Iron Man! Copper And Iron Futures Prices Decline As Global Growth Continues Slowing (Gold-Copper Ratio Similar To 10Y Treasury Yield)

Iron Man!

As a sign of continued slowing global growth, essential dry commodities like iron ore and copper have been declining since April/May of 2019.

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The copper-gold ratio has shown a decline after peaking in June 2018.

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The copper-gold chart looks similar to the 10Y US Treasury yield chart.

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Is the global economy paranoid about China-US trade and Brexit impacts?

 

Trade Fog! UK Industrial Production Falls 1.8% YoY In August, China’s Offshore Currency Goes Bananas And Gold Price/ Volatility Rises, V2X Volatility Goes Haywire

This is an update on key economic news relating to US/China trade and UK/EU Brexit talks. Better known as Trade Fog … or simply “The Fog.” 

On the Brexit side, the UK avoided recession by posting of 0.3% in August. Unfortunately, UK industrial production tanked to -1.8% YoY signaling a slowdown for the UK economy.

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On the China/US trade arm wrestling match, China’s offshore currency is showing volatility as even the NBA is getting caught up in the trade scuffle.

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The volatility surface for the CNH is quite steep.

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Of course, trade fog helps assets such as gold to rise.

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The volatility surface for gold is similar to that of the Chinese offshore currency.

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Trade fog (or trade vacillation) is on the rise as seen in this chart of V2X volatility.

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The V2X index is above its various historic moving averages.

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As Brexit negotiation crawl along and the US meets with China or tariffs, we continue to see “The Fog” until Brexit and tariffs are finalized. Throw in Federal Reserve policy errors and we have a party!

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Perry Omo? Fed Will Likely Restart QE In November (SOFR, Repo Rates Stabilize To Near Normal)

Is Fed Chair Jerome Powell really Perry Como? Or Perry OMO?

To the disappointment of many, Powell did not lower the target rate by 50 points and did not announce a resumption of QE.  Instead, the FOMC realigned both interest on excess reserves (IOER) and the reverse repo (RRP) rate lower by 5bp. Powell noted during his press conference that the Fed would use temporary open market operations (OMOs) “for the foreseeable future” to address pressures in funding markets.

However, and the reason why stocks shot up just before 3pm ET, is that that’s when Powell added that “it’s possible that we’ll need to resume the organic growth of the balance sheet, earlier than we thought. … We’ll be looking at this carefully in coming days and taking it up at the next meeting” in late October. Said otherwise, the Fed may not have announcer QE4 yesterday, but it will likely announce it in the very near future.

Sure enough, as Goldman wrote in its FOMC post-mortem, “we took this as a fairly strong hint and now expect the Fed to resume trend growth of its balance sheet in November with permanent OMOs. It is possible that the FOMC will take that opportunity to also reach a final decision on possibly shortening the maturity composition of its purchases, which it discussed at its May meeting.”

With all the OMO (or Perrys), the Fed’s Secured Overnight Finance Rate (SOFR) stabilized to normal levels.

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And the repo rate returned to near normal with the massive intervention with OMO.

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Fed Chair Jerome Powell (aka, Perry Omo).  Hot diggity dog. …

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On a side note, I tripped on a weight at the gym and fell against a weight machine. Fractured rib, badly swollen knee and dislocated perhaps broken finger(s). I call for a ban on power lifters dropping their weights and having them bounce in front of me!

The Big Squeeze! GC Repo Rate Crashes To 0% Amid Liquidity Squeeze And The Fed’s $53.2 Billion Flood Of Liquidity

Panic?

(Bloomberg) — The Federal Reserve took action to calm money markets on Tuesday, injecting billions in cash to quell a surge in short-term rates that was pushing up its policy benchmark rate and threatening to drive up borrowing costs for companies and consumers.

While the spike wasn’t evidence of any sort of imminent financial crisis, it highlighted how the Fed was losing control over short-term lending, one of its key tools for implementing monetary policy. It also indicated Wall Street is struggling to absorb record sales of Treasury debt to fund a swelling U.S. budget deficit. What’s more, many dealers have curtailed trading because of safeguards implemented after the 2008 crisis, making these markets more prone to volatility.

Money markets saw funding shortages Monday and Tuesday, driving the rate on one-day loans backed by Treasury bonds — known as repurchase agreements, or repos — as high as 10%, about four times greater than last week’s levels, according to ICAP data.

More importantly, the turmoil in the repo market caused a key benchmark for policy makers — known as the effective fed funds rate — to jump to 2.25%, an increase that, if left unchecked, could have started impacting broader borrowing costs in the economy. Because that’s at the top of the range where Fed officials want the rate to be, they are likely to make yet another tweak to a key part of their policy tool set to try to get things back on track when they meet Wednesday to set benchmark rates.

