David M Glassman, President

3055 Harbor Drive, Suite 1101

Fort Lauderdale, Florida 33316

Email: Stockmarketdoc@comcast.net


May 23, 2018



The Next Recession Will Be Devastatingly Non-Linear


The acceleration of non-linear consequences will surprise the brainwashed, loving-their-servitude mainstream media.

Linear correlations are intuitive: if GDP declines 2% in the next recession, and employment declines 2%, we get it: the scale and size of the decline aligns. In a linear correlation, we'd expect sales to drop by about 2%, businesses closing their doors to increase by about 2%, profits to notch down by about 2%, lending contracts by around 2% and so on.

But the effects of the next recession won't be linear--they will be non-linear, and far more devastating than whatever modest GDP decline is registered. To paraphrase William Gibson's insightful observation that "The future is already here — it's just not very evenly distributed": the recession is already here, it's just not evenly distributed-- and its effects will be enormously asymmetric.

Non-linear effects can be extremely asymmetric. Thus an apparently mild decline of 2% in GDP might trigger a 50% rise in the number of small businesses closing, a 50% collapse in new mortgages issued and a 10% increase in unemployment.

Richard Bonugli of Financial Repression Authority alerted me to the non-linear dynamic of the coming slowdown. I recently recorded a podcast with Richard on one sector that will cascade in a series of non-linear avalanches once the current asset bubbles pop and the current central-bank-created "recovery" falters under its staggering weight of debt, malinvestment and speculative excess.

The Intensifying Pension Crisis (37-minute podcast)

The core dynamic of the next recession is the unwind of all the extremes:extremes in debt expansion, in leverage, in the explosion of debt taken on by marginal borrowers, in malinvestment, in debt-fueled speculation, in emerging market debt denominated in US dollars, in financial repression, in political corruption--the list of extremes that have stretched the system to the breaking point is almost endless.

Public-sector pensions are just the tip of the iceberg. What happens when the gains in equities and bonds that have nurtured the illusion that public-sector pension funds are solvent and can be funded by further tax increases reverse into losses?

Pushing taxes high enough to fund soaring public pension obligations will spark taxpayer revolts as the tax increases will be monumental once the delusion of solvency is stripped away in the upcoming recession.

The entire status quo rests on the marginal borrower/buyer. All the demand for pretty much anything has been brought forward by the central banks' repression of interest rates and the relentless goosing of liquidity: anyone who can fog a mirror can buy a vehicle on credit, get a mortgage guaranteed by a federal agency, or pile up credit card and student loan debts.

Those with stock portfolios can gamble with margin debt; those with access to central bank credit can borrow billions to fund stock buy-backs or the purchase of competitors, the better to establish a cartel or quasi-monopoly.

What's not visible in all the cheery statistics is how many enterprises and households are barely keeping their heads above water as inflation shreds the purchasing power of their net incomes. Inflation is supposedly tame, but once again, following Gibson's aphorism, inflation is already here, it's just not evenly distributed.

While employees with employer-paid health insurance are dumbstruck by $50 or $100 increases in their monthly co-pays, those of us who are paying the unsubsidized "real cost of health insurance" are being crushed by increases in the hundreds of dollars per month.

The number of cafes, restaurants and other small businesses with high fixed costs that will close as soon as sales falter is monumental. Add up soaring healthcare premiums, increases in minimum wages, higher taxes and junk fees and rising rents, and you have a steadily expanding burden that is absolutely toxic to small businesses.

The first things to go are marginal employees, overtime, bonuses, benefits, etc.--whatever can be jettisoned in a last-ditch effort to save the company from insolvency. The first bills cash-strapped households will stop paying are credit cards, auto loans and student loans; defaults won't notch higher by 2%; they're going to explode higher by 20% and accelerate from there.

Here are a few charts that reveal the extremes that have been reached to maintain the illusion of "recovery" and normalcy: total credit has exploded higher, after a slight decline very nearly brought down the global financial system in 2008-09:


The massive expansion of assets purchased by central banks will eventually be slowed or even unwound, removing the rocket fuel that's pushed stocks and bonds to the moon:


As governments/central banks borrow/print "money" in increasingly fantastic quantities to keep the illusion of "recovery" alive, the currencies being debauched lose purchasing power. Venezuela is not an outlier; it is the first of many canaries that will be keeling over in the coal mine.


