Liz Ann Sonders, Chief Investment Strategist, Charles Schwab & Co, wrote today “Collapse in shipping rates continues to look unreal … cost to ship 40-foot container from Shanghai to Los Angeles has fallen by 83% from peak, by far largest drop on record (bringing level to lowest since June 2020)”
Yes, Liz Ann, shipping costs from Shanghai to Los Angeles are plunging. But why?
Federal Reserve and Federal government stimultypo has wound down. M2 Money YoY growth is the lowest since 2010 and no, it isn’t the result of Mayor Pete’s magical skills at clearing the logjam at Los Angeles ports. It is the slowing of Federal stimulus (or stimulypto).
Here is Liz Ann Sonders tweet.
Let’s see if 1) The Fed continues to hike and 2) will House Republicans halt the insane spending, particularly since the start of Covid in 2020.
The Federal Reserve’s DOTS PLOT shows where each Fed official’s projection for the central bank’s key short-term interest rate is headed. As of the September 21, 2022 Fed Open Market Committee (FOMC) meeting, the prediction of future Fed target rates is decidedly DOWNWARD SLOPING.
The Fed hawks, those that want to tighten monetary policy, are Bowman, Waller, Kashkari, Mester and George. The Fed doves (or those who are neutral) are Biden recent appointees Barr, Cook, Jefferson, Logan, Collins. Note that Brainard and Bostic are the only technical doves.
I call the hawks at The Fed “The Blackhawks” since their mission of fighting inflation may lead to a recession. And Bowman, Mester and George are Lady Blackhawks.
Things are getting interesting in DC, to say the least. The US is 100% likely to face a recession in the next 12 months while The Federal Reserve is on its crusade to fight inflation caused by … The Federal Reserve, Biden’s green energy shenanigans and massive, irresponsible Federal spending that even Former Obama economist Lawrence Summers warned would cause inflation. So what will The Fed do? Lower rates and expand their assets purchases to fight the impending recession OR keep tightening to fight Bidenflation? But where we are now is that the fixed-income market could be in big, big trouble.
For months, traders, academics, and other analysts have fretted that the $23.7 trillion Treasuries market might be the source of the next financial crisis. Then last week, U.S. Treasury Secretary Janet Yellen acknowledged concerns about a potential breakdown in the trading of government debt and expressed worry about “a loss of adequate liquidity in the market.” Now, strategists at BofA Securities have identified a list of reasons why U.S. government bonds are exposed to the risk of “large scale forced selling or an external surprise” at a time when the bond market is in need of a reliable group of big buyers.
“We believe the UST market is fragile and potentially one shock away from functioning challenges” arising from either “large scale forced selling or an external surprise,” said BofA strategists Mark Cabana, Ralph Axel and Adarsh Sinha. “A UST breakdown is not our base case, but it is a building tail risk.”
In a note released Thursday, they said “we are unsure where this forced selling might come from,” though they have some ideas. The analysts said they see risks that could arise from mutual-fund outflows, the unwinding of positions held by hedge funds, and the deleveraging of risk-parity strategies that were put in place to help investors diversify risk across assets.
In addition, the events which could surprise bond investors include acute year-end funding stresses; a Democratic sweep of the midterm elections, which is not currently a consensus expectation; and even a shift in the Bank of Japan’s yield curve control policy, according to the BofA strategists.
The BOJ’s yield curve control policy, aimed at keeping the 10-year yield on the country’s government bonds at around zero, is being pushed to a breaking point.
Well. Bidenflation certainly isn’t helping, but Statist Economist and Cheerleader Janet Yellen can’t bring herself to blame green energy policies, rampant Federal spending or irresponsible Federal Reserve policies for the crisis.
You will note the differences between today and the financial crisis of 2008-2009. The financial crisis gave us a massive surge in government securities liquidity thanks to then Fed Chair Ben Bernanke imitating Japan’s Central Bank and buying US government securities. Fast forward to today and the liquidity index hasn’t budged much since 2010 (except for a little blip around the Covid Fed intervention of early 2020), but we are now seeing near 40-year highs in inflation and a barely declining Fed balance sheet. And M2 Money YoY (mostly commercial bank deposits) are crashing.
I am guessing that The Fed will pivot given that stock futures are way up for Monday. The Dow Jones mini is up 770 points and the S&P 500 mini is up 88.75 points.
Bond market futures (specifically the US Ultra Bond) is down for Monday, meaning yields will be climbing.
I remember giving a speech at The Brookings Institute in Washington DC. Talk about stranger in a strange land. One person who I was debating got frustrated and said “You are such a … Republican!!!” As if that was the worst slur he could throw at me.
Bloomberg’s market pulse gauge is signalling panic.
The Bloomberg market pulse index quantifies sentiment using 6 factors — price breadth, pairwise correlation, low vol performance, defensive vs. cyclical sector performance, high vs. low leverage performance and high yield spreads.
New CEO Koerner sought to reassure employees in Friday memo
Shares fall to a fresh record low, gauge of credit risk rises
It is like the Lehman Brothers debacle in 2008 all over again.
(Bloomberg) — Credit Suisse Group AG was plunged into fresh market turmoil after Chief Executive Officer Ulrich Koerner’s attempts to reassure employees and investors backfired, adding to uncertainty surrounding the bank.
The stock, which had already more than halved this year before Monday’s sell-off, fell as much as 12% in Zurich trading to a record low that values the firm at less than $10 billion. That was accompanied by a spike in the cost to insure the bank’s debt against default, which jumped to its highest ever.
Koerner, for the second time in as many weeks, had sought to calm employees and the markets with a memo late Friday stressing the bank’s liquidity and capital strength. Instead, it focused attention on the dramatic recent moves in the firm’s stock price and credit spreads, and investors rushed for the exit when trading reopened after the weekend.
One notable difference between 2008 and today is that Credit Suisse’s equity was flying high in June 2007 then crashed a the global banking crisis went into full motion. We then saw Credit Suisse’s credit default swaps soar in early 2009. But today Credit Suisse’s equity is a pale imitation of its former self, but its credit default swap is now higher than it was at its peak in early 2009.
Credit Suisse is now trading lower than its European rival Deutsche Bank (aka, The Teutonic Titanic).
Yes, this brings back sickening memories of the 2008-2009 global financial crisis. Let’s see how The Federal Reserve, ECB and Bank of Switzerland handle this debacle, particularly with M2 Money growth so low.
It appears that we are in another Lehman debacle. Or should I say “Lemur Bros.”
REAL average hourly earnings growth remain in the toilet at -3.06% YoY.
Fuel oil used to heat homes rose 68.8% YoY. Food at home rose 13.5% YoY while rent (shelter) rose “only” 6.2% YoY. Wow, renters are REALLY getting the short-end of the stick from The Fed and the Biden Administration!!
New vehicles are UP 10.1% YoY. Good luck buying those “cheap” electric cars that Mayor Pete Buttigieg trumpets! And wait for the bill when the battery needs to be replaced!!!
Today’s jobs report was … strange. While the US economy added more jobs than expected, we also saw labor force participation contract and real wage growth decline again.
The reaction in the bond market? US Treasury 10-year yields exploded by +14 basis points. As I used to tell my fixed-income students, any basis point jump or decline of 10 basis points or more is a BIG DEAL.
The implied target rate for The Fed (based on Fed Funds Futures) is now lower for the Jan 1, 2024 FOMC meeting (3.025%) than it is for the Sept 21, 2022 FOMC meeting (3.034%).
Mortgage rates? They will go up as The Fed removes its Brawndo, the economy mutilator.