Fed Monkey? Mega Bond Sell-Off Spurs $1.2 Billion Outflow From Treasury Fund As Gold Futures Decline

As Europe shows signs of economic life and US recession fears dim, we are seeing an exodus from long-dated Treasuries and a large turnover in gold futures. But are markets expecting more active intervention by The Fed? (Aka, Fed Monkey).

(Bloomberg) — Investors are pulling the plug on a strategy tracking long-dated Treasuries as U.S. stocks trade near all-time highs.

The iShares 20+ Year Treasury Bond exchange-traded fund, ticker TLT, posted its worst week of outflows on record, with traders yanking more than $1.2 billion, according to data compiled by Bloomberg. The 10-year U.S. government bond yield soared in the span, approaching 2%.


Meanwhile, gold futures fell to a three-month low as contracts equal to over 3 million ounces changed hands in half an hour on the Comex.

In the 30 minutes ended 10:30 a.m. in New York Monday, 33,596 contracts were traded, more than triple the 100-day average for that time of day. Futures have declined in recent weeks as growth concerns ebbed, damping haven demand for the precious metal.


Is The Fed Monkey recession prevention system working?

A thanks to our veterans on this Veterans’ Day!


The Big Squeeze: The Corporate Margin Squeeze And Fed Policy

One of the historic indicators signaling the end of a business cycle (and an impending recession) is US corporate margin squeeze.

Note the red line which is plunging towards recession.

corporate margin squeeze

But can Jerome Powell and The Fed manage to save the day by pumping more QE into the economy to stave off shrinking corporate margins?

how qe works in practice

Loot is right!


Fish Stew! Momentum Strategies Get Creamed (Or Fish’d) As Atlanta Fed GDP For Q4 2019 Hits 1%

While the S&P 500 and Dow Jones Industrial Average hover near all-time highs, something is brewing .. and it smells like fish stew (or fish tacos at Brion’s Grille).

The Dow market-neutral momentum (blue line) is plunging and it coincides with short-momentum gains (red line).


Momentum ETFs are seeing a large outflow.


MTUM, the iShares Momentum Factor ETF, has seen large outpourings of funds.


I wonder if the Atlanta Fed’s GDP NOW forecast of 1% GDP for Q4 2019 has anything to do with the exodus from Momentum indices?

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Yes, I smell fish stew rather than red roses.



US Treasury Yield Curve Un-inverts (Can’t Turn The Fed Loose) Sag Gone In Treasuries, Not Swaps

Federal Reserve Chair Jerome Powell has said that the US economy is in a good place, and further rate cuts are not warranted. That is, Trump can’t turn The Fed loose.

Various US Treasury yield curves are un-inverting and are all positive.


The Treasury actives curve is no longer sagging, but the Dollar Swaps curve continues to sag.


But in terms of Treasury futures, the volatility for 2 year, 10 year and 30 year (Ultra) contracts   are progressively warping for 10 Delta Puts as maturity increases.





30-year (Ultra):


Every investor needs The Fed to keep propping up asset bubbles!

Of course, the yield curve can revert to a negative state if … the China trade agreement becomes unglued, Democrats succeed in impeaching President Trump, etc.


Act (Un)Naturally! ECB’s Draghi Warns of Bubble Risk (Including Real Estate) in the Euro Zone (17 European Nations Have Negative 2-year Sovereign Yields)

Slowing European economic growth coupled with massive, unnatural Central Bank policies has led to a massive bubble in stocks and real estate. All the ECB did was “act (un)naturally.”

WASHINGTON (Reuters) – There are “mild signs” of overvaluation in the euro zone financial and property markets, creating a risk for stability at a time when the economy is slowing, the European Central Bank’s President Mario Draghi said on Friday.

“The financial stability environment remains challenging, as the global economic outlook has deteriorated,” Draghi told fellow policymakers on the International Monetary and Financial Committee in Washington.

“There are mild signs of overstretched valuations in the euro area in some riskier segments of the financial markets, as well as in real estate markets, with marked differences across regions.”

The ECB has acted unnaturally since the financial crisis of 2007-2009 by dropping their main refinancing rate to 0% and rapidly expanding their balance sheet.


In addition, the ECB’s M3 money growth continues to grow.


And 17 European nations now have negative 2-year sovereign yields.


The heartland of Euro (meaning Germany, France and Austria) oppose more QE (asset purchases by the ECB) while peripheral counties (Spain, Italy and Greece) want to keep on expanding the ECB’s balance sheet.


Of course, none of this Central Bank interference is natural and sets the stage for a bubble burst.

