Less Negative is Positive

"A negative times a negative equals a positive."
--Jaime Escalante (Stand and Deliver)

Negative interest rate policies (NIRP) enacted by central banks across the globe in the middle of last decade spawned a mountain of negative interest-bearing debt. It was hard to imagine who was buying it although, in reality, central banks themselves were hoovering much of it up as part of their quantitative easing (QE) programs.

The worm has turned dramatically as inflation has picked up and CBs are now raising rates. After hitting a peak of about $17 trillion in 2020, negative yielding debt has plummeted to less than $2 trillion. Most of that decline has come since the beginning of 2022.

As NIRP debt declines, it seems likely that broken conventional discounting processes get repaired.

Central banks become extra big losers as NIRP reverses. They bought $trillions of negative yielding bonds that have now been pounded as rates rise and bond prices fall. Many CBs are approaching the broke point on paper.

While these institutions can simply print more money out of thin air to rectify their upside down balance sheets, this would create quite the paradox of creating more money in an inflationary environment.

TINA Turning?

All I want is a little reaction
Just enough to tip the scales
--Tina Turner

During the era of interest rate suppression, people turned to stocks, particularly dividend payers, because it seemed there was no alterative (TINA). With yields presently moving higher, the TINA attitude should dissipate as investors switch out of stock in favor of the relative safety of high yielding bonds.

Today the 2 yr Treasury yields touched 4%. This more than 2x the S&P 500 dividend yield.

The higher this spread goes, the more pressure we should see on stocks as investors flock to 'risk-free' cash yields.

CAPE Fear

I'm a walkin' in the rain
Tears are fallin' and I feel the pain
Wishin' you were here by me
To end this misery
--Del Shannon

Although stocks have come in, Robert Shiller's CAPE index suggests much more downside work must be done before 'normal' valuations return.

Could be, although I wonder how massive market stimulus and, now, structural goods/services inflation factor in.

Trading the Cable

"Cockamamie. That's a word you generation hasn't embraced yet. You ought to use it once in a while to keep it alive."
--Frank Horrigan (In the Line of Fire)

They say you learn something new every day. Saw this headline this am and couldn't figure what 'cable' meant in the context.

Turns out it refers to exchanges between the British pound and the USD. 

When transatlantic cable was stretched across the ocean floor in the mid 1800s to connect telegraph services between the England and the US, transactions between the two currencies became known as 'trading the cable.'

Obviously, this is no longer popular slang as it took me several decades before I heard it.

Interesting nonetheless. And I hope to put my newly discovered lingo to work soon.

See the Signs

Life is demanding
Without understanding
--Ace of Base

Article lays out five signs of recession currently flashing red:

1) Declining monetary base. As quantitative tightening proceeds, money supply should drop even more.

2) Inverted yield curve. Inverted yield curves are leading indicators of economic problems, and have preceded every recession for decades.

3) Tighter lending standards. Economic slowdowns increase risk aversion. Banks tighten credit standards to avoid losses during recessions. We're approaching tightness associated with past recessions.

4) Falling housing market prices. Mortgage rates have more than doubled over the past year. As prices and borrowing costs go up, demand for houses has gone down. Inventory is now above 10 months of supply--a threshold that has consistently been associated with past recessions.

5) Declining manufacturing and trade sales. Sales are down over one percent YOY. Declines below zero have coincided with every recession since the 1970s.

These indicators suggest that a recession is not imminent. Rather, it is likely already here.

Political Purge

"So, here's to the men who did what was considered WRONG, in order to do what they knew was right...what they KNEW was right."
--Benjamin Franklin Gates (National Treasure)

After Donald Trump and his close circle were hit by DOJ search teams, it appears that this administration is widening its nets. Tucker Carlson reports that subpoenas are in the process of being issued on dozens of Trump allies.

This is what a political purge looks like.

Obviously, this is meant to send a message ahead of the upcoming midterm elections, and to those who are considering involvement in the presidential election two years off.

Railroads Crossing

Seven, that's the time we leave, at seven
I'll be waiting up for heaven
Counting every mile of railroad track
That takes me back
--Doris Day 

Nice map of US railroads. Time stamped 2020 so slightly out of date.

