With investors on razor’s edge, markets around the world turned sharply negative as initial results from the British referendum on European Union membership showed a nail-bitingly close vote. …read more
Source: Markets around the world start freaking out
By Tyler Durden
The presence of a negative relationship between uncertainty and economic activity seems intuitive. Presumably, as Goldman explains, more uncertainty reduces the incentive for firms and households to engage in economic transactions that are costly to reverse (e.g., investments, hiring, purchases of durable goods). To the extent that this is the case, one would expect the resulting dampening effect on aggregate demand and economic activity to ebb as the fog of uncertainty clears.
But the consequences of an uncertainty shock may prove more malign than typically assumed.
To paraphrase former Fed Governor Jeremy C. Stein, uncertainty “gets in all the cracks”: it distorts economic decisions and behavior through numerous channels, in a manner that policymakers cannot easily restrain. Indeed, recent academic research argues that, when such dynamics become self-fulfilling and/or self-perpetuating, spikes in uncertainty (as witnessed in 2008-09) can lead to financial turmoil, as well as to a pronounced slowdown in activity.
And so, judging by the economic uncertainties of the following nations, there is one country that stands out…
The “sanctioned” and “increasingly alone” Russians see near record low levels of economic uncertainty… which may explain why their currrency, bonds, and stock market are all doing so well in recent months.
Source: Goldman Sachs
Source: Spot The Odd One Out – Political Uncertainty Edition
When less stuff is being bought, sold and shipped around the country with each passing month, how in the world can the U.S. economy be in “good shape”? Unlike official government statistics which are often based largely on projections, assumptions and numbers seemingly made up out of thin air, the Cass Freight index is based on real transactions conducted by real shipping companies. And what the Cass Freight Index is telling us about the state of the U.S. economy in 2016 lines up perfectly with all of the other statistics that are clearly indicating that we have now shifted into recession mode.
If you are not familiar with the Cass Freight Index, here is a definition of the index from the official Cass website…
Since 1995, the Cass Freight Index™ has been a trusted measure of North American freight volumes and expenditures. Our monthly Cass Freight Index Report provides valuable insight into freight trends as they relate to other economic and supply chain indicators and the overall economy.
Data within the Index includes all domestic freight modes and is derived from $25 billion in freight transactions processed by Cass annually on behalf of its client base of hundreds of large shippers. These companies represent a broad sampling of industries including consumer packaged goods, food, automotive, chemical, OEM, retail and heavy equipment. Annual freight volume per organization ranges from $1 million to over $1 billion. The diversity of shippers and aggregate volume provide a statistically valid representation of North American shipping activity.
When they say “all domestic freight modes”, that includes air, rail, truck, etc. As you are about to see, the total amount of stuff that is being bought, sold and shipped around the country by all these various methods has now been declining for 15 months in a row.
If it was just one or two months you could say that it was just an anomaly, but how in the world can anyone explain away 15 consecutive months?
Not only that, but the brand new number that just came out for May 2016 is the lowest number that we have seen for the month of May in 6 years.
Of course the number for April was the lowest number that we have seen for that month in 6 years too, and the number for March was also the lowest number that we have seen for that month in 6 years.
Are you starting to get the picture?
Below is some analysis of these numbers and a chart from Wolf Richter…
The Index is not seasonally or otherwise adjusted, so it shows strong seasonal patterns. In the chart below, the red line with black markers is for 2016. The colorful spaghetti above that line represents the years 2011 through 2015. The only month this year that was not the worst month since 2010 was February; only February 2011 was worse. That’s how bad it has gotten in the Freight sector:
“Truck tonnage continues to slide for both linehaul and spot markets,” according to the report. And railroads are also singing the …read more
Source: The Amount Of Stuff Being Bought, Sold And Shipped Around The U.S. Hits The Lowest Level In 6 Years
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Today is the Brexit vote.
When this ends, the world can move on to the other numerous Black Swans waiting to hit.
Firstly, the consensus is that the US is the early stages of a recovery. Consensus believes GDP growth will be 2.5%+ this year.
This is happening when the labor market conditions index, industrial production, C&I loan delinquencies, and sales to inventory ratios are all screaming “recession.”
Secondly, stocks are pricing in economic perfection. Earnings have fallen to 2012 levels. Stocks are 30% above that level.
Thirdly, China is set for another massive round of devaluation. The very issue that crashed markets in August 2015 has not gone away.
There are countless other black swans lurking in the financial system (corporate debt bubble, EU bank crisis, Greece debt forgiveness, $9 US Dollar carry trade, etc.). NONE of them are positive.
More and more, the markets feel like they did in late 2007/ early 2008: when stocks held up based on hype and hope that Central Banks could put off another Crash.
