Posted in Featured, Newsclips, Samples

Blame the Fed for MMT


  • – Jim Bianco: The Fed Has Given MMT Proponents Ample Ammunition
    The idea that the government can print money to spark the economy is not that much different than quantitative easing – with one big exception. 
    If this sounds familiar, it should. MMT is basically a sibling of quantitative easing. While QE allowed the Fed to print money to buy securities such as U.S. Treasuries, mortgage bonds and bad loans, MMT proposes printing money to fund the government. The Fed has hailed QE as a success, bringing the economy back from the brink. Former Fed Chairman Ben S. Bernanke was even anointed as Time magazine’s “Person of the Year” for 2009. Vice Chairman Richard Clarida said last month the central bank would solicit opinions on how to round off the edges of its new tools such as QE. Simply put, these tools are here to stay.


Although the concept of modern monetary theory has been around for some time, Ben Bernanke laid much of the groundwork for applying it to real-life scenarios.


When the Federal Reserve officially introduced the idea of quantitative easing in November 2008, a new era of central bank policy was ushered in. With rates around the world at or near zero, central banks needed additional tools to further stimulate their economies and avoid deflation.
Just as QE2 was getting underway, many economists became concerned over risks of currency debasement and inflation:
  • The Wall Street Journal – (November 15, 2010) Open Letter to Ben Bernanke
    The following is the text of an open letter to Federal Reserve Chairman Ben Bernanke signed by several economists, along with investors and political strategists, most of them close to Republicans
    We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.


Undeterred, Ben Bernanke pushed forward with QE2 and then QE3. As the story below highlights, he even suggested Japan should issue perpetual debt with no maturity date as a means of further stimulating their economy.


  • Bloomberg – (July 14, 2016) Bernanke Floated Japan Perpetual Debt Idea to Abe Aide Honda
    Prominent foreign economists drawn into nation’s policy making
    Honda emerges as an ideas matchmaker for the prime minister
    Bernanke at the Tuesday meeting said Japan should carry on with Abenomics policies by supplementing monetary policy with fiscal stimulus, according to Hamada. Bernanke told Abe that the BOJ still has instruments to further ease monetary policy, said Yoshihide Suga, Japan’s top government spokesman. The central bank didn’t reveal what Kuroda and Bernanke discussed. Hamada said helicopter money wasn’t mentioned with Bernanke on Tuesday. Suga denied an earlier report in the Sankei newspaper that officials around Abe were considering helicopter money as a policy option…in April the former Federal Reserve chief warned there was a risk Japan at any time could return to deflation. He noted that helicopter money — in which the government issues non-marketable perpetual bonds with no maturity date and the Bank of Japan directly buys them — could work as the strongest tool to overcome deflation, according to Honda. Bernanke noted it was an option, he said.


In hindsight, it appears concerns over inflation and currency debasement were unfounded. The Federal Reserve, along with many other central banks around the globe, argued they struck the right balance by pushing stimulus to previously untested limits while keeping inflation in check. If anything, many economies continue to suffer from low inflation.
Our Bloomberg Opinion piece above details how this experiment had the unintended consequence of laying much of the groundwork for proponents of MMT. If money printing worked for the financial system, why not apply it to all government programs?
  • Liberty Blitzkrieg (blog) – Michael Krieger: Federal Reserve Chairman Appears on 60 Minutes – Why Now?
    The increased popularity of MMT in the public conversation is proof of this. People are starting to wonder why the central bank can print money and buy assets to save the portfolios of baby boomers, yet the public can’t simply print money for stuff like healthcare, education and roads. The Fed intentionally obfuscates what it does (money printing) with terms like “quantitative easing,” but people are starting to get the joke.  The Fed doesn’t want people thinking about such things.
Posted in Samples

The Fed On 60 Minutes On March 10


  • CBS News – 60 Minutes: Fed Chairman Jerome Powell gives a rare interview to 60 Minutes

    Correspondent Scott Pelley interviews Powell along with his predecessors Ben Bernanke and Janet Yellen.

    Powell sat with Pelley this week in Washington, D.C. for a wide-ranging discussion that includes the Fed Chairman’s remarks on interest rates, the outlook for America’s economy and whether the U.S. financial system is vulnerable to cyberattacks.

    The interview comes almost 10 years to the day since Pelley’s groundbreaking interview with then-Fed Chairman Ben Bernanke during the Great Recession. Bernanke and his successor, Janet Yellen, appear alongside Powell in one of the interviews for this report to discuss how they advised him to handle the job and the criticism that comes with it.


