Where are bond yields going with debt on the rise?  Click here for our latest report.
*FED OFFICIALS SEE THREE 2017 RATE HIKES VS TWO IN SEPT. DOTS
*FED RAISES RATES BY 25 BPS, REPEATS GRADUAL POLICY PATH PLAN
*FED: POLICY SUPPORTING `SOME FURTHER STRENGTHENING’ ON GOALS
*YELLEN: THERE MAY BE SOME ADDITIONAL SLACK IN LABOR MARKETS
*YELLEN: FISCAL BOOST NOT OBVIOUSLY NEEDED FOR FULL EMPLOYMENT
*EMERGING MARKET CURRENCIES CONTINUE PLUNGE AGAINST THE DOLLAR

Global Credit Explosion, Debt Denominated in US Dollars*

2016: $52T
2010: $31T
2005: $22T
BIS data

“Credit risk on the heels of China’s aggressive currency devaluation will veto the Fed’s desired policy path in 2016.  They must pull out the fire hose, kill their planned 2016 (4) rate hikes and talk down the dollar.  The winners? Gold, Emerging Markets and Oil.”

The Bear Traps Report, February 2016

Where are bond yields going with debt on the rise?  Click here for our latest report.

Once Again, the Fed is Staring Down the Barrel of a Run Away Dollar

Currency Pain Since US Election

Japan -14.3%
Turkey -11.4%
Mexico -10.8%
Argentina -6.6%
Brazil -6.6%
Europe -6.4%
S Africa -5.8%
Korea -4.1%
Indonesia -2.5%
India -2.0%
China -1.9%*
Russia +3.3%

Bloomberg

*China is the big loser since the election, global populism is NOT China’s friend.  Competitive currency devaluations above are stealing billions in trade dollars from China.  The U.S. dollar’s surge has ugly side effects.

Easy Money Fed policy has enticed countries and companies around the world to borrow in dollars. We have witnessed a colossal leverage expansion. A substantially stronger dollar makes these debts even larger, much harder to repay. As we witnessed in February, credit risk vetoed the Fed’s desired policy path, their goal of four rate hikes in 2016. This “chicken out” by the Fed was almost entirely dollar driven, or what we call “handcuffs.”

The Dollar trades at elevated levels, something the global economy will struggle with. The effects of Dollar’s double edged sword will be felt in Q1 2017. Bottom Line: markets are underappreciating (have mis-priced) the short term economic risks tied to the dollar’s surge coupled with the backup in rates.

Where are bond yields going with debt on the rise?  Click here for our latest report.

Emerging Market Currencies in Pain

Breakouts in the Bloomberg Dollar Index have been associated with surges in U.S. equity market volatility as financial conditions have tightened globally.   The above divergence is highly unsustainable.

Where are bond yields going with debt on the rise?  Click here for our latest report.

Concerned or NOT Concerned, Federal Reserve

“The Committee continues to closely monitor inflation indicators and global economic and financial developments.”

December 14, 2016 Fed Statement

“However, global economic and financial developments continue to pose risk.”

March 16, 2016 Fed Statement

S&P 500 and the Fed’s “Concern”

Over the last 18 months we’ve witnessed a humorous disconnect between the Fed’s “concerned” and “NOT concerned” position on global credit and currency risk tied to financial conditions. When the Fed expressed “concern” we were typically near market bottoms, while their position of “not concerned” were always close to near term market highs.

Fed on Global Economic Risks

March 2016: concerned (market bottom)
Dec 2015: not concerned (market high)
Sept 2015: concerned
July 2015: not concerned (market high)

Fed Calling for Nearly 16 Rate Hikes Back in 2014

Year End 2017 FOMC Forecast

Back in 2014 the Fed was calling for nearly 16 rate hikes by the end of next year, but so far we’ve only seen two.  As they try and play “catch up” in an effort to save face, the big loser is China.  There’s a PRICE to pay for eight years of zero interest rate policy, it is NOT free!

Bloomberg Dollar Index and the VIX

The last time the Bloomberg dollar index was this high the VIX was above 25.  Of course China accelerated their currency devaluation in retaliation to the run away dollar from August 2015 – February 2016.  Today, we have President elect Trump blasting China and U.S. “One China” diplomacy in Tweets while the dollar is ripping in their face as well.   Bottom line: both the Fed and Trump are letting China have it, a financially painful double team.  Yellen’s hawkish tone is a slap in the face to China, talking up rate hikes only strengthens the dollar, hurts China’s competitive position in the global economy.  How will they respond???