On that note, we are already preparing our clients for this with a 21-page investment report titled the Stock Market Crash Survival Guide.
In it, we outline the coming crash will unfold…which investments w
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Best Regards
Phoenix Capital Research
Source: The Markets Are in "Late 2007/ Early 2008" All Over Again
By Tyler Durden
'Hope & Change' and devolved into Nope & Deranged… Since the start of President Obama's second term, Goldman Sachs note that the Partisan Conflict Index has averaged 50% higher than its 30 year average. So who is to blame? President Obama's divisiveness? Or The Federal Reserve's extremely accommodative monetary polict removing any need for actual decision-making?
Get back to work Mr. Chair(wo)man!!
As we previoously noted, while President Obama's progressive agenda has not endeered a “reaching across the aisle” moment, we place the blame squarely at the foot of The Federal Reserve and one look at the chart below shows the surge in “conflict” since The Fed started printing money, slashing rates, and enabling largesse…
We have said for many years that accommodative monetary policy completely removes the burden from politicians that would require them to actually make difficult decisions around fiscal reforms, and now Standard & Poor's is saying the same thing.
Speaking in London on Tuesday, S&P's top EMEA analyst Moritz Kraemer said that there was a strong relationship between government bond yields, an indicator of how much countries must pay to borrow, and their willingness to undertake structural reforms. “All of these (reform) efforts from the governments have really fallen by the wayside under the palliative that the ECB is providing” Kramer told the Euromoney Global Borrowers & Bond Investors Forum.
As the ECB policymakers have been urging governments to take advantage of the easy financing conditions to implement reforms, Kramer points out what everyone other than central planners have already figured out, which is that as long as the central banks monetize the debt, why face political difficulties and enact reforms – “The moment the pressure goes away, the action goes away as well” Kramer said.
Kramer also pointed out that in a normal interest rate environment, government deficits across the bloc would be 1.5 to 2 percentage points of GDP higher, which would force the issue of reform up the agenda for many nations.
Simply put, as we have tried to convey repeatedly over the years. As long as the central banks will continue to monetize the government's debt, and continue to push trillions of sovereign debt into negative yields, no pressure will ever be felt by any government to change its ways.
Source: America’s Seen 50% Surge In Partisan Conflict Since Obama’s Second Term Started
By Tyler Durden
In a twist worthy of a soap opera, just minutes after Sky and the major newswires reported that Nigel Farage said “looks like Remain will edge it”, a Nigel Farage spokesman told Bloomberg that “he never conceded. He looked at the prevailing weather and was honest. We’re not saying it’s over. We haven’t had a single bloody vote counted”, even as just moments later, wires also reported that Farage told his PA that “the UK has voted to remain in the EU.”
In any event, and Farage is quite right about this – without a single vote counted – the suspense over Brexit appears over, and reopening S&P futs were spiked 13 points higher, hitting 2,119 and less than 1% from all time highs.
Cable likewise jumped and rose above 1.15 moments ago…
.. although it has since trimmed some of its gains and was back under 1.15 at last check. As Bloomberg adds, leveraged accounts that bought GBP just after U.K. polls closed have trimmed positions after a post-voting survey sent the currency higher, according to an Asia-based FX trader.
Source: Farage Denies Conceding: “We Haven’t Had A Single Bloody Vote Counted”; S&P Futures Surge
By Tyler Durden
Submitted by Lance Roberts via RealInvestmentAdvice.com,
My friend, Anora Mahmudova, recently wrote for MarketWatch about Mohamed El-Erian’s discussion on the importance of “cash” for investors.
“At a breakfast meeting with reporters on Monday, the former Pacific Investment Management Company chief executive said central bank asset purchases have successfully decoupled asset prices from fundamentals and distorted traditional correlations.
‘Investors cannot rely on correlations as a risk mitigator, making cash a very valuable thing to have.
It can give your portfolio resilience during stressful times, optionality—whether you use it for tactical or strategic purposes and flexibility to deploy it when necessary.’
Central banks are finding it harder and harder to repress volatility in financial markets, and any jolts, such as currency devaluation in China or political events, such as Brexit, result in wild swings in the markets.’
El-Erian also said years of unconventional monetary policy, including asset purchases, and a lack of fiscal stimulus are making developed economies less stable.”
Whenever El-Erian makes comments about the value of holding cash, there is generally a good bit of media lash-back about relating to the impacts of inflation and the inability to successfully navigate market cycles.
El-Erian’s comments are a valuation call, driven to excess by monetary interventions, on the financial markets suggesting that having capital invested will likely yield substantially lower or negative returns in the future. This is an extremely important concept in understanding the “real value of cash.”
