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This Note Was Updated May 13, 2017 at 8am

Central banks have done it again, eight years of an easy money gravy train have led to a colossal overbuild in the mall – commercial real estate space.  Secular forces like Amazon and changing habits of shoppers are a factor, but this kind of divergence has a lot to do with too much bored capital reaching for yield in the WRONG places.

As America shifts to core urban sectors, there’s a substantial amount of real estate that becomes obsolete.  There are a lot of loans that NEVER should have been made – high debt levels exacerbated the overbuild disconnect.

A secular change in retail consumption is taking hold, department store year over year spending is off nearly 20%, BAC data.  Mortgage Daily reported this month – the rate of late payments on securitized commercial mortgage backed securities (CMBS) funded loans is surging at an alarming rate. The record number of balloon payments coming do this year means defaults will rise substantially in 2017.  The major correction in the retail sector is only making the situation worse.

Some US$6.6bn of property loans packaged into CMBS deals since 2010 could be impaired, Morningstar Credit Ratings estimated in Q4 of last year.  We think this number is closer to $40B, ultimately – when the dust settles.

Core CPI, the Credit Contraction Connection

At what point does the credit contraction in commercial real estate, auto loans, credit cards and student loans – leak over to core consumer prices?

U.S. Core CPI ex Shelter

2017: -0.9%*
2016: 2.2%
2015: 1.4%
2014: 0.8%
2013: 0.2%
2012: 1.9%
2011: 2.4%
2010: 1.1%
2009: -0.3%
2008: 0.4%
2007: 2.1%

*weakest quarter in at least 17 years

Bloomberg, Nordea Markets

IHS Markit CMX BBB- Series 6 Price Index

With the U.S. economy at “full employment” and the Federal Reserve hiking interest rates – credit risk is surging.  We believe 2017 will be a watershed moment, an acceleration of retail store closures and rent reductions – leading to credit risk contagion.  Structured leverage creates asymmetric credit risk as the cycle turns.  Retail assets make up over 40% of the debt load inside the CMBX 6 indexes, but only 10% are in the riskiest slices, the regional mall category

Traditional – on the ground retailers have announced nearly 3000 location closures through May 1st — including closing involving a number of national chains. The shutdown data for 2017 double those announced across the same period one year ago.

CDS Risk Surge

Credit risk in the retail space is rising at its fastest level since the financial crisis.

Based on the ongoing rate, projections through the end of 2017 are ugly.  Retailers are expected to close over 9000 locations by the time 2018 rolls around, substantially higher than the numbers seen following the 2008 financial crisis and recession.

CMBX6 in Some Pain

Off nearly 10% on the year, CMBX6 is the “big short” in the mall space.  Hedge funds focused on rising consumer credit risk have been buying default protection on this tranche because of its heavy exposure to U.S. mall REITS.

The Bloomberg Reit Regional Mall Index (BBREMALL) plunged another 4% this week – lowest intraday print since March 2014 – off 33% since August 2016.  This week, Macy’s and Kohl’s 1Q comp sales missed estimates.

Shorts have been focused on CMBX6, focused in HIGH mall exposure.  In CMBX6 there are sub-indices, each referencing 25 bonds from a portfolio of 25 CMBS offerings issued in 2012. Deals were be selected using rules-based criteria, such as deal size, pricing date, and the applicable rating and credit enhancement of the offered bonds.

Looking at equities, PEI is the worst performer – down as much as 3% to the lowest intraday print since 2012.  These names are not far behind in terms of pain; SPG, MAC, SKT, GGP, TCO, CBL and WPG.

This week, M shares are down as much as 20% to the lowest since 2011, while KSS fell 10%.

Mall Pain

REITs with exposure to M include NYRT, PEI, ESRT, VNO, SPG, and WPG, according to a JPMorgan report from March, while REITs with exposure to KSS include UE, DDR, KIM, RPT, KRG, CDR, ESRT, WPG, BRX, REG.

Office REITs are also moved lower this week; NYRT fell 10% after its liquidation estimate trailed expectations, and CLI dropped 4% after BTIG questioned 1Q results.

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The popular global growth story gets some important data points next week, China comes in with their import and export data on Monday May 8, 2017.

Everyone is Bought In

In recent days,  markets have witnessed significant weakness in the commodity space, especially focused toward the growth sensitive segment – oil, gas  and base metals.  On the other hand, global equities are surging while the growth story is faltering.