Mergers have left the industry with six major players. US operators include BNSF Railway (owned by Berkshire Hathaway), CSX (CSX), and Norfolk Southern (NSC), and Union Pacific (UNP). Two Canadian operators, Canadian National (CNI) and Canadian Pacific (CP), also have substantial presence.

Although their tracks overlap, you can see where each operator's home turf is.

As might be expected, the majors are now in the process of gobbling up smaller regional and local operators.

position in CSX

Lost and Found

When my teeth bite down I can see the blood
Of a thousand men who have come and gone
Now we grieve 'cause now it's gone
Things were good when we were young
--Von Bondies

In some ways the holes in my heart still feel as large as those twin holes in the ground.

In other ways, those holes have been filled with knowledge and love.

As terrible as that day was, I am grateful for the positive changes it has brought. 

Like today's gospel (Luke 15:1-32) that tells us of the lost son who has been found.

Climate Gravy Train

Strange voices are saying

What did they say?

Things I can't understand

It's too close for comfort

This heat has got right out of hand
--Bananarama

On the back of yesterday's post, another credentialed 'expert' fades the party line on climate change. He argues that any relationship between man and climate change is a spurious one. It is more likely, he suggests, that cyclical activity on the sun's surface is influencing weather patterns on earth.

Meanwhile, climate alarmists seek to ride a 'gravy train' to make money.

Greenpeace Man

"There is a WALL of water coming toward New York City!"
--Radio announcer (The Day After Tomorrow)

Interesting piece on Greenpeace founder who left the organization when it was 'hijacked by the political left' and morphed it into a 'political fundraising organization.'

Great comments particularly on the 'demonization' of carbon dioxide and its influence on climate. This chart should be particularly telling to any reasoning mind:

Also liked his comments on the dynamics of CO2, plant growth, and robust ecologies--something these pages have discussed.

Sanctions Fever

Life goin' nowhere
Somebody help me
Somebody help me, yeah
--Bee Gees

Vladimir Putin attributes Europe's energy crisis and related probs to 'sanctions fever.' It is hard to disagree.

Watching a related special last nite on CNBC and host Brian Sullivan asked a guess whether he thought the West's sanctions on Russia were 'working.'

Perhaps he should have asked the millions around the world who face starvation and hypothermia due to these sanctions.

Sadly, this was predictable from the get go...

Euro Energy Bailout

Here I am in silence
It's a game I have to play
You and I in silence
With nothing else to say
--Information Society

On the back of yesterday's post, headlines this morning find euro bureaucrats committing to massive bailouts of consumers and producers as they face virtual margin calls as energy prices spiral higher.

These bailouts are forms of stimulus--subsidies that work against efforts to reign in higher prices.

Still wrapping my head around how this spills over to the US. The obvious consequence is an even strong USD vs the euro.

Frozen Policy

Hear the Salvation Army band
Down by the riverside
Bound to be a better ride
Than what you've got planned
--The Bangles

Europe seems headed toward a self-imposed depression. Sanctions against Russia, combined with previous 'green' policies, have exploded in the face of euro bureaucrats, leaving the EU facing a winter with insufficient heat, electricity, and gasoline.

Some gas and electric bills are already printing 5-10x year ago levels.

Policymakers appear to be doubling down by developing plans for rationing, price capping, and money printing.

Absent a quick policy about-face, it is difficult to see how the EU survives the next few months.

Repos and QT

Then the door was opened
And the wind appeared
The candles blew
And then disappered
--Blue Oyster Cult

Interesting WSJ article suggesting that declining reserves stemming from the Fed's 'quantitative tightening' (QT) program poses a significant threat to financial markets. 

QT is the reverse of quantitative easing (QE). In QE, the Fed printed money out of thin air to buy bonds from banks. That printed money became 'reserves' that the banks have deposited with the Fed. Unsurprisingly, reserves have rocketed higher given the $9 trillion of bonds that the Fed now holds on its balance sheet via QE. 

Bank reserves serve various purposes. They can be used to settle trades with other banks. Reserves are also kept to satisfy regulatory requirements, which have generally been ratcheted higher since 2008, to provide some margin of safety in the event of another systemic credit event.