Wide swaths of the economy won't even notice the recession devastating the rest of the economy, at least at first. Public employees will be immune until their city, county, state or agency runs out of money and can no longer fund its obligations; shareholders of Facebook et al. who cashed out at the top will be doing just fine, booking their $18,000 a night island get-aways, and those few willing to bet on declines in the "everything bubbles" of real estate, stocks and bonds will eventually do well, though the Powers That Be will engineer massive short-covering rallies in a last-ditch effort to mask the systemic rot.

The acceleration of non-linear consequences will surprise the brainwashed, loving-their-servitude mainstream media. The number of small businesses that suddenly close will surprise them; the number of homeowners jingle-mailing their "ownership" (i.e. obligation to pay soaring property taxes) to lenders will surprise them; the number of employees being laid off will surprise them, and the collapse of new credit being issued will surprise them.

Don't be surprised; be prepared.













Learning From America's Forgotten Default


One of the most pervasive myths about the United States is that the federal government has never defaulted on its debts. There’s just one problem: it’s not true, and while few people remember the "gold clause cases" of the 1930s, that episode holds valuable lessons for leaders today.


One of the most pervasive myths about the United States is that the federal government has never defaulted on its debts. Every time the debt ceiling is debated in Congress, politicians and journalists dust off a common trope: the US doesn’t stiff its creditors.

There’s just one problem: it’s not true.

There was a time, decades ago, when the US behaved more like a “banana republic” than an advanced economy, restructuring debts unilaterally and retroactively.

And, while few people remember this critical period in economic history, it holds valuable lessons for leaders today.

In April 1933, in an effort to help the US escape the Great Depression, President Franklin Roosevelt announced plans to take the US off the gold standard and devalue the dollar. But this would not be as easy as FDR calculated. Most debt contracts at the time included a “gold clause,” which stated that the debtor must pay in “gold coin” or “gold equivalent.” These clauses were introduced during the Civil War as a way to protect investors against a possible inflationary surge.

For FDR, however, the gold clause was an obstacle to devaluation. If the currency were devalued without addressing the contractual issue, the dollar value of debts would automatically increase to offset the weaker exchange rate, resulting in massive bankruptcies and huge increases in public debt.

To solve this problem, Congress passed a joint resolution on June 5, 1933, annulling all gold clauses in past and future contracts. The door was opened for devaluation – and for a political fight. Republicans were dismayed that the country’s reputation was being put at risk, while the Roosevelt administration argued that the resolution didn’t amount to “a repudiation of contracts.”

On January 30, 1934, the dollar was officially devalued. The price of gold went from $20.67 an ounce – a price in effect since 1834 – to $35 an ounce. Not surprisingly, those holding securities protected by the gold clause claimed that the abrogation was unconstitutional. Lawsuits were filed, and four of them eventually reached the Supreme Court; in January 1935, justices heard two cases that referred to private debts, and two concerning government obligations.

The underlying question in each case was essentially the same: did Congress have the authority to alter contracts retroactively?

On February 18, 1935, the Supreme Court announced its decisions. In each case, justices ruled 5-4 in favor of the government – and against investors seeking compensation. According to the majority opinion, the Roosevelt administration could invoke “necessity” as a justification for annulling contracts if it would help free the economy from the Great Depression.

Justice James Clark McReynolds, a southern lawyer who was US Attorney General during President Woodrow Wilson’s first term, wrote the dissenting opinion – one for all four cases. In a brief speech, he talked about the sanctity of contracts, government obligations, and repudiation under the guise of law. He ended his presentation with strong words: “Shame and humiliation are upon us now. Moral and financial chaos may be confidently expected.”

Most Americans have forgotten this episode, as collective amnesia has papered over an event that contradicts the image of a country where the rule of law prevails and contracts are sacred.