MSCI Global Earnings Growth Estimates are Sky High

2017: +13.7% (record high)
2016: +1.9%
2015: -0.7%
2014: +4.2%
2013: +6.5%

MSCI, Datastream

LEVER UP then LEVER DOWN

In front of their 19th National Party Congress this Autumn, China is finally introducing some more meaningful regulations into their banking and credit systems – they’ve been levering up for the last twelve months, trying to juice equity market returns – now they’re taking the foot off the gas pedal.

We have always believed a major reason markets and the global economy reflated last year was influenced by China’s levered fiscal policies put forth last summer.  They fueled a recovery in their industrial sector. As that happened, commodity prices ripped and developed markets in Europe and the U.S. saw economic expansion. This is at great risk now, China is tightening liquidity and interbank lending rates are surging. We saw the effects of a China slowdown on Fed policy in 2015, this could be round two.

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Every investor should attend the Berkshire Hathaway Annual Meeting in Omaha, Nebraska. It’s filled with good times, friendly people and a lot of wisdom.

Packed with 35,000 shareholders and friends from all over the world.   After four trips to this spectacle, we still have never seen anything like it in all our years in finance.

Warren Buffett and his lifelong business partner,  Charlie Munger, sat on stage for nearly six hours, dazzling the crowd with financial acumen, incredible energy, and offer a unique look into their world of money management. In a marathon five hour question and answer session, they gave everyone a chance to be heard. This was the most impressive display of corporate transparency I had ever seen. Everyone there, most of them scribbling notes, heard firsthand the thoughts of these two billionaires on an abundance of issues: Greece, the Euro, the International Monetary Fund, Goldman Sachs, Derivatives, High Yield Bonds, the Stock Market, Politics, Renewable Energy, Ethics, the US and Global Economy, the Emerging Markets, Finance Reform, Philosophy, History… they covered it all.

Meeting Munger, an Invitation to Omaha

But the highlight of the trip was a 40-minute, one-on-one meeting we had with Charlie Munger, who had read “A Colossal Failure of Common Sense,” and actually wanted to meet our Larry McDonald.   Munger is considered by many to be Buffett’s alter ego, the conservative skeptic who keeps the Oracle in check.  Or just a loyal friend and business partner for over 40 years.  It’s all true.  It was an honor to meet Mr. Munger, not because he’s a billionaire, but because he represents the end product of a life built on a 24-carat gold business character.

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Imagine the tallest and widest of the great California Redwood trees just south of the Oregon border.  When you look at this magnificent 2,000 year old Sequoia, over 375 feet high, it’s what you can’t see that’s most impressive; a root system over 250 feet wide that runs deeper than tree’s actual height. Now that is a foundation.

Munger and Buffett have run their business, Berkshire Hathaway, with that type of foundation in mind.  They operate in a completely opposite way from most public companies.  They run their business, and let the stock price take care of itself.  Most CEO’s try and manage the stock price first and the company second.  This was the problem at Lehman Brothers…  ethics, treating your employees right, putting your customers and shareholders’ interests first, all came second to running the stock price.  Whether it be accounting gimmicks or raising our dividend when we were almost bankrupt, it was all about trying to fool investors and shareholders into thinking we were just fine.

When it comes to ethics, character, and treating your employees and shareholders the right way, Berkshire does it like no other.  They are a model for business ethics, and I could tell both men were torn over Goldman Sachs.  Berkshire made a bold investment in Goldman during the depth of the financial crisis, plunking down $5 billion for a 10% convertible preferred stock which pays Berkshire $15 a second, every hour, of every day.  One of Buffett’s first thoughts of every day was the $432,000 Berkshire Hathaway had made while he was sleeping. And sitting in that shareholder meeting a few days ago, I got the feeling Buffett and Munger were in a real dilemma. First, Goldman is probably their oldest of friend. Buffett pointed out to the audience back in 1967 he and Charlie were trying to borrow $5.5 million in a bond offering and there were not enough takers. But it was Goldman and Kidder Peabody who came to their aid with an extra $400k to complete the deal.

To Buffett and Munger loyalty is everything.  They’re torn, because they want to stand by an old friend, one who’s paying them very well. Buffett and Munger spoke at great length about their dark days around their large investment in Salomon Brothers.  In the late 80s Berkshire ended up owning over 12% of Salomon but a few years later they all ended up in hot water after a scandal broke out in regards to Salomon’s business practices around trading treasury bonds.  Back then, Buffett made a famous stand to Congress, the regulators, Berkshire Shareholders and Salomon employees.  Buffett is not only a brilliant investor, he knows how to relate to people in very unique ways.  Back then, he talked about ethics, and conducting business as if your actions were on display in your hometown newspaper for everyone to see.  He replayed the grainy 1970’s C-SPAN video with him in front of Congress last Saturday. It obviously still means a lot to him. He plays it every year.

