Treasurys Have The Worst Start To The Year Since The Great Depression

Three days ago, Bank of America's Chief Investment Officer, Michael Hartnett, published not one but 15 answers to the one question most investors are asking: "how late in the business cycle are we?" As Hartnett summarized it, we are now so "long in the vermouth", the late-cycle is starting to get "tipsy", and presented the following as evidence:

  • 2017: Bitcoin’s rip from $300 to $19,600 in 3 years made it the biggest bubble ever
  • 2017: Da Vinci’s Salvator Mundi sold for $450mn (would take average American 7,500 years to earn)
  • 2017: Argentina (8 defaults in 202 years) issued a (oversubscribed) 100-year sovereign bond
  • 2017: European high yield bonds were priced as less risky than US Treasuries
  • 2017: the market cap of Facebook (25k employees) exceeded that of India (1.3bn people)
  • 2018: US, UK, German, Japanese unemployment rates are at multi-decade lows
  • 2018: the global stock of negatively-yielding global debt remains >$10tn
  • 2018: S&P 500 trailing price-to-earnings ratio >20X…a level exceeded in just 12 of past 120 years
  • 2018: S&P 500 price-to-book ratio >3X…a level exceeded in just 5 of past 70 years
  • 2018: US tax cuts of $1.5tn will coincide with US corporate bond issuance of $1.5tn and US equity buybacks of $0.9tn
  • 2018: QE “winners” (REITs, credit, EM assets) have started to underperform QE “losers” (volatility, US$, commodities, cash)
  • Aug 22nd, 2018: S&P500 bull market becomes longest of all-time
  • Dec 2018: Fed will be 9 hikes into tightening cycle & G4 central bank liquidity will be contracting
  • May 2019: global profits are forecast to be 1/3 higher than their prior 2008 peak (IBES $3.3tn vs $2.4tn)
  • July 2019: the US economic expansion will become the longest since the Civil War

Hartnett, did not miss the opportunity to showcase some of his favorite charts, including the "3rd largest bubble of the past 40 years", i.e. e-Commerce...

... and the just as ominous chart showing that every Fed tightening cycle ends with an "event", a topic that was picked up yesterday also by Deutsche Bank's macro strategist, Alan Ruskin, who also took the opportunity to remind us that "Every Fed Tightening Cycle Creates A Crisis."

Looking at the chart above, Hartnett also writes that his strategy is stay defensive until an "event" or rise in  unemployment causes Fed to pause.

It should therefore not come as a surprise that in his latest "Flow Show", Hartnett starts off by repeating his thesis that it is "very late cycle" amid a "tightening Fed", and as evidence he presents the latest asset returns, where the outperformance of commodities certainly suggests he has a point, to wit: 

2018 returns scream Fed tightening & late-cycle": commodities 12%, US dollar 2%, stocks 2%, cash 1%, bonds -2%; annualized commodities on course for best year since 2002.

The spectacular commodity outperformance is shown below: on an annualized basis, the commodity return of 34% means that Jeff Gundlach's December 2017 call was spot on, and that this would be only the first time since 2002 that commodities were the top performing asset class.

Meanwhile, in light of the tightening in monetary conditions, the BofA CIO writes that neither US capitulation on China trade war nor dovish Fed minutes induced risk-on flows this week...$0.5bn out of equities, $1.5bn out of bonds, $0.1bn out of gold. In short: traders are starting to look very closely at this chart:

Hartnett further notes that the rise of Commodities may be just starting, as a result of more central bank hikes than cuts in 2018 "consistent with inflation > deflation flows," as shown in the chart below.

Indeed, this week's flows demonstrate this, as big inflows to resources ($0.6bn energy, $0.4bn materials):

note US  now largest world energy producer & exporter, and GDP Q2/3 will be boosted by oil >$70...US rig count at 3-year highs, and energy capex >20% US capex.

Meanwhile, perhaps a more interesting observation - if at least until this morning's surge in the US TSY which has sent 10Y yields sliding back to 2.92% - is that the market is (was?) starting to get very worried about inflation/supply/funding and nowhere is this more obvious than in the return on the 10Y, whose 2018 annualized loss of -10% is the worst since the Great Depression (specifically -12.6% in 1931) while the annualized return on AAA IG bonds (-11%) worst on record.

Of course, the pain for Treasurys investors may not last much longer if there is indeed another deflationary European crisis, i.e., global risk-off event, which makes US paper the global safe haven once again. However, no matter what happens in the US, Hartnett is confident that EM cracks will widen:

"since Q1’16 China/EM/oil crash...inflows to EM stocks = $600bn, EM debt = $200bn, EM equity + debt = $800bn, almost doubling."

Meanwhile, confirming that investors are now boycotting Europe is that this was the 11th consecutive week of European equity outflow, amounting to $2.6 billion in the past 7 days.

But nowhere was the pain worse than in Italy: according to BofA there was a record week of redemptions from Italy-only funds (6% AUM) as the BTP-Bund spread finally spiked, in a move which we previewed all the way back in December, which however is to be expected in a market which has long ago lost the ability to discount the future.


LawsofPhysics Fri, 05/25/2018 - 11:07 Permalink


It has been a global fractional fiat currency world for quite a while you stupid fuck!

99% of your are DEBT(created out of thin fucking air with no real work and no real risk) slaves...

...and yet no one seems to care and continues to face real risk performing real work to pay back that debt...

..for now...

"Full Faith and Credit"

same as it ever was!!!!!

Bill of Rights Fri, 05/25/2018 - 11:13 Permalink


Former Spokane Chapter NAACP President Rachel Dolezal is now facing legal trouble that could land her behind bars. KHQ has confirmed that Dolezal, who legally changed her name to Nkechi Diallo in 2016, is accused of 1st Degree Theft by Welfare Fraud, Perjury in the 2nd Degree, and False Verification for Public Assistance. Her potential punishment under RCW 74.08.331 could include up to 15 years in prison.

