Value stocks can be defined in many different ways. The basic premise, however, is the inclusion of stocks trading at a low price relative to their fundamentals; low price-to-earnings, low price-to-book, low price-to-sales, etc. The benefit of buying value stocks is the expectation that prices return to fair value. Quite often, the return benefits from above-market dividends. Equally important, buying a discounted asset reduces your risk.
Like value, there is no simple formula defining growth stocks. Growth stocks are companies whose earnings are expected to grow at a faster rate than the market. Because of the promise of future earnings, these stocks tend to trade at valuation premiums. Fewer of these stocks have meaningful dividends to bolster returns. Assets trading at a premium have a more daunting risk profile.
There is an appeal to owning value stocks and growth stocks. Mr. Market, however, makes deciding between the two difficult. At times, the premium for growth stocks can far exceed their potential growth. Frequently in such times, value is neglected and offers enormous relative performance potential. Other times growth stocks may be beaten down and offer a cheap entry point versus value stocks that have traded up to, or through, their fair value.
We firmly believe in mean reversion. The extreme highs for one asset class will eventually normalize closer to the long-term average. Often this occurs after dropping well below the long-term average. There is no example in the history of markets where mean reversion did not exert influence.
As mentioned, value has underperformed growth annually by 6.11% over the past decade. Over the last 100 years, value beats growth by 3.19% annually.
The graph below shows the rolling five year total returns for value versus growth.
As shown, there are very few five year periods where growth beats value. 82 percent of the time value outperforms growth. If we exclude the last ten years and the 1930’s the percentage climbs to 96%.
It is also notable that periods of value underperformance are followed by periods of strong outperformance. As we will highlight, this was last on display in the technology bubble of the late 1990s. From July of 2001 to July of 2006, value outperformed growth by nearly 150%.
As the chart above illustrates, the current period of value underperformance is the most extreme both in terms of duration and magnitude. Mean reversion argues that this trend will soon shift back to favor value.
Tech Boom and Bust
The graph below details the value-growth under- and outperformance of the late 1990s and early 2000s.
The chart tracks the cumulative net performance of value stocks versus growth stocks between 1998 and 2002. Like today, investors caught up in the tech boom only cared about growth. They bought into every story about the promise of technology. At the same time, companies trading with low valuations and steadily rising earnings are being thrown by the wayside.
In just two years, as markets rose to record-breaking valuations, growth beat value by 37.64%. However, when the markets came to their senses in early 2000, value rose from the dead. From low to high, just two years later, value beat growth by over 70%.
Value investors that held to their beliefs, stuck with their discipline, and shunned growth stocks may have lost the day in the late 1990s but won the battle. Not only did value stocks provide a great return but they provided a nice cushion. Owning value stocks in the early 2000s not only limited losses but actually produced gains in a down market.
20 Years Later
The experiences of the tech boom and bust have been long forgotten by most investors. There are a few value investors remaining today who are aware of what happened then. Like then, they are waiting for a second showing, but the wait is tedious.
The graph below shows that over the last two years growth has beaten value by 45%, 7% more than the two years leading into the tech bust.
Like the 1990s, every investor is chasing the same set of growth stocks. Today, they go by the name of FANGS. In the late 90s, they were called the Big Five.
The magnitude growth outperformance is amplified today due to the overwhelming popularity of passive investing. Those companies with the largest market caps receive a disproportionate percentage of investable dollars. Companies with the largest market caps today are predominantly growth companies.
2000 vs 2020
While the two periods may appear similar in their speculative nature and the value – growth divide, their fundamental backdrops are worlds apart.
In 2000, share prices of growth stocks, and in particular specific tech high flyers, got ahead of themselves. Their future earnings, however, had strong economic and fundamental underpinnings. Today they do not.
GDP was growing annually at 3.2% in the 1990s. That compares to 2% over the last ten years and most likely below 1.5% in the future. In the 1990s, debt as a percentage of GDP was a fraction of what it is today. Productivity growth was much stronger twenty years ago than today as well. In the 1990s, companies invested in their future development. Today they prefer to buy back stock and neglect their future earnings capabilities.
Today’s economy is not backed by organic growth and strong productivity, but rather debt and fiscal and monetary schemes. Given the environment, the argument for speculation over reliable earnings growth is befuddling.
If you appreciate history and understand that hangovers follow periods of excess, this article should be compelling. Growth’s recent outperformance over value goes beyond any historical precedence. Accordingly, any future underperformance, like its outperformance, might be one for the record books.
Exact timing on trend changes are difficult to predict. Growth may have already peaked versus value, or it may still have months or years to go. Regardless, the current period provides us precious time. Time to research stocks and slowly add value stocks to our portfolios. Adding value may seem futile like the late 1990s, but we know how that ended.
According to Elektrek, sources familiar with the matter are saying that Tesla’s internal systems are currently inexplicably down and on the customer-facing side, Tesla owners couldn’t connect to their cars through the mobile app starting at around 2300ET last night.
Shares, which have been under pressure al morning coming off yesterday’s “Battery Day”, tumbled on the news.
An outage is also impacting Tesla’s energy products, with Tesla solar and Powerwall owners not being able to monitor their systems.
Of course, it isn’t the first time that Tesla had a system-wide outage, but according to Elektrek, they are “fairly rare”.
It Will Take Up To 59 Years For The Fed To Hit Its Inflation Target Tyler Durden
Wed, 09/23/2020 – 11:23
Two days before Powell unveiled Flexible Average Inflation Targeting (FAIT) as the Fed’s new monetary doctrine on August 27, some analysts were already pricing it in and analyzing how long it would take for the Fed to hit its “target” using conservative assumptions, with BofA concluding that “it would take 42 years to reach the price level target if core PCE remained at 2.1% yoy” but just 2 years if core PCE rocketed to 4.0% (good luck hitting 4% inflation).
And while analysts had no choice but to make sweeping assumptions before AIT was unveiled, they have to do the same now as well after AIT became official, simply because the Fed refused to provide key details about the program it is now operating under, and as Bank of America writes in a post-mortem on FAIT, “The Fed will seek to average 2% inflation over time but specifics around the time frame for averaging and the extent of inflation overshoot were light.“
Still, one can model some scenarios using simple assumptions.
These clearly show just how difficult the Fed’s new inflation objective could be to achieve as the following analysis from BofA’s Claudio Irigoyen shows, using a few scenarios for average 2% headline PCE assuming a non-flexible average inflation target.
To wit: if the Fed began its averaging period at the start of 2017 and monthly headline PCE is equal to 2.1% y/y going forward it would take 11 years to achieve the inflation target. Alternatively, if one uses 2008, or even 2000, as the starting year for the “average period” and the monthly PCE inflation print is 2.1% y/y, then it would take either three generations – 59 years – or two generations of trades, (37 years) to average 2% headline PCE.
Sadly, it’s not starting off well: as the strategist notes, the BofA’s house view is for headline PCE of 1.6% y/y for 2021, “which would mean an even longer time until the target is achieved.”
Of course, the time period would be truncated if the Fed somehow managed to hit monthly headline PCE of 3.0% y/y (or higher): in that case, achieving the target would take about one year. Unfortunately, such inflation – which would only materialize if these was a burst in wages – appears impossible to none other than the Fed: as the FOMC’s latest economic projections show, the max inflation overshoot in the Fed’s 2023 inflation forecasts is 2.1%.
In other words, even the Fed admits that we are looking at decades before the Fed will hike rates, unless of course the Fed is given a greenlight to wire digital money into US households directly… something which the Fed itself admitted is the last-ditch attempt to spark inflation at any cost.
De Blasio Furloughs Another 9,000 NYC Employees Due To “Massive Budget Shortfall” Tyler Durden
Wed, 09/23/2020 – 11:05
One week ago, New York City Mayor Bill de Blasio announced that he will furlough himself and his City Hall staff for one week as the city weathers a budget (and everything else too) crisis.
“We’ve already had to make some tough cuts,” de Blasio announced last Wednesday.
“We’re doing everything we can to stop those cuts from becoming worse.”
Blasio, his wife first lady Chirlane McCray, and nearly 500 other staff members will take a week of unpaid furlough sometime between October and March 2021. The largely symbolic move is projected to save the city $860,000. And since “symbolic” was the key word here, moments ago the socialist mayor announced that New York City would expand its week long furloughs to another 9,000 employees to save $21 million, they mayor said this morning.
All managerial and non-represented employees must take five furlough days from Oct. 1 through March, the mayor revealed.
Alas, this latest round of furloughs will not be nearly enough as the city faces a $9 billion shortfall in revenue through June 2021. The mayor has warned of as many as 22,000 layoffs in the absence of federal financial aid or approval from the state for long-term borrowing.
“I know this is difficult news for the dedicated public servants of our city,” de Blasio said. “But we are forced to make these difficult decisions as we face a massive budget shortfall with no help in sight.”
The furloughs come as New York State is contemplating following New Jersey in slapping millionaires with higher taxes. A tax hike appears virtually inevitable should Gov Andrew Cuomo’s hope that Congress will appropriate additional aid fails.
The U.S. Army has deployed the first batch of its newly established military branch, the “Space Force”, outside the United States, specifically in the Arabian Peninsula.
The Chargé d’Affairs at the United States Embassy in Qatar, Greta C. Holtz, said on her Twitter account on Tuesday, that “Washington has deployed the first group of the space force at Al-Udeid Air Force Base in Qatar.”
She added: “The deployment of the first group of members of the U.S. Space Force to Al-Udeid Air Force Base in Qatar represents the commitment of the United States and Qatar to continue building their strategic partnership in the future and in the space field.”
The Space Force was established by a decision of U.S. President Donald Trump on December 21, 2019, and is the first to be established in the country in more than 70 years, and represents the sixth branch of the U.S. military.
In a swearing-in ceremony earlier this month at Al-Udeid, 20 Air Force troops, flanked by American flags and massive satellites, entered Space Force. Soon several more will join the unit of “core space operators” who will run satellites, track enemy maneuvers and try to avert conflicts in space.
“The missions are not new and the people are not necessarily new,” Benson said.
That troubles some American lawmakers who view the branch, with its projected force of 16,000 troops and 2021 budget of $15.4 billion, as a vanity project for Trump ahead of the November presidential election.
The deployment of the first members of the U.S. Space Force to Qatar’s #AlUdeid Air Base symbolizes the United States’ and #Qatar’s commitment to further building our strategic partnership into the future – and into space! @SpaceForceDoDhttps://t.co/smdDw0rqHF
The U.S.-Qatari relations in the military field are deepening, as about 13,000 American soldiers, most of them from the Air Force, are stationed at Al-Udeid base, 30 km southwest of the capital, Doha.
* * *
This is kind of like a coming-of-age ceremony for Space Force. You’re not a full branch of the American military until you’ve deployed to the Middle East on some vaguely-defined and never-ending mission. https://t.co/JGYDBj7JGu
WTI Extends Gains After Official Inventory Data Shows Big Draws Tyler Durden
Wed, 09/23/2020 – 10:36
Oil prices have chopped around overnight, rallying hard as Europe opened after weakness following last night’s surprise crude build reported by API.
“The API was positive I’d say, with draws in gasoline and distillates” and crude little changed, said Bjarne Schieldrop, chief commodities analyst at SEB AB. “A large drawdown in the fourth quarter or not is the big question.”
Additionally, as Bloomberg reports, in the near term, the demand outlook looks troubled. In Europe, the profit from turning crude into diesel slipped toward $2 a barrel earlier, a record low in data going back to 2011. That curbs demand for crude from refineries. The head of Russia’s Gazprom Neft PJSC said that the recovery in global oil consumption has indeed slowed down.