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Larry was blown away with how much we agree with Charlie Munger’s ideas on finance reform.  He feels like we do… that JP Morgan, Citigroup and Bank of America have no business sitting on top of $3 trillion of FDIC insured deposits, and $15 trillion of derivatives.  As Charlie said, “if I had it my way, I’d make Volker look like a sissy.”  He was referring to the Volker Rule which would force the banks to abolish big risk taking, investing in hedge funds, private equity and derivatives from traditional banking.

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Mr. Munger, like myself, would like to see more standardized accounting practices between the big four accounting firms and Wall St.  All firms should be treated the same way, no matter which accounting firm is signing off on the books. Abuses and innovative accounting moves like Repo 105’s must be made a thing of the past if we want to reduce systemic risks between the big banks.

Both Buffett and Munger are bullish on the future, especially the United States, and all of the advantages our capitalist republic provides.  But in the near term they seemed very cautious. Their main worries are centered around Greece, and the equity market pricing in higher taxes for the US.  Munger said of Greece, “high drama is on the way,” and the Eurozone “experiment” will be stress tested.

QUOTES
“Honey, if I lost everything, would you still love me?” “I’d love you, but I sure would miss you.” -Munger

“If I had to bet my life on higher or lower inflation, I’d bet a lot higher.” – Buffett

“Every one of my failures in investing brought me closer to that sweet smell of success. Just learn from each one. Humility builds character through hardship.” – Munger

“I like owning a company where your customers tattoo the name of that company on their chest. That’s why I own Harley Davidson.” -Buffett

“If I could only invest in the USA, I’d be just fine with that.” – Buffett

“Budget deficits of 10% of GDP are a lot of fun, but they can’t be sustained over long periods of time.” – Buffett

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“There is a disconnect between the Trump stimulus execution risk and how far we’ve come in terms of expectations. An actual fiscal boost is more than 12 months away in reality, Obamacare took well over 300 days to land on the President’s desk while the Dems controlled the House, Senate and the White House. As much as well all want to believe Mr. Gridlock is dead, he’s still breathing.  As we head into 2017, gold miners, bonds, gold miners and utilities continue to be our favorite options as the street has unanimously bought into the “reflationary trade” narrative.”

The Bear Traps Report, January 5, 2017

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Treasury Bond Gurus Blindsided Again as Reflation Trade Falters

Ten-year yield forecasts are off by the most since September.
Guggenheim’s Minerd sees rising odds of 10-year yields at 1.5%.

“In recent years, the overwhelming problem with bond market prognostications from U.S. economists is they’re far to wedded to their craft.  Bond prices are manufactured by political risk and global systemic risk, substantially more so than economic data.  We have a whole army of economists with their eyes on the wrong ball.”

The Bear Traps Report’s Larry McDonald, April 25, 2017

It’s never been easy being a bond-market prognosticator. But while history is strewn with botched calls and embarrassing revisions, 2017 is shaping up to be Not only is there the Federal Reserve to worry about, but also a new U.S. administration struggling to enact its pro-growth policies and geopolitical risks from elections across Europe to saber rattling in North Korea.
Perhaps that’s why on Wall Street, consensus estimates for the direction of Treasuries are proving to be so off the mark.
Strategists and economists were blindsided by the five-week rally in Treasuries, which left the gap between their forecasts
for the end of June and the actual 10-year yield at the widest since September. In theory, they’d converge as the date draws
closer.

To some, the disparity reflects a growing sense that traders in the Treasury market are giving up, at least for now, on the so-called reflation trade that was all the rage in the wake of Donald Trump’s election victory in November. “I don’t know that the words ‘confident’ and ‘yield forecasts’ belong in the same sentence,” said Richard Moody,  chief economist at Regions Financial. “Our forecasts have been based on where the market was, which is how you have to do it, but we’ve been saying since the day after the election that people need to slow down in terms of what they’re expecting.”
Moody, who called for the 10-year yield to end the quarter at 2.71 percent in March, dropped his forecast to 2.46 percent on April 13.

Lower for Longer

Higher yields have been a core component of the reflation trade, which was pinned on expectations of faster growth and inflation, as well as tighter monetary policy by the Fed and other central banks. Ten-year yields more than doubled from their all-time low in July to 2.63 percent on March 14. Since then, yields have retreated, falling victim to some of the same trends that led to the pervasive idea that rates would stay lower for longer. They ended at 2.27 percent on Monday.

