trump

uk-wage

As we pointed out to clients this summer, there’s a strong global connection in the populist rage.  For 15 months, establishment types have been trying to claim incidents like the Brexit were “isolated” with no connection to the U.S. Presidential election.  As you can see above, globalism has been destroying middle class wages for 30 years in the UK, the people have finally said “enough.”  

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“Donald J. Trump announced his candidacy for president in June 2015, to criticism, mockery, and doubt by the media and political class. Trump’s candidacy and campaign have been called a joke by many since Trump’s announcement.  Beware of clueless media elites who spend more time talking to each other at Manhattan cocktail parties than listening to the American people.  Trump has come this far against all odds, so is winning the general election really that farfetched?  No, it’s not. Trump can win, here’s how and the best trades to prepare for the unexpected.”

Bear Traps Report Election Playbook, July 2016

“We don’t care about the politics, we just want to make our clients money.

Larry McDonald

The Mixed Jobs Picture

This week’s headline number was relatively strong considering how late we are in the business cycle.   The jobs number allows the Fed to go ahead with an interest rate hike in December.  However, if we look under the hood,  all is NOT well.

There’s a strong connection between the jobs data and election 2016.  Why has the financial media had it so wrong?  Trump won 30 of 50 states and the popular vote outside New York City.  The media and Washington establishment have spent more time trying to convince you Trump couldn’t win than actually digging into the economic data.  Once again, investors were misled and are now playing catch up.

This summer we prepared our clients for a Trump victory, with conviction recommended a short bond position (had clients sell down their bond holdings), here’s what we were looking at:

Youth 15-24 Years Old Employment to Population Ratio

Obama: 44-48%
Bush: 53-59%
Clinton: 58-60%
Reagan: 55-63%

BLS Data

“Yesterday, the U.S. 10 year hit our long held 1.40% target. A sea of bond bears has become an ocean of bulls. Brexit’s risk to the global economy has created an opportunity for those willing to step in and short bonds in the face of a large group of clowns rushing to the exits (abandoning their long held bearish bond positions).  Sell bonds with conviction, buy the TBT ETF. “

Bear Traps Report Election Playbook, July 11, 2016

US Employment Population Ratio

2016: 59.7%
2010: 58.3%
2005: 63.5%
2000: 65.1%

BLS data

The employment ratio (also referred to as the employment rate) represents persons in employment as a percentage of the working age population.

“Most observers expected the unusually deep recession to be followed by an unusually rapid recovery, with output and employment returning to trend levels relatively quickly. Yet even with the U.S. Federal Reserve’s aggressive monetary policies, the recovery (both in the United States and around the globe) has fallen significantly short of predictions and has been far weaker than its predecessors. Had the American economy performed as the Congressional Budget Office fore­cast in August 2009—after the stimulus had been passed and the recovery had started—U.S. GDP today would be about $1.3 trillion higher than it is.”

Larry Summers

Inside the Data, What’s Going On?

Fewer and fewer Americans actually pay income taxes, Reagan democrats in Wisconsin, Michigan and Pennsylvania elected Trump in large part because of creeping globalism.  The data below show us another part of the story.

% of U.S. Population paying No Federal Income Taxes

2016: 49%
2000: 34%
1990: 28%
1980: 22%
1970: 11%

CBO, FED, Treasury data

Middle class Americans sent us a message on November 8th, but a lot of people still are NOT listening.   Actual taxpayers are weighed down by regulation, inequality and carrying a heavy cross of the over all tax burden.

youth-unemployment

When you incentivize young people NOT to work, they typically don’t.  We’ve been lectured by the White House how strong the jobs recovery is, but a lot of young people are NOT participating. 

ACA – Obamacare

+ Regulation Surge

+ Capex / Productivity Plunge*

+ Zero Visibility for CFOs, CEOs

= Stock Buyback and Dividend (financial engineering explosion)
= In the last three months:
Full-time jobs added: -98K
Part-time jobs added: +637k

Full Time Jobs Recession

The U.S. has only created a pathetic 2.1m FULL TIME jobs since 2007, and that’s with a population 29.4m HIGHER.  Youth unemployment (15-24 yr olds) at 50 year highs compared to EVERY other economic recovery.

*U.S. Productivity is the lowest since 1979, per Bloomberg.

full-time-jobs-new

Over the last five years, annual productivity gains averaged 0.6%, the weakest since 1978-1982, Bloomberg data.  Fewer and fewer Americans are picking up the bill.  We’re 8m full time jobs short of where we should be 8 years into an economic recovery.  Everyone’s favorite excuse is demographics, but a highly respected report by Goldman Sachs tells us only 28% of the decay in full time jobs can be blamed on the U.S. aging population.
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U.S. Productivity*

2010s: 0.4%
2000: 2.9%
1990s: 2.0%
1980s: 2.2%
1970s: 2.1%

*recovery peak, BEA / Bloomberg, YoY change GDP relative to total hours of work

Again, the 2016 election upset was a factor of weak underlying fundamentals within the economy, inequality and anemic growth.

What the media is NOT Telling You

The economy is still laboring under excessive regulation and rising core costs. Student loans, Fed/GSE induced housing prices, medical care costs and taxes, have all taken their toll. These factors are the CAUSE of the demographic problems. Policy decisions play a large role in determining long term future trends.

Americans NOT in the Labor Force

2016: 95m
2010: 84m
2005: 74m
2000: 67m

BLS data

A record 95,055,000 Americans were not in the labor force, that’s 446,000 more than October.  People over age 16 who are no longer working or looking for work are counted as not participating in the labor force.

Labor Force Participation Rate
Age 25-54

2016: 81.4%
2010: 82.1%
2005: 83.4%
2000: 84.5%

BLS data

Young Americans continue to leave the labor force.

 

NFP Jobs Report Recap

– The economy added 178,000 jobs in the month of November, basically in line with consensus. The moves in earnings and the unemployment rate were significant but will not change the expectations for the Fed meeting in 2 weeks. The report is bond bullish especially relative to extreme expectations. Wages smell to high heaven.
– Notably, average hourly earnings fell 3 cents, now 2.5% for the year vs 2.8% in October. Part of this fall was seen in hours worked falling. Either way, this should tame inflation expectations.
– The big move in the unemployment rate from 4.9% to 4.6% seems to be  largely attributed to the big drop in the labor force, 226,000 month over month.
– The three month average for jobs is 176,000 and the year to date average is 180,000. These totals do not do much to alter current economic readings and are quite strong considering we are in the 8th year of this cycle.

image-86
– Strong components of the report were in, Private service providing (139k), Leisure and Hospitality (29k). Both components we expected to be strong.
– Manufacturing was negative again at -4k, but was less negative than the previous two months. Information weighed, with that sector dropping 10k jobs in November.
– Employment to population was steady at 59.7%, this shows there still is significant structural slack with this number below 60%.

 

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