But good lawyers still remember it; today, the 1935 ruling is invoked when attorneys are defending countries in default (like Venezuela). And, as more governments face down new debt-related dangers – such as unfunded liabilities associated with pension and health-care obligations – we may see the argument surface even more frequently.

According to recent estimates, the US government’s unfunded liabilities are a staggering 260% of GDP – and that does not include conventional federal debt and unfunded state and local government liabilities. Nor is this a problem only for America; in many countries, pension and health-related liabilities are increasing, while the ability to cover them is diminishing.

A key question, then, is whether governments seeking to adjust contracts retroactively may once again invoke the legal argument of “necessity.” The 1933 abrogation of the gold clause provides abundant legal and economic reasons to consider this possibility. The US Supreme Court agreed with the “necessity” argument once before. It is not far-fetched to think that it may happen again.


Visualizing What Happens In An Internet Minute In 2018


In your everyday life, a minute might not seem like much.

But, as Visual Capitalist's Jeff Desjardins notes, when it comes to the vast scale of the internet, a minute of time goes much further than you ever could have imagined. That’s because the internet has a degree of scale that our linear human brains are unaccustomed to operating on.

An internet minute in 2018

Today’s infographic is from Lori Lewis and Chadd Callahan of Cumulus Media, and it shows the activity taking place on various platforms such as Facebook or Google in each 60 second span.


Courtesy of: Visual Capitalist

It really helps put an internet minute in perspective.

Just a minute, please

The numbers for these services are so enormous that they can only be shown using the 60 second time scale.

Any bigger, and our brains can’t even process these massive quantities in any useful capacity. Here are just a few key numbers scaled to a monthly basis, for fun:

42,033,600,000 Facebook logins

159,840,000,000 Google searches

1,641,600,000,000 WhatsApp messages sent

8,078,400,000,000 emails sent

On an annualized basis, the data becomes even more ridiculous, with something close to 100 trillion emails sent. (No wonder it’s so hard to get to inbox zero!)

Previous minutes

If the internet minute visualization looks familiar, that’s because it gets updated and re-released every year using the latest data available. See below for a direct comparison of the last two years:


Image: Visual Capitalist

The biggest and most noticeable jump comes in Netflix hours watched – a number which we believe may be too good to be true. While we have not seen the exact methodology of these calculations, we do know that in December it was announced by Netflix that users were watching approximately 140 million hours per day. This works out to roughly 100,000 hours per minute according to our math, which is still mind-boggling.

See the additional evolution of this chart by checking out the 2016 version as well.


Over 80% Of 2017 IPOs Had 'Negative' Earnings - Most Since Dot-Com Peak


2017 was a banner year for many things - record low volatility, record high complacency, and record amounts of money printed by the world's biggest central banks, among many others.

All of which heralded the belief in the super-human, 'can-do-no-wrong' venture capitalist... and of course the 'exit' cash-out moment.


108 operating companies went public in the U.S. in 2017 with the average first day return a healthy 15.0% - well above the average 12.9% bump seen since the start of the 21st century.

But of most note in years to come, we suspect, is the fact that over 80% of IPOs in 2017 had negative earnings... the most since the peak of the dot-com bubble in 1999/2000...


Source: Jay Ritter, University of Florida

Put a slightly different way, 2017 was the biggest "money for nothing" year since Pets.com... consider that the next time you're told to buy the dip. Remember the only reason "the water is warm" is because it has been 'chummed' by the the last greater fool ready for the professional sharks to hand their 'risk' to...



















Credit Card Delinquencies Spike Past Financial-Crisis Peak


Subprime is calling...

In the first quarter, the delinquency rate on credit-card loan balances at commercial banks other than the largest 100 – so at the 4,788 smaller banks in the US – spiked in to 5.9%. This exceeds the peak during the Financial Crisis. The credit-card charge-off rate at these banks spiked to 8%. This is approaching the peak during the Financial Crisis.

A sobering set of numbers the Federal Reserve Board of Governors releasedthis afternoon.

But overall, across all commercial banks, including the largest banks with the largest credit-card loan balances outstanding, the delinquency rate was 2.54% (not seasonally adjusted). This overall rate was pushed down by the largest 100 banks, whose combined delinquency rate in Q1 was 2.48%.