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That view is reflected in something called the term premium. As its name suggests, the metric should normally be positive and has been for almost all of the past 50 years. Yet it’s back in negative territory — an anomaly that first emerged as a result of the Fed’s quantitative easing — suggesting investors can’t see any risks on the horizon that would push yields higher.

“We’re acknowledging that the term premium will stay lower than we thought,” said Paul Ashworth, chief U.S. economist at Capital Economics. The firm reduced its June forecast by a half-percentage point to 2.5 percent, the biggest cut among those in
the latest Bloomberg survey. “The market is not convinced that the Fed is going to follow through or the economy is going to be strong.”
Mark Kiesel, Pimco’s chief investment officer of global credit, disagrees and says investors are underestimating the Fed’s intent to raise rates.

Coin Flip

“The market is wrong in terms of only pricing one hike this year and a little over one hike next year,” he said. “The Fed is going to do more than that.” Indeed, futures traders are pricing in just one more increase this year, likely in September.
Scott Minerd says the low-yield camp will ultimately prevail. Minerd, who co-manages the $5.7 billion Guggenheim Total Return Bond Fund, said the odds have risen that yields will fall to 1.5 percent over the next several months. As of Feb. 28, the fund’s largest holding was the principal portion of a stripped Treasury bond due in 2044, among the most profitable to own as rates fall.
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The outlook for inflation suggests that there’s no need for
the Fed to rush. Bond investors see little chance that U.S.
consumer prices will rise more than 2 percent a year, on
average, over the next three decades. The reading is close to
the lowest since November.
“We’re seeing a lot of signs that inflation is not picking
up,” BlackRock Chief Executive Officer Larry Fink said on
Bloomberg Television last week. “There’s a 51 percent
probability that the 10-year Treasury can go below 2 percent.”

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*EURO GAINS AS MUCH AS 1.9% TO $1.0931; HIGHEST SINCE NOVEMBER

*TREASURY FUTURES DROP 27/32, MOST SINCE MARCH 1, ON FRANCE VOTE, REFLATION TRADE REVIVAL

*Euro 1-Month Volatility Drops Most on Record After French Vote

*U.S. Treasury Yields spike up near 2.31%, that’s 10bps higher since Friday afternoon

Marine Le Pen and centrist Emmanuel Macron will make the second round of the French elections, a positive for euro and French government bonds.  So far, populism’s rage has taken a rest in France, but it is much too uncertain to lay claim to final round winner.

Currency Volatility Plunge, Post the Election Results

EUR/USD’s one month implied volatility plunged nearly 3.7 vol points to 9.4 vol, the steepest slide on a closing basis, going back to 1998.

This Cover Says It All

“For the week ahead, this is a nearly perfect risk on scenario for markets, there were concerns Le Pen would cross 27-28%.  This territory has been viewed strong enough to foreshadow a second round victory for the far right, euro skeptic party.  Short term, the uncertainty of a Le Pen – Melenchon (the extreme scenario) final has been put to bed, this will provide markets relief over the next several trading days.  Make NO MISTAKE, this is still a shock to the political establishment in Europe, the National Front Party is in the French final, something that was UNTHINKABLE just a year ago.  The people of France are NOT happy.”

Larry McDonald, Creator of the Bear Traps Report

Populism’s Rage: Nearly 50% in France voted for far-right or far-left Candidates

National Front leader Le Pen was on course to take 24.3 percent in Sunday’s election, with Macron, a first-time candidate and political independent, on 22.2 percent, according to projections from the Interior Ministry based on more than a third of votes counted, Bloomberg reported.

Markets Looking Risk On, Gold’s Biggest Drop in Two Months

Across the board, risk on assets are moving higher, risk off assets lower.

Soaring Income Inequality Fueling Le Pen in France

1983-2015

Richest 1%: +103%
Rest of Population: +24%

Piketty data

Lets not kid ourselves, when you combine failing fiscal policies with central banking steroids ($14T of asset purchases since 2008), you get an inequality explosion that results in populism.

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Euro Surge

The euro surged against the dollar after the initial count of ballots in the first round of the French election showed that entrist Emmanuel Macron and the National Front’s Marine Le Pen were on a path to reach next month’s run-off.  Euro moved to highest since November; trimmed gains as hedge funds fade the rally, now 1.8% higher to $1.0919.

