Delusional
Doug Nolan
February 8 – Bloomberg (Brian Chappatta): “Bond traders are dusting off their tried and true post-crisis playbook after the Federal Reserve’s pivot last month. What they don’t realize is that the game has most likely changed. In an unabashed reach for yield, investors suddenly can’t get enough of the riskiest debt, with the Bloomberg Barclays U.S. Corporate High Yield Bond Index posting a staggering 5.25% total return in the first five weeks of 2019, led by those securities rated in the CCC tier. In the largest CCC borrowing since September, Clear Channel Outdoor Holdings Inc. received orders this week of more than $5 billion for a $2.2 billion deal, allowing it to price its debt to yield 9.25%, compared with whisper talk of about 10%.”
A Friday headline from a separate Bloomberg article: “Corporate Bonds on Fire as Dovish Fed Soothes Investors,” with the opening sentence: “Fear is turning to exuberance in credit markets.” According to Lipper, corporate investment-grade funds enjoyed inflows of $2.668 billion last week, with high-yield funds receiving $3.859 billion. Bloomberg headline: “High-Yield Bond Funds See Biggest Inflow Since July 2016.” This follows the highest high-yield inflows ($3.28bn) since December 2016 from two weeks ago.
There’s support for the argument that financial conditions have loosened significantly over recent weeks. Prices of corporate bond default protection have declined. After trading as high as 95 bps on December 24th, by Tuesday an index (Markit) of investment-grade credit default swap (CDS) prices had dropped all the way back to 64 (near October levels). Risk premiums have narrowed, especially for high-risk junk bonds. U.S. high-yield spreads (Bloomberg Barclays) traded as wide as 537 bps on (tumultuous) January 3rd. By this Wednesday they were back down to 400 bps (still significantly above the 300bps from October 3rd).
Bank bond CDS prices have retreated. After spiking to 129 bps on January 3rd, Goldman Sachs CDS was back down to 82 bps on Tuesday (closed the week at 89). For perspective, GS CDS traded at 55 on the final day of July and 59 bps on October 3rd. After trading to 218 bps on January 3rd, Deutsche Bank CDS was back down to 167 bps by the end of January (ended Friday at 189bps)
February 8 – Reuter (Marc Jones): “Investors pumped record high volumes of cash into emerging markets shares and bonds in the past week, Bank of America Merrill Lynch (BAML) said on Friday amid expectations U.S. monetary policy could lead to a weaker U.S. dollar… Investors have piled into emerging market equities and bonds in recent months amid expectations that the U.S. Federal Reserve will not raise interest rates as quickly as previously expected or even no longer tighten its policy.”
February 7 – Reuter (Marc Jones): “A ‘wall of money’ is set to flood into emerging markets assets now the U.S. Federal Reserve has eased the risk of a sharp rise in global borrowing costs, the Institute of International Finance (IIF) said… The IIF, which closely tracks financing flows, said its high frequency indicators were picking up a “sharp spike” of inflows following last week’s confirmation of a change of tack from the U.S. central bank. ‘Recent events look likely to restart the ‘Wall of Money’ to Emerging Markets,’ IIF economists said in a report.”
Institute of International Finance estimates put January ETF inflows on a quarterly pace of about $50 billion, ‘already equal to strong EM inflows in 2017 and likely to go higher.’”
The MSCI Emerging Market equities index has gained 7.3% y-t-d. So far in 2019, dollar-denominated bond yields are down 828 bps in Venezuela, 36 bps in Indonesia, 34 bps in Ukraine, 33 bps in Saudi Arabia, 31 bps in Russia, 30 bps in Chile, 30 bps in Colombia, and 16 bps in Turkey. Local currency yields have sunk 91 bps in Lebanon, 77 bps in Philippines, 35 bps in Hungary, 35 bps in Mexico and 27 bps in Russia.