These large banks have been offering appealing incentives to consumers for years, and they’ve been going after consumers with the higher credit ratings, and they’ve been following good underwriting practices – having not yet forgotten the lesson from the last debacle – and this conservative approach is now helping to keep losses down.

But the thousands of smaller banks couldn’t compete with those offers, and so they got deeply into subprime cloaked in sloppy underwriting. This way, they were able to reel in new credit-card customers that the big banks didn’t want, and those customers needed the money and charged up their new cards in no time, and the interest rates of 25% or 30% looked good on the banks’ income statement and helped maximize executive bonuses, yes even at smaller banks.

But turns out, those banks had reeled in the most fragile customers and had eagerly doused them in irresponsible levels of debt at usurious interest rates – and now what? These customers won’t ever be able to pay off the balances or even pay the interest. For many of them, there’s only one way out. This caused the delinquency rate to spike from 3.81% to 5.90% in just three quarters.

This chart shows delinquency rates for the largest 100 banks (blue line) and for the remaining 4,788 banks (red line):


Credit card balances are deemed “delinquent” when they’re 30 days or more past due. The rate is figured as a percent of total credit card balances. In other words, among the smaller banks, nearly 6% of the outstanding credit card balances are now delinquent.

The bank tries to collect these delinquent loans, and some customers are able to catch up. Others are not. After recovering what it could, the bank moves the remaining delinquent balance out of the delinquency basket and into the charge-off basket. This is when the loan is “charged off” against loan loss reserves.

These charge-offs among the largest 100 banks rose to 3.73% in Q1 (not seasonally adjusted), the highest since the first quarter 2013.

But among the remaining 4,788 banks, the charge-off rate spiked to 7.99%, the highest since Q2 2010. The rate among smaller banks had peaked during the Financial Crisis in Q4 2009 at 8.78%:


Both charts show that the largest 100 banks had suffered massive losses during the Financial Crisis as their credit card loans blew up, and as consumers, many of whom had lost their jobs, could no longer keep up with their credit card debts.

The smaller banks had been more conservative leading up to the Financial Crisis, and their delinquency and charge-off rates had been somewhat less catastrophic.

The difference between then and now is that back then, unemployment was heading toward 10% and millions of people had lost their jobs; now the unemployment rate is near historic lows and the economy is humming. Yet already the smaller banks are booking these losses on their credit card portfolios. What will they do when the economy ever slows down?

That was a rhetorical question.

In the overall scheme of things, these 4,788 smaller banks hold only a small portion of all banking assets, including credit card balances. Of the $1 trillion in credit debt outstanding, these small banks hold only a fraction. So they won’t jeopardize the US financial system. And that’s why the Fed, as banking regulator, is relatively sanguine about these dizzying charge-off rates at the smaller banks.

But the surge in charge-offs at these banks points at something fundamental: Credit problems at the margin. The consumer spending binge in recent years has been funded not by surging incomes at the lower 60% of the wage scale, where real wage stagnation has reigned, but by borrowing – particularly via credit cards and auto loans. Both of them have turned sour at the margins. And these are still the best of times.

Only about half of retail is under attack from e-commerce, but that half is getting crushed. Read… Brick & Mortar Meltdown Pummels These Stores the Most



4 Reasons Why Markets Will Crash Again

Blackest Of Fridays

The closing bell had just stopped ringing. The phones certainly had not. It had been obvious to all of us for several hours now that equity markets had crashed. There were no circuit breakers in place. There were no algorithms. There were no methods of immediate electronic order execution in place. Bids and offers still had to be publicly (and verbally) announced at the point of sale.


My spot was just under the podium where television viewers now watch that already mentioned closing bell ring every day. The financial media still was not permitted on the trading floor. That was still several years in the future. They waited for us out on Broad Street... in hordes. They would wait for a while. Most of us would not leave the floor that night until close to midnight. Most of us would be in round the clock meetings... for a week.