ECB’s Draghi is a regular “buckaroo.”




Conference Board Leading Index MoM Prints At -0.1% (NOT Screaming Impending Recession, But Fed Manning The Bilge Pumps!)

The Conference Board leading index printed at -0.1% MoM indicating a slow but expanding economy through early 2020.


But Jerome Powell and The Federal Reserve are manning the economic bilge pumps just in case.


Yes, The Fed will be trying to pump liquidity into the economic ship in case it takes on too much salt water.


“Man the pumps!!!”


U.K. Bank Credit Rallies as Johnson Strikes Brexit Deal With EU (UK CoCo Prices Jump, But Not Deutsche Bank’s 6% CoCo)

While the UK Parliament has to sign off on the Brexit agreement, bank credit rallies after Boris Johnson reached an agreement with the EU.

U.K. lenders’ riskiest notes jumped, leading a credit rally, after Prime Minister Boris Johnson reached a Brexit agreement with the European Union.

Barclays Plc’s 1.25 billion pound ($1.6 billion) 5.875% CoCo reversed earlier losses and hit 99.5 pence on the pound, the highest since May 2018, according to data compiled by Bloomberg.


Nationwide Building Society’s 600 million-pound perpetual bond, sold last month, hit a record. Oddly, NBS’s perpetual bond started rising on October 10th, well before PM Boris Johnson announced his Brexit agreement.


A contingent convertible bond (CoCo), also known as an enhanced capital note (ECN) is a fixed-income instrument that is convertible into equity if a pre-specified trigger event occurs.

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A famous CoCo bond is the Deutsche Bank 6% Perpetual.


While issued at par (100), the G-spread on the Deutsche’s 6% CoCo bond is … 11%.


Odd, that DB’s CoCo bond remained relatively calm after the Brexit deal was announced.


Is that UK PM Boris Johnson or Martin Kernsten, the Nipple King from Parks and Recreation?


Its always sunny in the UK!

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.


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


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


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


Minneapolis Fed’s Kashkari Says Banks Didn’t Plan Well for Liquidity Needs (Did The Fed??) Bank Excess Reserves Positively Correlated With Home Price Growth

Neel Kashkari was one of the Godfathers of TARP when he was at Treasury under Henry Paulson,  Here is the longer version of the hearing in which I testified (you can see the back of my head at the beginning of the video).

(Bloomberg) — Minneapolis Fed President Neel Kashkari says banks don’t like to use a so-called discount window for emergency funding because “they think it makes them look weak,” according to an interview with Axios.

Says banks are supposed to plan for their own liquidity needs

Says banks did not do that adequately, “And now they’re complaining because they failed to plan”

Neel, one reason that banks may not want to use the discount window is that is 50 basis points higher than the upper bound of The Fed Funds Target Rate.


What Mr. Kashkari may be saying is bank excess reserves are positively with home price growth. As US home price growth is shrinking, so are bank excess reserves.


The good news for banks is that mortgage originations are a smaller part of their business models. Take JP Morgan Chase, for example. They went from over $60 billion in mortgage originations at the peak of the housing bubble in 2005 to $24.5 billion in Q1 2019.


JP Morgan Chase shifted away from residential mortgages to business loans, credit cards, etc. That is, shorter maturity loans.


Commercial bank credit continues to grow, but no where near the levels of the 2005-2007  credit boom years.

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So, Kashkari bashes banks, but The Fed certainly has their own history of policy errors.


Oyster Stew! Baltic Dry And Cass Freight Indices Still Above 2014-2017 Levels

The Trump Administration’s partial tariff truce with China drew swift criticism for not being enough. For example, from Bloomberg Economics, …

“Past experience is that U.S.–China trade agreements aren’t worth the paper they are written on, and this one hasn’t even been written down. For now, though, indications on trade are a little more positive. If that persists, it could help put a floor under sliding global growth.”

Tom Orlik and Yelena Shulyatyeva, Bloomberg Economics

Take two important shipping indices, the Cass Corp Freight Index (Shipments) and the Baltic Dry Shipping Index. Both indices are still higher today than at any time between 2014-2017.


Sure, the Baltic Dry Index is lower than it was in was in September 2019, just a month ago (white line). But it is still higher than at any time in the 2014-2017 time frame.

The same for the Cass Corp Freight Shipment index (green line) is below its peak in 2018, but still higher than at any point from 2012 to 2017.

So while trade tariff progress is moving along, the media and economists conveniently forget that shipping is still stronger than it was from 2014-2017.

Hence, the media’s negativity about the US-China trade negotiations is just a bowl of oyster stew.

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