Earlier this week, DoubleLine's Jeff Gundlach held his latest webcast with investors in which he warned that as a result of rising hedging costs, US Treasury bonds have become increasingly unattractive to foreign buyers. This can be seen in the chart below which shows the yield on the 10Y US TSY unhedged, and also hedged into Yen and Euros. In the latter two cases, the yield went from over 3%, to negative as a result of the gaping rate differential between the Fed and ECB or BOJ.
This is also why, as the next chart from Gundlach showed, foreign holdings of US Treasurys have been declining in recent years, and dropped to just over 36% as a percentage of total holdings, the lowest in over a decade, as domestic holdings of US paper have risen to just shy of 50%, and near all time highs.
Which brings us to today's latest monthly TIC data which showed that, as Gundlach would expect, the holdings of the two largest foreign US creditors, China and Japan, declined to multi year low.
As shown in the chart below, China’s holdings of U.S. Treasuries fell to the lowest level since mid-2017 as the world’s second-largest economy sold US reserves to stabilize the yuan which has been depreciating in recent months due to the ongoing trade war.
Chinese holdings of U.S. Treasuries declined for a fourth month to $1.151 trillion in September, from $1.165 trillion in August, a $14 billion decline. Despite the drop, China remained the biggest foreign creditor to the U.S., followed by Japan whose Treasury holdings also dropped by $2 billion to $1.028 trillion, the lowest since 2011.
Investors have been searching for clues whether China is dumping its vast holding of U.S. Treasuries to retaliate against U.S. tariffs, though Beijing has given no indication it’s doing so; meanwhile while the TIC data is relatively accurate, it tends to be revised rather materially which is why it is certainly possible that China's real holdings, when adjusted for valuation and currency changes, are far lower.
Of course, instead of selling Treasurys, China may have decided to hold on to its reserves and allow the yuan to depreciate against the USD, but not too much: so far 7.00 has emerged as a "red line" for the PBOC. The Chinese currency has already depreciated more than 4 percent against the dollar in the past year amid signs of an economic slowdown and capital outflows. In September, China’s foreign-exchange reserves stockpile fell by $22 billion to touch the lowest level since July 2017, however much of that number was due to valuation adjustments.
Going down the list, while Russia's Treasury liquidation was well documented in June and July, two new aggressive sellers of US paper emerged in the latest data: France, whose Treasury holdings declined from $118.4BN to $97.7BN...
... and Ireland, which sold over $25BN Treasuries in September, bringing the total to $290BN.
Not everyone was a seller: the infamous Belgium, host of Euroclear, added $10 billion to $164.7BN, likely working on behalf of some unknown foreign entity, while Saudi Arabia added another $6.6BN, bringing its total to a record $176.1BN, perhaps in hopes of showing Trump just what a good friend of the US it is.
Finally, away from US Treasuries, and looking at total flows, foreigners added a total of $7.5BN in long-term US securities, led by nearly $30BN in Agencies.
What was perhaps more notable is that in September, foreigners sold another $16.9BN in US stocks, the 5th consecutive month of selling, matching a record long stretch of foreign sales of US equities, and one during which official and private foreign investors sold a total of $102 billion over the past 5 months, a record high.
The bottom line: Trump told the world he doesn't need its generosity to either fund the US deficit or prop up stocks, and according to recent data, the world has taken up Trump on his dare, and has been actively liquidating US securities.
Will we someday look back on October 2018 as the turning point? As the month began, people were generally feeling pretty good about things, and the U.S. stock market quickly set a new all-time high. But from that point on, the wheels fell off for Wall Street. We just witnessed the worst October for U.S. stocks since the financial crisis of 2008, and at this point more than 8 trillion dollars of global wealth has been completely wiped out. But it isn’t just the stock market that is being shaken. The horrific violence in Pittsburgh is just the latest in a string of events that have rattled the entire nation. Sometimes I feel like I am literally watching the fabric of our society come apart right in front of my eyes. It is almost as if there is a tangible presence of evil in the air, and it seems to be getting stronger over time. For quite a while I have been warning that levels of anger and frustration are rising to unprecedented levels, and all of that anger and frustration is leading people to do things that are absolutely unthinkable. And if people are this crazed now, how bad are things going to get once the economy really starts unraveling?