With “risk on” back on track, why then would “safe haven” bonds be attracting such keen interest? German 10-year bund yields sank eight bps this week to nine bps (0.09%), the low going back to October 2016. Two-year German yields were little changed at negative 0.58%. Ten-year Treasury yields declined five bps this week to 2.64%, only nine bps above the panic low yields from January 3rd. Japanese 10-year yields declined another basis point this week to negative three bps (negative 0.03%), only about a basis point above January 3rd lows. Swiss 10-year yields declined six bps this week to negative 0.33% - the low since October 2016.
So, who’s got this right – risk assets or the safe havens? Why can’t they both be “right” – or wrong? There is much discussion of a confused marketplace: extraordinary cross-currents leaving traders confounded. In search of an explanation, I’ll point to the consequences of Monetary Disorder.
It has now been a full decade of near zero interest rates globally. Trillions (estimates of around $16 TN) of new central bank “money” were injected into global securities markets. What’s more, global central banks have repeatedly intervened to buttress global markets - from 2008/09 crisis measures; to 2012’s “whatever it takes”; to 2016’s “whatever it takes to support a faltering Chinese Bubble”; to last month’s Powell U-turn. The combination of a decade of artificially low rates, an unfathomable amount of new market liquidity and an unprecedented degree of central bank market support have fostered momentous market structural maladjustment. We’re living with the consequences.
It is certainly not easy to craft an explanation for today’s aberrant market behavior. I would start by positing that a massive pool of speculative finance has accumulated over this protracted cycle. There is at the same time liquidity excess, excessive leverage and the proliferation of derivatives strategies (speculation and hedging). In short, there is trend-following and performance chasing finance like never before – keenly fixated on global monetary policies. Illiquidity lies in wait.
When this mercurial finance is flowing readily into inflating securities markets, the resulting conspicuous speculative excess pressures central bankers to move forward with “normalization” (Powell October 3rd). At the same time, this edifice of speculative finance is innately fragile.
Speculative markets reversing to the downside rather quickly unleash “Risk Off” dynamics. These days, de-risking/deleveraging abruptly alters a market’s liquidity profile. Not only is there the liquidation of holdings and the collapse of leverage, the resulting downward market pressure triggers risk aversion more generally for this imposing global pool of speculative finance. And as the ETF complex suffers outflows, the leveraged speculating community and derivatives industry move to shed risk ahead of a retail investor panic. And when a meaningful component of the marketplace seeks to hedge market risk, it’s difficult to envision who takes the other side of such a trade.
Meanwhile, major shifts in dynamic-hedging programs unfold throughout the derivative universe. When markets are running on the upside, derivative-related buying (i.e. hedging in-the-money call options written/sold) exacerbates already powerful trend-following flows. But when a speculative upside (i.e. “blow-off” or “melt-up”) market advance eventually reverses course, derivative-related buying swiftly transforms into destabilizing selling. For example, a quant model used for (dynamic) “delta hedging” exposures from derivatives previously written (i.e. call options) would halt aggressive buy programs - immediately becoming a seller into market weakness.
Meanwhile, sinking markets will see keen interest in buying downside derivative protection (i.e. puts) – both for speculation and hedging. The sellers of these derivatives will then dynamically hedge these instruments, essentially requiring selling into declining markets. Using out-of-the-money puts options as an example, the amount of selling required to protect the seller/writer of these instruments expands exponentially as market prices approach option strike prices. The point is, derivatives tend to play a significant role in promoting destabilizing upside market moves, dislocations that are then highly susceptible to reversals and destabilizing market breakdowns.
Why have risk markets rallied so strongly to begin 2019? Because the Powell U-Turn incited a reversal of short positions and the unwind of bearish hedges and speculations. Derivative-related (“dynamic”) selling – that had been rapidly gaining momentum – reversed course and became aggressive buyers. Market momentum then incited buying from the enormous trend-following/performance chasing Crowd. Who can afford to miss a rally? Certainly not the global leveraged speculating community, with many at risk of losing assets, incomes and businesses.
