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Economics

What Are Bond Yields & Breakevens Telling Us?

#CKStrong    Carol K.’s ANC broke above 1200 today.  Absolute Neutrophil Count (ANC ) measures a type of white blood cell that kill and digest bacteria and fungi to help the body fight infections and heal wounds. At a time … Continue reading ?…

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Carol K.’s ANC broke above 1200 today.  Absolute Neutrophil Count (ANC ) measures a type of white blood cell that kill and digest bacteria and fungi to help the body fight infections and heal wounds. At a time around Day 0 of her stem cell transplant, it was below 100, which is severe neutropenia and often fatal for cancer patients.   Her fight and grit coupled with the combination of the miracle of modern medicine, deep resources, and all of your support — prayers, positive thoughts and energy, and other — around the world created this miracle.  Thank you so much to all of you.  She will be discharged after a 5 1/2 month hospital stay in isolation in early Novie.  Halle-freaking-lujah!

A very close friend posed the question in this post’s title to me the other day. 

I laughed and said, “are you kidding me?  I mostly ignore the bond market flapdoodle as it was nationalized long ago.  Bond yields and breakevens are about as relevant as the price of sausage, Back In The USSR!  Ergo, the bond market is not a real market with real price discovery. 

Baby, It’s Foggy Outside

Unfortunately, policymakers continue to make policy based on totally distorted flight instruments, which is very dangerous when it gets foggy.  The economy is foggy today, folks. 

It looks like PK is starting to waffle, and seems, to us, he may be considering playing out his option on Team Transitory,   

Why is it so hard to make a call on inflation right now? Because the current economy, still very much shaped by the pandemic, is, to use the technical term, weird. In particular, the standard measures economists use to distinguish between temporary price blips and underlying inflation are telling different stories. – Paul Krugman,  NY Times

Krugman’s piece is a must read. 

Fed Intervention In The “COVID” Bond Market

Maybe if we had a free bond market, we would have seen this inflation spike coming through a real and true bond yield and breakeven price. 

The conventional wisdom is that the Fed has financed 40-50 percent of the debt the U.S. Treasury has put on its books during COVID, and that is confirmed by the data at 46.6 percent of all new issuance, including Treasury Bills.    We dig deeper in the following table.  

Look at the profile of the new debt that financed the COVID deficit, however. 

The Fed has effectively purchased 75 percent of all new note and bond issuance and 160 percent TIPs issuance from March 2020 to September 2021.  If they hadn’t, interest rates would have spiked higher, maybe 500 bps higher, and it is possible some of the auctions would have failed. 

Why doesn’t the Treasury fund itself with more longer-term debt to lock in the lower rates?   Because they can’t, which illustrates why T-Bill issuance was up $2.5 trillion during COVID.  

Moreover, if you are going to repress coupon yields from moving to their equilibrium, you must also do the same in the TIPs market, otherwise breakevens would have gone wild and made no sense, especially  given its a relatively illiquid market. 

If there was real price discovery in the bond market, it may have tipped us off about a coming inflation spike and what markets really think about the path of future inflation.  After all the supply curve broke last year, so there was plenty of time for the bond market to get it right. See our post, Hot Retail Sales Not Supply Chain Positive.

 

Financing Of The Monthly Budget Deficits 

The following chart illustrates the path of the U.S. monthly budget deficits (red line) during COVID and how they were financed.

Treasury finances itself either through: a)  borrowing from the public (black line), b) reduction in operating cash. mainly in its General Account at the Federal Reserve (blue line), which is down from $1.8 trillion in July 2020 to a measly $78 billion on October 13 (see here), and confirms Secretary Yellin’s assertion the government is almost out of cash, and through c) other means, such as running arrears on Treasury contributions to federal government employee pension funds, to suppliers, and other extraordinary ways. 

We suspect “defaulting on the debt” as an “other means” financing is a bluff as the government will look for other bills and/or entitlements run up arrears on to conserve cash and prioritize spending. 

Tapping The Market When It Can

The chart also shows that Treasury seems to very good at tapping the market when there is a flight to quality bid.  Note how almost 70 percent of the borrowing from the public took place during March 2020 to June 2020, and exceeded the cumulative deficit during that period by 50 percent.  The differential went to build reserves in the Treasury’s General Account.

Even still, the Fed bought the equivalent of about 55 percent of all new borrowing during March 2020 to June 2020. 