Let there be no doubt – if U.S. stocks crash really hard, it will cause a massive credit crunch, and that would absolutely strangle economic activity.
Yes, October was bad, but we can recover from what happened in October.
But if November and December are equally as bad or worse, we could have a nightmarish crisis on our hands very rapidly. And many experts believe that this market is ultimately going to decline much, much further.
So it boils down to this: Some stocks have gotten crushed, but the market overall has barely been dented – though the fundamentals are rotten, shares are still ludicrously overpriced, enthusiasm is still exuberant except on bad days, and blind faith in annually rising stock prices still reigns. And the fact that stocks like Tesla [TSLA] or Netflix continue to levitate beyond all reality shows that this downturn has a long way, and years, to go.
The recent market weakness seen over the past two weeks is nothing compared to what’s in store. As we’ve been carefully chronicling, bubbles burst from ‘the outside in’, starting at the weaker places at the periphery before progressing to the center.
Emerging market equities are now down -26% from their January highs and -18% year-to-date. China’s stock market is down -32%, even with substantial intervention by the government to prop things up.
The periphery has been weakening all year, and the contagion has now spead worldwide.
But when I talk about a “perfect storm”, I am not just talking about money.
For years, I have been warning that the thin veneer of civilization that we all take for granted on a daily basis is rapidly disappearing, and the events of this past week made this exceedingly clear…
Wednesday, a white man with a history of violence shot and killed two African-Americans, seemingly at random, at a Kentucky Kroger store following a failed attempt to barge into a black church.
After mail bombs were being sent to people who’d been criticized by the President, a suspect was arrested Friday — a man who had railed against Democrats and minorities with hate-filled messages online.
And Saturday morning, a man shouting anti-Semitic slurs opened fire at a Pittsburgh synagogue, killing 11 people attending Jewish services.
I will not ever be able to understand the kind of hate that we have been witnessing. I have always preached against racism, and I even included an entire chapter against racism in my latest book. There is absolutely no room for racism in America, but it just seems to keep growing.
We are facing overwhelming challenges as a society, and if we do not learn how to love one another there is no way that we are going to make it.
This is a time of great governmental shaking as well. On November 6th, some candidates will win and some candidates will lose, but the hatred being expressed on both sides will not go away. Sadly, the truth is that there are corrupt politicians all around us, and the American people have been rapidly losing faith in our system. If the corruption is not cleaned up and some way is found to restore faith in our system of government, it is only a matter of time before it collapses.
On top of everything else, we also live at a time of impending global conflict. A major regional war could erupt in the Middle East at any time, and Russia and China are openly warning that they are “preparing for war” with the United States. World War 3 is a lot closer than people realize, and the fact that our relationships with both Russia and China are rapidly going downhill is a major concern.
And of course the planet itself is increasingly becoming unstable. Earthquakes and volcanic eruptions appear to be growing in both size and intensity, and massive storms have been hammering communities all over the globe in recent months.
The giant rock that we all live on is rapidly changing, and many believe that the Earth changes that we are currently witnessing are going to escalate dramatically in the years ahead.
Many ordinary Americans seem unconcerned about everything that is going on, and perhaps that is because they are unaware of the bigger picture. But the elite are definitely freaking out. In fact, the New York Times just published an article about how demand for private security services is higher than ever…
At Pinkerton, a private security and detective agency founded in 1850, requests for executive security have increased 20 to 30 percent annually over the last five years, said its vice chairman, Tim Williams. And people are looking for safeguards in all areas of their lives that pose risks, experts say, including information technology and social media.
We are entering a time that will cause many to have great fear, but now is not a time to be scared.
