Heartbreaking: A Man And His Dog

#41 And His Dog, Sully

Bush and Sully.png

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China’s Top U.S. Auto Imports

How global is this?

Of the ten best selling U.S. auto exports to China, six are German cars.  The real world is not as simple and more complex than conventional impressions.

China_Auto Imports

Source:  Bloomberg

It’s hard to unpack the president’s tweet.

According to the South China Morning Post,

China’s tariff on car imports from all over the world was cut to 15 per cent from 25 per cent. But for US cars, China added a 25 per cent tariff over the summer, making the rate 40 per cent.  – SCMP

So did China remove the 40 percent, of which 25 percent was in retaliation to the U.S. tariffs, on all U.S. cars, while the U.S. left its tariffs in place with the threat to escalate if negotiations go south?  That interpretation should be highly discounted until more clarification.

Traders are going to run with it, however.


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Month In Review – November 30


  • One helluva bear trap set the prior week sent traders scrambling after the Fed Chair caved, at least in rhetoric, to the president’s bullying
  • Most sovereign bond yields down on the month, led by hard-hit Turkey and Indonesian 10-years
  • The U.S. credit markets had a rough month
  • Argentina and Brazil currencies were lower with South Africa and Turkey recovering smartly.  Nice EM bookends
  • Last week’s big stock rally allowed most stock indices to turn up for the month
  • Mexico’s Bolsa showing exceptional weakness as the new government takes over
  • Natural gas up yuge in November while crude oil down yuge

Commentary:  Given that calling the short-term market is mug’s game,  it is exceedingly more difficult when politicians and economic policymakers will not allow the markets to find their true or correct level.   Everyone is now into market price manipulation:  companies with their buybacks;  central banks with their QE, and political leaders with their jawboning and selected, sometimes fake, news releases.  This can’t be positive in the long-run.  But, hey,  we get our bonuses and reelected in the short-run, no?

Nevertheless, we believe, given all indicators point to, and the backdrop of a shrinking Fed balance sheet, coupled with bloating U.S. budget deficit and the crowding out effect,  a high probability we have seen or are closer to the top than a new bull run.

The bullshit factor coming out of almost all governments is another factor traders must deal with.   For example, the president just tweeted “China has agreed to reduce and remove tariffs on cars coming into China from the U.S. Currently the tariff is 40%.”  It’s hard to unpack this.

According to the South China Morning Post,

China’s tariff on car imports from all over the world was cut to 15 per cent from 25 per cent. But for US cars, China added a 25 per cent tariff over the summer, making the rate 40 per cent.  – SCMP

So did China remove the 40 percent, of which 25 percent was in retaliation to U.S. tariffs, on all U.S. cars, while the U.S. left its tariffs in place with the threat to escalate if negotiations go south?  That interpretation should be highly discounted until more clarification.

We view the so-called  “biggest trade deal ever” just a cease-fire with a still high risk of tanking.

Let the traders run with it, however.

The 2810-15 level on the S&P is critical, right about where futures are trading as we write.  There is probably enough trader torque to take that out and rally this market into year-end.

Longer Term

The following charts were on Fareed Zakaria this morning, which capture our view of the U.S. market over the next few years.  We will let you make your own inferences and investment decisions based on the charts













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Sector ETF Performance – November 30






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Global Risk Monitor – November 30



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President Bush #41 Always Had A Strategic Vision & Plan

I was fortunate to work with the Bush #41 administration in developing and implementing their plan to resolve the 1980/90’s developing country (emerging markets in today’s parlance) debt crisis — The Brady Plan — named for his Treasury Secretary.  Can you imagine today’s inhabitant of the White House allowing, say,  Secretary Mnuchin to take credit for one of the administration’s signature policy triumphs?

President Bush always had a goal and a plan, which was always bathed in humility.   No victory laps, no dancing on the Russians’ grave after communism fell.

All, severely lacking and a stark contrast to today’s political leaders.

The Fall Of Communism

I also was hired by the Polish government shortly after the communists fell as an economic and financial advisor to help the country restructure its debt and economy.  My colleague and I had dinner one night with an administration official at a restaurant in Paris, which was once the childhood home/palace of Louis XIV.

The U.S. official conveyed to us the firm resolve of the Bush administration that it would not let Poland fail in their transition from communism to a market economy.   They wanted to make Poland an example of a successful transition that the ex-Soviets/Russians could see and emulate.  Poland became one of the superstar emerging economies over the next two decades.

Where Were The Europeans?