First, we are going to bet that the part with all three Fed heads will be about “Fed independence.” If right, is the Fed’s independence under such a threat that the Fed felt the need to get a 60 Minutes segment with all three?  Is the Fed overdoing it and risking coming off as a victim?

We hope for the Fed’s sake this part of 60 Minutes does not come off as Yellen two weeks ago. It does not serve the Fed to pick a fight with Trump. Don’t poke the bear!


Second, as noted above, it was literally 10 years ago to the day that Bernanke gave his first 60 Minutes interview (March 12, 2009).  In ourcircles, here is the legacy of that interview (also with Scott Pelley).

  • CBS News 60 Minutes – (March 12, 2009) Ben Bernanke’s Greatest ChallengeFed Chairman Discusses Recession, Financial Rescues And Recovery In Wide-Ranging 60 Minutes Interview
    Asked if it’s tax money the Fed is spending, Bernanke said, “It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It’s much more akin to printing money than it is to borrowing.” You’ve been printing money?” Pelley asked. “Well, effectively,” Bernanke said. “And we need to do that, because our economy is very weak and inflation is very low. When the economy begins to recover, that will be the time that we need to unwind those programs, raise interest rates, reduce the money supply, and make sure that we have a recovery that does not involve inflation.” He’s not kidding about printing money: the Fed issues U.S. currency, which is why it says “Federal Reserve Note” on all the bills in your wallet. The Treasury Department’s Bureau of Engraving and Printing is just a few blocks from Bernanke’s office. The Fed’s mandate from Congress is to put enough money in the system for maximum employment, but not so much that it sets off inflation.

And then this about 21 months later …

  • CBS News 60 Minutes – (December 3, 2010) Fed Chairman Ben Bernanke’s Take On The Economy
    Talks to Scott Pelley About Unemployment, The Deficit and Pressing Economic Issues
    BERNANKE: Well, this fear of inflation, I think is way overstated. We’ve looked at it very, very carefully. We’ve analyzed it every which way. One myth that’s out there is that what we’re doing is printing money. We’re not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way. ..

Ben, the myth that the Fed is printing money is because you said you were!

This is why Bernanke rubs people the wrong way.  He invents the terms (i.e., “helicopter money” or “money printing”) and when the term becomes inconvenient, he does not do a mea culpa saying that he should have chosen his words better.  Instead, he goes full head of the Princeton Economics Department and condescendingly corrects everyone like they are school children on why they are wrong … for using words he invented! 

It really hurts his credibility.

So, we wonder if Pelley is going to ask him a third time to describe QE and money printing.

Posted in Samples

Slowing Global Growth Continues

As regular readers know, we are fans of Citi’s Economic Data indices, which can be broken down into the following components:

Data Change – Consensus Estimates = Surprise Index

The Data Change indices take incoming economic series and compare them to their previous one-year average. Zero denotes the one-year average, so anything below zero indicates growth is lower than the one-year average.

Consensus Estimates compare median economic forecasts to their one-year average.

The Surprise Index is simply the difference between the Data Change index and Consensus Estimates.

Latest Data Change Measures

We prefer to look at the Data Change indices themselves as they give the best indication of where various economies stand in relation to growth over the past year. As the chart below shows, the global growth trend is becoming a bigger concern, particularly so in Europe.



China’s growth is also becoming a serious concern. Even their admittedly controversial GDP data is now at its worst level since the Great Recession (2008).



Citi’s Data Change Index for China continues to go the wrong way.



For some countries, Citi separates the Data Change indices between hard (official) data and soft (survey) releases. The charts below highlight this data for the US and the EU. Soft survey data in particular is horrific.

Simply put, sentiment surrounding the US and EU economies is currently as bad as ever in the post-crisis era.




When comparing economic data to its one-year average, growth continues to show signs of a slowing global economy.
Posted in Featured, Newsclips, Samples

The World of Negative-Yielding Bonds


With U.S. 10-year yields near the low end of their range of the past year, negative-yielding debt still makes up a considerable portion of global debt.


With 10-year yields near the low end of their range of the past year, there is still a considerable amount of negative-yielding debt across the globe. The charts below offer a look at these bonds.
The first chart shows the breakdown of global sovereign debt among developed countries. With more than $11 trillion in negative-yielding debt, roughly 30% of developed countries’ sovereign debt yields less than zero.


