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SPY Has Just Done Something It’s Never Done Before

SPY Has Just Done Something It’s Never Done Before

It appears "clots" won’t stop this meltup…

…as early weakness was met by a wall of buying around the CPI print and a replay of the reflation bet (Big-Tech up, Small Caps down) at the..

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SPY Has Just Done Something It's Never Done Before

It appears "clots" won't stop this meltup...

...as early weakness was met by a wall of buying around the CPI print and a replay of the reflation bet (Big-Tech up, Small Caps down) at the cash open. Nasdaq was the day's best performer, S&P closed green as Dow and Small Caps erased most of their losses for a small down day...

The Dow was hampered from its exuberance by JNJ's modest drop.

Underneath the surface, the market is assuming a defensive posture today led by mega-cap Tech and the bond proxies -- Utilities and Real Estate (yields on 10-year Treasuries are back down to 1.63%). On the flip side, the procyclicals - Industrials and Financials - are lagging.

Source: Bloomberg

Notably, however, the defensive tilt is taking place in an environment of relaxation, not anxiety. The VIX is down again today to 16.6 -- nearing the 15 level that the VIX was camped out at during long stretches of the pre-pandemic/post-GFC era. VIX has now closed below 20 for 10 straight days - something it hasn't done since Feb 2020

Bonds were bid with with 5Y-10Y segment outperforming...

Source: Bloomberg

A very strong 30Y auction helped...

Source: Bloomberg

The dollar continued to drift lower...

Source: Bloomberg

Crypto surged above $2.1 trillion market cap today with Bitcoin above $63k for the first time...

Source: Bloomberg

And Ether surged above $2300 - a new record high...

Source: Bloomberg

Dollar weakness helped send Gold higher...

WTI managed to close back above $60 ahead of tonight's API data...

And finally, this is the 13th day in a row where the S&P 500 ETF (SPY) closed above its opening price...

Source: Bloomberg

Since SPY's inception in 1993, that has never happened before.

Additionally, in the last 21 days, the Nasdaq is up 6% with the average breadth (advancers-decliners) across the Nasdaq at 147.

Source: Bloomberg

This hasn’t happened in the history of Bloomberg data.  

Tyler Durden Tue, 04/13/2021 - 16:00

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Economics

Rates, The Dollar, & The Fed’s Dis-Inflationary Dilemma

Rates, The Dollar, & The Fed’s Dis-Inflationary Dilemma

Authored by Lance Roberts via RealInvestmentAdvice.com,

As we move into the second half of 2021, interest rates and the dollar continue to shape the outlook.

Of course, much of…

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Rates, The Dollar, & The Fed's Dis-Inflationary Dilemma

Authored by Lance Roberts via RealInvestmentAdvice.com,

As we move into the second half of 2021, interest rates and the dollar continue to shape the outlook.

Of course, much of the debate focuses on whether rates and the dollar continue to miss the bigger picture. For example, just recently, Jim Bianco tweeted a critical point.

However, while I very much respect his opinion, I am not sure I entirely agree. Such is where the analysis of rates and the dollar suggests a different story.

The Inflation Premise

We previously discussed that inflation might indeed be more transitory given the drivers of increased prices were artificial. (i.e., stimulus, semi-conductor shortages, and pandemic-related shutdowns.) To wit:

“Inflation is and remains an always ‘transient’ factor in the economy. As shown, there is a high correlation between economic growth and inflation. As such, given the economy will quickly return to sub-2% growth over the next 24-months, inflation pressures will also subside.” 

“Significantly, given the economy is roughly comprised of 70% consumption, sharp spikes in inflation slows consumption (higher prices lead to less quantity), thereby slowing economic growth. Such is particularly when inflation impacts things the bottom 80% of the population, which live paycheck-to-paycheck primarily, consume the most.”

However, another important factor behind inflationary pressures is an individual’s actions. As noted last week by Société Générale’s Albert Edwards:

“Surveys suggest that inflation fears have become investors’ number one concern. But why look at it that way? We could equally say it is investors’ own bullishness on the strength of this economic cycle that is driving prices sharply higher in the most cyclically exposed equity sectors and industrial commodities.”

Bloomberg’s John Authers discussed the same, noting a “reflexivity” to investors’ belief in rising inflation.

“In inflation, as in many other areas of economic life, perceptions can form reality, and that is certainly true of inflation. The University of Michigan monthly survey of consumers’ expectations perennially shows shoppers foreseeing more inflation than will in fact arrive. The important factor here is the direction of travel. If they are more worried about inflation, they will do more to guard against it, which will tend to push up prices.”