The date was October 19th, 1987. As a group, traders were physically depleted due to the labor intensive nature of the job in those days. We have experienced several market "crashes" across the decades that have passed since. Of course nothing even comes close in terms of what can be lost over a single trading session. Still, the money disappears... but, quietly. Maybe, just maybe that's even more dangerous. Maybe.

Markets Will Crash Again

When? Tough question. One thing we do know though, is that highs and lows do happen, and the further down the road we go, there seems to be greater reliance upon speed, and less upon sentient price discovery at a centralized point of sale. You and I, and every honest person who watches the marketplace know that this is dangerous.


If we are unable to ascertain the when, are we able to determine the why? Why will markets crash next time? Four obvious reasons are:

1) Policy Error

Eventual policy error is almost written in stone. The Federal Reserve is in a tough spot. No joke. The economy is growing. Q2 GDP, if you follow the Atlanta Fed, is running at an annualized pace of 4.1%. Inflation seems to be rearing its ugly head in spots. Gasoline prices are on the rise. Input prices are rising in terms of labor costs, and prices both paid and received at the manufacturing level. Still, the central bank continues to stay on the course of regularly scheduled normalization while drawing down the balance sheet. Dangerous? Of course. The inevitable conclusion is an overall reduction in liquidity for the economy in general. The only way for this to work is for the economy itself to expand faster, and consumer level inflation to outgrow the speed with which monetary conditions tighten.

Fed Chairs of yesteryear used to refer to this as "breakaway speed". Poor Jay Powell. Really. It's a tightrope that the central bank must now walk. Extremely loose monetary policy has helped this nation avoid a depression. Or was it merely a delaying tactic? Wage growth still has not picked up to the point of personal comfort. You just have to talk to people to understand that. Corporate earnings are excellent, as is forward looking guidance. That said, most of this guidance was computed using cheaper US dollars than we have this morning. Tighter monetary conditions equal even more expensive US dollars. There is no way around that. That will eventually be a headwind for US large caps, as will the fact that the rest of the planet just does not seem to be sticking to the whole synchronized global growth script. There are holes there.

2) The Complexity Of It All

Economies in general, and financial markets in specific are more complex than ever. To identify existing bubbles well enough to avoid exposure in a timely fashion is much more difficult than it was 20 or 30 years ago. Even if identified, are these areas easily avoidable? The next "Black Swan" event will not likely be something so obvious as an act of war (though, it could be). It could, and likely will come from an area of perceived safety. One grand example of this, in my opinion, would be the crowd mentality of passive investment. We have seen repeatedly since January of this year what happens when index or sector funds try to blindly rotate. Innocent parties get hurt along with the guilty. Guilty parties are rewarded along with the innocent, depending on what types of funds hold the shares.

We could go on and on. Leveraged and inverse strategies based on using instruments that can barely be described without referring to a quant. Central banks holding assets (such as stocks and ETFs) that they have no proper business ever holding, and of course... artificially impacting the price of credit across time. Does that pervert the legitimacy of price discovery? Well, no kidding, Sherlock. Does this blow up on somebody? Yes. When?

3) Fiscal Irresponsibility

I loved the tax cuts. I bet most of you did too. It's plain to see that corporate America does as well. There is a date out there, kids. I can't tell you when it is, but there is a date when society in general will have to pay the piper. There is also a pretty good chance that both society and the piper will be angry on that day. This, unfortunately, is a problem many decades in the making, and this kind of deficit spending is now habit. Politicians can not get elected by promising to be responsible. They have to offer to give without taking.

Guess what? This growing irresponsibility is also global. In fact, it's rampant. The eventual reset is inevitable. Do we fear? No, we never fear. What do we do? We stay disciplined. We stay focused on mission. I can help you with that too. Let's explore.

4) Current Conditions

These are well known, topical factors. That said, these items can cause plenty of volatility. They can cause headaches, but in the end they are usually tradable. What do I mean by this? Chaos in Washington? Instability in the Middle East? Trade concerns? China, NAFTA. Both sides play nice. Both sides play hardball. The president makes a peace offering regarding ZTE (ZTCOY) . China seems receptive. The administration pulls back on playing well with ZTE. China has North Korea pull back on meeting with South Korea, as well as the US.

