Death Star? Fed Seems Resigned to Bubble Risk in Effort to Extend Expansion (Declining R-Star)

Asset bubbles abound thanks to Central Bank low rate policies. And these aren’t tiny bubbles, but gargantuan asset bubbles.

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(Bloomberg) — Some Federal Reserve policy makers seem resigned to running a heightened risk of asset bubbles and other financial excesses as they seek to keep the economic expansion going.

That’s one of the messages tucked inside the minutes of the Federal Open Market Committee’s March 19-20 policy making meeting.

“A few participants observed that the appropriate path for policy, insofar as it implied lower interest rates for longer periods of time, could lead to greater financial stability risks,’’ according to the minutes, published April 10.

Chairman Jerome Powell could be one of those officials. He’s publicly pointed out that the last two expansions ended not in a burst of inflation, but in financial froth, first a dot-com stock market boom, then a housing bubble.

A willingness by the Fed to court such perils by holding rates down should be good for the economy for a while. After all, the aim of such a policy would be to sustain growth at a healthy enough clip to meet the Fed’s twin goals of maximum employment and 2 percent inflation.

But that monetary stance could store up trouble down the road should the financial threats materialize.

“Easy financial conditions today are good news for downside risks in the short-term but they’re bad news in the medium term,” senior International Monetary Fund official Tobias Adriantold a Boston Fed conference last year.

In economists’ parlance, here’s the Fed’s dilemma: R-star — the neutral interest rate that stabilizes the economy when it’s meeting the Fed’s goals — may be so low that it also prompts super-risky behavior by investors.

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Behind the fall in R-star: an aging population and slower productivity growth that has boosted savings and depressed investment.

Catch a falling star? Or is it a Death Star?

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Raw Oyster Stew! BoJ’s Kuroda Says That There Is Room For Interest Rate Reduction (The Swiss Miss?)

Much like the Three Stooges bit “Raw Oyster Stew”,  using Central Banks to stimulate a structurally flawed economy is like Curly trying to eat the raw oyster.

(Reuters) – Bank of Japan Governor Haruhiko Kuroda told CNBC that there is room for reducing long-term and short-term interest rates.

“I think there (is) still some room for further monetary easing if needed,” he said, adding that it isn’t necessary at this stage.

Kuroda also said that the Japanese economy has “slightly slowed down”, partly because Japan’s exports to China have become “somewhat” weak.

Yes, Kuroda can try to push Japanese sovereign rates lower. The benchmark for low interest rates is … Switzerland. (Aka, The Swiss Miss!)

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Swaps? Yen versus Franc swap rates:

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So, Kuroda is suggesting a Swiss put on rates. Or a Swiss Miss!

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My Kuroda!!  

Speculators Increase Short Treasury Futures Position (But Gold LONG Positions Increase)

Speculators are increasinng Treasury short positions while speculators are favoring long positions in gold futures.
Speculators increased net short positioning throughout the Treasury futures curve in the week ended April 9. The bulk of the moves came from adding short positions in 10-year (TY) Treasury futures contracts. They increased their short position in TY contracts by $56,982. And they added some short risk to their two-year (TU) futures positions, after nearly cutting that position in half the previous week.

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Speculators also increased their short positions in five-year (FV), ultralong (WN) and classic 30-year (US). Speculators still remain short every Treasury futures contract.

How about gold? The net futures have actually increased since December.

 

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Thinner! San Francisco Home Price Futures Indicate Further Price Declines (But Futures Volume Is Razor THIN)

When the US housing bubble was in full steam, I was working with a major insurance company on a way to hedge home price risk in major metropolitan areas. Their risk committee thought housing was too risky (hence the reason for trying to hedge the risk). But to no avail.

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The problem with housing futures is … there is very thin volume in trading. Exactly one contract trade on March 12, 2019 at. 261.2.

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Aggregate open interest is a minuscule 20.

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This contracts with the SOFR futures with substantially larger open interest.

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Based on thin depth of trading, the trend line for San Francisco futures is downward sloping. And LAGGING the Case-Shiller home price index.

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If we look at the CFTC CBOE, CME futures activity, home price indices are so thin that don’t show up.

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Home price futures are thinner than other futures contracts, hence one must be careful.

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Remain Calm! VIX-MOVE Spread Separates As Fed Rate Cut Predicted

Welcome to the topsy-turvy world of financial markets!

The S&P 500 Cboe Volatility (Equity) index versus the Merrill Lynch 1-month Treasury bill index (MOVE) show a further separation.

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This comes as the WIRP Estimated Number of Moves Priced in for the US (Futures Model) is indicating one rate cut coming up (although Trump’s economist Larry Kudlow wants 50 points in cuts as does Trump’s nominee for The Federal Reserve Board of Governors, Stephen Moore.