Crude +691k (-4.0mm exp)
Gasoline -7.735mm (-1.9mm exp) – biggest draw since Sept 2017
Distillates -2.104mm (+1.2mm exp)
Crude -1.64mm (-4.0mm exp)
Gasoline -4.03mm (-1.9mm exp)
Distillates -3.364mm (+1.2mm exp) – biggest draw since March 2020
Dramatic draws in crude, gasoline, and distillates… This is the 7th weekly draw in gasoline in a row and biggest distillates draw since March
Between Hurricanes and Tropical Depressions, there is still some lingering noise in the production data, which showed a small drop in the last week…
WTI hovered around $40 ahead of the official inventory data and extended gains on the draws…
Bloomberg Intelligence Senior Energy Analyst Vince Piazza notes that resurgent coronavirus infections in Europe could depress crude demand sooner than we had expected. With the U.S. past peak summer travel season, we’re braced for near-term oversupply. Interestingly, domestic production has reawakened with a WTI rally through $43, pressuring sentiment and balances.
US COVID-19 Cases Near 7 Million As NYC Warns Of New ‘Hot Spots’ In Brooklyn, Queens: Live Updates Tyler Durden
Wed, 09/23/2020 – 10:34
US nears 7 million cases
Post-LBW spike continues
Trump moves more money to ‘Operation Warp Speed’
NYC warns of new hotspots that require “urgent action”
Mayor de BLasio furloughs 9k workers
France to announce new COVID restrictions
Japan on track to approve new COVID drug
Indonesia reports another daily record
China, Japan to ease travel restrictions on foreigners
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The number of new COVID-19 cases reported in the US on Tuesday accelerated to 39,345 (compared with +37,417 the prior day), as the post-Labor Day Weekend surge (something that BofA analysts insist is being driven almost entirely by increases in testing) continues. Mirroring the increase in cases, deaths increased by 438, compared with just 270 the day before. California saw cases climb 2,630 yesterday (compared with +3,294 for the prior day), while deaths increased by 53, vs. 31 a day ago.
“It’s completely unfathomable that we reached this point,” said Jennifer Nuzzo, a JHU researcher. The AP also noted that 200,000 deaths from the virus is roughly equivalent to one “9/11” per day for 67 days.
The newswire also noted that the milestone comes “six weeks before an election that is certain to be a referendum in part on President Donald Trump’s handling of the crisis.”
Speaking on CNN, Dr. Fauci said “the idea of 200,000 deaths is really very sobering, in some respects stunning.” President Trump, meanwhile, said last night that “if we didn’t do it properly and do it right, you’d have 2.5 million deaths”, while Democratic candidate Joe Biden took to twitter to proclaim “it didn’t have to be this bad” (then again, Biden also apparently believes the death toll is 200 million, several orders of magnitude higher than reality). Brazil, which essentially did let its outbreak run wild, is in second place with 137,000 deaths, though some critics believe that number underestimates the true death toll.
Looking ahead, the US is roughly 2 days away from becoming the first country to top 7 million confirmed cases: As of Wednesday morning, the US had 6,897,756 cases, and 200,818 confirmed deaths.
In terms of the big US news on Wednesday, NYC’s health department identified a new cluster of cases yesterday in Brooklyn which it warned could be cause for “significant concern”. the hot spots have been traced to four areas in Queens and Brooklyn.
Speaking Wednesday morning, Mayor de Blasio warned these new ‘hot spots’ require “urgent action” and that NYC will increase enforcement of social distancing rules and also bolster its testing efforts to try and stave off the new outbreak. The mayor also annonced a five-day furlough impacting 9,000 employees – a measure that will reportedly save the city $21 million.
And as we noted earlier, JNJ announced its vaccine candidate would be starting Phase 3 trials, making it the fourth candidate to cross that threshold. Yesterday, UK PM Boris Johnson unveiled new measures to slow a resurgence in the UK’s outbreak. The PM also warned that if the measures aren’t effective, that the UK may return to lockdown, even as a team of BofA analysts warned that tighter COVID restrictions will “scar the UK economy further”.
Wisconsin Gov Tony Evers announced new measures late Tuesday declared a public health emergency and extended an order to wear face masks into November.
Finally, the Trump Administration according to Bloomberg is shifting billions of dollars to ‘Operation Warp Speed’, its vaccine effort which relies on throwing money at vaccine projects, and away from testing and masks. The shift shows the administration’s “increasing focus on a medical solution to ease the pandemic,” Bloomberg said. The new money will swell the program to $18 billion from $10 billion.
“Escalating lockdown measures, fading stimulus measures and Brexit uncertainty will push the economy into contraction over the next two quarters,” said BofA’s Robert Wood, chief UK economist.
Here’s a roundup of other important COVID news from Wednesday:
Global cases have hit 31,615,836, while deaths have reached 971,116 (Source: JHU).
Indonesia sets new daily record: The country reported 4,465 new cases, and another 140 deaths. This is only the fourth time Indonesia has topped 4k daily cases, and each instance has come during the last week (Source: Nikkei).
Tokyo reports 59 cases, marking the lowest daily figure in nearly three months. The number was down from 88 on Tuesday and 98 on Monday, and the lowest since June 30, when 54 cases were reported (Source: Nikkei).
Fujifilm announced that its Avigan drug reduced viral loads and symptoms of COVID-19 patients, clearing the last hurdle to emergency approval in Japan, following months of delays. The Phase 3 clinical study of 156 patients showed that those treated with Avigan improved after 11.9 days, versus 14.7 days for a placebo group (Source: Nikkei).
Japan is finally planning to ease access for foreigners in October, though its restrictions will remain pretty stringent: Only 1,000 visitors will be allowed into Japan per day, and initially only those staying for more than 3 months will be allowed in (and they must quarantine for 2 weeks upon arrival) (Source: Nikkei).
India reported 83,347 cases Wednesday, up from 75,083 on Tuesday, bringing its total to nearly 5.65 million. The death toll has jumped by 1,085 to 90,020. The country’s testing capacity now exceeds 1.2 million per day, by far the highest in the world, and more than 66 million tests have been conducted in total (Source: Nikkei).
China reported 10 cases for Sept. 22, up from just six a day earlier. China is also planning to ease entry rules for foreigners starting Sept. 28 (Source: Nikkei).
Australia sees just 15 new cases in its COVID-19 “hot spot” of Victoria, the country’s second-largest state, and home to its second city, Melbourne. Reporting just 15 cases and five deaths, compared with 28 cases and 3 deaths yesterday (Source: Nikkei).
Goldman Sachs, HSBC and others have paused plans to return workers in London after PM Johnson appealed to Britons to work from home (Source: Bloomberg).
Argentina reported a record 470 COVID-19 daily deaths, pushing its total to 13,952, according to the government’s evening report. It’s the second day in a row Argentina has reported a record rise in fatalities. Officials also confirmed 12,027 new cases, bringing the total to 652,174 (Source: Bloomberg).
Finally, Goldman Sachs analysts have come up with the following chart to measure the level of COVID-19 restrictions in place in the US. Right now, it’s swinging back toward more restrictions as states move to curb an expected “fall surge” as college students return home.
In Unprecedented Monetary Overhaul, The Fed Is Preparing To Deposit “Digital Dollars” Directly To “Each American” Tyler Durden
Wed, 09/23/2020 – 10:19
Over the past decade, the one common theme despite the political upheaval and growing social and geopolitical instability, was that the market would keep marching higher and the Fed would continue injecting liquidity into the system. The second common theme is that despite sparking unprecedented asset price inflation, price as measured across the broader economy – using the flawed CPI metric and certainly stagnant worker wages – would remain subdued (as a reminder, the Fed is desperate to ignite broad inflation as that is the only way the countless trillions of excess debt can be eliminated and yet it has so far failed to do so).
The Fed’s failure to reach its inflation target – which prompted the US central bank to radically overhaul its monetary dogma last month and unveil Flexible Average Inflation Targeting (or FAIT) whereby the Fed will allow inflation to run hot without hiking rates – has sparked broad criticism from the economic establishment, even though as we showed in June, deflation is now a direct function of the Fed’s unconventional monetary policies as the lower yields slide, the lower the propensity to spend. In other words, the harder the Fed fights to stimulate inflation, the more deflation and more saving it spurs as a result (incidentally this is not the first time this “discovery” was made, in December we wrote “One Bank Makes A Stunning Discovery – The Fed’s Rate Cuts Are Now Deflationary“).
In short, ever since the Fed launched QE and NIRP, it has been making the situation it has been trying to “fix” even worse while blowing the biggest asset price bubble in history.
And having recently accepted that its preferred stimulus pathway has failed to boost the broader economy, the blame has fallen on how monetary policy is intermediated, specifically the way the Fed creates excess reserves which end up at commercial banks instead of “tricking down” all the way to the consumer level.
To be sure, in the aftermath of the covid pandemic shutdowns the Fed has tried to short-circuit this process, and in conjunction with the Treasury it has launched “helicopter money” which has resulted in a direct transfer of funds to US corporations via PPP loans, as well as to end consumers via the emergency $600 weekly unemployment benefits which however are set to expire unless renewed by Congress as explained last week, as Democrats and Republicans feud over which fiscal stimulus will be implemented next.
And yet, the lament is that even as the economy was desperately in need of a massive liquidity tsunami, the funds created by the Fed and Treasury (now that the US operates under a quasi-MMT regime) did not make their way to those who need them the most: end consumers.
Which is why we read with great interest a Bloomberg interview with two former Fed officials: Simon Potter, who led the Federal Reserve Bank of New York’s markets group i.e., he was the head of the Fed’s Plunge Protection Team for years, and Julia Coronado, who spent eight years as an economist for the Fed’s Board of Governors, who are among the innovators brainstorming solutions to what has emerged as the most crucial and difficult problem facing the Fed: get money swiftly to people who need it most in a crisis.
The response was striking: the two propose creating a monetary tool that they call recession insurance bonds, which draw on some of the advances in digital payments, which will be wired instantly to Americans.
As Coronado explained the details, Congress would grant the Federal Reserve an additional tool for providing support—say, a percent of GDP [in a lump sum that would be divided equally and distributed] to households in a recession. Recession insurance bonds would be zero-coupon securities, a contingent asset of households that would basically lie in wait. The trigger could be reaching the zero lower bound on interest rates or, as economist Claudia Sahm has proposed, a 0.5 percentage point increase in the unemployment rate. The Fed would then activate the securities and deposit the funds digitally in households’ apps.
As Potter added, “it took Congress too long to get money to people, and it’s too clunky. We need a separate infrastructure. The Fed could buy the bonds quickly without going to the private market. On March 15 they could have said interest rates are now at zero, we’re activating X amount of the bonds, and we’ll be tracking the unemployment rate—if it increases above this level, we’ll buy more. The bonds will be on the asset side of the Fed’s balance sheet; the digital dollars in people’s accounts will be on the liability side.”
So this morning, as if to confirm our speculation of what comes next, Cleveland Fed president Loretta Mester delivered a speech to the Chicago Payment Symposium titled “Payments and the Pandemic“, in which after going through the big picture boilerplate, Mester goes straight to the matter at hand.
In the section titled “Central Bank Digital Currencies”, the Cleveland Fed president writes that “the experience with pandemic emergency payments has brought forward an idea that was already gaining increased attention at central banks around the world, that is, central bank digital currency (CBDC).”
And in the shocking punchline, then goes on to reveal that “legislation has proposed that each American have an account at the Fed in which digital dollars could be deposited, as liabilities of the Federal Reserve Banks, which could be used for emergency payments.“
But wait it gets better, because in launching digital cash, the Fed would then be able to scrap “anonymous” physical currency entirely, and track every single banknote from its “creation” all though the various transactions that take place during its lifetime. And, eventually, the Fed could remotely “destroy” said digital currency when it so decides. Here are the details:
Other proposals would create a new payments instrument, digital cash, which would be just like the physical currency issued by central banks today, but in a digital form and, potentially, without the anonymity of physical currency. Depending on how these currencies are designed, central banks could support them without the need for commercial bank involvement via direct issuance into the end-users’ digital wallets combined with central-bank-facilitated transfer and redemption services. The demand for and use of such instruments need further consideration in order to evaluate whether such a central bank digital currency would allow for quicker and more ubiquitous payments in times of emergency and more generally. In addition, a range of potential risks and policy issues surrounding central bank digital currency need to be better understood, and the costs and benefits evaluated.