The next series of charts charts use a slightly different data set to arrive at a historical view. While the chart above includes all maturities of sovereign debt, the charts below work within the universe of the Bloomberg/Barclays Global Agg Index. This means these series include most types of fixed income (not just sovereigns) with maturities of one year or greater. It excludes the shortest maturities, many of which would qualify as negative-yielding.
With that being said, the chart below compares the current market value of all bonds in Bloomberg’s Global Agg Index (blue) to the negative-yielding portion of the Agg Index (orange).
As the green line in the bottom panel shows, over 17% of the bonds in the Global Agg Index are currently negative-yielding.


The next chart highlights the OAS, maturity and duration of these negative-yielding bonds.


So how have returns of negative-yielding debt compared to the benchmark? Since the end of 2016, the total return of negative-yielding bonds has typically outperformed the Bloomberg Global Agg Index. This recently changed as negative-yielding debt has struggled in 2019. YTD, the Global Agg Index is up 0.94% while the negative-yielding portion of the index is down 1.00%.


Posted in Featured, Newsclips, Samples

Will the Fed and Markets Get Back on the Same Page?

  • CNBC – Fed Chair Powell says balance sheet decision market is waiting for is ‘close’ to happening
    * Fed Chairman Jerome Powell said Wednesday the central bank is close to a timetable on when its balance sheet reduction will end.
    * The balance sheet is currently just over $4 trillion, most of which is Treasurys and mortgage-backed securities bought to stimulate the economy.
    * An announcement will be coming “fairly soon,” the central bank chief told House members.
    * “We are not looking at a higher inflation target, full stop,” Powell also said

  • The Wall Street Journal – Powell Says Fed Is Close to Agreement on Plan to End Portfolio Runoff

    Federal Reserve Chairman Jerome Powell said Wednesday the central bank is close to announcing plans for ending the runoff of its $4 trillion portfolio of bonds and other assets this year. “We’re going to be in a position…to stop runoff later this year,” Mr. Powell told members of the House Financial Services Committee. Mr. Powell said Fed officials are near agreement on a plan. “My guess is we’ll be announcing something fairly soon,” he said. The Fed’s rate-setting committee next meets on March 19-20.


Ending balance sheet reductions this year will go a long way to getting the Fed and markets back on the same page.


We have argued the Fed and the markets have not been on the same page regarding the effect balance sheet reductions have on the markets. Jay Powell has tried to downplay their importance many times, going as far as saying the QT process is, “like watching paint dry.”

In 2017 the Kansas City Fed conducted a study on the effects of balance sheet normalization. In a nutshell, they stated a $675 billion reduction in the balance sheet was roughly equal to a 25 bps hike. So a $600 billion reduction in 2019 would be the equivalent of less than one hike. Further, as the chart below shows, the actual reduction to date has been around $450 billion, or about two-thirds of one hike, according to this measure.

Going forward, as the chart above suggests, the balance sheet should fall another $500 billion. In total, the Fed’s study suggests the total balance sheet reduction from October 2017 to the end of this year is the equivalent of 1.25 rate hikes.



The markets believe balance sheet reductions equate to a much larger hike. Last month CNBC released their latest Fed survey in which they were asked the following two questions:


The participants in this survey think a $600 billion reduction is the equivalent of 41 basis points of tightening. 42% of respondents think the Fed should reduce the pace of the decline.  This is a far more aggressive effect than the Fed believes it to be.

The market sees balance sheet reductions as a loss of liquidity, which is one of the main reasons for the difference in opinion. As the balance sheet dwindles, someone in the private sector has to replace the demand for those securities. While the Fed likely understands this, they may not be as acutely concerned about it as market participants.

The next chart focuses on the overnight repo yields and IOER since balance sheet reductions began, using a 30-day average to remove the noise.

The bottom panel shows the difference between these two measures. The green bars signify repo yields are moving above IOER, evidence the funding markets have become tighter. 

From the time the Fed started reducing its balance sheet until now, this spread has increased roughly 23 basis points, the equivalent of almost one rate hike.



The next chart shows the bid-to-cover ratios in the Treasury market since 2010. These ratios have been in a downtrend and continued balance sheet reduction will only intensify these trends lower.