Debt Ceiling Politics

Nevertheless, the political cost to the Administration of using other means as a source of financing, say, suspending Social Security payments, if legal, is certain political death, and that, folks, is the game that is playing out in Washington today. 

Forget about advancing the national interest, just destroy the opposition, and to be fair,  it always seems  M&M is on the wrong side of this issue.      

(the sum of the three non red lines in the chart above will equal the red deficit line) 

It is interesting that the Treasury’s borrowing from the public (black line) is constrained by the debt ceiling has been negative over the past few months, all while the Fed is taking $80 billion per month in Treasury securities out of the market.  No wonder why bond yields dipped during the summer, which some took as “everything is perfect,” deflation is coming, or, we hope not, the policymakers took it as inflation is under control.   

It is almost laughable to hear comments, such as

Is inflation caused by [monetary] inflation or by the supply chain problems.   

These are coming from major market pundits, who appear, and we could be wrong, they don’t even understand the basic concepts of inflation, much less where it comes from and how to stamp it out.  

My experience working with the high to hyperinflation central banks back in the day was there were lots of shortages throughout the economy.  No bread on the shelf at grocery stores because of hoarding and a breakdown in…wait for it…local supply chains.  

We seriously doubt we get there, if the FOMC does its job.  They tell us they have the tools but do they have the stomach given such lofty and stretched asset valuations?   Starting to smell a bit of panic the Fed is offsides and needs to move quicker.  

Stay tuned, folks.  

As always, we reserve the right to be wrong in our conclusion as we are pretty certain we have the facts (data) right.  We like to tell this story about getting your conclusion wrongs. 

Facts Right, Conclusion Wrong

President Lincoln,  a great storyteller, had something to say about drawing different conclusions from the same established or, what economists like to call “stylized facts,”

During his days as an Illinois circuit court lawyer,  legend has it Lincoln would persuade juries with the use of his funny but truth piercing stories,

The story goes that Lawyer Lincoln was worried he had not convinced the jury during the closing argument of a civil case against a railroad.   The jurors had gone to lunch to deliberate.  Lincoln followed them and interrupted their dessert with a story about a farmer’s son gripped by panic,

“Pa, Pa, the hired man and sis are in the hay mow and she’s lifting up her skirt and he’s letting down his pants and they’re afixin’ to pee on the hay.” “Son, you got your facts absolutely right, but you’re drawing the wrong conclusion.”

The jury ruled in Lincoln’s favor.

Chart Appendix

Treasury General Account Balance At The Fed, October 13

10-Year Treasury Yield

10-Year Breakeven Inflation Rate

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Economics

Coffee price prediction: where to next after hitting a 10-year high?

Coffee price has been on a months-long uptrend; hitting a 10-year high on Thursday. Tight supplies are the key driver of the commodity’s bull run. Unfavorable weather conditions and the ongoing shipping snarl-ups have contributed to the shortage. Based…

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Coffee price has been on a months-long uptrend; hitting a 10-year high on Thursday. Tight supplies are the key driver of the commodity’s bull run. Unfavorable weather conditions and the ongoing shipping snarl-ups have contributed to the shortage.

Based on the prevailing weather patterns in different coffee-growing regions, the bullish market may linger on in the coming weeks. The effects of the frost and drought that hit Brazil in the past year are still being felt. Besides, Minas Gerais, which is a key coffee-producing area in Northern Brazil, is experiencing heavy summer rains. The subsequent floods have heightened disease concerns. The La Nina phenomenon in Colombia and wet weather in Vietnam has further boosted coffee price.   

Coffee price outlook

Coffee C futures, which are the benchmark for the Arabica variety, have been on a months-long uptrend following a recovery in demand. In the past year, the coronavirus pandemic placed 1.50 at an evasive level. Interestingly, that has turned into a steady support zone since coffee price surged above it in mid-July.

Since then, it has been on an uptrend as shown via the trendline highlighted in red. Since the beginning of the year, the commodity has had its price surge by about 94.12%. On Thursday, it extended its previous gains to trade at the highest level since October 2011. Besides, since mid-September, it has been in the green for nine out of ten weeks.

In the US Intercontinental Exchange (ICE), coffee price ended the week at 2.42; down by 1%. On a daily chart, it is trading above the 25 and 50-day exponential moving averages. Based on both the fundamentals and technicals, I expect the commodity to remain in an uptrend in the coming week.

With an RSI of 73, it entered the overbought territory on Thursday after reaching a 10-year high. While it has since pulled back, it is still at the border of this zone with an RSI of 70. As such, it may start the coming week on a low before rebounding.