The Federal Reserve has been researching issues raised by central bank digital currency for some time. The Board of Governors has a technology lab that has been building and testing a range of distributed ledger platforms to understand their potential benefits and tradeoffs. Staff members from several Reserve Banks, including Cleveland Fed software developers, are contributing to this effort. The Federal Reserve Bank of Boston is also engaged in a multiyear effort, working with the Massachusetts Institute of Technology, to experiment with technologies that could be used for a central bank digital currency. The Federal Reserve Bank of New York has established an innovation center, in partnership with the Bank for International Settlements, to identify and develop in-depth insights into critical trends and financial technology of relevance to central banks. Experimentation like this is an important ingredient in assessing the benefits and costs of a central bank digital currency, but does not signal any decision by the Federal Reserve to adopt such a currency. Issues raised by central bank digital currency related to financial stability, market structure, security, privacy, and monetary policy all need to be better understood.
To summarize, the wheels are already turning on a plan that sees the Fed depositing “digital dollars” to “each American”, a stunning development that essentially sees the Fed bypass Congress, endowing the Central Bank with targeted “fiscal stimulus” capabilities, and which could lead to a dramatic reflationary spike as it is the lower income quartile segments of US society that are the marginal price setters for economic goods and services. And having already implemented Average Inflation Targeting, the resulting burst of inflation would be viewed by the Fed as insufficient on its own (as it would have to persist for a long time over the “average” period whatever it may end up being), to tighten monetary policy. In fact, even as inflation rages – which some alternative inflationary measures to CPI suggest it already is – the Fed will have a semantic loophole in explaining just why it needs to keep inflation scorching hot even as the standard of living in America collapses to the benefit of a handful of asset holders.
Absent a massive burst of inflation in the coming years which inflates away the hundreds of trillions in federal debt, the unprecedented debt tsunami that is coming would mean the end to the American way of life as we know it. And to do that, the Fed is now finalizing the last steps of a process that revolutionizes the entire fiat monetary system, launching digital dollars which effectively remove commercial banks as financial intermediaries, as they will allow the Fed itself to make direct deposits into Americans’ “digital wallets”, in the process also making Congress and the entire Legislative branch redundant, as a handful of technocrats quietly take over the United States.
Dubai. Abu Dhabi. Bahrain. And, of course, Saudi Arabia. The two emirates this year issued debt for the first time in years. So did Bahrain. Saudi Arabia stepped up its debt issuance. The moves are typical for the oil-dependent Gulf economies. When the going is good, the money flows. When oil prices crash, they issue debt to keep going until prices recover. This time, there is a problem. Nobody knows if prices will recover.
In August, Abu Dhabi announced plans for what Bloomberg called the longest bond ever issued by a Gulf government. The 50-year debt stood at $5 billion, and its issuance was completed in early September. The bond was oversubscribed as proof of the wealthiest Emirate’s continued good reputation among investors.
Dubai, another emirate, said it was preparing to issue debt for the first time since 2014 at the end of August. Despite the fact the UAE economy is relatively diversified when compared to other Gulf oil producers, it too suffered a hard blow from the latest oil price crash and needed to replenish its reserves urgently. Dubai raised $2 billion on international bond markets last week. Like Abu Dhabi’s bond, Dubai’s was oversubscribed.
Oversubscription is certainly a good sign. It means investors trust that the issuer of the debt is solid. But can the Gulf economies remain solid by issuing bond after bond with oil prices set to recover a lot more slowly than previously expected? Or could this crisis be the final straw that tips them into actual reforms?
No economy, especially not the ones dependent on a single export for most of its budget revenues, can rely on borrowing for long-term survival, let alone growth. In fact, the growth prospects of the Gulf economies are dimming, Reuters’ Davide Barbuscia wrote in a recent analysis of the region. Gulf governments are doing what they have always done: cut public spending and borrow. This time, however, the crisis is like no other before it, and these governments may find themselves in a tight spot while they wait for prices to bounce back.
The problem is that public spending is the main growth driver in the Gulf economies, Barbuscia wrote, quoting the chief economist of Abu Dhabi Commercial Bank. If public spending falls, so will consumption and, therefore, growth. This is already happening and, what’s worse, it is happening across industries.
Earlier this month, IHS Markit said, as quoted by Arabian Business, that non-oil private sector activity in Saudi Arabia and the UAE had fallen in August below 50—the figure that separates growth from contraction. That was after this indicator had registered improvement in the previous month despite still low oil prices.
All Gulf economies—except Qatar—are expected to stay or swing into budget deficits this year, according to the International Monetary Fund. Saudi Arabia, the biggest economy in the region, is seen faring the best, with a deficit of 11.4 percent of GDP, and Oman faring the worst, with a deficit of 16.9 percent. Deficits happen. There is nothing extraordinary about them. What is extraordinary is the lack of wiggle room for the local governments. Investor interest in their new bonds may have been strong, but how likely would it be to remain strong for further debt issues if prices continue hovering around $40 a barrel? This is much below the Gulf economies’ breakeven levels, even the lowest ones. Saudi Arabia’s breakeven alone, according to the IMF, is $76.10 per barrel this year. It could fall to $66 next year, but this will still be too high for comfort with Goldman optimistically projecting Brent to hit $65 a barrel next year.
In what is perhaps a cruel twist, this unprecedented situation is stifling the Gulf economies’ attempts to diversify their economies away from oil. This is incredibly obvious in Saudi Arabia, which had the ambitious goal of becoming a diversified economy by 2030. The goal, however, was to be financed with money from oil sales, and these collapsed this year as the pandemic spread globally. Vision 2030 may well be on its deathbed as the Kingdom, which is the Middle East’s largest producer of oil, grapples with the drop in oil revenues that has promoted a tripling of VAT, a hefty cut in public spending, and the removal of state subsidies for public servants.
Other oil producers in the Gulf are also cutting public spending because this is pretty much the only thing they can cut, along with privileges for citizens, which is unlikely to be a popular move. Spending cuts and loans are the name of the Gulf game amid the crisis. The risk with this game is that if prices do not recover soon, it could turn into a vicious circle or, rather, a vicious spiral that could destabilize the whole region. Maybe these economies need to try a new playbook, one that prescribes actual economic reforms to make them more resilient to oil crises.
US Services PMI Disappoints In September, “Risk Tilted To Downside In Coming Months” Tyler Durden
Wed, 09/23/2020 – 09:55
Following a mixed picture from European PMIs (EU Composite lower, manufacturing gains as services slump back into contraction), analysts were expecting a similar picture in the US for preliminary September data, with Market PMI Manufacturing accelerating and Services slowing, and that is what printed.
Markit US Manufacturing 53.5 vs 53.5 exp vs 53.1 prior – 20-month high
Market US Services 54.6 vs 54.7 exp vs 55.0 prior – 2 month low
Notably this is happening as US Macro data is rolling over aggressively…
The US Composite PMI remains above Europe’s but both are starting to lag as Services’ hope starts to fade…
“US businesses reported a solid end to the third quarter, with demand growing at a steepening rate to fuel a further recovery of output and employment.
“The survey data therefore add to signs that the economy will have enjoyed a solid rebound in the third quarter after the second quarter slump.
“The question now turns to whether the economy’s strong performance can be sustained into the fourth quarter. Covid-19 infection rates remain a major concern and social distancing measures continue to act as a dampener on the overall pace of expansion, notably in consumer-facing services. Uncertainty regarding the presidential election has also intensified, cooling business optimism about the year ahead. Risks therefore seem tilted to the downside for the coming months, as businesses await clarity with respect to both the path of the pandemic and the election.”
Wells Fargo CEO Apologizes For ‘Limited Black Talent’ Comment, Says It Shows ‘Own Unconscious Bias’ Tyler Durden
Wed, 09/23/2020 – 09:45
Wells Fargo CEO Charles Scharf apologized on Wednesday over comments that the bank has trouble meeting diversity goals because “the unfortunate reality is that there is a very limited pool of black talent to recruit from.”
The comments sparked an immediate backlash, including from US lawmaker Alexandria Ocasio-Cortez, who said “Perhaps it’s the CEO of Wells Fargo who lacks the talent to recruit Black workers.”
In a statement, Scharf said he’s sorry his comments were misinterpreted.
“The financial industry and our company do not reflect the diversity of our population,” he said in a statement tweeted by the company, adding “We, at Wells Fargo are committed to driving change and improving diversity and inclusion.”
The CEO of the largest U.S. bank employer has pledged to double the number of Black leaders over five years and tied executive compensation to reaching diversity goals, a spokesperson told Reuters. He is also requiring hiring managers to consider diverse candidates for high-paying roles that are vacant, and ensure diversity on interview teams. –Bloomberg
And in a longer statement from the company, Scharf went further – apologizing “for making an insensitive comment reflecting my own unconscious bias.”
“There are many talented diverse individuals working at Wells Fargo and throughout the financial services industry and I never meant to imply otherwise. I’ve worked in the financial services industry for many years, and it’s clear to me that, across the industry, we have not done enough to improve diversity, especially at senior leadership levels. And there is no question Wells Fargo has to make meaningful progress to increase diverse representation. As I said in June, I have committed that this time must be different,” the statement continues.
Trump’s “national security” claims are “just an excuse”, the PD argued…
The US is absolutely good at playing routines. Sometimes it looks like a step back, but in fact it is pressing harder. In this “hunting” against Tik Tok, the United States has always used national security as an excuse, but it is in fact untenable. Security is just an excuse. The real approach in the United States is to exert extreme pressure and public opinion, to break through the moral bottom line, to constantly dig traps and bring rhythm. In the depths of the trap, the great rod of power has already been prepared. Aiming at a technology company, the world’s number one power actually used its full power, using the President’s Executive Order and the Ministry of Commerce’s ban.
…and if ByteDance falls for this trickery, Washington will destroy ByteDance and TikTok, just like it did to Alstom, to Toshiba and to Huawei, the paper argued.
“Commercial competition no longer relies on honesty and bottom line,” the paper continued. “The superiority of technological hegemony needs to be maintained by political cards.”
This deal is only the “starting point” for “bullying and robber logic.”
How familiar is this technique. Because of the “American trap”, Toshiba, a Japanese company that once led the world in the semiconductor industry, has difficulty finding a chance to make a comeback. Because of the “American trap”, the French business giant Alstom, which once spanned the global electric energy and rail transit industries, has been “dismembered” by the Americans. If these lessons are not enough, the Chinese people understand Huawei’s bloody struggle in the US in the past two years.
For a country that is trying to dominate forever, this is not a fuss, but a “precision strike.” All opponents stronger than it in a certain aspect are targets of strike. Commercial competition no longer relies on honesty and bottom line, and the superiority of technological hegemony needs to be maintained by political cards. “America first” has become a stark declaration of hegemony. As long as the United States is no longer dominant in any aspect, it will use political tools. This trick has been tried and tested repeatedly, and it is the starting point for bullying and robber logic.
The Trump Administration’s skullduggery in trying to crush a competitor isn’t just a problem for China. “A hegemonic country…cannot tolerate any country above it.”
Kyle Bass reminded us on Tuesday that China’s claims are simply more ‘pot calling the kettle black’. By giving ByteDance a hard time, the Trump administration is essentially giving China a taste of its own medicine (foreign companies operating in Beijing are subjected to a host of controls, including forced partnerships with domestic entities), Bass argued
Still, the editorial continued: “China, which has gone through ups and downs, will not hide or turn a blind eye to difficulties and challenges, obstacles and variables, and will not panic or get confused. After the wind and rain, it is a rainbow.It has withstood the test again and again, and we will finally go through the wind and rain and usher in a better tomorrow.”
Gao Zhikai, a prominent former diplomat and translator, warned that the saga has sparked “complete disbelief” among Chinese leaders: “China wants to emphasize that the Chinese companies’ legitimate rights cannot be violated without consequences.” Others reminded the US of threats, leaked over the weekend, that Beijing might respond to the US’s latest aggression by restricting trade, investment and visas for certain American companies by adding them to an “unreliable entities” list that Beijing used as a cudgel during the trade talks with Washington. This just further cements the impression that the TikTok-Oracle deal was just another “for show” agreement, like the ‘Phase 1’ trade deal.