The Fed is probably correct that the reduction in the balance sheet means little for reserves or bank lending and that its impact on jobs and GDP will be minimal. But, the market is also correct that the Fed is no longer buying securities, which means the private sector must step up to absorb that supply.

Neither side is incorrect in its view, but the difference in opinion was the source of much anxiety in the markets in December. As balance sheet reductions are expected to be coming to an end, the hope is that the Fed and the market’s views will be better aligned.

Posted in Featured, Newsclips, Samples

The Most Important Driver of Inflation?

  • – Powell Gets Sharp Warning From Senator Over Fed Inflation Target
    Low interest rates over the past four decades have made it more likely that the Fed’s policy rate will drop to zero again during future recessions, Powell said, making it more difficult for the central bank to stimulate economic growth. That, in turn, may help lower inflation expectations, a force Powell called “the most important driver of actual inflation.” “We’re trying to think of ways of making that inflation 2 percent target highly credible, so that inflation averages around 2 percent, rather than only averaging 2 percent in good times and then averaging way less than that in bad times,” Powell said during his testimony before the Senate Banking Committee.


Yesterday Powell pointed to inflation expectations as the most important driver of actual inflation. However, inflation expectations are often little more than a reflection of crude oil prices.


In yesterday’s testimony Powell said the following regarding inflation expectations:

In our thinking, inflation expectations are the most important driver of actual inflation.

While most economists might see this as a statement of the obvious, we see a couple issues with it. For starters, true Inflation expectations are nearly impossible to measure. Even if they were easily measurable, we would question their ability to drive actual inflation.


Do Expectations Drive Inflation?


Micheal Shedlock (Mish) addressed this idea yesterday:

Mish details how inflation expectations do not really drive purchase decisions and thus do not affect inflation. He also notes the irony that expectations can actually drive asset prices like homes and stocks. But, this is not the goal of the Fed.

He also notes that Lael Brainard sees issues with long-term inflation expectations:

“There is no single highly reliable measure” of longer-run inflation expectations, Fed Governor Lael Brainard told The Economic Club of New York on Sept. 5.


How To Measure

Inflation expectations come in two forms, market-based measures and surveys. Treasury Inflation Protected Securities (TIPS) breakeven rates are one of the more popular market-based measures of inflation expectations.

The black line in the chart below shows WTI crude oil prices. The orange shows the 5-year inflation breakeven and the blue line shows the 10-year inflation breakeven.

The energy sector, both commodities and services, only account for 7.1% of the overall CPI (December 2018). While this sounds small, the chart shows WTI prices move in tandem with inflation expectations.



Inflation swaps/caps are another popular market-based measure of inflation expectations.

The thick gray line (right scale) below shows crude oil prices while the colored lines show the market’s opinion on inflation remaining above 2.5% over various time frames (left scale). The correlation is not as tight in this case, but when crude has sharp moves like it has the last few months, inflation expectations react. So even this measure, that is supposedly insulated from energy prices, seems to react when energy prices have a hard move.



The ISM Prices Paid index is another gauge of inflation expectations that the Fed likes to monitor. It is shown in blue below overlaid on crude oil prices in orange. Energy is a huge input to prices, so it should not be surprising that these two measures track each other closely.



The next chart shows crude oil (black) overlaid on year-end inflation forecasts from a Bloomberg survey of over 50 economists.

When crude oil was rising in 2017 and early 2018, the 2018 forecasts for inflation (blue) were rising. When crude oil was collapsing in late 2018, the 2019 forecasts for inflation (orange) were falling. The relationship between crude and this measure of inflation expectations is apparent.



We believe it is dubious that inflation expectations are drivers of actual inflation as Jay Powell said. Even if so, it is next to impossible to find a reliable measure of expectations. Those that exist are heavily influenced by crude oil prices, a concept that would make the Fed uncomfortable. In the end, the Fed is setting policy on a debatable proposition that is impossible to measure.

Posted in Featured, Newsclips, Samples

The Indexation of the High Yield Market

  • The Financial Times – Fitch flags risks of forced sales for bond mutual funds

    The rapid growth of corporate bond funds could present a threat to financial stability, according to Fitch Ratings, if a combination of investor runs and deteriorating trading conditions sends shockwaves through markets. Concerns over the growth of corporate debt funds and the implications for “liquidity” — a gauge of how easy it is to buy and sell financial securities — have been rising since the financial crisis. Figures such as Blackstone’s Stephen Schwarzman and economist Nouriel Roubini have warned that the mismatch between how easy it is to pull money out of a fund and how hard it can be to sell the underlying bonds could exacerbate or even cause another market crunch.