This is all very cat and mouse and will both impact corporate input costs as well as earnings. That, in turn, will impact inflation. Then again, is it all part of the game? Does this type of unpredictable event force something along the lines of a policy error, or a pop somewhere unforeseen in a complex system?

Rock And Roll

I could tell you to buy gold now that the market price has come in on dollar strength. Actually that probably would be a wise purchase along with some stored clean water and canned foods. What we really have to do though, and what has served me well over the years is to simply trade the environment provided.

There is nothing wrong with preparing for a date with destiny. Just do not let that consume you. By embracing earnings growth, economic expansion, and lower tax rates, by embracing a core set of disciplines, and remaining flexible in the many ways available to traders out to derive some revenue, one can better, in fact much better prepare him or herself for whatever calamity might ensue. I do not see a crash in our immediate future. I do not see the potential for a US recession on our immediate front either.

By the afternoon of Friday, October 16th of 1987, I knew that markets would crash on Monday the 19th. I think everyone in the marketplace did. However, I did not see it coming on Thursday, the 15th, or even early in the trading session on the 16th itself. Point is simply that as individuals, the big picture is out of your control. Awareness, preparation, and discipline... well those things are entirely on you. Rock and roll.



Emerging Market Massacre Continues - Latam FX At Weakest In History


All the pesos are getting pounded - Argentine, Colombian, Chilean, and Mexican - but the 'best indicator of EM turmoil' - the Brazilian Real - is really suffering...


But the Rand is the worst...


As the Emerging Market massacre continues to accelerate... this is the worst start to a year since at least 2010...


Amid an incessantly strengthening USDollar.


And the collapse of the EM FX carry trade...


Latin American currencies just keep selling off even as commodities, the region's main exports, rise. The LACI index is at the lowest since January 2016...


And the lowest relative to emerging markets peers ever...


It's not just FX, Emerging Market Debt is suffering its worst year since at least 2012...


Bloomberg's Eric Balchunas points out more evidence of calm before EM ETF bloodbath is traders (EEM) are bailing now, and allocators (IEMG) while not yet leaving haven't added inflows at all for 20+ days straight...


Roughly translated - the professionals are dumping to retail (while we have previously noted just how exuberantly the professionals are pitching this 'dip' as a buying opportunity in EM)...

And Bloomberg's Lisa Abramowicz points out that the biggest local-currency emerging-markets ETF has lost nearly 20% of its assets since the beginning of April, dropping to $6.5 billion from $7.9 billion.




































































This Market Is Loaded With Trip Wires

May.15.18 | About: ProShares Ultra (UVXY)


Austrolib


Deep Value, biotech, gold, monetary trends

The Jewish Libertarian.cls-1{fill:#024999;}

(1,932 followers)

Summary

The national debt has risen $1 trillion in six months, a statistic met with a collective yawn.

The US embassy move to Jerusalem could trigger a wider middle east conflict drawing the US in. Tensions in Syria are intense as it is.

The money supply is growing at its slowest pace for this time of year since 1999, even slower than 2008.

Interest rates are at 3% and rising, the yield curve is flattening fast, and inflation is on the rise.

Maybe it's just me, but it seems that the Federal debt situation has lost all ability to be described by superlatives. The debt has risen by $1 trillion in six months, and the next trillion will probably take even less time to rack up. What can really be said about this aside from just shrugging and saying, "So what?" just tucking it in the back of our minds and trying to forget about it? Otherwise, you're called an alarmist. To paraphrase Uncle Joe, $1 in debt is a tragedy. $1 trillion is a statistic.

For the debt mavens out there who object, yes, debt can be good provided that the debt is invested in capital that has higher returns than debt service costs, or if it's used for very short-term consumption purposes. But the vast majority of government debt is not invested in anything productive. It's mostly debt to finance American consumption, and eventually, it has to be paid off by taxes or inflation.