According to media reports, current deal terms allow ByteDance to retain control of the TikTok content-recommendation algorithm, while Oracle steps in to handle all of the user data. It’s still not exactly clear how China would overtly ‘kill’ the deal, though Bloomberg said it expects a statement from the Ministry of Commerce would just about do it.
Rabo: Brexit Was Always Inevitable If Politicians Understood UK Drinking Habits Tyler Durden
Wed, 09/23/2020 – 09:20
By Michael Every of Rabobank
Markets were briefly roiled yesterday by the Fed’s Evans being misquoted in suggesting that the Fed might do the complete opposite of what it has just pledged to stick with – not doing anything for years and years and years, almost regardless of what inflation (doesn’t) do for years and years and years.
Further roiling can be expected in the UK as the same government who weeks ago was telling people “Go back to the office or risk losing your job,” is now telling them they will be working from home for the next six months, and that restrictions could get tighter yet. For example, only being able to drink until 9pm not 10pm?
Apart from the obvious “whocouldadnooed?” incompetence, it is stunning that a British government misunderstands its own people so badly. The infamous UK ‘closing time’ was only introduced around a century ago in 1914‘s Defence of the Realm Act to try to ensure that WW1 munitions workers would not be so hung-over that they couldn’t work the next day. Back then, it was 10.30pm and “Last orders!” or “Time, ladies and gentlemen, please!” needed to win the war. Now it’s 10pm, apparently.
The key point (or pint) is that British culture just adapted to drinking the same quantity of alcohol as before, but in a shorter time: sobriety was notably not increased. Hangovers were not decreased. Quite the opposite in fact.
The fact pubs are closing an hour earlier for six months was literally all the UK news was talking about last night: Donald Trump and Xi Jinping’s clashing speeches at the UN hardly got a look in. One would think politicians, who are not afraid of the odd drink –they have a subsidised bar, after all– would know this.
(Adrian Edmondson): “One thousand, five hundred and seventy four gin and tonics, please, Monica.”
(Rik Mayall): “LARGE ones.” .
‘Mr. Jolly Lives Next Door’ (1988)
As a co-worker in New York put it yesterday, one would think perhaps the UK is one giant pub. Indeed, perhaps it always was. This certainly isn’t the first time UK politicians have put the ideal ahead of the real and the drinking culture at the heart of UK identity.
Tony Blair –who I suddenly picture with a Campari and soda or a Babycham, trying to fit in at a rough 1980’s northern Working Men’s Club where Bernard Manning is on the week after– massively liberalised the Licensing Laws in the 2000s. Suddenly, pubs could stay open until 1 or 2am or later. “Ah-ha!” cried the Blairites. “Brits will now sup their drinks slowly until the wee hours in outside pavement cafes while discussing arthouse cinema and Sartre, and we will have turned the UK into continental Europe.”
That was the plan.
What actually happened in many locations was a get-‘em-in-let’s-have-another-I-love-you-you-know-did-you-spill-my-pint-vomit-and-blood-and-tears-and-half-a-kebab-down-the-shirt-broken-beer-bottle-in-the-face-where’s-my-taxi-here-come-the-rozzas nightly apocalypse that started at 7pm and went on well until dawn. Good job there wasn’t a war on.
In other words, Brexit was perhaps always inevitable if politicians understood UK drinking habits – though to be fair the Scandinavians, who are capable of some pretty epic drinking of their own, somehow manage to do so without trying to fight everyone in the EU shirtless.
One will certainly need a stiff drink in the next few months, however, if the British government’s claim that 7,000 trucks a day could be stuck in lines at the port of Dover in a “reasonable worst case” if it exits the EU without better customs preparation, and that traders should prepare for January. (The people doing that prep are apparently the same ones doing the UK’s Covid testing and the track and trace system.) That would mean an 80% decline in normal goods flow, and so an 80% decline in imported goods on shelves.
You want a UK pub-style apocalypse all day long? Try all that drinking on an empty stomach – or less of the drinking too if it is imported booze you are after.
In short, both the EU and the UK are negotiating over Brexit trade terms, but the latter seems to, again, be shirtless and shouting “Come and have a go if you think you’re hard enough!” while swaying from side to side.
There are of course other global parallels with well-intended effects to try to corral liquidity: which brings us back to the Fed, the ECB, the BOJ, the BOE, the BOC, the RBA, the RBNZ (who just left rates on hold), the PBOC, etc., etc., and the mother of all hangovers that looms at some point.
(Policeman): “Are you drunk, sir?”
(Adrian Edmondson): “Of course I am, I’m out of my bloody mind. I’ve just spent three thousand quid in there.”
‘Mr Jolly Lives Next Door’ (1988)
What is the crumpled what-you-hope is money you want to be drunkenly fumbling for in your pocket when the bills for all of this come due?
Hunter Biden Raised ‘Counterintelligence And Extortion’ Concerns, May Have Participated In Sex Trafficking: Senate Report Tyler Durden
Wed, 09/23/2020 – 09:05
A long-awaited Senate report on Hunter Biden’s financial dealings with Ukrainian, Chinese and Russian businesses created potential “criminal financial, counterintelligence and extortion concerns,” and alarmed US officials who perceived an ethical conflict of interest and flagged potential crimes ranging from sex trafficking to bribery.
The findings are contained in a joint report by the GOP-led Senate Homeland and Government Affairs and Senate Finance Committees, released just six days before the first Presidential Debate between Joe Biden and President Trump.
According to the Daily Caller’s Chuck Ross, suspicious financial transactions between Hunter Biden’s firms and foreign nationals from Russia and China – including a CCP-linked Chinese businessman, raised serious concerns. What’s more, Hunter’s seat on the board of Ukrainian energy giant Burisma while his father served as the Obama administration point-man for Ukraine, worried State Department officials in 2015 and 2016.
One official, Amos Hochstein, told the Senate Homeland Security and Senate Finance committees that he said to then-Vice President Joe Biden in October 2015 that Hunter Biden’s position on the board of Burisma “enabled Russian disinformation efforts and risked undermining U.S. policy in Ukraine.”
Hunter Biden, now 50, joined Burisma’s board of directors in April 2014, shortly after his father, Joe Biden, took over as the Obama administration’s chief liaison to Ukraine. –Daily Caller
As Ross notes, while the report does not produce direct evidence of wrongdoing by Hunter Biden, Republicans say the evidence paints a troubling picture of Biden receiving “millions of dollars from foreign sources as a result of business relationships that he built during the period when his father was vice president of the United States and after.”
And as Just The News‘ John Solomon writes, “Perhaps the most explosive revelation was that the U.S. Treasury Department flagged payments collected overseas by Hunter Biden and business partner Devon Archer for possible illicit activities.“
The so-called Suspicious Activity Reports flagged millions of dollars in transactions from the Ukrainian gas company Burisma Holdings, a Russian oligarch named Yelena Baturina, and Chinese businessmen with ties to Beijing’s communist government, the report said. Senate investigators have yet to determine if the FBI or others investigated the concerns. –Just The News
“The Treasury records acquired by the Chairmen show potential criminal activity relating to transactions among and between Hunter Biden, his family, and his associates with Ukrainian, Russian, Kazakh and Chinese nationals,” reads the 87-page report. Other transactions involving Biden-controlled firms were flagged for “potential criminal financial activity,” including wire transfers to Hunter’s Uncle, James Biden.
The report focuses on millions of dollars in wire payments that Hunter Biden’s firms received from Ye Jianming, the founder of CEFC China Energy Co., and Gongwen Dong, a U.S.-based associate of Ye’s.
According to Republicans, Ye has “extensive” connections to the Chinese government. –Daily Caller
Meanwhile, according to US government records cited in the report, concerns were raised over potential ties to sex and human trafficking rings.
“Hunter Biden paid nonresident women who were nationals of Russia or other Eastern European countries and who appear to be linked to an Eastern European prostitution or human trafficking ring,” the report reads.
Senate Homeland Security and Governmental Affairs Committee Chairman Ron Johnson told Just The News that the sheer volume of potentially illegal activity in Hunter Biden’s foreign dealings left Joe Biden vulnerable to illicit influence or extortion.
“The report raises serious questions that former Vice President Biden needs to answer. There are simply too many potential conflict of interest, counterintelligence and extortion threats to ignore,” he said.
Belarus’ Lukashenko Sworn-In At ‘Secret’ Ceremony To Avoid Protests Tyler Durden
Wed, 09/23/2020 – 08:55
After his Aug.9 controversial reelection to a sixth term, Belarusian President Alexander Lukashenko has been sworn in during an event international reports describe as a “secret ceremony” which was held with no prior announcement.
Belta state news agency was the first to report the swearing in on Wednesday, the first indication of which were eyewitness reports of widespread street closures in Minsk and even allegations of intentional internet outages as the presidential motorcade sped through the streets.
“Alexander Lukashenko has taken office as President of Belarus. The inauguration ceremony is taking place in these minutes in the Palace of Independence,” Belta reported.
In his few recent public appearances, Lukashenko has donned combat gear, including a bullet proof vest and black utility clothes, while carrying an automatic rifle.
Armored vehicles have also now for weeks protected the president’s residential complex in Minsk after almost every weekend demonstrations have swelled to an estimated 100,000 – including marches which seek to confront the strongman who has already been in office for 26 years.
The AP reports that “Lukashenko’s official website did not make any announcement and the ceremony was not shown live on state television, apparently to avoid protesters gathering.”
Most likely Lukashenko is going to have his inauguration today. Nothing has been announced but in central Minsk there’s no mobile internet, all the major roads are blocked, police is everywhere, buses bring people to Lukashenko’s palace. This is what 80% of support look like. pic.twitter.com/MT76JqhWUo
Lukashenko and his supporters have warned there’s a NATO-sponsored “color revolution” unfolding. Russian intelligence officials have alleged the same thing.
Last week for example, the director of Russia’s foreign intelligence service SVR, Sergey Naryshkin, charged thatthe United States is “stage managing” the unrest in Belarus, which has since the contested election sought to oust Lukashenko from office.
“I would worry less about the gods and more about the fury of a patient man.”
As the market sort of rallies on the back of Fed Head Jerome Powell suggesting the lack of US stimulus might be a problem, thereby anticipating a new stimulus will come – for that is the way markets think. Meanwhile, there are a number of themes discernible amongst the noise that is the Market this morning…
Follow the money: Ragnar acts….
The Norwegians are pivoting their $1.15 trillion pension fund away from European stocks towards US equites. The FT says the Nogs are going to cut Europe from 33% to 26.5% while raising US allocations to 48%. “Better represents the distribution of value creation” said the Minister of Finance. It makes sense: US stocks represent some 65.5% of global market cap. Europe? Not so much. Yet Europe was 50% of Norway’s equity allocation as recently as 2012.
The timing is significant. There is much talk about how overvalued US stocks look and how Federal government stimulus, over-easy policy by the Fed, and Donald Trump’s constant talking-up of US Stocks and tax-handouts, have boosted US valuations and driven the continuation of a 11-year bull market. On the other hand, it’s been NIRP (Negative interest rates), QE Infinity and “do-what-ever-it-takes” that’s stopped European stocks and sovereign debt tumbling into the abyss these last few years.
The US has posted positive growth. Europe… less so.
Whatever, it’s an “Ouch” moment for Europe. The announcement was wrapped up in diplomatic flannel, but it’s clear the Nogs don’t have much faith in European recovery prospects, or believe Europe is relatively undervalued compared to the US – a common investment theme in European Investment Bank “research”in recent months…
Interesting fact – during the last unpleasantness with Germany, the Norwegian Government based itself in Edinburgh, at Riccarton which is now Heriot-Watt University’s campus. As a result my student days involved carousing with lots of wild Nog students – they are brilliantly bad and funny people. Celebrating their national day was something on an eco-hazard. I called one of my Norwegian chums to ask his view on the portfolio shift. (He’s a banker.. but definitely would have been a Viking in a former life.)
He told me the “team” (the fund and politicians) are concerned about the Norwegian economy being too closely aligned with the faceless bureaucracy of Brussels the reality of the Japanification of Europe and low growth prospects. They need growth to continue the shift of their economy towards a more global and sustainable perspective. Politically they remain neutral.