  • Summary

    Traders continue to use the high yield index market as a hedge rather than trading the underlying bonds. This is a strategy that works while liquidity exists, but could pose serious problems in volatile markets.


    The idea of money managers using ETFs and indexed products to hedge positions in high yield bonds has been a consistent theme of ours. It is a strategy that works so long as liquidity exists. But, as the story above suggests, it could cause many headaches during times of high volatility.

    The top panel of the chart below shows trading in high yield ETFs (green and orange) versus cash bond trading (blue). The bottom panel shows ETF trading as a percentage of the underlying market is at almost 40%. While this is off its recent peak of more than 60%, it is still elevated.



    The blue line in the chart below shows total put volume in the iShares iBoxx HY ETF. Although well off its high, it still remains elevated versus the average of the past couple years.


    This past equity downturn highlights the potential for problems due to an increased reliance on high yield ETFs and puts. If money managers are trading ETFs and puts instead of the actual cash market, dislocations will eventually occur. Disaster was avoided this time around due to January’s massive bounce in risk markets.

    We still believe high yield’s “indexation” represents a risk. As we stated earlier this month:

    This represents a risk as the [high yield] bonds that make up these indices are too different to assume they can trade as one. When stresses rise enough, these bonds could go their separate ways, making index level strategies ineffective.

Posted in Newsclips, Samples

2019 Earnings Are a Concern

View PDF


  • The Wall Street Journal – Apple and the Art of Guidance
    CEOs and their finance chiefs are in a tight spot this month as they report quarterly financial data, aiming for a delicate balance of realism and optimism.

    The art of guidance is always a delicate dance between realism and optimism, but a misstep in these febrile times can lead to a fall. Anything cautious that a CEO or CFO says about consumer demand, supply chains, inventory or credit conditions could be read as proof the sky is falling. When making predictions about the economy, “you don’t want to be the guy that sticks his head above the water and all the sudden, two months later, have The Wall Street Journal writing about how wrong your comments were,” said Ken Goldman, Yahoo’s former CFO.


Q4 2018 S&P 500 operating earnings estimates look good, but this is the last quarter benefiting from the corporate tax cuts. As analysts focus on 2019, the story gets worrisome. Q1 2019 S&P 500 operating earnings growth projections look much lower and Q2 2019 projections are not looking any better.


This week the Q4 2018 earnings season gets underway. Since corporate tax cuts took effect on January 1, 2018, this will mark the last quarter that benefits from a jump in earnings over the previous year. Because of this, many will be less interested in actual Q4 results and more interested in guidance for 2019.

The chart below shows weekly estimates for Q4 2018 S&P 500 earnings growth are falling hard. As of January 4, however, analysts are still expecting double-digit growth rates.



The next chart shows the last sixteen quarters of earnings estimates. Each series starts as an average of 500 estimates. As companies report, the estimate is replaced with the actual result.

Before 2018 the pattern was predictable. Earnings estimates started off too high and were lowered heading into earnings season. Once earnings season started (vertical line) and actual results beat estimates, growth rates bounced higher.

This pattern broke in 2018 (rightmost red, orange, and blue lines) as earnings rose into the end of the quarter and then bounced higher. This was largely due to the corporate tax cuts.

The estimates for Q4 2018 have returned to this pattern of falling prior to results being released. We still expect to see the typical bounce as earnings season gets underway, leading to a final growth rate above the current estimates of 12.55%.



It would be difficult to categorize a 12%+ growth rate as anything but positive. However, as the next chart shows, earnings estimates are expected to be much lower in 2019. Q1 estimates (red) are under 4% while Q2 estimates (orange) are under 5%. Full-year 2019 earnings estimates (blue) are under 8%. While these numbers are lower across the board, they still have plenty of time to head even lower.

Analysts will be watching these 2019 figures closely. While the Q4 2018 numbers should prove positive, any guidance offered for 2019 will affect the chart below immensely.



The next chart shows full-year 2019 earnings estimates in various iterations. Note that estimates peaked in late September and have been falling with the stock market. So, this stock market decline is occurring with an environment of decelerating earnings.


Posted in Featured, Newsclips, Samples

Economic Data and Monetary Policy Rule the Roost, Not Trade


Do not become overly wrapped up in short-term reactions produced by trade policy headlines. Slowing global economic data changes and heightened monetary policy uncertainty continue to rule the roost. 


