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Rabobank: Markets Are Confused And Unhappy. Alpha Or Delta? Inflation Or Deflation?

Rabo: Markets Are Confused And Unhappy. Alpha Or Delta? Inflation Or Deflation

By Michael Every of Rabobank

Friday saw markets abuzz following…

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This article was originally published by Zero Hedge

Rabo: Markets Are Confused And Unhappy. Alpha Or Delta? Inflation Or Deflation

By Michael Every of Rabobank

Friday saw markets abuzz following a call between US President Biden China’s Xi Jinping. A call! That means free trade! That means good for markets!....right? No, it doesn’t. The US read out stressed the call occurred out of American frustration that lower level contacts had failed to achieve any traction, and no concessions were made, even if there quite probably was a “C’mon man, can’t we cooperate on green and disagree on everything else?” To which the answer was likely still ‘no’: because who controls green raw materials and green industrial value chains is a zero-sum game. More importantly, however, the US made clear that the primary goal was to ‘to ensure competition does not veer into conflict’. In other words, not so much about the desire for the absence of trade war as the absence of war. Is that now considered bullish?

So, a call; and then to arms anyway. Because within hours it was reported the US is considering a new 301 trade investigation against China and the subsidies it offers its SOEs. Of course, if this were to occur it would be hard to prove, would take months, and even then wouldn’t resolve US trade imbalances, just reallocate them (e.g., moving exports away from China to Vietnam or India.) However, that is:

  1. the (bi)polar (world) opposite of what the market was buzzing about;

  2. that would be seen as a US geostrategic win in the eyes of hawks in DC; and

  3. it would obviously have a huge impact on FX markets at the very least, more so with Bloomberg already talking about “fissures” in the China growth story ahead of key data this week and ongoing bankruptcy fears at Evergrande, and how they are acting as a drag on EM FX, if not on CNY. (“Because markets know their place.” On which note, China just announced it is to split AliPay off from the rest of the firm and hand it over to a state-controlled entity.)

Moreover, the US is reportedly also considering renaming Taipei’s trade mission to DC to include the word “Taiwan”, as is the EU, both infuriating Beijing. The Global Times warns if this happens then recalling China’s ambassador to the US --as happened with Lithuania alongside an export boycott-- is likely “the lowest diplomatic reaction.” Indeed, it stresses this would, in its eyes, mean the US dropping its One China Policy, and would prompt Beijing into imposing economic sanctions on Taiwan while placing “the island’s airspace into the patrol area of the PLA”. It concludes: “It seems that sooner or later, the Taiwan Straits will be plunged into a storm that will change the situation there drastically.”

Meanwhile, the solemn anniversary of 9/11 in the US coincided with: the Taliban starting to Tali-ban Western things; the internal division and decline of the West flagged in both Chinese and Western media (with Western social media both for and against); the Al Qaeda leader reappearing to stir the Middle East pot; a slimmed-down Kim Jong-Un of North Korea launching a new long-range missile for his nukes; Iran making only token CCTV concessions on its nuclear program; the US pulling its advanced missile defenses out of Saudi Arabia; and Ukraine’s president warning of Russian invasion as Moscow moves closer to union with Minsk and undertakes another massive joint military exercise. I am sure markets and Western social media will focus on “The Kim Jong-Un diet”, but the rest gets stuck in their throat.

On the international front, supply chain news is also worrying. Backlogs at LA port are at new record highs, and while we may have hit a new peak in prices --unless geopolitics gets messy-- shippers are locking these prices in alongside various attempts at industry consolidation. The line is being drawn that this is a new shipping normal that we need to adjust to rather than a boom-and-bust cycle – or at least that is what the Too Big To Sail oligopoly is trying to achieve, as too-big-to-fail neoliberalism has managed to achieve in all other sectors. At least until government gets involved, which history strongly suggests it will.

On a related note, Matt Stoller in “Counterfeit Capitalism: Why a Monopolized Economy Leads to Inflation and Shortages” underlines the US has built both inflation and shortages into its system by deliberate monopoly and oligopoly choices that cannot cope with any of the stresses currently being experienced. He refers to the inadvertent collapse that kicks in along supply chains when, for example, US trucking firms, now unable to ship in spare parts, find all truck repairs are dependent on one key part…that need to be *trucked* in from Mexico. And when the trucks fail, everything else fails. ‘Resilient’ this is not. Yes, monetary and fiscal policy both matter hugely, as does the location of production vis-à-vis labour power: but if almost every industry is structurally hamstrung by growing layers of monopoly and oligopoly, then EM-style inflation and shortages are here to stay, he argues; unless the presidential executive order working against them achieves something major, which will likely take years at best.  