It’s fascinating to get an outsider’s view. There are three problems in Europe likely to lead to continued underperformance relative to the US and Asia:
i) The inability of EU member states to reconcile domestic policy agendas with real fiscal union hampers effective recovery at the regional level. There are serious issues in terms of delivering regional policy goals – including endemic corruption in parts of East and South Europe. These need strong domestic government, rather than centralised power projection from Brussels.
ii) The ECB’s ineffectual and unreliable tinkering with increasingly ineffective monetary stimulus is doing little to address long-term growth and employment outside Germany. Its simply sustaining what is broken, rather than replacing it. The current debate about ending QE Infinity early sums up the lack of direction and clear objectives within the ECB.
iii) While Europe is sinking, there are more attractive relative opportunities elsewhere. It makes sense to move.
There is a fourth issue, which is apparently causing concern at the political level. Some Norwegian politicians are increasingly “unhappy” at the way Norway is increasingly painted as some kind of vassal state by Brussels in terms of being “subject” to EU laws and paying for the privilege of access. They see the EU’s domestic leaders as distracted and focused internally on issues like the pandemic, immigration and employment, while the EU is effectively run by an unelected clique of officals in Brussels focused on the preservation of the union – which isn’t reflecting tensions building up between the states and the union. The way the relationship with Norway has been used to justify the EU’s position re Brexit negotiations has particularly jarred some politicians in Oslo.
While one Norwegian banker is not representative of the entire nation – he makes a lot of sense. It’s a single perspective, but the Norwegians have faith in the global economy, but not so much in Europe.
10 years ago I wrote that HSBC was my “banker stock”. It was then the European bank we’d always be able to rely on and the one European financial institution I was confident of getting my money back from. I invested heavily in deeply discounted HSBC pref notes at the depth of the 2008/09 banking crisis – confident they wouldn’t need a bail-out. It was a great trade.
Today, HSBC heads my list of stocks to avoid – utterly. It’s facing an irrecoverable multiple whammy of irreconcilable issues:
It’s going to take massive Pandemic bad-loan provisions – the $11 bln it was talking about earlier this year are going to look a massive underestimate.
It’s a tech dinosaur plagued by legacy systems that need replacement and reinvention and internal bureaucracy – while new nimble digitally based Fintechs are set to eat it’s lunch.
It’s got the looming political crisis in Hong Kong, the source of the bulk of its profits that have subsidised its lacklustre global efforts for years. It’s likely to suffer massive disruption if the HK$ currency peg breaks, trigger massive corporate defaults. Its corporate reputation is tarnished as a result of the China trap.
It’s top of the Chinese government sh*t list as the easy name to hit. It’s likely to be put on the new “unreliable entity list” for perceived collusion with the US over Huawei and as a bargaining chip.
What makes me smile is HSBC’s claim to be the best bank to advise clients on ESG (Environmental, Social and Governance issues.) That’s a bad joke. ESG is not just about the environment – it’s about how firms treat people, customers and staff. HSBC is the only major UK bank that is taking advantage of the UK pensions act 2011 to reduce contracted staff pensions via clawbacks. It’s shaping up to be an enormous “Social” ESG failure – a bank that apparently is willing to inflict harm and damage on its own staff at the end of their careers doesn’t care much for stakeholder society. And it’s a reason HSBC service is so appalling – staff morale has collapsed in the face of redundancies and the pensions issue. Clients looking for ESG advice should be looking at HSBC as a warning… not a teacher.
As for Governance, that’s another terrible black mark. For the last 12 years HSBC has been walking on regulatory tenterhooks – terrified if it made another mistake on money laundering then it would attract the full ire of the SEC and other regulators. In the noughties it made the mistake of assuming putting the Hexagon logo on some newly acquired Mexican banks somehow made them pristine. Nope. They simply legitimised drugs money. For the next decade their board was compromised by the fear of another mistake. It caused management paralysis from the top – culminating in a serious of mistakes like the appointment of the short-lived John Flint as CEO and the disastrous continuation of internal appointments to senior roles. The genetics of HSBC’s management remain about as diverse as a family of one-eyed hillbillies – but considerably less talented.
And now… it turns out HSBC “multi-year journey” to cleaning up its act re money laundering and other nefarious banking practices were equally dire. As the BBC highlighted on Panorama earlier this week – it deals with some shady characters.
HSBC remains a massive sell for the reasons listed above. It’s not a recovery stock. It’s not going to be a bargain – because every single one of these issues is going to get worse. Not better. It’s a massive short.
Tesla Battery Day
I don’t need to say much about Tesla’s much anticipated battery day. As we all know Elon Musk is a master of the “Overpromise and Underdeliver” school of stock-market hype. His preferred mode is to make the same promise again and again, state the downright obvious as if was some deep insight, and keep saying these things again and again in the hope investors don’t notice and think it done.
Yesterday’s battery day saw Tesla announce they will make batteries cheaper and better. They will launch a $25,000 affordable car! Fantastic. What stunning insights into Tesla’s path to riches.
Darn… I can’t just leave it like that. Tesla admitted it doesn’t actually have new battery designs or a new manufacturing process to make them. Musk said “We do not have an affordable car. That’s something we will have in the future. We’ve got to get the costs of batteries down.”
Tesla is a serial underdeliverer. Three years might be thirty in Musk-speak. The stock crashed 6% following battery day. Wake me up when it is down 80%. At that point I’m a buyer.
Even though at the September FOMC meeting, the Fed indicated it plans to hold interest rates at zero at least through 2023 and it plans to continue quantitative easing at current levels, the markets said, “That’s not enough.”
The markets need more. This bubble is so much bigger than the one that we had back then (2008) that it requires far more air coming from the Fed to keep it from deflating. So, we need more. The Fed needs to talk about negative interest rates. The Fed needs to commit to bigger quantitative easing.”
Of course, in effect, the central bank is calling for more QE as Jerome Powell eggs on Congress to pass additional fiscal stimulus.
Any additional fiscal stimulus automatically requires more monetary stimulus, because where is the government going to get the money for the fiscal stimulus? It’s going to get it from the Fed. That’s what supposedly makes it a stimulus is that the government is going to run larger deficits. It’s going to spend money it doesn’t have.”
But there is concern that if Congress and the White House can’t get some type of fiscal stimulus package passed, the Fed won’t just provide more monetary stimulus on its own.
All that monetary stimulus is going to do, absent the fiscal stimulus, is pump up the asset markets – the stock market, the real estate market, or bond market. It’s not going to do anything for the real economy. I think the Fed believes that what will help the real economy is the fiscal stimulus. Now, the Fed is wrong. That’s not going to help the real economy either.”
With all of the political turmoil, ratcheted up by the death of Ruth Bader Ginsburg, the possibility of getting a fiscal stimulus deal done appears less likely.
Peter said he thinks the stock market will continue to be shaky and the sell-off could even gain momentum unless we get a concrete commitment to more monetary stimulus from the Fed, which may require something coming from Congress in terms of fiscal stimulus.
Which again, doesn’t stimulate the economy. But it will stimulate the markets. It will provide the addicts on Wall Street the drug they need in order to bid stock prices higher.”
But Peter said he thinks even if Congress can’t get a stimulus deal done, the Fed will ultimately act on its own.
Because the Fed will see the weakness in the market as a sign that the economy is going to weaken because it realizes that it is the wealth effect that is powering whatever recovery it thinks is in progress. And so if that is in jeopardy, I think the Fed will act unilaterally.”
No matter how you get it – more stimulus is bullish for gold and silver in the long-term. This recent dip could be a nice buying opportunity.
Futures Extend Rebound As Nike Soars, Tesla Tumbles; Powell On Deck For 2nd Day Tyler Durden
Wed, 09/23/2020 – 08:09
S&P futures and global stocks rose on Wednesday for the second day as Tuesday’s global rebound extended after the recent correction, ahead of data that would throw light on the pace of an economic recovery from a coronavirus-driven recession. Investors also waited for a second speech from Fed Chair Jerome Powell who will appear before the House Select Subcommittee on the coronavirus to discuss the central bank’s response. The dollar extended its impressive Tuesday gains while 10Y yields were fractionally higher.
Nike was set for a record open after a stunning quarterly earnings report. Shares of the world’s largest athletic shoe maker surged 13.2% in premarket trading as its digital sales, especially in North America, helped offset a fall in sales at traditional brick-and-mortar stores. The Dow constituent was set to drive the blue-chip index higher for a second straight day, clawing back more of the sharp declines from Monday that were driven by fears of another round of lockdowns to contain a global surge in COVID-19 cases.
On the other end, Tesla fell 4.8% in premarket trading as the goals announced at Tuesday’s “Battery Day” event was a dud and Musk failed to impress with his promise to cut electric vehicle costs. Oracle headed lower after a report by a state-backed Chinese newspaper said Beijing was unlikely to approve a proposed deal by the software maker and Walmart for ByteDance’s TikTok.
Meanwhile, Russia’s largest internet company Yandex surged 9.2% in premarket after it said it’s in talks to buy TCS Group Holding Plc for about $5.48 billion. Elsewhere, the FAANGs edged higher before the bell. The group has borne the brunt of the declines this month after fuelling a Wall Street rally since March.
Overall sentiment remains skittish as doubts about more U.S. fiscal stimulus and growing political uncertainty in the run-up to the Nov. 3 presidential elections have kept investors from making big stock market bets.
“We are seeing a solid bounce, but it’s in the context of a very sharp pullback on Monday, which was a reset,” said Neil Wilson, chief market analyst in London for Markets.com. “We had bulls just tipping their toes back in the water, and the higher closes — as small as they were — seems to have been enough to cue today’s gains.”
“If we get a second (COVID-19) wave, it could have a significant impact on the election itself and that’s why markets have been wobbly in the last few days,” said Andrea Cicione, head of strategy at TS Lombard in London.
In Europe, the Stoxx 600 Index climbed 1.5%, the biggest gain in two weeks, helped by a jump German stocks after manufacturing data rose to a two-year high. Auto companies and travel stocks led the advance in Europe, with gains of 2.8% for both. Despite stronger German mfg PMI, the service sector stumbled and broader Eurozone data showed eurozone business growth ground to a halt this month with the post-Covid economic recovery stumbling this month, as the latest Euro area composite PMI declined by 1.8pt to 50.1 in September, notably below expectations. Across sectors, the overall decline was concentrated in the service sector, with the pace of recovery in manufacturing reaccelerating from August:
Euro Area Composite PMI: 50.1, consensus 51.9, last 51.9.
Euro Area Manufacturing PMI: 53.7, consensus 51.9, last 51.7.
Euro Area Services PMI: 47.6, consensus 50.6, last 50.5.
And the sharp divergence in Germany:
Germany Composite PMI: 53.7, consensus 54.0, last 54.4.
German Services PMI: 49.1, consensus 53.0, last 52.5
German Manufacturing PMI: 56.6, consensus 52.5
Earlier in the session, Asian stocks were fractionally higher, with health care rising and energy falling, after falling in the last. Markets in the region were mixed, with Australia’s S&P/ASX 200 and Singapore’s Straits Times Index rising, and India’s S&P BSE Sensex Index and Taiwan’s Taiex Index falling. The Topix declined 0.1%, with Daiichi Kigenso and Land Co falling the most. The Shanghai Composite Index rose 0.2%, with EGing Photovoltaic Technology and Jinko Power Technology posting the biggest advances
Chinese state-run media decounced the TikTok deal as “an American trap” and a “dirty and underhanded trick” as sentiment in Beijing swings against the proposal. TikTok owner ByteDance said it would remain in control of the new entity that would be created in the agreement, pushing back on President Donald Trump’s assertions that Oracle Corp. would be in control. The wider context of resistance from China is that the country’s leaders do not want to be seen to be pushed around by unilateral U.S. actions.
Looking at today’s main event in markets, Fed Chair Powell is in Congress again testifying to a House select subcommittee on the coronavirus response from 10:00 a.m. Yesterday he said the U.S. economy has a long way to go before it is fully recovered and that more support will be needed.