Why have safe haven assets performed so well in the face of surging equities and corporate debt? Because current Market Structure is inherently unstable and increasingly prone to an accident. Today’s buyers of Treasuries, bunds and JGBs are less concerned with January/Q1 equities and junk bond returns, keenly focused instead on acute global market instabilities and the inevitability of a systemic market liquidity event. I would further argue that this dysfunctional market dynamic recalls the destabilizing rally in Treasuries and agency securities in 2007 and well into 2008. This market anomaly stoked end-of-cycle speculative Bubble excess and exacerbated systemic fragilities.
When risk markets advance, news and analysis invariably focus on the positives – an expanding U.S. economy, prospects for a trade deal with China, buoyant profits, a backdrop of ongoing exciting technological advancements, perpetual low interest rates, endless loose financial conditions, etc. With markets advancing, mounting risks are easily disregarded. “Deficits don’t matter.” Debt concerns are archaic. Market Structure is a nothing burger. Best to ignore escalating social, political and geopolitical risks. The unfolding clash between the U.S. and the rising China superpower – it’s nothing. An increasingly fragmented and combative world – ditto.
As we saw in December, sinking markets direct attention to an expanding list of troubling developments. Years of inflating securities prices seemed to demonstrate that so many of the old worries were unjustified – none really mattered. The problem is that many do matter – and some tremendously. The current extraordinary backdrop has all the makings for a decisive bearish turn in market sentiment that would create a problematic feedback loop within the real economy – domestically and globally.
I’ll highlight an issue that has come to be easily dismissed - yet matters tremendously. Zero rates and QE were a policy experiment. The consensus view holds that the great success of this monetary exercise ensures that QE is now a permanent fixture in the central banking “tool kit”. The original premise of this experiment rested on the supposition that a temporary boost of liquidity would stimulate higher risk market prices and risk-taking with resulting wealth effects that would loosen financial conditions while stimulating investment, spending and income growth throughout the real economy. The expectation was that a shot of stimulus would return the real economy back to its long-term trajectory.
History teaches us that monetary inflations are rarely temporary. Travel down that road and it’s nearly impossible to get off. Dr. Bernanke, the Federal Reserve and global central bankers never contemplated what a decade of unending monetary stimulus would do to Market and Financial Structure. Most – in policy circles and the marketplace - believe beyond a doubt that monetary stimulus was hugely successful in resuscitating economic growth dynamics.
But it’s on the financial side where consequences and repercussions have been fatefully neglected. It’s in the financial world where a decade of QE, zero rates and central bank market backstops imparted momentous structural change: the colossal ETF complex, the passive “investing” craze, quantitative strategies, algorithmic and high-frequency trading, a proliferation of derivative trading, leveraging and trend-following speculation on a global basis – to list only the most obvious. Along the way, aggressive monetary stimulus had much greater inflationary effects on risk markets than upon real economies. This ensured a continuation of aggressive stimulus - and only deeper market Bubble maladjustment.
For a month now, markets have celebrated the view that Chairman Powell (and global central bankers more generally) will not be attempting to “normalize” monetary policy. No Fed-induced tightening of financial conditions, along with no fretting the new Chairman’s commitment to the “Fed put.” Lost in all of this is recognition that a decade of experimental monetary stimulus has failed. Global finance is much more fragile today than prior to the 2008 crisis – the global economy more imbalanced and vulnerable.
Never has it been so easy to speculate – equities and corporate Credit alike. Never has corporate Credit availability – and financial conditions more generally – been governed by the interplay between the ETF complex, derivatives strategies and a distressed global leveraged speculating community. The Powell U-Turn unleashed another round of speculative excess. Right in the face of faltering global growth, I would argue this bout of speculation is especially precarious. And when the current “risk on” gives way to reality, maladjusted Market Structure will ensure liquidity issues on a scale beyond December.
“This is deflation, the amazing lurch toward recession despite QE...,” read the opening sentence of a friendly email I received last week. Yet I remember all the talk of deflation after the 1987 stock market crash. It became even louder in 1990 – then again in ‘97/’98. Deflation was the big worry with the bursting of the “tech” Bubble and then with corporate debt problems in 2002. Global central bankers have been fighting deflation now for a decade since “the worst crisis since the Great Depression.”