It is when times are the darkest that light is needed the most, and I believe that this coming “perfect storm” will be an absolutely thrilling time to be alive.
Yes, life is going to become a lot more uncomfortable for all of us, but it is during times of great challenge that we find out what is truly inside of us. This will be a time when some will show that they are great villains, but many will also emerge as great heroes.
We have reached a critical juncture in human history, and everything is about to change. I would encourage you to be a light in the darkness, because that is going to be greatly needed in the days ahead.
The Last Days Warrior Summit is the premier online event of 2018 for Christians, Conservatives and Patriots. It is a premium members-only international event that will empower and equip you with the knowledge and tools that you need as global events begin to escalate dramatically. The speaker list includes Michael Snyder, Mike Adams, Dave Daubenmire, Ray Gano, Dr. Daniel Daves, Gary Kah, Justus Knight, Doug Krieger, Lyn Leahz, Laura Maxwell and many more. Full summit access will begin on October 25th, and if you would like to register for this unprecedented event you can do so right here.PritEquity Market Selloff Resembles Liquidity Squeeze of 2000
Equity Market Selloff Resembles Liquidity Squeeze of 2000
By Joseph Carson, Former Director of Global Economic Research, Alliance Bernstein.
The abrupt and sharp decline in equity prices in recent weeks has been largely pinned on the Federal Reserve as policymakers continue to move forward with their plan to raise official rates. Yet, the sell-off in the equity market is much more complex and in some ways resembles the early stages of the liquidity squeeze and the high equity valuations of 2000. Here’s why.
First, according to my estimates, the market valuation of household holdings of real and financial assets topped 6.1 times the level of nominal GDP at the end of Q3 2018, exceeding the peak valuations that occurred during the end of tech-equity bubble (5.1) and the housing-bubble (5.8). History shows that asset markets are most vulnerable when expectations of business profits and market returns outrun the economy’s fundamentals for a long period. In other words, the markets have a lot of good news priced in and need a constant of flow of even better news and more liquidity to continue to run hot.
Second, the liquidity backdrop is deteriorating. My proprietary liquidity index, which was developed years ago by the Department of Commerce and is based on the growth in real broad money, the change in business and consumer credit growth and new flows into liquid assets, has slowed dramatically over the course of the past year. The slowdown in liquidity growth has been underway for almost a year and resembles that of 2000. That by itself is a major warning sign for the financial markets, especially for the high-priced growth stocks.
Third, the US economy is absorbing more and more of the liquidity flows to finance the sharp acceleration in nominal GDP growth. Through the year ending in the third quarter of 2018 nominal GDP growth is estimated to have increased 5.5%, which is nearly 200 basis points faster than the average of the Nominal GDP growth rate of the past 8 years of the expansion and the fastest growth rate since early 2006. A large part of the acceleration in nominal GDP growth is directly linked to the changes in fiscal policy as Congress raised defense spending and discretionary domestic spending by over $300 billion for the next two fiscal years and also cut business and individuals taxes.
The bottom line is that the wide swing in equity prices is driven by confluence of factors and the revaluation process has just begun. The most important factor is the concomitant decline and shift in liquidity flows. To be sure, the collision between monetary policy draining liquidity and fiscal policy transferring more liquidity to the real economy results in a double whammy for the financial markets.
While some of these characteristics were also present in the tech-equity sell-off of 2000 what makes the current environment different and more risky is that asset valuations are at higher highs and stance of monetary policy is far from being even neutral. Indeed, today the real federal funds rate is still close to zero, and in 2000 it was around 400 basis points. As policymakers continue to lift official rates it's hard to see how that process of interest rate normalization does not lead to an additional squeeze on liquidity resulting in continued high volatility in financial markets, downward pressure on the market’s multiple and financial assets in general.