I was always perplexed where were the Europeans on the Poland issue?  The German bankers, for example, were obsessed with one thing, getting their loans repaid with the smallest haircut possible, as they should have been.  But why was the U.S. government the one leaning on the banks, including some of the largest in the U.S., to grant Poland a 50 percent debt haircut?   Global leadership, that’s why.

The Europeans were not happy with the Bush administration over their hardball tactics in dealing with Poland’s private and Paris Club creditors.

Later, I found out the Poles, who were essentially broke, were being subsidized by the U.S. Treasury and my fees were effectively being paid by the American government, err the American taxpayer   Japanese bondholders.


One of my best undergraduate college buddies, Malek, was from Kuwait.  He told me that when Sadaam invaded in 1990,  Sadaam’s brother, who led the invasion, set up headquarters in the house in front of his.   Malek would rail against the Palestinians, many of whom were guest workers in Kuwait at the time because they sided with the Iraqis during the invasion.  So much International Arab Brotherhood.

I called Malak a few years after the Gulf War who couldn’t talk as he was running out to celebrate the national holiday, “Festival of Gratitude,”  in honor of George Herbert Walker Bush.

The celebration began as soon as a chartered blue and white Kuwaiti Airways jetliner landed, bringing the former President, his wife, Barbara, and other guests on his first visit to Kuwait.

The thousands lining the highway from the airport to the city included schoolchildren who were given a holiday for the occasion. Many waved small United States flags or balloons and others held signs.  – NY Times

The Kuwaitis loved George H.W. Bush.

Dana Carvey & #41

A few years later, my wife and attended a Saturday Night Live performance.   Here was the opening monologue.





Click here to view video

Golf Connection

President Bush was also well connected to the golf world.  He and #43 take a middle name from their maternal grandfather,  George Herbert Walker, of the Walker Cup fame.  His grandfather once had to suspend golfing legend, Bobby Jones, for throwing a club and wounding a female spectator, telling Jones, “You will never play in a USGA event unless you can control your temper.”

His golf pedigree can be found in his name. George Herbert Walker was his maternal grandfather, a former president of the United States Golf Association, who was instrumental in the founding of the biennial amateur competition that bears his name, the Walker Cup. Bush’s father, Prescott Bush, was also a former USGA president and a scratch golfer who impressed upon his son the importance of playing golf at a fast pace.  – Golf World

President Bush proclaimed he was taught to play golf the proper way.  He would often brag about his course record at Cape Arundel Golf Club in Kennebunkport, Maine. Was it a 63 or 64?   “An hour and 20 minutes,”  #41 would say.


R.I.P,  President Bush.  History will treat you well.

Sure, like all presidents, you made some mistakes.  Nevertheless, we expect you’ll be among, or close to,  the Top 10 before we see you on the other side.

Thank you for your service and sacrifice.


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R.I.P., #41

The last true Republican president.


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A life of boom and bust: Can Argentina break the cycle?

A century ago, Argentina was one of the ten richest countries in the world. But crisis after crisis has earned it the dubious distinction of being the only nation ever to regress to developing country status. With hyperinflation, devaluations and IMF bailouts now facts of life, we meet the people who have lived through a major economic crisis roughly once every decade – including a taxi driver who lost everything in the 2001 crisis and now earns more money selling antiques. We also travel to some of the worst-hit places, where sermons from slum priest “Padre Toto” give people hope. But 2018 has once again tested Argentines’ patience. Inflation has topped 40% and the peso’s value has halved compared to the US dollar. Mauricio Macri’s government has tried to stem another crisis by signing up to the biggest bailout package in the IMF’s history. With the country’s future in limbo, the FT provides a glimpse into life in constant economic turmoil and asks: Can Argentina finally break the cycle of boom and bust?

► Subscribe to FT.com here:http://bit.ly/2GakujT


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Mr. Market Goes Full Powell-Wow Over Fed Chair’s Cave

He caved.  At least in rhetoric.

Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy‑‑that is, neither speeding up nor slowing down growth. My FOMC colleagues and I, as well as many private-sector economists, are forecasting continued solid growth, low unemployment, and inflation near 2 percent.
Fed Chairman Jerome H. Powell, November 28th

Call us skeptics.

The current 2.25 percent Fed Funds rate with a “near 2 percent inflation,” the Chairman’s words, equates to a level  “just below… the range of estimates that would be neutral for the economy”?   To be exact,  year-over-year CPI in October was 2.5 percent with core CPI coming in at 2.1 percent.