For a long time now, I’ve argued that Bubbles are the overarching risk. The “scourge of deflation” was not the ghastly plight to vanquish with interminable “whatever it takes.” Rather, deflation is a fateful consequence of bursting Bubbles – Bubbles inflated in the process of central bankers fighting so-called “deflationary forces.” Now, after thirty years of unending global Credit growth, activist central banking and egregious financial speculation, Bubble risk has never been so great. “The amazing lurch toward recession” and financial dislocation specifically because of a failed experiment in QE and inflationist monetary management.
But I’ll conclude with Market Structure. Global markets have turned even more synchronized during this upside convulsion. This increases already highly elevated risk come the next downturn. And I wouldn’t expect much in the way of diversification benefits from Treasuries, bunds and JGBs. It’s worth mentioning that Italian 10-year yields were up 31 bps in two weeks (spreads to bunds widening 41 bps!). With Italian and European economic prospects seeming to darken by the week, European corporate debt came under some pressure this week. Germany’s DAX equities index fell 2.4%, and Japan’s Nikkei dropped 2.2%. And one could almost see fissures start to appear in EM currencies, equities and bonds. Eastern European currencies were notably weak, while the South African rand, Brazilian real and Argentine peso were all down about 2%.
THE CHALLENGE OF ONE WORLD, TWO SYSTEMS / THE FINANCIAL TIMES OP EDITORIAL
The challenge of one world, two systems
Unbridled strategic competition between China and the west would be a disaster
Martin Wolf
The accelerating breakdown in relations between China and the US is the most significant current event. How is this to be managed, given today’s global interdependence?
Three recent pieces of evidence reveal alarm over the rise of China to its current status as the world’s “junior superpower”, in the words of Yan Xuetong of Tsinghua University. One is the campaign against Huawei, standard bearer for Chinese technological ambitions, which must be viewed in the context of the US trade war with China and its description of the latter as a “strategic competitor”. Another is a paper from the free trade-oriented BDI, Germany’s leading industry association, which labels China a “partner and systemic competitor”. The last is the description of Xi Jinping’s China by George Soros as “the most dangerous opponent of those who believe in the concept of open society”.
This, then, is a point on which a nationalist US administration, German free-traders and a noteworthy proponent of liberal ideas agree: China is no friend. At best, it is an uncomfortable partner; at worst, it is a hostile power.
Should we conclude that a new “cold war” has begun? The answer is: yes and no. Yes, because so many westerners think of China as a strategic, economic and ideological threat. This comes not just from Donald Trump, nor only from the security establishment, nor just from the US, nor merely from the rightwing of the political spectrum: it is increasingly becoming a unifying cause. The answer is also no, however, because the relationship with China is very different from that with the Soviet Union. China is not exporting a global ideology, but behaving as a normal great power. Again, unlike the Soviet Union, China is embedded in the world economy.
The conclusion is that across-the-board hostility towards China might be far more disruptive than the cold war. If, above all, the Chinese people were to be convinced that the west’s aim is to stop them from enjoying a better life, the hostility would be bottomless and endless. Co-operation would collapse. Yet no country can today be an island.
It is not too late to avoid such a breakdown. The right path is to manage relations that will be both competitive and co-operative and so to recognise that China can be both foe and friend. In other words, we must embrace complexity. That is the path of maturity.
In so doing, we need to recognise that the US and its allies (if the former still recognises the value of the latter) possess huge strengths. China’s rise has been stupendous. But the US and its allies, in aggregate, spend vastly more on defence, have bigger economies and account for a larger share of world imports than China. Again, China’s dependence on markets in high-income countries is far greater than US dependence on China. It is likely that these advantages will last, because China is turning away from the path of reform, as Nicholas Lardy of the Peterson Institute for International Economics argues in a new book, and so its economy could slow sharply.