Stock Market Plunges Again – Global Stocks Down 5 Weeks In A Row – 8 Trillion Dollars In Wealth Wiped Out
It’s not over. The worst October stock market crash since 2008 got even worse on Friday. The Dow was down another 296 points, the S&P 500 briefly dipped into correction territory, and it was another bloodbath for tech stocks. On Wednesday, I warned that there would be a bounce, and we saw that happen on Thursday. But the bounce didn’t extend into Friday. Instead, we witnessed another wave of panic selling, and that has many investors extremely concerned about what will happen next week. Overall, global stocks have now fallen for five weeks in a row, and during that time more than 8 trillion dollars in global wealth has been wiped out. That is the fastest plunge in global stock market wealth since the collapse of Lehman Brothers, and it is yet another confirmation that a major turning point has arrived.
The wild swings up and down that we witnessed this week are very reminiscent of what we saw in 2008.
Markets just don’t go down in a straight line. In fact, some of the best days in all of Wall Street history happened right in the middle of the last financial crisis.
When markets are very volatile, the overall trend tends to be down. So what investors should be hoping for are extremely boring days on Wall Street when not much happens. That has been the usual state of affairs for much of the past decade, but now volatility has returned with a vengeance. The following is how CNBC summarized the carnage that we witnessed on Friday…
The Dow Jones Industrial Average closed 296.24 points lower at 24,688.31 after dropping 539 points at its lows of the day. The Nasdaq Composite dropped 2.1 percent to 7,167.21. At its lows, the tech-heavy Nasdaq had fallen more than 3 percent.
The S&P 500 fell 1.7 percent to 2,658.69 and briefly entered into correction territory, trading more than 10 percent below its record high reached in September. The average stock market correction, since WWII, results in a 13 percent drop and lasts for four months if it does not turn into a full-fledged bear market.
Larry Benedict, CEO of The Opportunistic Trader, said traders “don’t want to be long heading into the weekend.” He added, “S&P now down on the year and people are more afraid to be long today than they were when market was 10 percent higher.”
And when you step back and take a longer-term view of things, the devastation is breathtaking. The following facts come from Zero Hedge…
Dow down 9% from record high (down 4 of last 5 weeks)
S&P down 10.1% from record high (down 4 of last 5 weeks)
Nasdaq down 13% from record high (down 4 weeks in a row)
Dow Transports down 15.2% from record high (down 6 weeks in a row)
Small Caps down 15.8% from record high (down 6 weeks in a row)
More importantly, global systemically important bank stocks have now fallen for 5 weeks in a row, and they have now plunged more than 30 percent from the peak.
In other words, the “too big to fail banks” around the world have already seen almost a third of their value wiped out.
There are quite a few global candidates that could potentially become “the next Lehman Brothers”, and once one “too big to fail bank” goes down, it could escalate this new financial crisis very rapidly.
But for most ordinary Americans, the main concern is about keeping their own money safe. Thanks to low returns almost everywhere else, more retirement money is in the stock market than ever before, and many Americans are very anxious about what a stock market crash would mean for their savings…
Experts say big sell-offs are often a good time for investors to double down on their investments. One recommended looking for companies that are expected to post healthy gains in sales and earnings. A strong balance sheet and a steadily growing dividend don’t hurt either.
“With earnings season in full force, this is when stock pickers can add a lot of value,” said Ernesto Ramos, managing director of active equities with BMO Global Asset Management. “There really was no good reason for the market to be down as much as it was Wednesday.”
That is about the exact opposite from the advice that they should be giving, but unfortunately this is the narrative that we get from the corporate media before every major crisis.
October has historically been the most volatile month for stocks, and without a doubt this has been a wild month. Of course the midterm elections are coming up early next month, and those results could potentially spook investors. But once we get past that, hopefully the markets will start to settle down.
But if things continue to unfold as they did in 2008, this crisis could continue to escalate during the months ahead, and that would especially be true if some sort of “trigger event” sent a major surge of panic through the marketplace.
At this point, investors are extremely jumpy. For example, even though Amazon reported very good earnings this week, the stock crashed on Friday because revenue growth was slightly below expectations.