From August to February 2015-16, China was trying to teach the White House and Treasury a lesson:

“Let your currency surge too quickly and we’ll deval our currency too quickly and upset global capital markets in an election year”

China’s Behind the Scenes Message to Washington, January 2016

One Steep VIX Futures Curve

If you model up the spread between the 2 month VIX future and the 8 month relative to currency risk (Bloomberg Dollar Index) BBDXY, vol looks the cheapest going back 18 months. Deep contago in the VIX futures curve makes ZERO sense with EM currencies in flames, thanks Janet.

After China accelerated their currency devaluation Aug – Feb, the S&P plunged 14% in an election year.  Next, the Fed pulled out the firehose and started talking down the dollar, killing their planned beloved four rake hikes.  It’s Groundhog Day just without a U.S. election in 2017.

We do have election cycles in Italy, Netherlands, France and Germany : )  More to come….

Where are bond yields going with debt on the rise?  Click here for our latest report.

*TRUMP SAID TO PICK TILLERSON ( AS SECRETARY OF STATE): NBC NEWS

Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here

Where are bond yields going with debt on the rise?  Click here for our latest report.

Exxon Mobil Corp. Chief Executive Officer Rex Tillerson has emerged as the leading candidate for secretary of state in President-elect Donald Trump’s administration, according to two people familiar with the matter.

Mitt Romney, who was the 2012 Republican nominee for president and a critic of Trump during this year’s campaign, remains on the short list of candidates, according to the people, who has asked for anonymity because the discussions are private. Trump has said he will make an announcement next week. – Bloomberg

*SAUDI MINISTER SAYS COUNTRY TO CUT BELOW LEVEL AGREED WITH OPEC

*IRAN OIL MINISTER SAYS NON-OPEC WILL CUT BY ABOUT 600K B/D

*SAUDI CUT BELOW 10 MLN B/D WOULD BE LOWEST SINCE FEB. 2015

*SAUDI ARABIA’S FALIH: POSSIBLE THAT DEAL MAY END IN MID-2017

Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here

Where are bond yields going with debt on the rise?  Click here for our latest report.

Khalid Al-Falih says at press conference in Vienna that country will cut substantially from Jan. 1.

Saudi Arabia agreed to production limit of 10.058 mln bld,
a cut of 486,000 b/d from Oct. levels.

Russia and several other non-OPEC nations pledged to curb oil production next year at a meeting in Vienna, joining forces with the Organization of Petroleum Exporting Countries to end a global glut that’s crashed oil prices and shaken energy-rich economies.

The pact — the first between the two sides in 15 years — involves a reduction of 558,000 barrels a day from non-OPEC countries starting in January, Iraq Oil Minister Jabbar Al-Luaibi said on Saturday after the meeting ended.

The agreement represents the strongest effort yet by oil-rich countries, from giants such as Saudi Arabia and Russia to tiny producers including Bolivia and Equatorial Guinea, to end a market share war that has shaken investors, hit energy companies and damaged economies. – Bloomberg

Breaking: Third Quarter GDP in at 3.5%

Annual GDP growing 1.9%

Q4: 2.6%*
Q3: 3.5%
Q2: 1.4%
Q1: 0.9%

*Per Atlanta Fed from Dec 16, 2016

Where are bond yields going with debt on the rise?  Click here for our latest report.
Yesterday, the lame duck Congress was able to avoid the annual government shutdown risk surge, there were less games – more action.  Ultimately, the big showdown is next year at the start of Donald Trump’s presidency.

Trump Tax and Foreign Policy: Winners and Losers

Stocks, Bonds, Currencies and Commodities Since the Election*

Russell: 21%
Russia: 18%
Brent: 17%
Copper: 14%
Mexico: 8%
S&P 500: 8%
EuroStoxx 600: 6%
Brazil: 5%
Nasdaq 100: 5%
Emerging Markets: 5%
China: 4%
Dollar DXY: +4%
FANG Stocks: 0%
Treasuries: +65bps in yield, US 10 year
Gold: -9%

*Bloomberg data, from the November lows near election day, FANG = Facebook, Amazon, Netflix, Google

*SENATE PASSES STOPGAP U.S. SPENDING BILL, AVERTS FUNDING LAPSE

The Senate passed 63 to 36 a stopgap spending bill, funding the government through April 28, averting a shutdown but putting off a long list of decisions on bills to finance the rest of the fiscal year through October.

That lawmakers are heading toward a potentially time-consuming fight over spending in the spring that could test the limits of newfound Republican unity with Trump and eat up valuable time, delaying other legislative priorities.