Moreover, despite the global rise of authoritarianism and the post-financial crisis malaise, the high-income democracies continue to possess a more attractive ideology of freedom, democracy and the rule of law than China’s communism offers. Furthermore, it is obvious that the west’s recent failures are overwhelmingly self-inflicted: they should not be blamed on others, however attractive that option might be.
Thus, the US should view its situation with far greater equanimity than can China, provided it retains its network of alliances, especially given its geographical location and economic strengths. If it did so, it could also recognise that its interdependence with China is a stabilising force, since it strengthens both sides’ interest in peaceful relationships.
Similarly, the US would recognise that making common cause with allies, in the context of the rules-governed trading system it created, would increase pressure on China to reform. Indeed, in an interview in Davos, Shinzo Abe, Japan’s prime minister, argued that the best way to deal with China is precisely in that context. To make concessions in support of a global agreement would be far easier for China than in response to bilateral US pressure. If that required reform of the World Trade Organization’s rules, that would also be fine.
Co-operation is as essential as interdependence. We cannot manage the global environment or ensure prosperity and peace without co-operation with China. Moreover, if every country were forced to choose one side or the other, there would again be deep and costly divisions among and within countries.
None of this implies that western countries need accept whatever China wants. Takeovers of strategically important businesses could be legitimately out of bounds, on both sides. Simultaneously, if evidence of strategic danger from the presence of certain companies within our economies did exist, then action against them should be taken. But the word here is “evidence”.
Finally, and to me most significantly, it is indeed vital, as Mr Soros suggests, that we protect our freedom and those of Chinese people living in our countries from China’s new “social credit” system and other forms of extraterritorial reach, so far as we can. But this would be easier to justify if the US were not so extraterritorial, too. Indeed, the belief of the US that it is entitled to impose its priorities upon the world, willy-nilly, is highly destabilising.
A new great power has emerged, one that was never part of a western-dominated system. In response, many are trying to shift the world into an era of unbridled strategic competition. History suggests this is dangerous. What is needed instead is a combination of competition and co-operation with a rising China. The alternative will be deepening hostility and rising disorder. Nobody sensible should want that. So stop, before it is too late.
5G, CHINA AND THE RACE TO DOMINATE HIGH-TECH / GEOPOLITICAL FUTURES
5G,China and the Race to Dominate High-Tech
How Beijing plans to dominate 5G technology, and how the West plans to stop it.
By Phillip Orchard
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THE NATIONAL DEBT MATH DOESN´T ADD UP / SEEKING ALPHA
The National Debt Math Doesn't Add Up
by: Doug Eberhardt
- The Budget's set by Congress always fall short.
- What supports government spending and what does the data tell us today?
- Everyone ignores the elephant in the room; interest on the national debt.
- Gold & silver maintain purchasing power over time. Dollars pay interest and held up well. One has $22 trillion of debt backing it.

AN ITALIAN WARNING FOR FRANCE / PROJECT SYNDICATE
An Italian Warning for France
With Italy’s populist government supporting the “Yellow Vest” protests, France needs to understand how and why it has become the principal target of Italian criticism. Reckoning with this latest turn of events could help France to overcome its own internal divisions and prevent Italian-style populism from taking power in Paris.
Dominique Moisi
PARIS – The support from Italy’s populist leaders for the “Yellow Vest” protests in France is a sad first in the history of the European Union. Never before has one of the six founding countries of the European project intervened so resolutely in the domestic affairs of another. To add insult to injury, Italy is supporting a movement that contains elements who clearly reject fundamental European values of tolerance and respect for democratic institutions.
Italy has gone astray, and France needs to understand why, so that it can fight to ensure that populism does not gain further ground domestically. In doing so, France must distinguish the Italian people from some of their far less admirable political leaders.
Rising tensions between the French and Italian governments are partly the result of competition between the two populist parties in Italy’s ruling coalition, which took office in June 2018. This was recently reflected in strong anti-French rhetoric from the leader of the Five Star Movement, Luigi Di Maio, who until now has been largely eclipsed by the League party leader, Matteo Salvini. But anti-French sentiment in Italy has deeper roots, and exists among both the elites and parts of the wider population.