Psychological Inflation & China

Such is an important point, as Albert notes:

“When investors pile into commodities as an investment vehicle to benefit from rising inflation, they create substantial upstream cost pressures. Beyond the cascading effect of upstream commodity price pressures, headline CPIs are also quickly impacted as food and energy prices rip higher.”

In other words, investors cause inflation by their actions. However, this is where Albert keys in on another critical driver of inflation.

“In addition to this, the observation by investors that industrial commodity prices are rising only serves to reaffirm their belief about cyclical strength and rising inflation, most especially ‘Dr. Copper.” Many investors see copper as extremely sensitive to economic conditions.

The circular, or as George Soros terms it, ‘reflexive’ nature of financial markets makes them extremely vulnerable to being whipsawed. Yet because of the current extreme momentum, it would take a very heavy weight of evidence to convince this market to reverse direction.

We continue to highlight that commodity prices are at high risk of a major reversal because of the steep downturn in the Chinese Credit Impulse. We have highlighted this before and we are not alone. Julien Bittel of Pictet Asset Management posted the following chart.”

“When commodity prices do start to fall, expect a major reversal in inflation sentiment. Furthermore, expect momentum to become as self-reinforcing and reflexive on the way down just as it was on the way up.”

As we discussed previously, this is something the bond market already expects.

What Rates Are Saying About Inflation

While investors expect surging inflation, the bond market continues to price in weaker future economic growth. As noted in “No, Bonds Aren’t Over-Valued.”

“The correlation between rates and the economic composite suggests that current expectations of sustained economic expansion and rising inflation are overly optimistic. At current rates, economic growth will likely very quickly return to sub-2% growth by 2022.”

Note: The “economic composite” is a compilation of inflation (CPI), economic growth (GDP), and wages.

There is a fundamental reason why the bond market is pricing in deflation currently.

“The correlation should be surprising given that lending rates get adjusted to future impacts on capital.

  • Equity investors expect that as economic growth and inflationary pressures increase, the value of their invested capital will increase to compensate for higher costs.

  • Bond investors have a fixed rate of return. Therefore, the fixed return rate is tied to forward expectations. Otherwise, capital is damaged due to inflation and lost opportunity costs. 

As shown, the correlation between rates and the economic composite suggests that current expectations of sustained economic expansion and rising inflation are overly optimistic. At current rates, economic growth will likely very quickly return to sub-2% growth by 2022.”

The Fed Will Push Deflation

The problem for the Federal Reserve is that the fiscal and monetary stimulus imputed into the economy is “dis-inflationary.” 

“Contrary to the conventional wisdom, disinflation is more likely than accelerating inflation. Since prices deflated in the second quarter of 2020, the annual inflation rate will move transitorily higher. Once these base effects are exhausted, cyclical, structural, and monetary considerations suggest that the inflation rate will moderate lower by year end and will undershoot the Fed Reserve’s target of 2%. The inflationary psychosis that has gripped the bond market will fade away in the face of such persistent disinflation.” – Dr. Lacy Hunt

The point here is that while economic growth may be booming momentarily, inflation, which is destructive when not paired with rising wages, will be transient. Given the massive surge in prices for homes, autos, and food, the reversal will cause a substantial disinflationary drag on economic growth.

The most considerable risk is a divergence among Fed policymakers which possibly leads to a policy mistake of tapering too quickly or even hiking rates. 

The majority of the inflation and economic growth pressures are artificial, stemming from the stimulus injections over the last year. However, with those inputs fading as year-over-year comparisons become more challenging, the “deflationary” impact could be more significant than expected.

There is also one other point about the Fed tapering the purchases. As shown in the chart below, rates rise during phases of QE as money rotates from bonds to stocks for the “risk-on” trade. The opposite occurs when they start to taper, suggesting a decline in rates if “taper talk” increases.

The Story Of The Dollar

While many view the US Dollar as a proxy for economic strength, there is very little correlation between the currency on a short-term basis. However, as shown below, there is a long-term trend of the dollar’s value as compared to economic growth. In other words, the value of the dollar does reflect economic strength over the longer term.

Currently, the U.S. dollar is weakening as the Government is flooding the system with liquidity. Now, the money supply is spiking, but given the relative surge in debt, the injections fail to spur an increase in monetary velocity.