Any piece of bad news could send the markets tumbling right now, and if a major disaster were to happen we could be talking about a total collapse.
The Last Days Warrior Summit is the premier online event of 2018 for Christians, Conservatives and Patriots. It is a premium members-only international event that will empower and equip you with the knowledge and tools that you need as global events begin to escalate dramatically. The speaker list includes Michael Snyder, Mike Adams, Dave Daubenmire, Ray Gano, Dr. Daniel Daves, Gary Kah, Justus Knight, Doug Krieger, Lyn Leahz, Laura Maxwell and many more. Full summit access will begin on October 25th, and if you would like to register for this unprecedented event you can do so right here.
THE US DOLLAR IS DONE: China & Saudi Arabia Will Trade Oil In Yuan
KSA has been trading their oil to China for dollars for decades. China’s looking to change that, and the rest of the world will follow suit. Here’s more…
Josh Sigurdson talks with author and economic analyst John Sneisen about the currency swaps happening across the board as China convinces Saudi Arabia to trade oil in Yuan.
For years, Saudi Arabia has traded with China in US Dollars, the world reserve currency, frustrating China. Well now, as the US dollar sees its inevitable precipice, China says they will compel Saudi Arabia to trade oil in Yuan! If this is done, most experts believe the rest of the oil market will move with them.
China has been attempting to establish itself as the world reserve currency for quite some time as power incrementally shifts. It’s a massive phenomenon that’s not likely to stop any time soon.
Saudi Arabia is the kingpin of OPEC and the IMF is looking to base its headquarters in China in the next few years if all works out as planned.
This isn’t to mention the fact that China is pushing its centrally planned digital currency system or cashless society as the state gets more technocratic by the day, pushing social credit scores and examining every square foot with facial recognition technology.
Individuals must decentralize and find a way out of this dependent system or being forced into it with little recourse. Self sustainability and independence is key!
Even SocGen's Albert Edwards was surprised at how quickly his latest predication was validated.
Recall that 3 weeks ago with the 10Y yield at 3.10%, with Edwards looking at the surge higher in 10Y Yields the SocGen strategist pointed out that the break in the 10y above 2.8% was not the key level that could mark the end of the secular bull market, but rather it was the 3.05% zone as shown in the chart below.
Commenting on this breakout, he said that rates might surge further and addressed whether this would mean the end his "Ice Age" thesis. As he noted, if investors “get the wrong side of a new multi-year bear market in government bonds, all investment portfolios will be shredded to ribbons as bonds are the cornerstone of most equity valuation models”.
Fast forward to today when in his latest note he writes "let me be totally honest: I was most surprised that the US 10y yield managed to smash through its multi-decade downtrend last week, mainly due to the fact that the CFTC data showed that speculators had already built unprecedented large short positions. It seemed that every man, woman and child was already bearish and so who was left to sell? Well clearly someone was! One thing that helped tip bond prices over the edge and take yields up to 3¼% was the fundamental support from stronger than expected economic data (see chart below). "
Another factor for the latest breakout in yields which pushed the 10Y interest rate to fresh 7 years highs was the previously discussed economic exuberance by Fed Chair Powell who managed to convince markets that they were still too sanguine on their expectations on interest rates, "and the futures strip ratcheted up another notch towards the Fed dots."
The speech last week by Fed Chair Powell was interpreted as unusually upbeat - referring to a remarkably positive outlook for the economy. This contributed to the surge in expectations for further tightening throughout next year. For, although expectations for tightening in the first half of next year had been rising for some time, until very recently this had merely pulled rate hikes forward from H2 to H1. In recent weeks, expectations of more rate hikes have risen sharply in both halves of next year and even spilled into 2020.
Yet while he may have called the short-term move in rates correctly, Edwards is anything but a bond bear. In fact, quite the opposite, and as he notes, "despite the highly significant technical breech of the critical 3.05% long-term secular downtrend, I still stand by my forecast that US 10y yields will go deeply negative in the next recession (to around minus ½-1%)."