I've noticed a change among the perma-bears in the last few months. Until a few weeks ago, they have generally shied away from timing their predictions. Some of them are now getting bolder. Peter Schiff, for example, who has been called a stopped clock warning of a major economic collapse since well before the last one, has been recently blasting Jeremiah-sounding memes like " the end is near" and that this year, 2018, will be it. The content hasn't changed, but his tone and boldness have, for those who listen to him at least semi-regularly.

David Stockman, who has been railing against the debt ever since he resigned as the director of the Office of Management and Budget for the Reagan Administration in 1985 in frustration, has been getting even more cantankerous than usual, putting specific time constraints on his forecasts of doom. Here's Stockman from back in March (bold mine):


Here’s how you’ll know when this bull market is just about done


Published: May 15, 2018 7:48 a.m. ET





Look out below if investors become stubbornly optimistic about stocks


Getty Images



By

MARK

HULBERT

COLUMNIST

 

Bullish sentiment hasn’t soared so much or so fast as to sabotage the stock market’s rally. That’s the good news.

But you can’t let down your guard. Even if it’s not at an extreme, bullishness has grown markedly over the past couple of weeks. And, given investors’ manic-depressive mood swings, bullishness could reach dangerous extremes in a matter of days.

Consider the average recommended equity exposure among a subset of short-term market timers who focus on the Nasdaq market in particular (as measured by the Hulbert Nasdaq Newsletter Sentiment Index, or HNNSI). Since the Nasdaq responds especially quickly to changes in investor mood, and because those timers are themselves quick to shift their recommended exposure levels, the HNNSI is my most sensitive barometer of investor sentiment in the equity market.

The last time I devoted a column to market sentiment, at the end of March, the HNNSI stood at minus 29.0% — suggesting a healthy level of worry and concern among the stock market timers I monitor. Since then the Nasdaq Composite Index COMP, -0.96%  has risen 5.5%, while the S&P 500 SPX, -0.70%  is up 3.6%.

The HNNSI rose as high as 57.6% last week, for example, before dropping back at week’s end to 40.4%. As you can see from the chart below, this most recent reading is well-below the extreme levels that have accompanied the short-term market tops of the past year-and-a-half.




How high must the HNNSI rise to signal excessive bullishness? There is no one magic number, but notice that the HNNSI has been 88% or higher at short-term since the beginning of last year. At the stock market’s January high, for example, the HNNSI got as high as 89%. In mid-March, when the Nasdaq Composite was actually above where it stood in January, the HNNSI rose to an even higher level — 92%.


So the first early warning signal that bullishness is at dangerous levels would be when the HNNSI and similar sentiment indices get as high as they were at the January or March tops.

The second thing to watch for: How investors behave in the wake of the next bout of stock market weakness. It would be an encouraging sign if they quickly run for the exits — as happened in February and late March, for example, which is one reason why contrarians were willing at that time to give the stock market the benefit of the doubt despite the market’s turmoil.





Why you don't need to worry about robots stealing your future job



It would instead be a bad sign if the timers stubbornly cling to their bullishness in the wake of any weakness. The textbook illustration of such stubborn bullishness was how the HNNSI reacted in early 2000 to the bursting of the internet bubble. In the first two weeks after that bursting, the Nasdaq Composite fell by more than 10% — enough to satisfy the semi-official definition of a correction. Yet the HNNSI over those two weeks actually jumped by more than 30 percentage points.

Bottom line: Look for extreme levels of bullishness that persist in the face of any market weakness. Since we’re not there yet, sentiment over the near term should not be an impediment to the rally continuing.





These Two "Emerging Market Canaries" Just Fell Over


Over the weekend, we showed why according to Macquarie strategist Viktor Shvets, the "biggest risk facing investors over the next 12 months" was an intense appreciation in the US dollar. The key reason behind the thesis was simple: a sharp reduction in dollar supply has been observed as the Fed destroys liquidity by shrinking its balance sheet resulting in a contracting US monetary base, coupled with the seeming inability of the US to significantly widen its CA deficits (despite public sector dis-saving).