In other overnight news, while there is still very little progress on reaching a new stimulus deal, there was some relief late yesterday when an agreement to keep the government funded through Dec. 11 was reached, avoiding a shutdown just before the election. More importantly, Republican moves to get a confirmation hearing for Trump’s Supreme Court nominee in the coming weeks now seem unstoppable, after Democrats gained little support in the Senate for a delay.
In FX, the dollar advanced a fourth day after breaking above a key technical resistance level. The Bloomberg Dollar Spot Index was set for its longest run of gains since June as the greenback continued its rebound and advanced versus most Group-of-10 peers. The euro erased losses, after falling to 1.1672 in early London trading, despite weaker- than-forecast European services PMI data. The pound also steadied after dropping following comments by Foreign Secretary Dominic Raab on not being able to rule out a nationwide shutdown. The Australian dollar led declines after influential Westpac Banking Corp. economist Bill Evans predicted the central bank would cut interest rates at its Oct. 6 meeting; the New Zealand dollar also slipped, with the central bank maintaining the size of its quantitative easing program and keeping rates unchanged.
In rates, treasury yields are slightly cheaper in early U.S. trading as Asia-session gains – led by steep gains for Aussie bonds – eroded ahead of 5-year note auction. Yields are cheaper by about 0.5bp from intermediates to long end with 10-year around 0.675%, trading broadly in line with bunds; gilts outperform slightly, about 0.5bp richer vs. Treasuries. Treasury auction cycle resumes with $53b 5-year note at 1pm ET, concludes with 7-year Thursday. Italian bonds rallied to send 30-year yields to an all-time low with investors continuing to snap up the securities on fading domestic political risk and support from European institutions. Elsewhere, Zambia became the first African country to ask bondholders for relief since the onset of the coronavirus.
In commodities oil was unchanged after fluctuating earlier, while gold continues to slide, dropping below $1,900 earlier and sliding below the 50DMA.
Looking at the day ahead, in addition to Powell speaking in the House, there is a slew of Fed speakers today, including Cleveland Fed President Loretta Mester, Chicago Fed President Charles Evans, Boston Fed President Eric Rosengren, Minneapolis Fed President Neel Kashkari, Atlanta Fed President Raphael Bostic, Fed Vice Chair for Supervision Randal Quarles and San Francisco Fed President Mary Daly. Latest U.S. government crude stockpile data is at 10:30 a.m. President Trump is due to speak to state attorneys general on social media abuses. The UN General Assembly continues.
S&P 500 futures up 0.5% to 3,314.00
STOXX Europe 600 up 1.3% to 362.11
MXAP up 0.09% to 171.12
MXAPJ up 0.2% to 557.55
Nikkei down 0.06% to 23,346.49
Topix down 0.1% to 1,644.25
Hang Seng Index up 0.1% to 23,742.51
Shanghai Composite up 0.2% to 3,279.71
Sensex down 1% to 37,353.04
Australia S&P/ASX 200 up 2.4% to 5,923.93
Kospi up 0.03% to 2,333.24
German 10Y yield fell 0.8 bps to -0.513%
Euro down 0.2% to $1.1689
Italian 10Y yield fell 5.2 bps to 0.661%
Spanish 10Y yield fell 1.8 bps to 0.217%
Brent futures up 0.4% to $41.87/bbl
Gold spot down 1.1% to $1,879.89
U.S. Dollar Index little changed at 93.94
Top Overnight News from Bloomberg
The European Central Bank risks legal trouble if it tries to extend the “emergency powers” of its pandemic bond-buying plan to its other asset-purchase program, according to Executive Board member Yves Mersch
SNB President Thomas Jordan has taken his foot off the pedal after the most aggressive currency intervention in five years early in the outbreak of the coronavirus pandemic
The euro area’s economic recovery stalled this month as consumers fretted about a resurgence of the coronavirus and governments reinstated restrictions to control the spread of the disease
Banks from Goldman Sachs Group Inc. to HSBC Holdings Plc have hit pause on plans to return workers in London after Prime Minister Boris Johnson appealed to Britons to work from home to help tame a resurgent coronavirus
JPMorgan Chase & Co. is moving about 200 billion euros ($230 billion) from the U.K. to Frankfurt as a result of Britain’s exit from the European Union
A quick look at global markets courtesy of NewsSquawk
Asian equity markets traded mixed and failed to take full impetus from the rebound across their global peers, with the region tentative amid ongoing US-China tensions and with Japan suffering post-holiday blues on return from the extended weekend. Nonetheless, ASX 200 (+2.4%) outperformed and is on track for its best day in seven weeks as tech names led the broad advances after they found inspiration from the resurgence of the sector stateside, with sentiment also buoyed by increasing calls for the RBA to cut rates at next month’s meeting after RBA Deputy Governor Debelle recently outlined policy options. Nikkei 225 (U/C) was subdued as it played catch up to the recent days’ weakness and with Panasonic shares pressured alongside fellow Tesla supplier LG Chem after the EV-maker’s Battery Day Event fell flat where Elon Musk announced plans for a reduction in costs and to manufacture its own batteries, while he also showcased the Model S Plaid which is to be available next year. Conversely, Fujifilm Holdings was at the other side of the spectrum after announcing its Avigan drug met the primary endpoint in Phase 3 COVID trials. Hang Seng (+0.1%) and Shanghai Comp. (+0.2%) were indecisive as the continued PBoC liquidity efforts were offset by ongoing US-China tensions after US President Trump put China on blast for the spread of the coronavirus at the virtual UN meeting, while Beijing later criticized President Trump of spreading “political virus”. In addition, the uncertainty regarding the TikTok deal persists and the US House also overwhelmingly passed the forced labour bill which would ban imports from China’s Xinjiang region that were produced using forced labour. Finally, 10yr JGBs were higher amid the risk averse tone in Japan and with the BoJ also in the market for nearly JPY 1.3tln of JGBs in up to 10yr maturities, while it also offered to purchase 3yr-5yr corporate bonds.
Top Asian News
Hong Kong’s BEA Is Said to Press Ahead With Life Insurance Sale
Richard Li’s FWD Said to Plan Up to $3 Billion Hong Kong IPO
Malaysia Leader Calls for Stability After Anwar Claims Majority
Hong Kong Traders Chased 1,600-1 Odds to Buy IPO That Flopped
European equities are back on the grind higher (Euro Stoxx 50 +1.7%) after experience a fleeting blip lower on the back of French Services PMI dipping back into contractionary territory on second wave woes. The region picked up the baton from a mixed APAC handover, with reports also noting that the ECB as called upon Brussels to make the EU Recovery Fund a permanent measure. Bourses in the EU are seeing broad-based gains, whilst UK’s FTSE (+2.2%) ploughs ahead initially with the aid of a softer Sterling. Meanwhile UBS Wealth Management sees UK domestic banks falling 15-20% and insurance stocks decline by 7-10% in a no-deal Brexit scenario, but expects double digit positive returns from UK equities over the next 9-12 months in the event of a deal. Sectors in Europe are higher across the board with a slight cyclical/value bias, although material names do not fare so well amid the USD-induced declines across the metals complex. Consumer Discretionary meanwhile tops the charts with the aid of Nike (+13% pre-mkt) post-earnings, who beat on both top and bottom lines whilst reporting digital sales +82% YY – thus bolstering the likes of Adidas (+5.7%), Puma (+4.6%) and JD Sports (+5.1%). In terms of the breakdown, Travel & Leisure leads the gains, closely followed by Autos and Banks. Turning to individual movers, Osram Licht (+14.6%) is the top Stoxx 600 gainer after ASM (+1.4%) has signed a denomination and profit and loss transfer agreement with Osram as part of the takeover process.
Top European News
Europe’s Economic Revival Put on Hold by Virus Resurgence
U.K. Recovery Slows as Households Start to Rein In Spending
Sunak Urged to Save U.K. Firms From ‘Ruin’ of Covid Curbs
Merkel Resists Full Ban on Huawei, Making Germany an Outlier
In FX, the Dollar has extended its impressive recovery rally, partly in relief that the House finally passed the stopgap spending bill to avert a Government shutdown, but mainly as the Greenback continues to regain its global safe-haven and reserve status amidst the ongoing resurgence in COVID-19 that is accelerating outside the US and notably across Europe again. As a result, the index breached 94.000 and topped out just above 94.250, with several Buck/major pairings looking very vulnerable near or through psychological/round number levels.
AUD/NZD – Dovish RBA calls via Westpac and NAB both looking for 15 bp cuts at the October meeting, plus a dovish RBNZ hold overnight, leaving the door wide open for more easing and in the offing or in the pipeline, an FLP by the end of 2020, according to the accompanying statement, have all added further pressure on the Aussie and Kiwi, with the former struggling to stay above 0.7100 and latter even less assured around 0.6600 ahead of NZ trade data.
CAD – Some solace for the Loonie from relative stability in oil prices, but not enough momentum to convincingly reclaim 1.3300+ status within a 1.3345-1.3294 range awaiting the reopening of Canadian Parliament by PM Trudeau.
CHF/EUR/GBP/JPY – All narrowly mixed vs the Dollar, but not before losing grip of 0.9200, 1.1700, 1.2700 and 105.00 handles respectively in advance of Thursday’s quarterly SNB policy review and following mixed Eurozone/UK prelim PMIs where services sector weakness outweighed manufacturing strength to keep the composite readings compressed. However, Sterling was undermined by domestic factors related to the coronavirus and warnings from Foreign Minister Raab about latest restrictions not going far enough to rule out the risk of reverting to full lockdown. Cable plumbed fresh lows around 1.2677 and Eur/Gbp retested recent peaks circa 0.9220 in response, but the Pound has subsequently received a reprieve from EU’s Barnier expressing determination to strike a Brexit trade deal. Elsewhere, pretty standard commentary from BoJ Governor Kuroda has marked the return of Japanese markets from their 4-day break, but not really the Yen between 104.91-105.19 parameters eyeing mega option expiries for tomorrow that span 105.00 in an even tighter band (104.90-105.10).
SCANDI/EM – The Norwegian Crown continues to slip closer towards the sentimental if not technically significant 11.0000 level vs the Euro regardless of crude finding a base as noted above, but the Swedish Krona is still benefiting from Riksbank rigidity on the repo staying at the zero lower bound until this time in 2023. On that note, the Turkish Lira will be looking for continuity and some much needed support from the CBRT on Thursday via a form of indirect tightening as it plumbs almost daily record lows, and more immediately the Czech Koruna has the CNB to provide direction, albeit with no change in rates expected.
In commodities, WTI and Brent front month futures have nursed the losses seen in APAC hours, as sentiment in Europe picks back up after the EZ Services PMI fell back contraction but manufacturing topped estimates across the board. The initial weakness in the crude markets stemmed from a surprise build in the Private Inventory data (+0.7mln vs. Exp. -2.3mln), whilst concern remains over the demand implications from the reimposition of lockdowns and quarantine travel rules, with the Gazprom CEO also noting that we are seeing global oil demand recovery slowing down due to pandemic, and expects global oil consumption to return to pre-crisis level in H2 2021. In terms of the reopening supply from Libya, reports yesterday noted that next week could see output of some 260k BPD (vs. 1mln BPD pre-blockade), although analysts at ING downplay the relevance, noting that “In the current environment, where there are clear concerns over demand, additional supply will do little to help rebalance the market.” Something else to be aware of: reports noted that Chinese refiners are requesting additional import quotas for the fourth quota, having had taken advantage of the lower oil prices earlier this year. Desks note that further quota allocation could support the physical market. Aside from that, news-flow has remained relatively light for the complex thus far, WTI Nov meanders around USD 39.85/bbl (vs. low USD 39.26/bbl), while its Brent counterpart resides around 41.85/bbl (vs. low 41.21/bbl), awaiting the weekly EIA inventory data – with headline crude stocks seen drawing 2.325mln barrels. Elsewhere, precious metals initially succumb to the firmer Dollar and broader gains in stocks. Spot gold moves further below the USD 1900/oz mark to find support at USD 1875/oz, and has picked up given the most recent slip in the USD, whilst spot silver found a current base around the USD 23/oz level. Base metals are also mostly lower – with LME copper weighed on by the firmer Buck and lackluster China performance, whilst Dalian iron ore futures fell for a third straight days as higher shipments from mainstream miners weighed on prices.