But the central bank didn’t wait until then to do something, resorting to a money-market operation it hasn’t deployed in a decade. The New York Fed bought $53.2 billion of securities on Tuesday, hoping to quell the liquidity squeeze. It appeared to help. For instance, the cost to borrow dollars for one week while lending euros retreated after almost doubling Monday.

For repo traders, hedge funds and others that rely on that market for financing, this intervention came none too soon.

A bit of an overshoot?

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And something that went unnoticed by many …

The New York Fed bought $3.001b of T-bills in the secondary market Tuesday as part of its planned reinvestment purchases.

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Yes, it is The Big Squeeze (not to confused with The Big Short).

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What up with that?

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Alternative Investments? Sovereign Bonds At A Premium, Duration Is Climbing As Rates Fall (But MBS Duration Falls With 10Y Yield), House Prices Slowing

Rising bond prices (premium) are spooking some investors as global bond yields plummet. The fear of a global slowdown/recession is spawning interest in alternative investments.

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As the 10-year Treasury yield drops, the duration of US Treasuries rises. On the other hand, the duration of Agency MBS is falling.

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And with national home price growth declining to the lowest rate since the beginning of The Fed’s QE3, where do we put our money?

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Firms like AQR offer products in the alternative investments sphere.

AAA Global Portfolio Space

 

Facebook Wants Its Cryptocurrency to One Day Rival the Greenback (Will Zuck Coins Compete With Gov’t Money??)

Facebook’s new digital currency, Libra, is a Stablecoin. That is, it is tied to a currency like the US dollar. But probably not the Venezuelan Bolivar.

(Bloomberg) —  Called Libra, the new currency will launch as soon as next year and be what’s known as a stablecoin — a digital currency that’s supported by established government-backed currencies and securities. The goal is to avoid massive fluctuations in value so Libra can be used for everyday transactions in a way that more volatile crypotcurrencies, like Bitcoin, haven’t been.

Libra is the culmination of a year-long effort to devise an easy way for Facebook users to send and receive money through its messaging services. Private messaging is one of the company’s fastest growing products, and Chief Executive Officer Mark Zuckerberg is embracing this by integrating all Facebook’s messaging products to let users communicate between its different apps.

This focus comes at a time when user growth of the main social network has plateaued in some major markets, and regulators are scrutinizing the company’s frequent privacy failures. Payments are a potential way to turn messaging into a business that complements Facebook’s advertising operation, which generates almost all its revenue.

To come anywhere close to matching the U.S. dollar for utility and acceptance, Libra will need to be widely trusted. So Facebook and its partners are mimicking how other currencies have been introduced in the past.

“To help instill trust in a new currency and gain widespread adoption during its infancy, it was guaranteed that a country’s notes could be traded in for real assets, such as gold,” the companies wrote in a white paper. “Instead of backing Libra with gold, though, it will be backed by a collection of low-volatility assets, such as bank deposits and short-term government securities in currencies from stable and reputable central banks.”

The total number of Libra can change, and new digital coins can be issued whenever someone wants to exchange their Libra for an existing fiat currency, so the price shouldn’t fluctuate any more than other stable currencies, according to David Marcus, head of the Facebook blockchain team that’s spearheading the project.

“It would make a scenario where there’s a run on the bank completely impossible, because we are backed one-for-one,” he said. Libra will also be audited, he added, an important step in an industry with limited transparency.

If successful, Libra could make Facebook a much bigger player in financial services. That’s a big “if,” though. Cryptocurrency companies have been trying to build cross-border, digital currencies on the blockchain to disrupt traditional banking and payments for a decade. Nothing has caught on at the scale of traditional money yet.

When it finally arrives, Libra will be late to a party that’s been going on so long, many of the party-goers have either left or collapsed. Some past attempts to make coins usable for commerce, such as Bitcoin, haven’t widely caught on yet because price volatility mainly attracted traders and speculators. Predecessor stablecoins, like Tether, have been used by some traders to park funds in during times of high volatility, but have not been broadly adopted for commerce.

U.S. regulations may represent another hurdle for Facebook. Creating a digital currency doesn’t just require buy-in from financial institutions who need to accept it, and consumers who need to trust it, but it requires approval from regulators, too. The Securities and Exchange Commission has shut down about a dozen businesses issuing their own tokens for violations of securities law. Marcus said Facebook has been in contact with regulators and central banks, but added that the company hasn’t received a “no-action” letter from the SEC yet. That would have safeguarded the project from regulatory action by the agency.