Franco-Italian relations have always been complex. As the heir to the Roman Empire, Renaissance and Baroque Italy felt culturally superior to France and more refined. For Italians, the demonstrative way in which France exhibited its greatness and glory from the time of the Sun King (Louis XIV) to Napoleon made it appear “nouveau riche.” Even French support for Italian unification in the second half of the nineteenth century contributed to further misunderstanding, because France “received” Savoy and Nice in exchange for its precious help.
In more recent times, there had at least been some signs of mutual admiration. Italians looked enviously at France’s well-functioning state, while the French nodded approvingly at northern Italy’s dynamic network of small and medium-size companies. Today, however, this kind of reciprocal praise seems like the stuff of nostalgia.
The view from Rome these days is that France gives lectures on budgetary rigor but no longer practices it, as when French President Emmanuel Macron canceled his planned fuel-tax increase in the face of the Yellow Vest protests. But Italy’s current negative perception of France is above all emotional. From the crisis in Libya (a country Italy knows well) to the migrant crisis (which has hit Italy disproportionally hard), Italians feel deliberately ignored, if not abandoned, by the French – who, to make matters worse, also give the impression of looking down on their neighbors.
It is tempting to compare Italy’s criticism of France to the Yellow Vests’ hostility toward French elites. Both sentiments, after all, draw their strength from a feeling of humiliation in the face of perceived arrogance and privilege. The big question now is whether Italy’s populist present will be France’s future.
Clearly, this scenario is no longer inconceivable. Defenders of liberal democracy in France and elsewhere must, therefore, adopt and adapt the Yellow Vest motto and refuse to give in.
In a short 2008 essay entitled “The Spirit of the Enlightenment,” the late French essayist of Bulgarian descent, Tzvetan Todorov, reminded us that “there would not have been a Europe without the Enlightenment and no Enlightenment without Europe.” And in the immediate aftermath of World War II, statesmen such as Robert Schuman in France and Alcide de Gasperi in Italy not only were devout Christians, but also believed in the ideas of Montesquieu and Voltaire.
This is clearly not the case with Salvini or Marine Le Pen in France. Rather than being united and moved by hope and trust, they are exploiting a culture of fear and humiliation and a common desire to destroy the existing system.
There is little to be gained simply by contrasting the spirit of the Enlightenment with the populist spirit of the Yellow Vests, or Macron’s deep and sincere desire for reforms with Salvini’s shrewd and brutal vulgarity. But there are lessons to be learned from the rise of the Italian populists and the French Yellow Vests.
For starters, one cannot ignore the emotions of others. Equality of respect is as important as equality of means. Humiliation is a powerful motor that can drive people to sheer hatred, as Macron is currently experiencing. Furthermore, representative democracy is fragile and precious. It must be defended at all costs from its authoritarian external enemies, as well as from domestic opponents intent on seeing only its shortcomings.
France, meanwhile, should maintain its moderate, reasonable, yet firm stance and not engage in a war of words with Italy. Instead, it should try to understand how – and, even more so, why – it became the principal target of its transalpine neighbor. Critical reflection here could help France to overcome its own internal divisions and prevent Italian-style populism from taking power in Paris.
Dominique Moisi is Senior Counselor at the Institut Montaigne in Paris. He is the author of La Géopolitique des Séries ou le triomphe de la peur.
Bienvenida
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Las convicciones son mas peligrosos enemigos de la verdad que las mentiras.
Friedrich Nietzsche
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
Lao Tse
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
Warren Buffett
No soy alguien que sabe, sino alguien que busca.
FOZ
Only Gold is money. Everything else is debt.
J.P. Morgan
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Proverbio Chino
Quien no lo ha dado todo no ha dado nada.
Helenio Herrera
History repeats itself, first as tragedy, second as farce.
Karl Marx
We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.
Paulo Coelho

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