From this perspective, the support levels to look out for are 2.33 and the 25-day EMA at 2.20. On the upside, it will likely find some resistance along last week’s high of 2.48. Above that level, the bulls will be eyeing the psychological 2.50 and 2011’s high of 2.60. For as long as coffee price is above the resistance-turn-support zone of 2.00, the bulls will remain in control.

coffee price
coffee price

The post Coffee price prediction: where to next after hitting a 10-year high? appeared first on Invezz.

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Government

Bureaucrat’s False Promise: Take Two COVID Shots And We Will Reopen

Bureaucrat’s False Promise: Take Two COVID Shots And We Will Reopen

Authored by Mike Shedlock via MishTalk.com,

More lockdowns are underway in Europe. What happened to reopen promises?

Fury Over Lockdowns 

Global markets are reeling…

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Bureaucrat's False Promise: Take Two COVID Shots And We Will Reopen

Authored by Mike Shedlock via MishTalk.com,

More lockdowns are underway in Europe. What happened to reopen promises?

Fury Over Lockdowns 

Global markets are reeling in the wake of more lockdowns and threats of them.

The Economist (paywall) notes surge of deadly covid cases in Europe is met by popular fury over lockdowns.

The sight of 40,000 unvaccinated Austrians marching through their capital, Vienna, in recent days was troubling twice over. The tightly packed opponents of lockdown measures were at risk of spreading the coronavirus. They also threatened to stir up an already tense political situation. Karl Nehammer, Austria’s interior minister, warned that anti-vaxxers in the Alpine republic are growing more radicalised. He called the demonstration’s mood “incensed” and “aggressive”. Some protesters were extremely provocative, carrying placards likening Alexander Schallenberg, Austria’s new chancellor, to Josef Mengele, the sadistic physician at the Nazi concentration camp in Auschwitz.

The protesters were marching against Austria’s increasingly tough measures against anti-vaxxers. On November 22nd the government imposed a full lockdown once again, to last for at least ten days. That compels Austria’s 9m people to hunker down at home, leaving only for work, essential shopping and exercise. Austria is also the first Western democracy to make covid-19 vaccinations mandatory for all, starting on February 1st 2022. “For a long time—maybe too long—I and others assumed that it must be possible to convince people in Austria to get vaccinated voluntarily,” said Mr Schallenberg when he announced his “very difficult” decision.

Let Our Guard Down

The Washington Post (paywalled) reports ‘We let our guard down’: Frustrated Europe heads into second pandemic winter

Life was finally starting to feel normal. An online flier for an October party in this Belgian beach town cursed the coronavirus and invited people to dance and drink again, to “get your clacker back from the attic” and kick off Carnival season.

Hundreds attended that event and another Carnival party the next night. Most of the town is vaccinated, and people were required to show proof, or a recent negative test, to enter. But it wasn’t enough. Coronavirus cases spiked the week after. Officials worried about pressure on the local hospital. And soon the town found itself under semi-lockdown once more.

As Americans catch up with family and friends this holiday week, with some trepidation about enduring risk, Europe is facing another wave of the virus — and a gloomy and frustrating second pandemic winter.

New Heavily Mutated Covid Variant

CNBC reports Belgium Confirms Case of New, Heavily Mutated Covid Variant.

The emerging variant arrives in Europe amid an already devastating Covid surge linked to the delta strain. Europe saw more than 2.4 million new Covid cases over the week ended Nov. 21, an increase of 11% from the previous seven days, according to the WHO’s most recent epidemiological update.

Europe represented 67% of all Covid cases reported globally during that span, the WHO measured.

Belgium tightened restrictions this week to stop the spread of the virus, requiring people to work from home four days a week through the middle of December. Austria started its fourth lockdown of the pandemic on Monday, with a nationwide vaccine mandate scheduled to take effect on Feb. 1. Chancellor Alexander Schallenberg has said that the lockdown will last for at most 20 days.

New Lockdowns and Restrictions

  • Slovakia declared a two-week lockdown on Wednesday. People can leave home for a limited number of reasons, including buying groceries, going to work and to school, and getting vaccinated. And starting next week, all workers will have to show they’ve been vaccinated, recovered from the coronavirus or had a recent negative test.

  • Austria, imposed a lockdown that will last at least 10 days and up to 20. 

  • The Netherlands ordered bars and restaurants to close at 8 p.m.

  • Belgium has mandated that all but essential employees work from home four days a week. Belgium also reinstituted an indoor mask mandate this month.