The chart below shows the connection between BofA’s Global Risk (left axis) and Citigroup Economic Data Change (right axis) indices. BofA’s Global Risk index, which is reversed in the chart below, measures fund flows and volatility differences between risk and safe assets. The Citigroup Economic Data Change index measures incoming releases from across the globe relative to their one-year averages.

Global growth continues to slow with nearly 4 out of 5 economies producing below-average economic data changes. Not surprisingly, volatility has risen across risk assets and fund flows have become mostly risk-off.



The next chart shows the rolling six-month changes in Google search trends from across the globe for each policy concern. Waves of policy uncertainty as measured by the composite of these search trends tends to lead shifts to higher market volatility.

Policy search trends are finally beginning to crest led by trade (light blue). However monetary (black) and spending (orange) policies remain elevated given concerns over their direction in 2019.



We decompose six-month changes in BofA’s Global Risk index (top panel) using these policy search trends along with global economic data changes. The decomposition in the bottom panel shows just how dominant monetary policy uncertainty has become in addition to economic data changes. 

Trade policy has offered only a modest impact on overall global volatility and fund flows. We believe markets may put too much weight into trade breakdowns or breakthroughs, extrapolating ultra short-term reactions like this morning to a longer-term outlook. 

Global economic data changes continue to deteriorate and monetary policy uncertainty remains heightened as a result. A slew of Fed officials speaking today and this week will be very closely watched for any confirming dovish biases of Powell and Clarida’s comments from last week. Check back for our natural language processing of these speeches for any substantial clues.


Posted in Featured, Newsclips, Samples

Fed and Markets as Data Dependent as Ever

  • Bloomberg – Tim Duy: The Economy’s Too Robust for the Fed to Bow to Markets
    Growth would need to slow to around 1.8 percent before the central bank considers slowing the pace of interest-rate hikes.

    The nasty sell-off in equity markets has raised doubts about the Federal Reserve’s willingness to follow through with its plan to boost interest rates again in December. It shouldn’t. The odds that market participants place on a rate hike had dropped to around 65 percent from a high of more than 80 percent a few weeks ago. The decline comes even as central bankers give little reason to doubt that another rate hike is coming. New York Federal Reserve President John Williams, a permanent voting member on the Federal Open Markets Committee, reiterated this week his expectation that the Fed would “be likely raising interest rates somewhat but it’s really in the context of a very strong economy.”

  • The Wall Street Journal – Greg Ip: Amidst Roaring Economy, Troubled Markets Sound Alarms

    By most measures the U.S. economy is in excellent health. Yet stocks are sinking, yields on corporate bonds are rising and commodity prices are tumbling—all typical precursors of a slowdown or recession. The dichotomy is rooted in two unusual features of the world today. First, while the U.S. is surfing a wave of fiscal stimulus, growth in the rest of the world is slowing. That’s undercutting prospects for companies that do business abroad. Second, the Federal Reserve is steadily withdrawing the unprecedented monetary stimulus that buoyed the economy and almost every asset class over the last decade. The question is whether markets, in adjusting to these new realities, will overreact to the point that they endanger the expansion, on track to become the longest ever next summer. The answer for now appears to be no, but the trends are troubling.

  • The Wall Street Journal – Real Time Economics: What Are Markets Telling Us About the Economy?
    Stan Druckenmiller is a legend among hedge fund managers, as lieutenant to George Soros and head of his own firm. The market has him worried. “The defensive stocks have been going straight up since May. All the economically sensitive stocks have been going down since May. They’re predicting we’re in a very, very late cycle,” he said Tuesday. The signs are the “same stuff I screamed about in 2007.” He’s not saying the Fed shouldn’t tighten, ever; but it should wait, and “see what happens.” The time to tighten was a few years ago; now, it’s more dangerous: “The leveraged loan market is two times what it was in 2007.” He pins the blame on the Fed’s quantitative easing which “encouraged more malinvestment…than at any time I can ever remember. We’re in the most economically disruptive period since the 1880s and there’s been no bankruptcies. As quantitative easing turns to quantitative tightening, all these zombies are going to be exposed.”
  • Summary

    Seasonality suggests U.S. economic data and rate hike timing rise into year-end. However, a slowing global economy puts heavy pressure on the U.S. as a lone performer. Volatility should remain high around key U.S. data releases given both the Federal Reserve and markets have become as data dependent as ever.