This was shown in the chart below:


Now, in a strategy note sent to us  by Neels Heyneke and Mehul Daya of South Africa's Nedbank, the analysts reach the same conclusion as Shvets, claiming that we are now entering "the beginning of a prolonged risk-off phase as global dollar liquidity has started losing momentum."

Just like for Macquarie, Nedbank agrees that "it's all about the dollar", explaining that there is nothing more important than "getting the dollar right." Here's why:

The US dollar is still the dominant global currency, and a stronger dollar is an indication of tighter global financial conditions.

If this is the case now again, and we believe it is, then we can expect real rates (term/risk premium) to rise, which would be negative for risk assets. The tighter financial conditions would also be deflationary by nature.

We therefore expect the US10yr to rally (continuation of the 30yr bull trend), reflecting the deflationary forces of a stronger dollar and contraction in the Global $-Lliquidity – this would not bode well for risk-assets (like SA bonds/FX /equities).

One can see why Nedbank is concerned with its version of a chart we first presented three months ago:


Meanwhile, once again echoing Macquarie, Nedbank then points out that its own global $-Liquidity indicator has been losing momentum "due to the tightening monetary conditions by the US Federal reserve (and as US current deficit shrinks)", the same reasons highlighted by Shvets previously, and largely repeating the same warning as we noted before, Heyneke writes that as "dollar liquidity slows down, it is likely to unwind the extreme positioning and enforce a strong dollar (ie de-risking)."


To be sure, if indeed a significant dollar repricing is in the works, the first place one would see the turmoil - is the same place we already have seen turmoil in response to the recent spike in the dollar: emerging markets.

A contraction in Global $-Liquidity, as reflected by a stronger dollar and tighter financial conditions, is likely to correct the distortion between deteriorating EM fundamentals and the carrytrade (portfolio allocation to EM).

And while we pointed out last week that EM had just suffered the biggest outflows since December 2016...


... should dollar strength continue, that would be just the beginning of a sharp rotation in capital away from EMs.



Ok fine... but we knew all of this already; where the Nedbank report differs from Macquarie, however, is that it lays out what its authors believe may be a trigger point, or rather "canaries in the coalmine" to determine just when the Emerging Markets inflection point hits.

As Heyneke writes, there are many "canaries" that are starting to "fall over", which is why the strategist is "deeply concerned about current market conditions. We are faced with very large risk-on positions (ie record net long positions in oil, copper, EUR/USD etc)."

The first "canary" is that the Bloomberg EM FX carry index has finally broken out of the bull trend first launched in early 2016 with the Shanghai Accord. Here's Nedbank:

The carry index is an important “canary” to monitor. The index has broken out of the bull trend at 260 and has rallied from the 255 neckline on Friday to test 260 from below.

The next few days will be important, as a consolidation below 260 would confirm a major reversal.

A break below the neckline at 255 and below the wave-A high at 252 would project substantial downside (to below the (red) wave-C low of early 2016). The MACD has also confirmed the break out of the bull trend.


The second "canary" is even more ominous, as it is not merely some squiggle on a chart but a direct market response to funding conditions, and suggests that a dollar shortage is already spreading among Emerging Markets.

As Nedbank shows in the chart below, the Bloomberg Barclays EM local and USD denominated debt spreads "has taken out the highs of 2016 and has broken into the late-2016 lows", suggesting that EM funding conditions are now reminiscent to the days when every single night Chinese stocks would crash as traders panicked over China's ongoing devaluation.

Here, Heyneke warns that the latest move sharply higher in yields "is likely to be more than just a correction phase and should target the neckline at 5.50%" for one reason:

The world, and in particular emerging markets, has been on a dollar debt binge – one that has issued over $3.5.tn (rest of world $10tn) in dollar debt. Hence our concern that a slowdown in dollar liquidity would not bode well for dollar-indebted nations/corporations.


Putting it together, Nedbank concludes that "if the EM currencies fail over the next few days to break back into the bull trend that has been in place since the start of 2016", or in other words, if the Dollar move higher continues, "then it is just a matter of time in our opinion before the EM currencies force foreign investors out of the EM markets."

That, incidentally, is also part of what Macquarie dubbed the "biggest danger facing investors over the next twelve months."





















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