  • Merkel pushed for a German lockdown as its death toll passed 100,000.

  • The U.K.  halted flights from six countries in the region, and European Union member states have collectively agree to pause travel to and from southern Africa.

  • Singapore banned flights from southern Africa

  • Japan is increasing border controls for travelers from the region.

  • Italy requires proof of vaccination or recovery for access to many parts of public life. Vaccination restrictions fcome into effect on December 6 and last until January 15.

Mess in Germany 

Eurointelligence comments on Germany's Federal Virus.

The massive outbreak in Covid-19 hospitalizations and fatalities in Germany raises disturbing questions about who is in charge. Having failed to achieve the right levels of vaccine procurement early on during the pandemic, the German authorities have repeated the same mistake. They did not procure the booster shots they needed. They have not set up a network of vaccination centres to deliver them rapidly.

As of this weekend, only 11.4% of the population has received booster shots. It is very difficult to get an appointment. Only doctor's surgeries are allowed to deliver them. The network has not been expanded to pharmacies. 

So why is this happening again? The answer is that the German healthcare system, well-funded as it is, is not set up for a pandemic, or indeed for public health emergencies in general. This is a publicly-funded, but privately run, healthcare system. The states are in charge of the local healthcare administrations and hospitals. Health insurance is a matter for the federal government, but states supervise the health insurance companies. What can possibly go wrong?

Message From German Stats

In Germany, over 45% of people hospitalized for Covid-19 are fully vaccinated.

That last stat sounds more shocking than it really is. Germany is 68% fully vaccinated. Thus 55% of the hospitalizations cases come from 32% of the population.

Only 11% of Germany received a booster. Given vaccinations wear off, the proper take away is get a booster, not flout the stats. 

Vaccine Mandate US

In the US, the Biden administration imposed a vaccine mandate vis OSHA on companies with more than 100 employees.

On November 15, I noted Appeals Court Blocks Biden's Vaccine Mandate in a Blistering Rebuke

The rebuke was a huge attack on the competence of Biden's mandate. My position, upfront was the mandate was unconstitutional. 

Given multiple attacks on the mandate, jurisdiction, the case moved from the 5th Circuit to the 6th Circuit, where Biden doubled down. 

On November 23, I commented Biden Doubles Down on Vaccine Mandate With Another Circuit Court

The justice department files an emergency motion with the 6th circuit court arguing the 5th circuit's postponement of the OSHA vaccine mandate was unjustified

I strongly suspect the 6th Circuit will reaffirm the previous ruling.

Meanwhile, protests or not, mutations go on and on. 

What Covid Lockdowns and Disruptions in Europe Signal to the U.S.

False Promise

"Take two shots and we will reopen society. That turned out to be a false promise."

It's been one false promise after another, by Dr. Fauci, by Trump, by Biden, by Merkel, globally everywhere.

Trust is essentially gone and rising protests are proof.

*  *  *

Like these reports? If so, please Subscribe to MishTalk Email Alerts.

Tyler Durden Sat, 11/27/2021 - 13:45

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Economics

How Did Friday’s Selling Compare To March 2020 Selling? My Takeaways

News that a new COVID-19 variant has surfaced in South Africa spooked global equity markets on Friday. Was it an overreaction and an opportunity to buy some of your favorite stocks cheaper? Or is the start of a much deeper, panic-driven selloff. Unless…

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News that a new COVID-19 variant has surfaced in South Africa spooked global equity markets on Friday. Was it an overreaction and an opportunity to buy some of your favorite stocks cheaper? Or is the start of a much deeper, panic-driven selloff. Unless you're a scientist with inside knowledge, I don't think it's possible to know. There are so many questions right now that haven't been adequately answered and may not be answered for several days or weeks. Among those questions would be (1) rate of transmissibility, (2) efficacy of current vaccines against the new variant, (3) the new variant's infection fatality rate (IFR), and so forth. Without this information, it's impossible to try to determine what steps countries around the globe may need to take.

When the delta variant was first studied, it was found to be much more contagious and now the World Health Organization (WHO) estimates that 99% of the world's COVID cases are the delta variant. The worst case obviously would be that this new variant is even more contagious and that vaccines are proven to be ineffective protecting against it. But if global markets continue to panic and selloff as they did on Friday and the new variant poses less risk than first thought, clearly a major global rally could follow.

So what do we do?