    Rate hike timing for the Federal Reserve and Bank of Canada have modestly declined in recent weeks to approximately 2.6 hikes over the next 12 months. Declining inflation expectations, tumbling energy prices, and slowing global economic growth are beginning to weigh on investors.



    The chart below shows the Citigroup Economic Data Change indices for each region, which measure incoming data releases as they relate to one-year averages. The Asia Pacific, emerging markets, Eurozone, and United Kingdom have all fallen below zero, indicating below-average growth.

    Notably, Latin America’s pace of economic improvement is tempering and nearing a break to below-average growth. This would leave the United States the lone survivor.



    The next chart shows the average year-to-date path of Citigroup Economic Data Change indices by region since 2004. The United States’ economic data has tended to rebound into year-end according to seasonals, while the picture is quite muddled for other regions.



    The seasonality of Federal Reserve communications (speeches, statements, minutes, and testimonies) has become moderately less hawkish into year-end. The Federal Reserve’s hawkish-to-dovish bias leads the chart above of seasonality found within the U.S. realized economic data changes. 



    We are exiting the most seasonally dovish period according to market-based rate hike timing. Markets have historically become increasingly hawkish into year-end, possibly encouraged by a belly full of turkey and sweet potatoes.

    The Federal Reserve and markets are as data dependent as ever, heavily focused on U.S. releases given slowing data outside its borders. All in all, volatility should remain heightened around key releases as the opportunity to dial down the hawkish rhetoric will be there.


Posted in Newsclips, Samples

Falling Oil Prices to Test the Bank of Canada


Potential weakness in the housing market and the drop in oil prices will test the Bank of Canada’s hawkish intentions. 


Canadian existing home sales are due later this week and will be viewed as an early test for a surprisingly hawkish stance from the Bank of Canada. Stephen Poloz and his colleagues voiced their intent to continue raising interest rates toward a neutral rate between 2.5% and 3.5%. The statement marked a short-term peak in the hawkishness of words in Bank of Canada speeches. It may mark a larger inflection point in their policy stance.

The charts show a rolling sum of the mentions of hawkish (left) and dovish (center) words in officials’ remarks. References to economic strength and tighter policy have been trending higher while references to economic weakness and dovish remarks have trended lower. Stephen Poloz’s most recent speech on November 5 sent the spread between hawkish and dovish mentions (right) sharply lower from its highest point looking back to 2014. 



Consumer borrowing was one of several risk factors we highlighted at the end of October as Canadian economic growth slipped further below its one-year average. Existing home sales will be one read on the borrowing interests of consumers. In the meantime, Google search trends in Canada point to weakness across a range of real estate related categories. Home financing searches have resumed their decline. Interest in home improvement and appliances is falling at its fastest pace since at least 2015. This echoes weakness in U.S. home improvement searches and threatens home improvement retailers after a strong summer



But weakness in housing has been on the Bank of Canada’s radar. The charts below show the rolling sum of mentions for other keywords. References to financial stability, uncertainty and housing have all been trending higher this year. One key risk has been conspicuously absent from Bank of Canada speeches, references to energy and oil have been quite sparse. 



We expect concern over the sharp drop in oil prices to become a much hotter topic. This would not be the first time a sharp drop in oil prices affect the Bank of Canada’s policy stance. The last chart shows the price of WTI crude oil (dark blue) and the Bank of Canada’s overnight policy rate (orange). 

The response to the financial crisis was well underway before oil prices peaked in 2008. But drops in oil prices preceded the start of easing cycles in November 2000 and July 2014. They preceded pauses or the end of tightening cycles in March 2003, October 2004 and August 2006. 

Supply bottlenecks in Western Canada are compounding the problem. The spread between WTI crude oil and Western Canada Select has widened to nearly $40. The key oil sands benchmark is now trading near $16 per barrel, the lowest since February 2016. Potential weakness in housing aside, the unexpected blow to the economy from falling oil prices may be sufficient for the Bank of Canada to moderate its policy stance. 


Posted in Featured, Newsclips, Samples

Slowing Global Growth and Rising Policy Uncertainty


Global synchronized slowing is taking hold, but the U.S. and Latin America remain out-performers for now. Safe assets and the U.S. dollar have performed quite well during similar instances in the past.


The Citigroup Economic Data Change indices shown below for each region measure incoming data releases relative to one-year averages. Below zero values indicate below-average growth.