One way Facebook hopes to appease regulators is through the Libra Association, a governing body tasked with making decisions about Libra. At least 27 other firms, including Visa Inc., Uber Technologies Inc. and PayPal Holdings Inc., are part of the group. Marcus described these members as “co-founders,” and said they will have an equal say in how the cryptocurrency is managed.

“Facebook will not have any special privilege or special voting rights at the association level,” said Marcus, the former president of PayPal. “We will have competitors and other players on top of this platform that will build competing wallets and services.”

All Libra Association members are putting a minimum of $10 million into a reserve to help support the cryptocurrency’s value. This buy-in comes with voting privileges. However, the association’s governance structure is still in flux, and most of the group’s crucial decisions, including the creation of its charter, have not yet been decided, according to several members of the group. They asked not to be identified discussing private details.

Libra’s timing could also pose challenges. Facebook is being investigated by the Federal Trade Commission over the company’s privacy practices. Some have called for the company to be broken up, including Senator Elizabeth Warren and Facebook co-founder Chris Hughes. Asking consumers to put more trust in the social media giant, and giving Facebook a strong entry into the world of digital payments and banking, will likely draw further criticism.

The company plans to keep financial data gathered from Libra users separate from Facebook user data. That’s why Facebook’s digital wallet will exist under the Calibra subsidiary, which will house user transaction data on separate servers, Marcus said. If a WhatsApp user uses her Calibra wallet to send money to a friend or pay a retailer, those interactions won’t be stored alongside her social-media profile.

“There’s a clear distinction between Calibra and what Calibra has access to, and what Facebook Inc. has access to,” Marcus said. “It’s very clear that people don’t want their financial data from an account to be comingled with social data or to be used for other purposes.”

Cryptocurrencies like Bitcoin (white line) and Litecoin (yellow line) are too volatile? Say it ain’t so!

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There are a plethora of cryptocurrencies out there, here is a sample.

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But Tether is different in that it avoids the sometimes wild volatility of Bitcoin, Litecoin and Ethereum since Tether mirrors the US dollar.

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Libra (or the Zuck coin) should behave in a similar fashion to Tether in that they are both Stablecoins.

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Gold, Housing And Credit Impulses (US House Price Growth Slowing As US Residential Credit Impulse Slows)

As Hurricane Dorian (cat 4) approaches the eastern Florida coast and Hong Kong protestors clash with police, I thought I would discuss something cheerful .. like rising home prices globally and in the US. Cheerful for current homeowners that is, not current renters.

According to the International Monetary Fund (IMF), the global REAL house price index (white line) has recovered from the global housing bubble burst and is now at an all-time  high. US NOMINAL home prices have recovered from the housing bubble and are now higher than at the peak of the US housing bubble (2005).

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If we look at real estate with respect to gold, US housing was the most expensive in the early 2000s. And the ounces of gold needed to buy an average US home remains relatively low (that is, back to 1984 ratios).

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Of course, the flow of credit can help explain housing prices. In the US, both Commercial and Industrial loans (C&I) and loans and leases (Lo&Le) are significantly lower than during the late 2000s. Yet, US home prices continue to rise.

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If we put home price growth YoY (green line) on the chart, you can see home price growth slowing with the lower than average credit impulse (red line).

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At the global level, credit impulses are down but may be showing signs of increasing.

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Come Dancing? US Treasury Considering Issuing 50- or 100-year Bonds As 30-Year Treasury Bond Yield Hits All-time Low (Negative Yielding Debt Growth Sends Gold Skyrocketing – 14 European Countries Have Negative 10-year Yields)

As the US House of Representatives (that controls the purse strings of the Federal government) escalates spending, the US Treasury has to issue more debt. In fact, the US has now exceeded the 100% debt to GDP that was first exceeded back in 2012 in the wake of the financial crisis.

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And with the US Treasury 30-year yield hitting all-time lows,

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Treasury is exploring longer-term maturities to refinance its debt and issue additional debt to cover the Federal budget deficit.

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(Bloomberg) — With interest rates on 30-year U.S. debt hitting all-time lows this week, the US government is once again considering whether to start borrowing for even longer.

The U.S. Treasury Department said Friday that it wants to know what investors think about the government potentially issuing 50-year or 100-year bonds, going way beyond the current three-decade maximum.

Well, US dollar swaps go out to 50 years, so 50-year Treasuries are not that much of a leap.  But can we try 40 years first??

But given the unusual shape of the Treasury and Swap curves (both inverted in the short-term), is this Fed-caused disturbance in the yield curve or a signal of recession in the coming 5 years.

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And as global negative yielding debt explodes, so does gold prices.

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Its the same all over the world in terms of negative yields.

In fact, 14 European nations have negative 10-year yields.

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