Well, rather than search media outlets looking for financial advice, which proved to be absolutely worthless during the height of the 2020 pandemic (remember the Great Depression 2.0 forecasts?), I'd suggest we focus instead on what Wall Street is doing with their money. What sectors and industries are performing poorly on a relative basis (suggesting more exposure to an extended selloff)? Also, which sectors and industries actually performed better during the day on Friday, which would impact their respective AD lines. If you recall, the AD lines were, in my opinion, the best technical indicator throughout 2020 as they helped us identify which areas were being accumulated vs. distributed during the pandemic.

So let's take that approach again as we analyze Friday's action.

It's Deja Vu All Over Again

When I looked at major index and sector performance on Friday, the ranking was nearly identical to the period from February 19, 2020 (market top before panicked selling began) through March 23, 2020 (subsequent low on the S&P 500).

Energy (XLE), financials (XLF), industrials (XLI), and real estate (XLRE) were the bottom 4 sectors during the panicked selloff in 2020 and those 4 were again among the weakest on Friday. Meanwhile, consumer staples (XLP) and health care (XLV) were first and second (though reversed) both during the initial crisis in 2020 and again on Friday.

The order of performance on our major indices were almost identical.

Based on this quick analysis, if we continue to see a COVID-related selloff, I'd most definitely be expecting those bottom groups to continue to lead the selloff. If you have significant exposure in Friday's weakest sectors and industry groups, then I believe your risk is higher as we move into next week.

The Outliers

Not all industry groups conformed with last year's performance ranking. Those that remained relatively strong on Friday (key word here is relative as it wasn't a good day for many groups) and were also relatively strong back in March 2020 included the following industry groups:

  • Gold mining ($DJUSPM): #1 in March 2020 and #2 on Friday, or 1 and 2 (out of 104 industry groups)
  • Mining ($DJUSMG): 3 and 3
  • Mobile telecom ($DJUSWC): 4 and 6
  • Biotechnology ($DJUSBT): 8 and 1
  • Toys ($DJUSTY): 9 and 4

These were the only 5 groups that were in the Top 10 in March 2020 and on Friday.

Then there's the flip side - those industry groups that were weak in both periods:

  • Recreational Services ($DJUSRQ): 103 and 104
  • Oil equipment & services ($DJUSOI): 101 and 96
  • Coal ($DWCCOA): 100 and 98
  • Airlines ($DJUSAR): 99 and 103
  • Aerospace ($DJUSAS): 97 and 97

These were the industries that were in the Bottom 10 in both periods. I'd definitely avoid all of these groups in the very near-term until we get more clarity. It may mean you miss some upside, but steering clear will eliminate the significant risk that exists if this new COVID variant proves to be more problematic than the delta variant.

What About Accumulation/Distribution (AD Lines)?

We saw very weak futures overnight on Thursday and our major indices gapped down significantly. But where did Wall Street see opportunity to accumulate? Well, one way to gauge that is to compare Friday's closing price to its opening price. It makes common sense that a higher close means there were more buyers than sellers throughout the day. The opposite is true if the close was below the open.

I'll be honest. I wasn't expecting the results that we actually saw. For instance, energy (XLE) was clearly the worst performing sector on Friday, but it rallied strongly in the afternoon and its AD line neared a 3-month high:

I have to say that energy behaved quite well during the day on Friday after a rather inauspicious start. The hammer at support, along with that rising AD line provides hope for a group that I said to avoid earlier in this article. We can't ignore that volume because it came on extremely heavy volume. Nearly 45 million shares changed hands, which wasn't the biggest volume day of the year. But we need to keep one thing in mind. The market closed early at 1pm ET on Friday. Had we been open a full day I believe the XLE may have traded its heaviest volume of the year. That, combined with the huge reversal, could signal a major bottom here. We'll have more days ahead that will provide us more clues, but based on my AD analysis, I'd turn bullish the group if I knew we weren't going to wake up to more negative COVID news on Monday morning. But that's the world we live in right now and the uncertainty is almost paralyzing.

There was one industry group on Friday that showed even greater signs of accumulation, gaining roughly 3.5% in the final 90 minutes of trading. The S&P 500 was flat during this same 90-minute period and the NASDAQ actually lost some ground, making this industry group's recovery stand out even more. I'm featuring the group and one of its component stocks to keep an eye on in my FREE EB Digest newsletter on Monday morning. If you're not already a free EB Digest subscriber, you can subscribe HERE by providing us your name and email address. There's no credit card required and you may unsubscribe at any time.

Happy trading!

Tom


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