The Eurozone, APAC, and emerging markets are leading a period of global synchronized slowing. The U.S. and Latin America remain standouts with above average growth, but have also been moderating throughout 2018.



More concerning is the percentage of economies (35 in total) producing above-average growth has tumbled to a paltry 24%. In other words, only 24% of economies have Citigroup Economic Data Change Indices still above zero. 



Slowing economic growth is occurring just as policy uncertainty boils over. The chart below shows Google search trends from across the globe for public, spending, trade, and monetary policy uncertainty. Policy concerns are rivaling those seen in early 2010. Higher volatility and risk-off flows are expected to dominate as long as these uncertainties remain high.



The next chart shows the reaction by U.S. 10-year notes and U.S. dollar after the percentage of economies producing above-average economic growth falls below 25%.

U.S. 10-year notes tend to perform quite well. But, remember risk-off flows have been heavily concentrated into shorter duration safe assets this time around. Heavy positioning for steepening (ETFs and futures) may finally allow longer-end U.S. Treasuries to again rally. We detail the impact of risk-off flows and positioning in a post today and our Weekly Roundup.

The U.S. dollar has been a steady performer during global angst. 



The last chart shows the reactions by the MSCI World ex-US and Emerging Markets equity indices. The outlook is much less clear, but both produce sideways-to-negative returns over the ensuing month.

We left out the U.S. (e.g. S&P 500) since its data changes continue to outperform much of the globe. U.S. equities will sour if U.S. economic data converges with the more global economy.


Posted in Newsclips, Samples

A Different Kind of Risk-Off Has Treasuries Underperforming


The longest risk-off cycle since December 2016 marches on, now at 37 trading days. Treasuries have underperformed versus typical risk-off cycles. 


U.S. Treasuries are underperforming as the current risk-off cycle stretches to 37 trading days. We use the BofA Merrill Lynch global flows index, a measure of fund flows and volumes between safe and risk assets, to identify risk-on and -off cycles. The present period of risk-off flows began September 21 and is the longest risk-off cycle since December 2016. 



U.S. Treasuries have underperformed versus the typical move. The next chart shows changes in the U.S. 10yr yield during risk-off cycles since 2000. The current cycle is highlighted in orange, the median change in the thicker gray line. 

This time has been different, the 10yr yield is +12 bps versus a median change of -22 bps. Only two other cycles that lasted 37 trading days saw yields rise as much. One, highlighted in blue, saw yields soar after the 2016 presidential election. The other was a period from March to June of 2004. The next month of persistent risk-off cycles has been kind to Treasuries. The median change falls another 20 bps by day 60. 

Unusually strong preferences for short-term safe assets have been the differentiating feature of risk-off in 2018. We have more discussion of market moves after extreme risk-off flows, and our expectations for Treasuries and the yield curve, in our Weekly Roundup


Posted in Newsclips, Samples

Consumer Interest in Shopping Dropping Fast


Consumers are finding other things to do with the time they used to spend shopping. We see headwinds for retailers, especially in the home improvement space. 


It’s nearing crunch time for retailers with the crucial holiday season approaching fast. Economists are expecting a rebound in retail sales in October after a disappointing 0.1% rise in September. They may be disappointed. We’ve discussed global search trends pointing to slower consumer spending.

The search outlook for the U.S. specifically has even more grim news for retailers. The latest changes in U.S. search interest show consumers continue to shy away from shopping in favor of other experiences. Interest in shopping is falling at its fastest pace in three years. 



Low consumer traffic continues to strangle both weak retailers and the malls and shopping centers housing them. The impacts are clear in retail-related REIT performance. Freestanding retail continues to deliver with a 2018 total return of 16.8%. Regional malls are underperforming freestanding, but still riding the rebound in department stores. Shopping center REITs have failed to rally and are -6% on the year. 



We see particularly strong headwinds for home improvement retailers. Home Depot and Lowes were riding high as the softening housing market drove a burst of home improvement interest earlier this year. That tide has turned.

The chart below shows six-month changes in seasonally adjusted search trends. Although we’re seeing improving interest in home financing searches, search interest in home improvement is falling at an accelerating pace. 



That means slim hopes for home improvement retail equities. The last chart shows average year-to-date total returns for industry groups in the S&P 500. Up nearly 20% on the year as recently as August, home improvement stocks are now -1.1% for 2018 on average.