On the fiscal front, the US Democrats are reportedly now prepared to offer much lower tax increases than previously flagged in their $3.5 trillion fiscal stimulus bill. The top corporate tax rate would now rise from 21% to 26.5%, not 28%, and capital gains from 20% to 25%, not 39.6%. The important thing here is that if the tax take is to be lower, then the spending side will have to match if it is to be covered. Hence we already don’t have a $3.5 trillion package, but something moving in the direction of what Senator Manchin has been talking about – if even that can pass. At least that might take the edge off shipping inflation: after all, “Consumer demand must ease to end supply chain crisis,” says a Maersk executive.

On the monetary front, this is ironic timing for the Fed to be tapering, doubly so given even Bloomberg and the Financial Times are grasping that --guess what?-- Covid has not been beaten by the vaccines. Indeed, considering we know vaccine effectiveness wanes after six months, the US and EU will both be heading into winter virus season with that biological headwind in front of them: does the market really want to rule out new lockdowns ahead? Nonetheless, the market chatter is that we could QE tapering flagged ahead for a start date before the end of the year. And for those who feel they can avoid all of this mess with a monetary side-step, the US is also reportedly closer to moving against stable coins, as yet another anti--crypto sabre is rattled.

Bringing all of these stories together, markets are confused and unhappy. Alpha or Delta? Inflation or deflation? And “geopolitics” every which way. As such, US stocks went down on Friday, and by a non-negligible amount, while US Treasury yields went up, not down, and crypto isn’t going down even as regulators say they are going to take it down. Expect more such confusion until markets understand what is actually happening on Covid (as if we don’t know), on fiscal policy (yes/no?), then on QE (no/yes?), on supply chains (no?), and on crypto (no-no?).   

As I keep repeating, it’s all about political calls at this point – just not Friday’s Biden-Xi call; and hopefully not about the call to arms.

Tyler Durden Mon, 09/13/2021 - 11:49


US Hog Herd Hit By Largest Monthly Drop Since 1999

US Hog Herd Hit By Largest Monthly Drop Since 1999

US hog herds experienced the most significant monthly drop in two decades, according to…

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US Hog Herd Hit By Largest Monthly Drop Since 1999

US hog herds experienced the most significant monthly drop in two decades, according to new data from the USDA. The reason behind the drop is because farmers decreased hog-herd development over the last year due to labor disruptions at slaughterhouses plus high animal feed. 

USDA data showed the US hog herd was 3.9% lower in August than a year ago. It was the largest monthly drop since 1999 after analysts only expected a decline of about 1.7%, according to Bloomberg

On Monday, hog futures soared in Chicago after the news of tightening supply. Since contracts hit a seven-year high in June, they have plunged from $120 to $80 but have since recovered in recent days to $90. 

Supply chain woes at slaughterhouses, and declining cold pork storage in US warehouses, have pushed up pork consumer prices to record highs. 

Farmers are experiencing a challenging environment of skyrocketing feed prices and other commodity prices used to maintain and growing pig herds, along with the labor disruptions at slaughterhouses that sometimes force them to cull herds. 

Soaring supermarket meat prices have been devastating for working-poor families who allocate a high percentage of their incomes to basic and essential items. The Biden administration spent most of the year ignoring the dramatic increase in food prices and only addressed the issue earlier this month by blaming meatpackers. The administration even had the nerve to say that if meat prices are taken out of the equation, troubling grocery inflation would be lower. 

To sum up, shrinking hog herds means pork prices will stay high. 

Tyler Durden Tue, 09/28/2021 - 20:25
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Volatility Roars Back

The surging 10-Year Treasury yield spooks tech investors … watch out for Evergrande default volatility… another debt ceiling showdown

It’s like…

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The surging 10-Year Treasury yield spooks tech investors … watch out for Evergrande default volatility… another debt ceiling showdown

It’s like when you’re flying, feel a few jolts of turbulence, then see the “seatbelt” sign flash on.

Investors are experiencing some market turbulence – and buckling up is probably a good idea.

There are three things troubling markets right now. Let’s look at them to get a sense for how significant they might be.

As I write Tuesday morning, the markets are deep in the red thanks to the soaring 10-Year Treasury yield.

After falling under 1.2% in early August, the yield on the 10-Year Treasury has been pushing higher over the last two months.

That “push” turned into a full-blown “leap” last week, as the yield jumped from roughly 1.3% to over 1.5% as I write.

I’ve circled this one-week spike of about 18% on the chart below.