With the US dollar breaking down to the lowest level since 2014 and trading below its 2-year moving average, the risk of the dollar retrenching to “Financial Crisis” lows is not out of the question.

The massive increase in the US budget deficit as a percent of GDP also suggests that “deflationary” pressures weigh both on economic growth and the dollar. As Bryce Coward of Gavekal recently noted:

“The ballooning budget deficit suggests a level of 70 or 80 on the US dollar index over the coming years would not be out of the realm of possibilities. That would equate to a further decline of 11% to 22% from here. If the US dollar drops below $90 such would have fairly large ramifications for equities.”

The Fed May Be Right For The Wrong Reason

With double-digit rates of change in essential items like transportation (going back to work), food, goods and services, and energy, the impact on disposable incomes will come much quicker than expected. If we strip out “housing and healthcare,” which are fixed budget items (mortgage and insurance payments), we see that “household” inflation is pushing 5.86% annualized.

Such is particularly problematic when wages aren’t keeping up with inflation.

The Fed is probably right. Inflation will be transitory, but for all the wrong reasons.

Conclusion

There is a significant difference between a “recovery” and an “expansion.” One is durable and sustainable; the other is not.

Those expecting a significant surge in inflation will likely be disappointed for the one reason which seems to get mostly overlooked.

“If the economy was growing organically, which would create stronger rates of wage growth and inflation, then there would be no need for zero interest rates, continued monetary interventions by the Federal Reserve, or deficit spending from the Government.”

The obvious problem is that not all “spending” is equal. Pulling forward consumption through stimulus is indeed short-term inflationary but long-term deflationary. Since 1980, there has been a shift in the economy’s fiscal makeup from productive to non-productive investment. 

As we have pointed out previously, you can not overstate the impact of psychology on an economy’s shift to “deflation.” When the prevailing economic mood in a nation changes from optimism to pessimism, participants change. Creditors, debtors, investors, producers, and consumers change their primary orientation from expansion to conservation.

  • Creditors become more conservative and slow their lending.

  • Potential debtors become more conservative and borrow less or not at all.

  • Investors become more conservative, and they commit less money to debt investments.

  • Producers become more conservative and reduce expansion plans.

  • Consumers become more conservative, and save more, and spend less.

As we have been witnessing since the turn of the century, these behaviors reduce the velocity of money. Consequently, the decline in velocity puts downward pressure on prices. Given the massive increases in debt and deficits, the deflationary drag continues to increase as stimulus fades from the system.

Likely, the dollar and rates already figured this out.

Tyler Durden Fri, 06/11/2021 - 10:20

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Bonds

Bond Yields Plunge Most In A Year, Dollar Spikes As Inflation Soars

Bond Yields Plunge Most In A Year, Dollar Spikes As Inflation Soars

On the week, the major stock indices were mixed with The Dow lower, S&P unch-ish, and Small Caps and Big-Tech leading…

The flip-flopping rotation between big-tech…

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Bond Yields Plunge Most In A Year, Dollar Spikes As Inflation Soars

On the week, the major stock indices were mixed with The Dow lower, S&P unch-ish, and Small Caps and Big-Tech leading...

The flip-flopping rotation between big-tech and small caps continued all week...

Growth won the week as traders rotated back from value stocks...

Source: Bloomberg

Meme stocks also roller-coastered this week...

Source: Bloomberg

Banks notably underperformed the market this week as yields tumbled...

Source: Bloomberg

Healthcare stocks outperformed as financials lagged...

Source: Bloomberg

VIX closed with a 15 handle for the first time since before the pandemic...

Source: Bloomberg

But, the big story of the week was the collapse in Treasury yields (in the face of a soaring CPI print) as bond shorts were increasingly squeezed...

Source: Bloomberg

Bond shorts this week...

This week saw 10Y Yields drop 10bps - the biggest weekly drop since last June (4th weekly drop in a row)...

Source: Bloomberg

The Treasury yield curve also flattened by the most since last June this week...

Source: Bloomberg

And breakevens saw their biggest weekly drop since April 2020...

Source: Bloomberg

The dollar screamed higher today... erasing all the losses from last Friday's payrolls plunge...

Source: Bloomberg

Cryptos ended the week mixed with Ether notably underperforming Bitcoin...

Source: Bloomberg

ETH/BTC saw a big drop on the week (second biggest weekly drop in ETH relative to BTC since Jul 2019)...