I recently reviewed the Global Strategy Weekly of 13 June 2007 when I was at Dresdner Kleinwort (I was not able paste the pdf into this weekly for copyright reasons). Then the remarkably similar and decisive break in the 20-year downtrend of bond yields did not mark the end of the bull market, despite 10y yields breaking above 5.05% and rising to 5¼%.
Edwards than reminisces that as Q3 2007 progressed, "yields slumped towards 4% as the bond market began to sniff the recessionary vapours." And, just like now, equities ignored the signs of course and made new highs in October a few weeks after the Fed’s first rate cut. "But by December, less than six months after the June peak in yields, the US economy had entered the very worst of recessions" Edwards notes, a point he made last month when he laid out the reasons why the next recession "might be only six months away."
As a result, and contrary to conventional wisdom, Edwards continues to think that "recession and a collapse in bond yields is a greater threat to equities than a further push up in yields from this point, especially given the over-extension of speculative
shorts."
Having broken above 3.05%, do not be surprised if this sell-off loses energy.
Maybe, but not today, because even with the disappointing core CPI print, which missed on the biggest plunge in used-car prices in 15 months, the 10Y is already higher than before the number was released.
Having thus concluded his traditionally deflationary view on bonds, Edwards then focuses on Italy, where he highlights one specific chart, which he carries "in my handout while I discuss Italy’'s dire long-term economic situation within the eurozone, which has resulted (unsurprisingly) in a populist backlash. Frankly, I am surprised that it has taken so long to reach this crunch point."
The chart comes from an excellent recent article in Politico magazine. The full article is well worth reading to understand the hostility in Italy towards the EU, particularly among the young. Politico notes, “In countries like France, the U.K., Germany and the Netherlands, polls show a notable generational difference in attitudes toward the EU. Young people tend to feel more positively toward the bloc, while older people tend to hold less favourable opinions. In Italy, the trend is reversed.” Voters under 45 are significantly more likely to vote to leave the EU (51%, compared to 26% over 45), according to a study conducted by Benenson Strategy Group in October 2
To Edwards, this suggests that "the passing of time will only make anti-EU sentiment worse as the older cohort who approve of the EU die" and is the opposite in the UK where Remainers hope a second referendum may change the result purely due to demographic change since the last vote.
In other words, "in Italy time is not a healer. Time is the one thing the pro-EU establishment does not have on its side in Italy."
* * *
So putting it all together, here is Edwards' traditional punchline which, it will come as no surprise to anyone, is of the doom and gloomy variety:
Equity investors are facing the four horsemen of the apocalypse thundering towards them. Out in front leading the charge is the surge in US bond yields, but close on its heels is the escalating trade war and the instability in emerging market currencies. The final but probably most unpredictable horseman is the current faceoff between the Italian government and the European Commission on Italy’s budget deficit.
And in case this was not graphic enough, Edwards also compares what lies in store for equity investors to the fiery death of citizens of Pompei that took place shortly after Vesuvius erupted:
I just can’t seem to escape the financial markets though, because as I saw the cowering skeletal remains in Herculaneum, I was minded of how equity investors might soon feel. They have a big decision to make. Is the eruption in the bond market subsiding? Is it safe to stay in equities and return to normal domesticity, or should they flee?
It’s all very well to say that the victims of Pompeii and Herculaneum should have heeded the warning signs in the weeks leading up to the devastating eruption of 79AD. But equity investors might be ignoring similar early warning signs that the bond market is giving.
“After 12 hours huddled in the beachside boat houses, the refugees from Herculaneum had probably assumed that the worst was over. Vesuvius had been erupting all day and, apart from the hail of pumice, there seemed to be no obvious danger. Yet as the 300 men, women and children sat in the semi-darkness debating whether to return to their homes or flee down the coast, a scorching cloud of superheated volcanic ash burst into the crowded shelters. They were instantly fried alive.”
Edwards' recommendation: when you see a volcano erupt next you, run.