Because Dolezal changed her name, we'll be referring to her as Nkechi Diallo. According to court documents, Diallo illegally received $8,747 in food assistance, and illegally received $100 in childcare assistance. Total restitution, according to the documents, is $8,847, allegedly stolen from August 2015 through November 2017.


 Her comment " I DIDN'T DO NUTTIN "

lester1 Fri, 05/25/2018 - 11:22 Permalink

Historians will look back at this period and blame the biggest crash ever on the easy money policies of the Federal Reserve for massive distortions in the free market. 

Until the Federal Reserve is fully audited, we will continue to see mal investments like Tesla and Bitcoin and distortions in price discovery. Aka fantasy land!



WeJamEcono Fri, 05/25/2018 - 11:32 Permalink

we've been in a depression since 2008. we are just very lucky that the USD is the world's reserve currency...but foreigners are really getting tired of that shit. thank goodness for our military. snarky snark snarkerton.

Zhaupka Fri, 05/25/2018 - 13:21 Permalink

During the Great Depression, there were those who worked through it all, others part-time, others cyclically hired and laid off, and others who, as today, cannot and will never work again.

During the Great Depression the economic experience was repeatedly and vehemently denied calling the economic experience a Recession . . . a Great Recession.

Many years after the Great Depression all organizations did acknowledge all experienced a Great Depression.

So, investors / businesses slowly got Fed money, initially laid off millions of workers, hired back workers for less money, hired part-time workers, showed balance sheets awash in cash, used changed accounting techniques, bought their own stock seeing no other growth opportunities.

On paper all is well showing strong stocks, reduced costs, better profits, and steady stock. Reality is this activity is False. It works! The accounting numbers look good. But False.

The cash was not gotten by businesses from the capitalist market, the hiring was not done for real demand economic expansion, the stocks did not rise on business supply to economic demand, and hence GDP is False.
Hence, economic expansion beyond equilibrium (between basic needs and supply) did not occur. There is no Growth.

Counting dollars at 2 percent +/- dollar inflation show more dollars used not from voluntary demand dollars but customers forced into buying at higher prices showing increase in sales dollars not actual increase in number of sales based economic demand expansion growth. Yes, a False economy.

Yes, the U.S. Federal government is at Fault. Providing cheap loans to the poor who received for generations U.S. Federal Government Welfare, wrote laws telling Fed to let loose money for low interest rates enabling those on Generational Welfare to use their housing stipend to move into a house, however, what was good for one-class is egalitarian good for all. Itinerant unstable income job holders in the economy were also approved hence housing bubble.

All mortgages were bundled with other investments -securities. The Generational Welfare could always pay because they get a steady monthly housing cash transfer (check) from the same U.S. Federal government (different department), the itinerant workers less able. Fail then Epic Uproar among the investors! Next the U.S. Federal Government via Treasury, via the Federal Reserve made / is making whole those defaulted securities paying a few trillion unaccounted for extra.

Taxes were not raised but Fees imposed in lieu of Taxes were. Muddle through (memes) i.e. New Normal, etc.

Businesses now having zero percent loans and awash with cash, if they take it, do not borrow for economic demand expansion (because there is none) but can borrow for margin stock purchases (buy low sell high margins) and could possibly pay back “fed gov loans” if stock “profit” margins are a gain. No cash for long term U.S. Economic Expansion based on Economic Demand. Finance Capitalism.

During the time U.S. Media (investor class) cooperated with the U.S. Federal Government broadcasting using the National Microphone to all U.S. Citizens via newspapers, magazines, radio, television, and the internet various Propaganda / PSYOPS supporting the Do-Not-Scare The Populace Policy using a variety of Propaganda / PSYOPS Techniques: All is well. Including today.

Next, the U.S. Federal Government Nationalized the U.S. Medical Industry forcing all U.S. Citizens to send money to the U.S. Federal Government.
Economic Reality: U.S. Economy is completely distorted (disrupted for those chic’). 100 percent of all U.S. Business are Directly or Indirectly Dependent on U.S. Federal Government for Earnings. All Six Stock Market Ratios Indicate False Stock Prices.
Truly, Baby Boomers are completing their lifetime purchases en masse. Demographically, GenX are missing the 11 million consumers needed for the economy (import foreign workers multicultural PSYOPS) as compared to Baby Boomers (77 million or so), and Baby Boomer Children (157 Million) won’t come on-line until 2020 the very earliest to make a Real Economic Recovery Reality.

Business Earnings Disclosures show Profits based on Economic Demand Flukes, U.S. Federal Government Direct Contracts, Modified Accounting Techniques, and Lessened Government Taxes, Reduced Work Force, Reduced Wages, and Supported Stocks via Buybacks. Including all aforementioned, many companies are able to show health.

All the same, Stay Calm. Hide Facts. Finance Capitalism (China and India), u know.

MusicIsYou Fri, 05/25/2018 - 14:26 Permalink

Well, it's all just part of the phony system. They create money out of thin air; send thousands of people to college to learn a terminology to call the financial system in order to make it all seem legit. And it's all because the population is in love with itself, in that what I mean is that people will never admit to themselves that all the years they put into college study or labor is total buIIshit and for naught. Kind of the same way billions of people will continue to practice an incorrect religion for only the reason they have 1000's of years invested into it. They're in love with themselves and can't admit it's all been a waste. On the other hand, the alternative doesn't seem very attractive either. People enjoy the lies becoming the truth - it helps them sleep at night. I mean let's face it, there's very few people who can walk a straight-line to truth/God, before they self-destruct, and do not live long enough to speak about it.