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Despite Kudlow and Moore touting 50 basis point cuts (and a slowing advanced retail spending report for February) …

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Remain calm .. all is well!

 

Shiller CAPE (Cyclically Adjusted Price To Earnings) Ratio At 30.31, Almost Twice The Historic Average of 16.61

Are today’s Price-to-earnings ratios reasonable? Or too high?

Yale’s Nobel laureate Robert Shiller developed the cyclically-adjusted price-to-earnings (CAPE) ratio to address this question. The answer? Today’s P/E ratio is almost twice the historic average.

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If you like the Shiller CAPE ratio, you can invest in the Barclay’s or Doubleline Enhanced CAPE products.

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DoubleLine Shiller Enhanced CAPE seeks total return total return in excess of the Shiller Barclays CAPE US Core Sector Net ER USD Index by using a combination of derivatives, and direct invests, to earn a returns that closely tracks the performance of the index. The Fund will also invest in a portfolio of debt securities to provide additional long-term total return.

Inverted US Treasury Yield Curve: Signal Of Impending Recession Or The Fed Raising Its Target Rate Too Quickly?

The US Treasury Yield Curve inverted on Friday for the first time since 2007. The talking heads were stumbling and mumbling about its meaning.

Here is my explanation. It is a combination of an overzealous Federal Reserve AND a slowing US (and European) economy.

In short, The Federal Reserve has been raising its target rate relatively quickly (driving the 3-month Treasury bill yield up) as the 10-year Treasury note yield has been falling (particularly since November 2018). They met on Friday and passed each other. This view of the inverted Treasury yield curve is more about The Fed raising its target rate despite a declining 10-year yield.

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But another interpretation of the inverted curve is it is signal of an impending recession, the same way that household net worth (as a percentage of disposable personal income) peaks then falls prior to a recession (a tip of the hat to Jesse’s Cafe Americain!)

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So, it is really a combination of the two: an overzealous Fed and a slowing global economy

 

Ichimoku Blues! Rocky Times Ahead For Emerging Market Currencies (And Stocks/Gold)

The bloodbath for emerging-market currencies that erupted Friday may just be getting started, according to the Ichimoku cloud strategy that correctly forecast last year’s five-month slide. The technical analysis shows that MSCI’s currency gauge has once again broken downward through its forward-looking cloud, or the space between two moving averages. Once it pierces the cloud multiple times, it’s likely to gain momentum in that direction.

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The S&P 500 also remains above the Ichimoku cloud. Also a sign of rocky times ahead.

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This scary chart supports the Ichimoku cloud expectation of a rocky road ahead for the S&P 500 index.

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The gold spot could also experience turbulence, but less so. Gold is near the top of the Ichimoku cloud.

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Venezuela’s 2Y Sovereign Yield Tops 100% … Again As US Imposes More Economic Sanctions (Oil And … GOLD!)

The US is imposing additional economic sanctions on Venezuela, both on oil … and gold!

The United States imposed sanctions on Venezuela’s state-run gold mining company on Tuesday, accusing it of illicitly propping up the government of President Maduro.

The US Treasury claims Maduro has relied on an illegal mining boom in recent years with the profits generated by the gold mining company, Minerven, proving vital to maintaining the military’s support for the government.

“Treasury is targeting gold processor Minerven and its president for propping up the inner circle of the corrupt Maduro regime,” US Treasury Secretary Steven Mnuchin said in a statement.

The announcement comes days after Uganda opened an investigation into US$300 million of unexplained gold suspected of originating with Maduro’s government. Flights this month from Caracas to Entebbe raised concerns that the government is smuggling gold out of the country and selling it to traders in Africa and the Middle East.

It is the sixth round of sanctions imposed by the U.S. since January as they attempt to wrest power away from Maduro and towards opposition leader Juan Guaido. Most Western countries have recognised Guaido as Venezuela’s interim president.

Venezuela’s gold industry is allegedly one of the country’s most lucrative financial schemes in recent years. Minerven is accused of purchasing high volumes of gold from local miners using the countries depreciated currency. The gold is then melted into bars and transported to the Central Bank of Venezuela.

The sanctions have led to a spike in Venezuela’s 2-year sovereign yield (in USD) as their economy continues to liquify.

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The Cafe con Leche index, meant to reflect inflation for the average coffee-drinking citizen. 2019 has been a bad year, in particular, for the average Venezuelans.

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And the Gold/Venezuelan Bolivar Cross hasn’t looked so good in 2018 either.

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The good news? At least Venezuela isn’t on the Pacific coast of South America so they can avoid the Fukushima reactor meltdown aftermath. Chile, on the other hand. …

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