Yes, oil prices have collapsed.  Inflation will temporarily come down.  Yada, yada, yada.

The stock market was moving lower, President Trump was ranting and raving, and tweeting, the market clowns were proclaiming a coming economic deflationary apocalypse after two just 10 percent S&P corrections in 2018, all in the context of a negative real Fed Funds rate and ubiquitous  labor shortages with a sub-4 percent unemployment rate.  Seriously, folks?

Chairman Powell, simply, caved to political pteesures.   Punto!

Janet Yellen may be short but that girl did have spine, did not day trade the S&P nor the economic data, was methodical in her approach, and truly understood the complicated dynamics of the economy.

Chairman Powell the first non-economist in 40 year since Wiiliam Miller, who was a disaster and ushered in the Carter administration’s inflation spike,  may just have committed a fatal blunder if markets believe the Fed is losing its independence from political pressures.  Too early to make a definitive judgment, however, and we are not ready to write off the Chairman just yet.

But negative real policy rates with unemployment less than 4 percent and a “strong economy” is close to a range estimates that are neutral?  Not credible.

Negative Real Fed Funds Is Hardly Close To Neutral

The real effective Fed Funds rate (using monthly yoy CPI inflation) has been negative every month since October 2015, and 94.4 percent of the months since November 2009 (102 out 108 months).

Other than 2018, a negative real Fed Funds rate with a corresponding unemployment rate under 4 percent has only occurred once in the last seventy years (see chart).

Since 1956 there have been only 64 months where the civilian unemployment rate was below 4 percent.  Only in 9 of those months, the real Fed Funds rate has been negative, 6 of which have occurred this year.  Moreover, in 1957, the Fed Funds rate was not the primary monetary policy tool that it is today.

The real Fed Funds rate with a sub-4 percent unemployment rate during the 64 months has averaged 1.64 percent.  That is no chip shot from last month’s reading of -0.34 percent.

Headline inflation will fall in November with the collapse of oil but come on, man!

If inflation falls to 1.5 percent (doubt it can be sustained) and rates move up another 75 bps, we are in business.


Labor Shortages Matter

We don’t think this “time is different.”  Labor shortages still matter.

If you don’t believe us go talk to any young couple trying to buy their first house, who are forced out of the market due to high prices and limited supply.

“Labor shortages in the construction industry remain significant and widespread,” says Ken Simonson, chief economist of the contractor’s group. “The best way to encourage continued economic growth, make it easier to rebuild aging infrastructure and place more young adults into high-paying careers is to address construction workforce shortages,” he says. – The Post and Courier

Powell Caved To Political Pressure  

The Chairman wilted under the relentless pounding by President Trump, in our opinion.  How do you think foreign holders of U.S. Treasury bonds are feeling?   Can they feel the love tonight?

Foreign bondholders are already fleeing the market.

Top foreign holders of Treasuries like China and Japan have shrunk their portfolios of U.S. government bonds this year, and a recent barometer of participation in Treasury auctions suggests overseas buyers have not been showing up in force, according to Treasury Department data.

Some auctions since late October had the weakest foreign participation rates in nearly a decade, a Reuters analysis of U.S. Treasury sales shows. At the same time, auction sizes are rising fast, with bond issuance this quarter projected to set a record of $83 billion after deducting maturing debt.

“We do worry about where demand for Treasuries is going to come from, given the ongoing significant increase in supply,” said Torsten Slok, chief international economist at Deutsche Bank. – Reuters

Increasing Size Of Bond Auctions Is The Real Culprit

In our reading of the Chairman’s speech today, no peep of the Fed’s balance sheet runoff (we missed the Q&A), which, coupled with the Treasury’s increased borrowing requirement due to higher deficits,  is what is really impacting and spooking the market, in our opinion.  Even though today Mr. Market acted as if it is all about the trajectory of interest rates.

Going from zero to 2 percent with a “near 2 percent” inflation isn’t going to shut down a viable economy, much less “the greatest economy ever,”  or even make a dent in it.    The question becomes then, do we have a viable economy or is it a “new economy.”  excessively dependent on asset values?

Our hypothesis that the economy is becoming more influenced by asset prices and debt, and to a lesser extent by income (which is endogenous) due to a secular stagnation in real wages, is a work in progress.