Click here for our latest report.

Today’s Federal Budget Deficit is Substantially Greater than those Found in the Bush and Clinton Economic Recoveries

The deficit as percentage of GDP has come down considerably over the Obama years. Of course, when Obama took over the White House the economy was in a recession.  Naturally government deficits rise and GDP falls in economic downturns, which makes this number more negative (-10.2% in 2009 above).  However, over the Obama years deficits have been lower as the recovery took hold.  Trump and his aggressive pro-growth plans will likely reverse that trend, until the growth follow through offsets it.  We’ll see a return to supply side economics in the years to come, Trump wants to use tax cuts to stimulate growth.
Percentage of US Government spending on entitlements and debt
interest payments:

2015: 71%
1965: 26%
CBO

In 8 years of the Obama administration, the U.S. didn’t achieve one year of year over year +3% growth.  That has not happened in nearly 100 years.

U.S. Real Year over Year Annual GDP

2016: 1.8%
2015: 2.6%
2014: 2.4%
2013: 1.7%
2012: 2.2%
2011: 1.6%
2010: 2.5%
2009: -2.8%
2008: -0.3%
2007: 1.8%
2006: 2.7%
2005: 3.3%
2004: 3.8%
2003: 2.8%
2002: 1.8%
2001: 1.0%
2000: 4.1%
1999: 4.7%
1998: 4.5%
1997: 4.5%
1996: 3.8%
1995: 2.7%
1994: 4.0%
1993: 2.7%
1992: 3.6%

• Above 3% year over year growth is in blue

Bloomberg, CBO data

Where are bond yields going with debt on the rise?  Click here for our latest report.

The Trump administration and Congress of 2017 have a colossal collection of goals for their first 100 days; a) filing and (Congress) approving Cabinet posts, b) a Supreme Court vacancy, c) corporate and individual tax reform, d) replace and repeal of Obamacare and reversing a long list of regulations issued by the outgoing Obama administration in its final months. Adding the need to fund the entire federal government makes all of those objectives even more difficult.  As you can see above, the Federal deficit is near unsustainable proportions.  The U.S. needs far more than 1.7% GDP growth to support this debt load.

U.S. Federal Spending as a % of GDP

16: 35%
10: 33%
00: 29%
90: 32%
80: 30%
70: 29%
60: 23%
50: 19%
40: 14%

Arthur Brooks, CBO, Treasury data

“The Federal Reserve’s decision to raise interest rates is a warning sign to government budget watchers. The combination of rising debt levels and rates will lead to soaring interest payments, putting a strain on U.S. purse strings. A measure known as net interest costs — which balances what the government receives in interest payments against what it pays on debt — is already set to nearly triple by 2026, to $712 billion, or 2.6 percent of gross domestic product, according to the Congressional Budget Office forecasts from August. That figure soars to nearly 6 percent of GDP by 2056.”

Bloomberg, December 2016

Tax Reform and Side Effects

Front and center, corporate tax reform tied to infrastructure, will be priority number one in our view. The prospect of tax reform and a lower rate have already played a big role in equity market returns. The Russell 2000 is up 17% year-to-date and 11% since the election. The S&P 500 is only up 8% year-to-date and 3.1% since the election. Many mega-cap S&P companies have already used tax shelters such as Ireland, which has a corporate tax rate of 12.5% (vs 38% in the U.S.). The market is now rewarding companies who will see the biggest nominal effective change in the reduction of their corporate tax rate.
FANG stocks, who have been famous for using other countries as a base in order to pay less in taxes, have been punished relative to domestic retailers and energy companies who have very high effective tax rates.

See the report below, click on the link.

Click here for our latest report.

The benchmark 30-year fixed-rate mortgage rose this week to 4.15% from 4.13%, according to Bankrate’s weekly survey of large lenders. A year ago, it was 4.06%. Four weeks ago, the rate was 3.73%.  We’re focused on the follow on impact; home builders and prices, regional banks and the U.S, consumer. 

Pick up our latest report on interest rates, sectors for 2017 here:

Click here for our latest report.

“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

Click here for our latest report.

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

Germany 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

Click here for our latest report.

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

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. 

Click here for our latest report.

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

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?

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%. 

Click here for our latest report.

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

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

Click here for our latest report.

Click here for our latest report.

“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

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

Click here for our latest report.

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

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.

Click here for our latest report.

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

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.

Click here for our latest report.

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.

Click here for our latest report.