Source: Bloomberg

The dollar's spike today slammed gold to the week's biggest loser in commodity-land as crude managed gains...

Source: Bloomberg

Is it time for copper crash or gold run? Or are yields completely off base still?

Source: Bloomberg

And finally, The Fed's balance sheet reached $8 trillion this week for the first time ever - basically a double since the start of the pandemic panic-response...

Source: Bloomberg

And the balance sheet keeps expanding despite the collapse of COVID...

Source: Bloomberg

Tyler Durden Fri, 06/11/2021 - 16:00

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Government

‘In the Heights’ celebrates the resilience Washington Heights has used to fight the COVID-19 pandemic

Local institutions and community bonds forged during the turmoil of the 1970s and 1980s helped a vulnerable neighborhood walloped by the pandemic endure.

For decades, Manhattan's Washington Heights neighborhood has been home to a mosaic of ethnic groups. Andrew Burton/Getty Images

With camera work that swoops from rooftops to street corners, the film “In the Heights” brings to life the dynamism of northern Manhattan’s Washington Heights neighborhood.

Directed by Jon M. Chu, “In the Heights” updates Lin-Manuel Miranda and Quiara Alegría Hudes’ Tony Award-winning musical of the same name. Set in a changing neighborhood defined by Dominicans and Latino immigrants, the film eloquently expresses the feel of a hardworking place where your block is your home and a 10-minute walk is a journey to another world.

For me, the film hit home. It brought me back to the years I spent researching and writing my book “Crossing Broadway: Washington Heights and the Promise of New York City,” when I interviewed residents, walked police patrols and dug into municipal records.

Lin-Manuel Miranda poses in front of a cart that sells flavored ice.
Lin-Manuel Miranda on location while filming ‘In the Heights’ in Manhattan’s Washington Heights neighborhood. James Devaney/GC Images via Getty Images

In Washington Heights, long home to a mosaic of ethnic groups, some people have recoiled from human differences and huddled up in tight but exclusionary enclaves – ignorant of their neighbors at best, nasty toward them at worst.

Other residents, street-smart cosmopolitans, learned to cross racial and ethnic boundaries to save their neighborhood from crime, decayed housing and inadequate schools. In the 1990s, their efforts turned Washington Heights, once known for a murderous drug trade, into a gentrification hot spot.

My book was released in paperback during the fall of 2019. Just five months later, COVID-19 came.

Could a neighborhood already grappling with the challenges of gentrification – a prominent theme of “In the Heights” – survive a global health disaster? And could a film conceived before COVID-19 emerged speak to a city that sometimes seems to be transformed by the pandemic?

So far – and even though Washington Heights stands out in Manhattan for its suffering due to the coronavirus pandemic – the answer is a cautious yes.

But that painful victory, won with vaccines, local institutions and local ingenuity, will be valuable only if enough can be learned from northern Manhattan’s solidarity and activism to build a healthier and more just city as the pandemic recedes.

A neighborhood rife with vulnerabilities

Like other immigrant neighborhoods confronting the pandemic, Washington Heights and Inwood – the neighborhood to its immediate north – faced serious vulnerabilities.

Immigrant labor and business acumen rescued New York City from the urban crisis in the 1970s and 1980s, when white flight, job losses, a withering tax base and high crime devastated the city.

But as my co-author David M. Reimers and I pointed out in “All the Nations Under Heaven: Immigrants, Migrants and the Making of New York,” the rebuilt city is marked by inequality. Rents are astronomic, so families in Washington Heights and Inwood often double up to make costs more bearable. In the face of an easily transmitted disease, overcrowded housing was a ticking bomb.

A sign in a storefront requests only three customers enter at a time.
Many Washington Heights residents couldn’t hunker down in their homes during the pandemic. They needed to staff stores that keep the city running. Led Black, Author provided

Residents in these uptown neighborhoods were also endangered by their jobs. In a city where many white-collar workers could work from home on their laptops, a disproportionate number of Washington Heights residents had to venture out to staff stores, clean buildings, deliver groceries and provide health and child care. As one uptown resident told me, her neighbors weren’t worrying about gaining 15 pounds – they were worried whether their next customer would infect them.

Equally troubling, many uptown residents had nowhere to run to. In more affluent neighborhoods, like the Upper East Side where I live, many people with country houses could decamp. In Washington Heights and Inwood, most people hunkered down in their apartments.