Reserves can also be used for investment purposes. One popular avenue toward this end is the repo market. Repos are contracts where one party sells securities to another party in exchange for cash. The buyer (who is engaging in what is called a 'reverse repo) promises to sell the securities back to the original holder at some future (usually near term) date and at a set (usually higher) price.

These pseudo loans help the pseudo borrowers manage short term cash obligations while providing the reverse repo pseudo lenders with quick profits.

When reserve levels are high then the 'interest rates' governing repos are low and usually in line with the Fed Funds Rate. However, when reserves decline, repo rates are prone to rise because there is less capacity for reverse repo 'lenders' to employ. 

As the Fed embarks on QT, reserves are beginning to fall. Although there are no signs yet of stress in the repo markets, there is belief that it is only a matter of time before problems surface. 

Indeed, in 2019, the Fed had to inject emergency shots of liquidity into these markets after previous QT programs resulted in skyrocketing repo rates that threatened to seize up money markets.

Given the size and centrality of money markets to contemporary market functioning, it may once again be time to fear the repo.

Tracing History

Dr Alexander Denny: You know you don't have to do this.

Doug Carlin: What if I already have?
--Deja Vu

Interesting analog comparing this year's market action to 2008-2009.

So far patterns are pretty similar.

Extremism and Liberty

"Tonight, our country, that which we stand for and all we hold dear, faces a grave and terrible threat. This violent and unparalleled assault on our security will not go undefended...or unpunished. Our enemy is an insidious one, seeking to divide us and destroy the very foundation of our great nation. Tonight, we must remain steadfast. We must remain determined. But most of all, we must remain united."
--Adam Sutler (V for Vendetta)

It's difficult to imagine that this administration doesn't lose more political support each time it opens its mouth. Last night Biden spoke like a geriatrically challenged version of Adam Sutler, declaring that supporters of Donald Trump and the Make America Great Again ideology constitute a "threat to our country."

If one infers that those who voted for Trump in 2020 comprise this group, then it numbers at least 70 million.

The president's press secretary added the e-word. The president, she said, sees this group as "an extreme threat to our democracy."

Moreover, "when you are not with where the majority of Americans are, then, you know, that is extreme. That is an extreme way of thinking."

Setting aside questions involving what precisely in MAGA ideology is inconsistent with the views of the majority of Americans, or, for that matter, whether MAGA ideology itself doesn't actually constitute the majority viewpoint, any American with a modicum of grounding in US history understands that our founding ancestors designed a government that protected the rights of those who not aligned with the whims of majority opinion. 

If the press secretary's definition of extremism is employed, then opinions inconsistent with the majority are to be protected from tyrannical treatment. Government is legally barred from acting against 'extremists'--again defined as those who think differently from the 'majority.' 

My sense is that Americans still understand this founding principle well enough they are are turned off by the caustic 'extremist' claims of leftists.

Cause for Pause

How can you just leave me standing
Along in a world that's so cold?
--Prince

Our working hypothesis is that the Fed will pivot from its hawkish track when 'something breaks' in the market. That's been the historical pattern and there's no reason to believe this time will be any different.

But where will the breakage occur this time around? One possibility is something in the credit markets. The greater the systemic leverage, the more susceptible the system is to higher interest rates. And systemic leverage has never been higher.

After the Fed's historic tightening over the past six months (on a relative basis), some folks are on the lookout for cracks in credit. We recently noted, for example, that low rated debt spreads are widening toward alarm levels.

Another possibility, one stressed here, is that a funding crisis arises in Washington. Higher rates mean more interest expense on ever-escalating federal debt levels. We're currently on a run rate to spend over $1 annually on Treasury bond interest. How much longer before politicians exert enough pressure on the Fed before it breaks?

Finally, one possibility that I frankly had not entertained concerns the strong dollar. The dollar index (DXY) currently stands at its highest level since 2002. The broader Bloomberg dollar index has spiked above the pandemic highs.

There is growing suspicion that this is sparking margin calls in emerging markets stemming from short dollar positions. 

If so, then systemic contagion could provide another possible cause for Fed pause.