US Event Calendar
7am: MBA Mortgage Applications, prior -2.5%
9am: FHFA House Price Index MoM, est. 0.45%, prior 0.9%
9:45am: Markit US Manufacturing PMI, est. 53.5, prior 53.1; Services PMI, est. 54.5, prior 55; Composite PMI, prior 54.6
9am: Fed’s Mester Discusses Payments and the Pandemic
10am: Powell Appears before House Panel on Covid-19
11am: Fed’s Evans Discusses the U.S. Economy and Monetary Policy
12pm: Fed’s Rosengren Discusses U.S. Economy
1pm: Fed’s Kashkari Discusses Public Health
1pm: Fed’s Bostic Speaks to Hale County Chamber of Commerce
2pm: Fed’s Quarles Gives Speech on the Economic Outlook
3pm: Fed’s Daly Discusses Labor Force Implications of Covid-19
DB’s Jim Reid concludes the overnight wrap
I suspect this won’t be the last Zoom call I do from home after the U.K. yesterday effectively encouraged those who can work from home to do so – and possibly for the next 6 months. Today also sees a big change in the weather here as the Indian Summer has come to an abrupt end. Winter is coming in more ways than one. On the virus we’ve revamped our daily cases and fatality tables that appear in the PDF (click view report above) and given they are sorted worst to best they show that the U.K. is certainly not at the top of the second wave, but restrictions are nonetheless being tightened as case numbers build (4,926 yesterday and the highest since early May). In addition to WFH guidance, all hospitality venues must now close at 10pm daily from Thursday. In a nationwide address Johnson stressed the desire to avoid a full lockdown scenarios saying, “we must do all we can to avoid going down that road again.” Though if the infections continue to rise the government naturally left the option on the table. Meanwhile in Scotland, First Minister Nicola Sturgeon went even further, with a ban on households visiting other households indoors.
In Europe, the summit of EU leaders planned for this Thursday and Friday has now been postponed to the following week, after the President of the European Council, Charles Michel, went into quarantine because a security officer had tested positive. We also heard from German Chancellery Minister Braun that it is not the country’s ‘first choice’ to close borders to neighboring countries with high level of infections, citing the economic challenges. So here again we see a level of moderation in policy enactment during the second wave. Can this continue as the virus spreads? Cases are also rising in the US again, with the daily rate of people testing positive for the first time jumping to 5.9% in Florida after being under 5% for the better part of the last 2 weeks. We also saw some vaccine related news yesterday with the Washington Post reporting that the US FDA is expected to spell out a tough, new standard for an emergency authorisation of a coronavirus vaccine as soon as this week that will make it exceedingly difficult for any vaccine to be cleared before Election Day.
The virus news flow has been a difficult backdrop for markets this week but US markets started to gather some momentum after Europe went home last night. There was a particular reversal in US technology stocks, which continued to outperform after the late-session rally on Monday. The S&P 500 broke a four-day slide and gained +1.05%, however cyclicals sectors like Banks (-1.89%), Autos (-1.13%) and Energy (-1.03%) continued to lag. Retail (+3.64%), Media (+2.24%) and Software (+1.94%) all the led the S&P higher as the tech gains saw the NASDAQ rally +1.71%. This could again signal that the stay-at-home trade is coming back into vogue with further restrictions being seen in Europe. Europe still saw a slight recovery from Monday’s worst day for three months as the STOXX 600 climbed +0.20% higher.
Asian markets are mixed this morning with the Nikkei (-0.36%) and Kospi (-0.25%) both down while the Hang Seng (-0.01%) and Shanghai Comp (+0.02%) are trading broadly flat and the Asx (+2.15%) is up partly helped by stronger preliminary PMIs (more below). Japanese markets have reopened post 2 days of holiday. In overnight news, Tesla’s “Battery Day” event came short of expectations for a blockbuster leap forward as the company laid out a roadmap to build a $25,000 car only by 2023 which disappointed some. The stock was down -7% in aftermarket trading. This is also weighing on Nasdaq futures (-0.38%) while those on the S&P 500 are trading broadly flat.In fx, the US dollar index is up a further +0.25% this morning after yesterday’s +0.47% advance.
In other news, the US House passed a stopgap funding bill to keep the government operating through Dec. 11 after both parties in Congress and officials at the White House struck a deal to provide aid to farmers and food assistance for low-income families. The temporary spending bill will now move to the Senate for a vote.
Today, investors will be watching out for the flash PMIs for September, which will give us an early indication of how the global economy has fared this month. Overnight we’ve already had readings from Japan and Australia, with Japan struggling to recover further as manufacturing PMI rose by just 0.1 pt to 47.3 while the services reading improved to 45.6 (vs. 45.0 last month). Australia’s readings were a bit more robust with manufacturing PMI climbing to 55.5 (vs. 53.6 last month) and the services reading printing at 50.0 (vs. 49.0 last month). Australia’s reading seem to be helped partly by the easing of lockdown in Victoria, the second largest state. With infections rising again in Europe, not least in the UK, France and Spain, the question is to what extent this will impact on economic activity there as well. DB’s Peter Sidorov put out a piece yesterday (link here) in which he writes that his analysis points to a slight upside risk to the Euro Area PMI because of mobility trends, which has been rising in September. We’ll get those releases this morning.
Back to yesterday, and Fed Chair Powell appeared before the House Financial Services panel, where he again stressed the need to keep the virus under control and for further policy actions from “all levels of government.” Secretary Mnuchin who testified alongside the Fed Chair said that he and the President he would continue to seek Congressional agreement on further fiscal stimulus. Though now Congress seems like it will be more focused on a supreme court confirmation than fiscal stimulus in the short term. The Fed Chair said the Fed has only purchased $1.5 billion in loans so far through its Main Street Lending Program. The program is a $600 billion facility backed by Treasury funds, which aims to provide credit to small-mid sized companies. Mnuchin did bring up the idea of reallocating some of the unused money in Fed facilities to other uses, though it would require congressional approval.
There were a few other central bank headlines. From the ECB, we had Fabio Panetta of the Executive Board saying that “the risks of a policy overreaction are much smaller than the risks of policy being too slow or too shy to react and the worst-case scenarios materialising.” And over in the UK, Bank of England Governor Bailey downplayed the prospect of an imminent move to negative rates after last week’s MPC minutes showed that they were exploring the operational considerations of such a move.
In fixed income, there was a sharp narrowing of sovereign bond spreads in Europe, particularly following the regional election results in Italy that were regarded as positive for the government’s stability. Yields on 10yr BTPs fell -5.2bps to their lowest levels in almost a year, moving below the levels they were at before the pandemic hit the country in late February. And with the selloff for bunds, that sent the BTP-bund spread down -7.7bps to 1.37%, its lowest level in 7 months. Elsewhere, US Treasury yields saw a slight +0.5bps move higher, as the dollar index climbed a further +0.35% to reach its highest level in nearly 2 months.
Staying on the US, and with less than 6 weeks now until the election, President Trump said that he’d announce his choice this Saturday at 5pm (Washington Time) on who would replace Justice Ruth Bader Ginsburg on the Supreme Court. In a positive development for Trump, Senator Mitt Romney said that he’s in favour of moving forward with a confirmation vote on Trump’s choice, which leaves just 2 Republican senators out of the 53-member caucus who have opposed going ahead with a vote. With Trump’s choice on Saturday and the first debate between himself and Biden this Tuesday, the coming week will be one of the most important yet ahead of election day on November 3rd.
Looking at yesterday’s data, existing home sales in the US rose to an annualised rate of 6.00m in August, in line with expectations, and the most since 2006. Meanwhile the Richmond Fed’s manufacturing survey rose to 21 (vs. 12 expected). Finally, the advance consumer confidence reading from the Euro Area in September rose to -13.9 (vs. -14.7 expected). This was its highest level since March, but still some way below the -6.6 reading back in February before the full impact of the pandemic became apparent.
To the day ahead now, and the aforementioned flash PMIs will be one of the key highlights. Otherwise, there are an array of Fed speakers, including Chair Powell before the House Select Subcommittee on the Coronavirus Crisis, as well as the Vice Chair Quarles, Mester, Evans, Rosengren, Kashkari, Bostic and Daly. The ECB’s Hernandez de Cos will also be speaking.
Johnson & Johnson Project Becomes 4th COVID-19 Vaccine To Enter ‘Phase 3’ Trials Tyler Durden
Wed, 09/23/2020 – 07:24
As worries about vaccine makers’ credibility intensify, Johnson & Johnson announced Wednesday morning that it would become the fourth western vaccine project to enter ‘Phase 3’ trials.
Johnson & Johnson has officially started dosing the first of the 60,000 volunteers it has recruited/will recruit for the Dow component’s final long-term trial, which differs from other US trials by being the first big US trial to test inoculation after just one dose of the vaccine.
If JNJ doesn’t encounter any issues recruiting the 60,000 people it needs for the trial – like other vaccine trials, participants will be sorted into two groups: One will receive the vaccine, the other, a placebo. Then vaccine makers wait to see if any of the patients inoculated with the vaccine contract the virus.
JNJ expects the trial to yield results as soon as year-end, allowing the company to seek emergency authorization from the FDA early next year, should the vaccine prove effective, said Chief Scientific Officer Paul Stoffels.
As far as the official timeline, CNBC interviewed Trump’s “Vaccine Czar” yesterday, who said that we are “pretty close” to finding a vaccine, with three vaccines in Phase 3 and a “fourth one starting imminently”.
“The readout is 50% of the answer to the question…that will happen some time between October and January. The other 50% of when a vaccine will be available is manufacturing…”.
If things go as planned, the US plans to vaccinate the most vulnerable patients by the end of the year, then proceed on to front-line health-care workers in January, then start rolling vaccines out to the rest of the US population – at least, to those who are willing to be inoculated – some time after that.
NEW BRUNSWICK, N.J., Sept. 23, 2020 /PRNewswire/ — Johnson & Johnson (NYSE: JNJ) (the Company) today announced the launch of its large-scale, pivotal, multi-country Phase 3 trial (ENSEMBLE) for its COVID-19 vaccine candidate, JNJ-78436735, being developed by its Janssen Pharmaceutical Companies. The initiation of the ENSEMBLE trial follows positive interim results from the Company’s Phase 1/2a clinical study, which demonstrated that the safety profile and immunogenicity after a single vaccination were supportive of further development. These results have been submitted to medRxiv and are due to be published online imminently. Based on these results and following discussions with the U.S. Food and Drug Administration (FDA), ENSEMBLE will enroll up to 60,000 volunteers across three continents and will study the safety and efficacy of a single vaccine dose versus placebo in preventing COVID-19.
Johnson & Johnson has continued the scaling up of its manufacturing capacity and remains on track to meet its goal of providing one billion doses of a vaccine each year. The Company is committed to bringing an affordable vaccine to the public on a not-for-profit basis for emergency pandemic use and anticipates the first batches of a COVID-19 vaccine to be available for emergency use authorization in early 2021, if proven to be safe and effective.
Johnson & Johnson will develop and test its COVID-19 vaccine candidate in accordance with high ethical standards and sound scientific principles. The Company is committed to transparency and sharing information related to the Phase 3 ENSEMBLE study – including the study protocol.
“As COVID-19 continues to impact the daily lives of people around the world, our goal remains the same – leveraging the global reach and scientific innovation of our company to help bring an end to this pandemic,” said Alex Gorsky, Chairman and Chief Executive Officer, Johnson & Johnson. “As the world’s largest healthcare company, we are bringing to bear our best scientific minds, and rigorous standards of safety, in collaboration with regulators, to accelerate the fight against this pandemic. This pivotal milestone demonstrates our focused efforts toward a COVID-19 vaccine that are built on collaboration and deep commitment to a robust scientific process. We are committed to clinical trial transparency and to sharing information related to our study, including details of our study protocol.”
“We remain fully focused on developing an urgently needed, safe and effective COVID-19 vaccine for people around the world,” said Paul Stoffels, M.D., Vice Chairman of the Executive Committee and Chief Scientific Officer, Johnson & Johnson. “We greatly value the collaboration and support from our scientific partners and global health authorities as our global team of experts work tirelessly on the development of the vaccine and scaling up our production capacity with a goal to deliver a vaccine for emergency use authorization in early 2021.”