Bonds forged in mutual struggle

Nevertheless, Washington Heights and Inwood have strengths born in the hard experience of making a new home in New York.

The neighborhood has long been the destination of newcomers to the city, among them African Americans escaping Jim Crow, Irish immigrants putting behind them political and economic hardship, Puerto Ricans looking for prosperity, Eastern European Jews in flight from pogroms, German Jewish refugees from Nazism and Greeks expelled from Istanbul. In the 1970s, Dominicans fleeing political repression and economic hardship began to arrive in transforming numbers, along with a small but significant number of Soviet Jews escaping anti-Semitism.

For all their differences the German Jews, Soviet Jews and Dominicans had one thing in common: individual and collective memories of living with three brutal dictators – Hitler, Stalin and Rafael Trujillo. Such experiences were traumatic and could foster a tendency to stick to the safety of your own kind, but they also bred resilience.

Starting in the 1970s, and with cumulative impact by the late 1990s, significant numbers of these residents crossed racial and ethnic boundaries to revive and strengthen their neighborhood.

Thirty years later, when federal authority was absent and the pandemic surged, public-spirited residents – fortified by community institutions – stepped up again. In both cases, it was a clear example of what the sociologist Robert J. Sampson has called “collective efficacy.”

The community steps up

Back when the neighborhood was ravaged by the crack epidemic, Dave Crenshaw, the son of African American political activists, took action. Crenshaw set up athletic activities with the Uptown Dreamers – a youth group that combined sports, community service and educational uplift. The program gave young people, especially women, an alternative to dangerous streets.

When the COVID-19 pandemic erupted, Crenshaw built on his track record. He worked with The Community League of the Heights, a community development organization founded in 1952, Word Up, a community bookshop and arts space dating to 2011, and students from Columbia University’s Mailman School of Public Health. Together, they distributed food and masks, cleaned up grubby street corners, and got people tested and vaccinated.

Further north, the YM-YWHA of Washington Heights and Inwood, founded in 1917, built on its record of serving both Jews and the entire community. Victoria Neznansky – a social worker from the former Soviet Union – worked with her staff to help traumatized families, distribute money to people in need, and bring together two restaurants – one kosher and one Dominican – to feed homebound neighborhood residents.

At Uplift NYC, an uptown nonprofit with strong local roots, Domingo Estevez and Lucas Almonte had anticipated, during the summer of 2020, running summer programs that included a tech camp, basketball and a youth hackathon. When the pandemic struck, they nimbly shifted to providing culturally familiar foods – like plantains, chickens and Cafe Bustelo coffee – to neighbors in need and people who couldn’t go outside.

Arts and media organizations eased the isolation of lockdown. When the pandemic loomed, blogger Led Black, at the local website the Uptown Collective, told readers that “solidarity is the only way forward.” In his posts he shared his griefs and vented his rage at President Donald Trump. He closed every column with “Pa’Lante Siempre Pa’Lante!” or “Forward, Always Forward!”

Inwood Art Works, which promotes local artists and the arts, shut down a film festival scheduled for March 2020 and started “Short Film Fridays,” a weekly presentation of local films on YouTube. The organization also launched the “New York City Quarantine Film Festival,” which explored topics such as life uptown in the COVID-19 pandemic, the beauty of uptown parks and the life of an essential worker.

Dreams of a better life

Of course, Washington Heights suffered during the pandemic.

Beloved local businesses vanished. Foremost among them was Coogan’s, a bar and restaurant that was the unofficial town hall of upper Manhattan, whose life and death were chronicled in the documentary “Coogan’s Way,” which is now screening at film festivals.

People congregate outside Coogan's restaurant.
Coogan’s – a bar and restaurant that served as a neighborhood institution – wa shuttered during the pandemic. Rob Kim/Getty Images

Families were forced to live with unemployment, isolation and fear of infection. As the social fabric frayed, loud noise levels and reckless driving of motorcycles and all-terrain vehicles raised alarm. Worst of all, the neighborhood’s residents died at rates greater than in Manhattan overall.

In Washington Heights and the rest of New York City, the coronavirus pandemic exposed long-brewing inequalities. It also illuminated character, community, strong local institutions and dreams of a better life. All these receive loving and lyrical attention in “In the Heights.”

We live, I believe, in an era when it is important to see the strengths that immigrants and their institutions bring to our cities. This film could not have come at a better time.

[Get the best of The Conversation, every weekend. Sign up for our weekly newsletter.]

Robert W. Snyder does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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