None of the candidates won an absolute majority, the two leading candidates will head for a run-off vote on May 7.

Similar to Clinton – Trump in October 2016, nearly every poll has Macron beating Le Pen 60% to 40% in the final round.  Not so fast, this is Le Pen’s best showing of her long political career.   A far right candidate should not be doing this well in France, Le Pen’s strength speaks to an electorate shifting right in France.

Bond Sell Off Picks Up Steam

The Trump trade has some life left.  We recommended clients short bonds last week in our Bear Traps Report, pick up our latest – click on the link below.

Socialist Benoit Hamon conceded defeat as soon as the projected figures came through. He told his remaining supporters to rally behind Macron, in order to defeat Le Pen.

Republican Francois Fillon also called on his supporters to back Macron in the run-off vote.

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Updated at 7:30pm, April 18, 2017

BREAKING: *JAPAN’S 10-YEAR BOND YIELD FALLS TO ZERO, LOWEST SINCE NOV. 16

U.S. 10 Year Treasuries surged to fresh 2017 highs after Friday’s soft economic data and testosterone filled rage coming at markets out of the North Korea.

Market Participants Growing Doubt over the Fed’s Rate Hike Plans

Bond futures players have grown more skeptical the Federal Reserve will raise interest rates aggressively this year.  The Fed’s dot plot, central banker’s view on future hikes is up at two more for 2017.  Implied rates on the fed fund futures curve are fully pricing in a September rate increase, with only a 20% percent chance of another by year-end.  Bottom line, the spread between market participants and Fed governors views on future rate hikes has widened dramatically.  Special thanks to Bloomberg’s Alexandra Harris (chart above).

New Highs for Unloved Bonds

Overweight bonds, gold miners and emerging markets; we’ve done a solid job from clients in 2017.   This week we’re focused the 50 percent retracement of the Trump Reflation Trade selloff at 2.178%.

All those “bond bears” have been hit with some heavy punches in recent weeks, a short covering capitulation climax is near.

1. A Dovish Surprise Fed Meeting with no movement in the Dots.

2. Paul Ryan’s Fumble – ACA repeal vote failure in the House, Tax Reform curveballs from Washington.

3. FOMC’s Dudley Bloomberg interview on the Fed’s balance sheet.

4. Soft March Jobs data.

5. Mother of all Bombs in Afghanistan, U.S. Missile Strikes in Syria, North Korea-Trump testosterone filled Verbal Slugfest.

6. Friday’s Colossal CPI, Retail Sales miss.

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“There is a disconnect between the Trump stimulus execution risk and how far we’ve come in terms of expectations. An actual fiscal boost is more than 12 months away in reality, Obamacare took well over 300 days to land on the President’s desk while the Dems controlled the House, Senate and the White House. As much as well all want to believe Mr. Gridlock is dead, he’s still breathing.  As we head into 2017, gold miners, bonds, gold miners and utilities continue to be our favorite options as the street has unanimously bought into the “reflationary trade” narrative.”

The Bear Traps Report, January 5, 2017

Friday, the Atlanta Fed revised their Q1 2017 GDP forecast down to 0.5%, dangerously close to recession levels.

Atlanta Fed GDP Now Outlook

In just a few months the Atlanta Fed has moved from 3.4% to 0.5% economic growth outlook for Q1 2017.  The Bottom line is wage data is NOT consistent with full employment.  Average hourly earnings have risen at a very soft pace in recent months.  Our Bear Traps Report wage tracker is treading water at 2.4% YoY over the past few quarters, that’s 0.60% below the rate is should be in a “full employment” economy.

On Bond Yields, Why Has Wall St. Been the Gang that Can’t Shoot Straight?

In our view, the current expansion’s full time job creation is 5 to 15 million short of what it should have accomplished.

1. The result is a large increase in underemployed, unemployed and idle individuals.
2. They number 129 million, 1.5 million less than the end of November 2016 and are over 50% of workforce.
3. In the eight years ended November 2016, their ranks increased over 10% by 12.53 million to 130.5 million.
4. The 129 million are unemployed, not in labor force and usually working part time.

With our Friend Chip Dickson

CPI Plunge

For the first time since February 2016, the cost of living in the U.S. declined in March.  From 1986 to 2006, CPI inflation -month over month- results never printed below 0.0%, but since red prints have occurred seven times, the latest in March.