The Janssen COVID-19 vaccine candidate leverages the Company’s AdVac® technology platform, which was also used to develop and manufacture Janssen’s European Commission approved Ebola vaccine and construct its Zika, RSV, and HIV vaccine candidates. Janssen’s AdVac technology platform has been used to vaccinate more than 100,000 people to date across Janssen’s investigational vaccine programs.
With Janssen’s AdVac® technology, the vaccine, if successful, is estimated at launch to remain stable for two years at -20 °C and at least three months at 2-8° C. This makes the vaccine candidate compatible with standard vaccine distribution channels and would not require new infrastructure to get it to the people who need it.
PHASE 3 ENSEMBLE STUDY
The Phase 3 ENSEMBLE study is a randomized, double-blind, placebo-controlled clinical trial designed to evaluate the safety and efficacy of a single vaccine dose versus placebo in up to 60,000 adults 18 years old and older, including significant representation from those that are over age 60. The trial will include those both with and without comorbidities associated with an increased risk for progression to severe COVID-19, and will aim to enroll participants in Argentina, Brazil, Chile, Colombia, Mexico, Peru, South Africa and the United States. In order to evaluate the effectiveness of Janssen’s COVID-19 vaccine, countries and clinical trial sites which have a high incidence of COVID-19 and the ability to achieve a rapid initiation will be activated.
Built on a legacy of purpose-driven actions and a commitment to diversity and inclusion, the Company aims to achieve representation of populations that have been disproportionately impacted by the pandemic in the implementation of its COVID-19 Phase 3 trial program. In the U.S., this includes significant representation of Black, Hispanic/Latinx, American Indian and Alaskan Native participants.
ENSEMBLE is being initiated in collaboration with the Biomedical Advanced Research and Development Authority (BARDA), part of the Office of the Assistant Secretary for Preparedness and Response at the U.S. Department of Health and Human Services (HHS) under Other Transaction Agreement HHSO100201700018C, and the National Institute of Allergy and Infectious Diseases (NIAID), part of the National Institutes of Health (NIH) at HHS.
In parallel, the Company has also agreed in principle to collaborate with the United Kingdom of Great Britain and Northern Ireland (the UK Government) on a separate Phase 3 clinical trial in multiple countries to explore a two-dose regimen of Janssen’s vaccine candidate.
“With our vaccine candidate now in our global Phase 3 trial, we are one step closer to finding a solution for COVID-19. We used a highly scientific and evidence-based approach to select this vaccine candidate. We are extremely grateful for the tireless efforts of our researchers and for the vital contributions of those participants who have volunteered to take part in our studies. Together, we are working to help combat this pandemic,” said Mathai Mammen, M.D., Ph.D., Global Head, Janssen Research & Development, LLC, Johnson & Johnson.
The Company is in ongoing discussions with many stakeholders, including national governments and global organizations, as part of its efforts to meet its commitment to make the vaccine candidate accessible globally, provided the vaccine is demonstrated to be safe and effective and following regulatory approval.
Amazon Says It Isn’t Involved With Echelon’s $500 ‘Peloton Killer’; Bars Bike From Platform Tyler Durden
Wed, 09/23/2020 – 07:03
Peloton shares took a hit on Tuesday after Amazon supposedly unveiled a low-budget alternative that was priced at just $500, roughly one-fifth the price of a Peloton. Such a deal seemed almost too good to be true.
And as it turns out – it was.
Business Insider reported Wednesday morning that the “Echelon” “Prime Bike” that went on sale Tuesday isn’t “an Amazon product or related to Amazon Prime”, citing a statement from the company. As a result, Amazon has removed the product from its online store (it had become available “exclusively to ‘Prime’ customers”.
Even more bizarre, Echelon said in a press release that the bike had been developed “in collaboration with Amazon”. The company told Forbes on Wednesday that Echelon “does not have a formal partnership with Amazon”.
“We are working with Echelon to clarify this in its communications, stop the sale of the product, and change the product branding,” Amazon added.
Neither Amazon or Echelon was willing to comment to Business Insider. In recent years, hackers and market scammers have successfully managed to get ‘fake’ news releases through to newswire services before. Could this be another example of deliberate manipulation?
Trevor Milton’s Fortune Falls By $1 Billion After Stepping Down As Nikola Chair Tyler Durden
Wed, 09/23/2020 – 06:30
Despite giving up $166 million in stock options as a result of his resignation and Nikola shares plunging over the last two weeks, company founder Trevor Milton’s holdings of the company are still worth about $2.8 billion. (That is, unless the Department of Justice or SEC ultimately have anything to say about it.)
Regardless, that sum is down from the nearly $4 billion Milton was worth just last Friday, before he announced his resignation from the company, sending shares lower by another 30%.
He still owns about a third of the company, which has been at the center of fraud allegations from Hindenburg Research after the short seller alleged, among other things, that the company was an “intricate fraud” and that Nikola videoed a prototype semi rolling down a hill and passed it off to unknowing investors as running under its own power. The company later admitted that it did, in fact, roll a semi down a hill and videotape it.
Despite Milton’s resignation likely coming as a joint decision between his lawyers and crisis PR firm Joele Frank, it was positioned as a move to put the best interest of the company – and its stockholders – first.
The company announced that Stephen Girsky, who is former Vice Chairman of General Motors Co. and a member of Nikola’s board, will fill Milton’s role as chairman of the board, effective immediately.
As part of his resignation, Milton “agreed to relinquish 100% of the 4.86m performance-based stock units granted to him on Aug. 21,” according to the company’s 8-K. He also “gave up right or claim to enter into a two-year consulting agreement with an annual fee of $10 million.”
Milton’s resignation comes less than 2 weeks after Hindenburg Research’s original report calling the company an “intricate fraud” and just 6 days after Hindenburg’s follow up report stating it viewed Nikola’s response as a “tacit admission of securities fraud”.
GM has said it is going to continue to try and work with Nikola, despite the allegations.
Why would the mainstream media want all of us to believe that stock prices are about to fall dramatically? Just like we witnessed earlier this year at the beginning of the pandemic, the corporate media is full of reports that seem to imply that it is a virtual certainty that stock prices are going to go even lower. Of course it would make perfect sense for stock prices to go down because they are incredibly overvalued right now, but normally the mainstream media does not try to tell us where stock prices are going next. And the fact that so many news outlets are repeating the same mantra right now is particularly troublesome.
Without a doubt, the momentum of stock prices is taking us in a downward direction at the moment. All of the major stock indexes have posted declines for three weeks in a row, and it looks like this week could make it four.
As I write this article, the Dow Jones Industrial Average is down 4.5 percent for the month, the S&P 500 is down over 6 percent, and the Nasdaq has fallen about 8.5 percent. Overall, the market is on pace for the worst September in 18 years, but the corporate-controlled media seems convinced that things are going to get even worse. For example, the following comes from a CNBC article entitled “Stock sell-off accelerates and is expected to get worse before it gets better”…
Stock investors focused on new worries about the coronavirus and economy, selling into a market Monday that was already technically shaken and set for further declines.
I looked for evidence that would back up the assertion that the market is “set for further declines” in the remainder of that article, but I didn’t see any.
Without a doubt, I definitely agree that stock prices have a long, long way to fall, but there is no reason why they couldn’t bounce back for the rest of this week.
“Massive fiscal and monetary policy stimulus” that came together to prop up the economy has caused debt to balloon and stocks to become potentially overvalued, posing “the serious risk of a looming global financial crisis as central banks begin to shift away from easy (monetary) policy at some point in the years to come.”
Once again, I definitely agree that a global financial crisis could erupt at any time.
But normally we don’t see the mainstream media using such language.
At this point, we are less than a month and a half away from the election, and many have suggested that uncertainty about the outcome could weigh heavily on the market. In fact, CNN is telling us that we should anticipate “that volatility will be high” during the period surrounding election day…
Market experts have warned that volatility will be high toward the end of the year and around the election, especially because many expect the winner won’t be known immediately.
Could it be possible that there will be an attempt to disrupt the market in an attempt to make one of the candidates look bad?
I know that would sound absurd during normal times, but these are definitely not normal times.
And ultra-wealthy insiders definitely seem to believe that something is coming, because they have been selling stocks like crazy recently. According to Zero Hedge, “during the week ended September 11, insiders sold $473 million in shares while only buying $9.5 million.”
I don’t know about you, but those numbers definitely got my attention.
Of course stock prices should have never, ever gotten so high in the first place. The unprecedented market rally that we have witnessed in 2020 has occurred during a time when we have actually plunged into a new economic depression. Almost every day I share more horrific economic numbers with my readers, and here are some more from the New York Post…
Nearly 90 percent of New York City bar and restaurant owners couldn’t pay their rent in August, heightening the continued crush the coronavirus shutdown has inflicted on Gotham’s economy.
Eighty-seven percent of bars, restaurants, nightclubs and event spaces in the five boroughs could not pay their full August rent, according to data from 457 businesses surveyed between Aug. 25 and Sept. 11, in a new study released Monday by the nonprofit NYC Hospitality Alliance.
How in the world can anyone possibly use the phrase “economic recovery” when we are seeing numbers like that?
We have never seen an economic downturn of this magnitude in all of modern American history, and many believe that what we have experienced so far is just the beginning.
With each passing day, we see more societal turmoil in the headlines, and the upcoming election threatens to bring our societal tensions to a thundering crescendo.
In such an environment, a huge stock market crash would not be surprising at all, and some are suggesting that the shove that pushes us over the edge could actually happen on purpose. In his most recent video, Greg Mannarino warned that the upcoming financial crash “is going to be epic”, and he told his audience that our largest financial institutions could collapse the market any time that they want…
“They can crush the global economy or the market. The global economy, which is the middle class, is already crushed, ok. They can destroy the stock market like this [snaps fingers.] And you can see it playing out right now. So all to of this is more than likely going to get brushed under the rug as it always does,” Mannarino says of the banks controlling the world.
It is not unusual for pundits such as Mannarino to make such bold predictions, but what alarms me is that the mainstream media is also strongly suggesting that a market crash is coming.
Even if the mainstream media is not attempting to do it on purpose, their words can become a self-fulfilling prophecy as countless investors spooked by their reports pull money out of the marketplace.
Sadly, this is one instance in which the mainstream media will ultimately be proven correct. Whether it happens in the immediate future or not, the truth is that we are heading for a financial meltdown that will be absolutely horrifying.
In recent months, the Federal Reserve was able to reinflate our financial bubbles one more time, and hordes of investors eagerly jumped aboard the rally train.
But now that train is in danger of being derailed, and those that do not hop off in time could find themselves plunging into a nightmarish financial abyss.
Edward Snowden Agrees To Forfeit Over $5 Million From Book, Speaking Fees Tyler Durden
Wed, 09/23/2020 – 05:30
Former CIA analyst Edward Snowden has agreed to hand the US government over $5 million in earnings from his book and speaking fees, after his memoir, Permanent Record, violated a nondisclosure agreement he signed with the agency. The money will go into a trust.
A federal judge sided with the Justice Department, which sued the former contractor who leaked US intelligence secrets in 2013 which exposed US surveillance programs. The judge has yet to approve the forfeiture plan, according to the Washington Examiner.
Snowden made more than $4 million in book sales and a little over $1 million across 56 paid speaking engagements over the last year, according to court documents.
“This is not like he’s going to fork over the money,” the attorney told CNN. “This gives them a judgment they were going to get anyways.” –Washington Examiner
In 2013, Snowden left his job at an NSA facility in Hawaii where he worked for contractor Booz Allen Hamilton – fleeing to Hong Kong where he subsequently disclosed hundreds of thousands of NSA documents. He was granted asylum by Russia and currently lives in Moscow, and was charged by the DOJ with violating the Espionage Act.
Last month, President Trump told reporters that he was going “to take a very good look at” pardoning Snowden, saying “There are many, many people — it seems to be a split decision that many people think that he should be somehow treated differently, and other people think he did very bad things.”