Moreover, the whole inflation/deflation debate has morphed into a dialectic, which is path dependent on asset prices.   Stocks values move up to a critical level (which holders likely believe to be permanent) that stirs the animal spirits and kicks economic growth into gear.  Inflation eventually becomes an issue moving interest rates higher.  The asset bubble pops, stock values go down,  confidence declines, aggregate demand softens and deflation now becomes the headline issue.   Wash, rinse, repeat.  – GMM, March ’18

Nevertheless,  take a look at the dramatic growth in the size of this year’s monthly Treasury auctions.  The total gross issuance of coupon notes/bond, the 2-year FRN, and TIPs,  increased 35 percent from last November, growing from $187 to $252 billion.

Those funds have to come from somewhere, folks,  and it ain’t from the central banks anymore.  We’re not so certain the global markets can adapt, or, at the very least, are going to have difficulty living in this brave new world.


The FED’s SOMA portfolio took down 11.59 percent of the November auctions with the refinancing of its maturing Treasury portfolio in excess of the $30 billion quantitative tightening cap.  Through 2019, however,  the Fed will be participating in only 4 of the 13 monthly auctions even as the Treasury’s financing needs continue to grow.

It will be interesting to see how the bond market holds up under the growing technical stress during the next year. We are taking the over on interest rate forecasts, by the way.

In addition, remember, it was the bond yield breakout through 3 percent that precipitated the Q4 stock market volatility.  Watch this space.

Treasury  Yield Curve Management 

We also found this chart interesting.   The Treasury has dramatically increased its relative issuance of 2-years, up 54 percent this month from last November, and held back on 10-year issuance.   We are not familiar with the government’s yield curve management policy and thus not really at liberty to comment too much.

The data do explain  a lot technically, at least to us, as to why the yield curve has pancaked this year.  Is it an explicit policy?

Makes sense to us.  Keep long rates down.   Kind of like an Operation Twist run out of  Fifteenth and Pennsylvania.



The market rebound has been less feeble than we expected.  We got nervous a few nights ago as everyone seemed bearish and we were all leaning on the wrong side of the ship.  Then along comes Jay.


This weekend G20 and the Trump-Xi dinner should be interesting.   The rebound in stocks will most likely embolden Trump to play harder, and last week’s election in Taiwan strengthens Xi in geopolitical political terms, though China has been accused of meddling in that election.

The U.S.-China relationship is much larger than trade and Taiwan is at the top of the list.

A pair of Navy ships sailed through the Taiwan Strait on Wednesday, just days before President Donald Trump is expected to meet Chinese President Xi Jinping during the Group of 20 summit in Argentina.  

The guided-missile destroyer USS Stockdale and the replenishment oiler USNS Pecos made a “routine” transit that “demonstrates the U.S. commitment to a free and open Indo-Pacific,” Pacific Fleet spokesman Lt. Cmdr. Tim Gorman said in a statement.  – Stars and Stripes

There could be positive news from the G20 that Mr. Market may like, such as a delay in another round of tariff increases — totally absurd, in our book —  or things could fall apart.  We certainly don’t expect a major breakthrough.


That brings us back to the S&P500.

Recognizing momentum begets momentum,  today’s take out of last week’s high is unduly positive.  We need a few days of closing above the 200-day and a break above the 50-day, 1.4 percent higher, for us to believe this market continues to rally through December. Otherwise,  given our above analysis, which we believe the market may soon begin to internalize, consider the past few days an early Christmas present to lighten up and/or get shorty.

To paraphrase the Chairman today, who was paraphrasing Thomas Jefferson,  “eternal vigilance is the price of financial stability [survivability].”



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Why is Canadian oil so cheap? – Financial Post

$10 Handle On WCS

Wow!  Canadian crude traded with a $10 handle!

That is frickin’ stunning.  Production is stranded and nowhere to go.  Can’t use oil tankers for storage as they can’t get it to port.

Here’s to wishing we had some caverns in Canada to fill up with WCS.

Canadian Crude

Before 2018, the average price gap for Edmonton Mixed Sweet was about US$4 a barrel, in Bloomberg data going back to mid-2014. It hit a record discount of US$39 this month.

Canada’s lighter grades are getting slammed by the same forces affecting heavy crude – namely, a pipeline bottleneck that’s made it tougher to ship product, along with refinery outages during maintenance season in the U.S. Midwest. As a result, an increasing amount of crude is being transported by rail and truck. Some executives in the oil patch have also called on the Alberta government to intervene and impose production cuts, aimed at bolstering prices.  – The Globe and Mail, November 27th


Hat Tip:  The Polish Rifle, Dougie Skrypek

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