Core Fell, Most Since 1982

The drop in the core rate was the – recession like – eye opener.   A reading this low almost never occurs outside meaningful economic contractions.   Leading the way south were apparel and vehicle prices.  It’s clear, the colossal supply of unsold automobiles has created substantial price dislocations in the USA.  March light vehicle sales equate to 16.62 million seasonally adjusted annualized rate of cars sold – the slowest pace in 25 months.   In our view, the glut of unsold automobiles had a heavy hand in the biggest drop in core CPI in over 30 years this week.

“If the bond market was open this morning, 10s (10 year U.S. Treasuries) would have traded at 2.00%, that’s a far cry from Wall St’s call for 3.20% by year end (Street yield consensus estimate).”

Larry McDonald, Creator of the Bear Traps Report

CPI M/M -0.3%, Exp. 0.0%
CPI Core M/M -0.1%, Exp. +0.2%

The data shows “just a crawl” for inflation, after such sky high expectations from Wall St’s “reflation trade.”

Friday, the U.S. dollar plunged to the lowest level in nearly six months versus the yen.   After very weak inflation data, he greenback touched its the 200-day moving average first time since February 2016.  In January, once again Wall St. sold their clients up the river on the “reflation trade” fantasy.   In reality, today’s data shows core CPI (ex food and energy) fell for the first time since 2010.

Dollar Heading South after the Soft Data
The decline — reflecting cheaper motor vehicles, wireless phones services and apparel — interrupts a recent pickup in inflationary pressures. Businesses have been regaining some pricing power on the heels of improving global demand and steady sales in the U.S. The Federal Reserve’s preferred gauge of inflation, a separate figure that’s based on what consumers purchase, exceeded its 2 percent goal in February, though some officials focus on the measure excluding food and energy, which is still below their target. The year-over-year gain in the March core CPI was the smallest since November 2015. – Bloomberg reported

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“The Trump election surprise impact on markets presents us with a unique opportunity, rarely have we ever seen trades this crowded headed into the new year.  We’ll take the road less traveled; recommend clients overweight utilities, bonds and emerging markets heading into 2017.”

The Bear Traps Report, December 12, 2016

-The consumer-price index decreased 0.3 percent (forecast was unchanged) following a 0.1 percent advance the prior month.
-From a year earlier, prices were up 2.4 percent (forecast was 2.6 percent) after a 2.7 percent gain.
-Excluding food and energy, the so-called core CPI fell 0.1 percent from the prior month, the first decrease since January 2010
-Core rate was up 2 percent from March 2016

Retail Sector Jobs and Core Inflation

When we look at retail sector employment growth, the plunge has been spectacular.

Historical Trend: +17 to +22k per month*
Last 4 Months -6k per month

*BLS data 1996-2006

How much of this weakness is due to the structural shift of retail sales from brick and mortar stores toward less labor-intensive e-commerce firms, and what is the likely future pace of retail job growth?  Pick up our latest report.

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Goldman, Before Today’s News

Even before today’s soft retail sales and CPI data, Goldman was hedging their bets lower:

“Our economists’ real GDP tracking estimate for Q1 has edged down further to just 1.4%, and other estimates are even lower. By contrast, even after Friday’s partly weather-driven slowdown in nonfarm payroll growth to 98k, our economists’ current activity indicator (CAI) for March is 3.6%, down from the February reading of 4.2% but still strong in absolute terms. In averaging these numbers, our analysts would put most of the weight on the CAI, partly because they think it is generally more stable and partly because GDP in the first quarter suffers from a downward seasonal bias of about 1pp. Our economists think that true growth is well above the US economy’s underlying trend of around 1.75%.”

Goldman Sachs, April 13, 2017

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Its been repeated one thousand times, the words are establishment group therapy in Europe, “Macron seen beating Le Pen in second round 62% vs 38%.”  Have no fear, “populism will not come here” is the mantra, but credit markets are singing a very different tune.

You now get 0.52% more on a two year bond in France than you do in Germany, the most in five years.

Listen to Credit Markets, NOT Establishment Tainted Polling

• First-round support for Francois Fillon was stable at 20% while support for Marine Le Pen dropped by 1 percentage point to 23%
• First-round support for Benoit Hamon gains 1 percentage point to 9%
• Fillon seen beating Le Pen in second round 58% vs 42%

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What are Equities Saying?

The CAC 40 is up 27% from the June – Brexit lows, with the S&P 500 only 17% better.

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A Surge from the Far Left is NO Establishment Friend

First-round support for French presidential election candidate Emmanuel Macron declined by 1 percentage point from yday to 22% while support for Jean-Luc Melenchon remained stable at 17%, according to daily Opinionway poll results published today.

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