The chart below shows the inflation-adjusted return of $100 invested in the S&P 500 (using data provided by Dr. Robert Shiller). The chart also shows Dr. Shiller’s CAPE ratio. However, I have capped the CAPE ratio at 23x earnings which has historically been the peak of secular bull markets in the past. Lastly, I calculated a simple cash/stock switching model which buys stocks at a CAPE ratio of 6x or less and moves to cash at a ratio of 23x.
I have adjusted the value of holding cash for the annual inflation rate which is why during the sharp rise in inflation in the 1970’s there is a downward slope in the value of cash. However, while the value of cash is adjusted for purchasing power in terms of acquiring goods or services in the future, the impact of inflation on cash as an asset with respect to reinvestment may be different since asset prices are negatively impacted by spiking inflation. In such an event, cash gains purchasing power parity in the future if assets prices fall more than inflation rises.
While no individual could effectively manage money this way, the importance of “cash” as an asset class is revealed. While the cash did lose relative purchasing power, due to inflation, the benefits of having capital to invest at low valuations produced substantial outperformance over waiting for previously destroyed investment capital to recover.
While we can debate over methodologies, allocations, etc., the point here is that “time frames” are crucial in the discussion of cash as an asset class. If an individual …read more
Source: The Fed’s 3rd Mandate & The Value Of Cash
By Tyler Durden
Moments ago we presented the contrarian thesis from Greg Peters, who hinted that the equity response may be one of “selling the news” in case of Remain, and one where US stocks actually surge if Leave wins, as a result of an influx of global funds seeking US “safe haven” assets. Next, we go back to a more conventional model of how assets would react, and present “a roadmap for the ‘Day After’” from UBS, which seeks to answer the question “at what level would we buy or sell each key asset class in either a Remain or a Leave scenario?” It then show ranges of the potential near-term market reactions.
Any moves outside these ranges, UBS says, could signal that the market is under-pricing or overpricing the relevant macro risks. The Swiss bank caveats by warning that it can not predict exactly how the markets will trade immediately following the 23 June vote, as there could be liquidity driven dislocations or surprising reversals of price spikes.
Here are the summary cases:
A “Leave” scenario
Following the risk-rally of the last few days, we believe there is significant room for downside in the event of a “Leave” vote. We estimate percentage moves in the midteens for UK and EU equities but materially smaller moves for the S&P 500 and EM equities. While GBP may come under significant pressure, the EUR may be more stable. Risk currencies (CHF & JPY) would benefit, but policy responses could limit the degree of strength quickly. We think Euro-area core yields and UK yields would decline substantially (roughly 10-40 bps), and potentially even more so in the US. Moves in the range of 50bps look possible in Euro-area periphery yields and corporate credit spreads.
A “Remain” scenario
Outside European and UK stocks (where a significant relief rally is likely to manifest) we would expect much less pronounced moves across assets. In equities, we think the S&P 500 could reach new highs, albeit near-term no more than 1-3% higher than current levels. Fundamental pressures limit the potential upside in global bond yields. Yields could rise more for core Euro-area bonds, which look the most expensive. We also see limited upside across EM assets (except perhaps local currency bonds). Interestingly, we believe the potential sell-off in Gold in a “Remain” scenario would be small relative to the upside potential in the opposite case.
And the details:
Market levels for the day after
The UK referendum was always likely to be a source of uncertainty with potentially significant spill-overs across markets. We have argued that the UK’s macro imbalances would imply downside risk for the pound, and for UK domestic demand-driven UK equities and bonds. We have also argued that the macro read-across to the EU carries broader implications across European equities and bonds.
Over the past few weeks, the market’s focus on the outcome of the vote has increased. By the end of last week, the risk premium attached to the event was already quite sizeable. …read more
Source: UBS’ Trading Roadmap For The "Day After" Brexit
By Tyler Durden
Submitted by Martin Armstrong via ArmstrongEconomics.com,
The lies being told by Cameron that Britain will suffer are rather astonishing.
It is the EU that has the most to lose on so many fronts it is rather alarming how the press do not tell the truth.
Forget the imports-exports that are just under half of the the trade between the two, which would never stop nor would it be in the EU best interest to cut Britain off. The real key is diplomacy.
Whenever Europe has EVER accomplished something useful, it has always been the UK’ in the driver’s seat.
Any thought that BREXIT would end relations is rather absurd. The EU has nothing without Britain.
The only other country that spends more on its military than the UK is the United States. Germany could not defend Europe nor could France. Without the UK, Europe would have fell to Hitler.
A post-BREXIT that tried to stand on pride in the EU would quickly find itself no longer a powerful player on the world political stage. Sorry, but the EU is nothing without Britain.
Source: Martin Armstrong Rages "The EU Is Nothing Without Britain!"
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