This is significant because the yield on the 10-Year Treasury is a major barometer for how traders are feeling about the market and inflation-risk.

A rising yield also serves as a major headwind for technology stocks. Given this, it’s no wonder that our hypergrowth tech expert, Luke Lango, has been monitoring this surge.

From Luke’s Early Stage Investor update yesterday:

The 10-year Treasury yield broke above 1.5% today, continuing its sharpest ascent since February.

Yields have now risen about 20 basis points since the Fed’s meeting last week, as investors are bracing for the Treasury market’s biggest buyer to become a seller before year-end.

This move makes sense, and more importantly, it’s nothing to worry about.

***Why Luke is urging a levelheaded response

Luke points out that while yields might have further to climb, they should return to lower levels due to a handful of reasons.

Back to Luke with those details:

The fact of the matter is that yields were too low, so now they’re correcting higher, but they won’t go much higher from here because there are structural forces in place that will keep them lower for longer.

For one, you have secular deflationary pressures via the expansion and improvement of productivity-boosting and cost-reducing technologies, like automation, artificial intelligence, and virtualization platforms.

For another, you have persistently strong demand for risk-free assets from risk-adverse funds like pension funds – in a market where “cash is trash” and valuations are a bit too stretched to attract major allocations from these risk-adverse funds.

You also have the fact that the labor market will face long-term headwinds from automation technology threatening to disrupt large swaths of the labor market. That will put a floor on how low the unemployment rate can go, which will keep the Fed on the sidelines.

Not to mention, the Fed serves the U.S. government, and the U.S. government has accumulated a lot of debt over the past few years (especially the past 24 months) … so, in order to keep interest payments low for its “boss,” the Fed is incentivized to keep rates lower for longer. Same with every other central bank in the world, for that matter.

Long story short, there are simply too many secular forces at play here for yields to rise much higher. Make no mistake. They will move higher. But at a very slow and gradual pace

The second reason why Luke isn’t alarmed by the yield spike is because he’s focusing on what matters – the long-term growth story, along with earnings.

Back to Luke:

Near-term movements in the yield curve will dictate near-term price action.

But the long-term value of our stocks will be driven by the long-term earnings growth trajectories of our companies.

So long as our companies produce lots of earnings over the next few years, our stocks will move higher – regardless of where yields end up.

Even though the long-term is what matters, for now, the short-term is volatile – and painful. But Luke stresses this is a temporary problem that’s actually an opportunity:

All in all, things look great.

Let the yield volatility resolve itself in the coming weeks. Let tech stocks chop around. Buy the dip when the volatility settles.

Let’s move on to the second source of today’s volatility.

***The threat of a broader fallout from Evergrande is also worrying investors

Let’s begin with yesterday’s update from our Strategic Trader team of John Jagerson and Wade Hansen:

The Evergrande situation in China is continuing to put traders on edge.

A default seems very likely, and most of the world’s major financial institutions have material direct or indirect exposure to that risk.

To make sure we’re all on the same page, Evergrande is an enormous Chinese real estate company that is failing to meet its debt payments.

Last Thursday, the troubled company missed an $84 million payment. It owes another $47.5 million tomorrow.

The broader fear is that this could be a “Lehman Brothers” meltdown for China. Real estate makes up roughly 30% of the Chinese GDP, so a collapse would have a very real impact on their broader economy. It’s reported that Evergrande alone helps sustain more than 3.8 million jobs each year (directly employing about 200,000).

Yesterday, legendary investor, Louis Navellier, also updated his Accelerated Profits subscribers on this situation. Here he is speaking to this broader fear:

A housing bust would have a pretty big impact on the Chinese economy.

Some economists are even predicting that if Evergrande fails, it could cause China to slip into a recession — and, of course, these fears are part of the reason why the stock market sold off hard last Monday.

The good news is neither Louis nor our Strategic Trader team believe significant economic contagion from a default will reach the U.S. However, we could be in for market volatility. Given this, it’s impacting where John and Wade will be looking for trade set-ups.

Back to their update on this note:

We should be cleareyed about the risks and potential for volatility as we get closer to 3rd quarter earnings season in October.

We expect volatility to rise, and we don’t plan on targeting any trades in energy or basic materials, but we also don’t see much risk of a major drawdown yet.

As I write Tuesday, the latest news is that Beijing is urging government-owned property developers to buy up some of Evergrande’s assets. So, it’s not a direct bailout, though it’s a bailout.

From Reuters:

Authorities are hoping, however, that asset purchases will ward off or at least mitigate any social unrest that could occur if Evergrande were to suffer a messy collapse, they said, declining to be identified due to the sensitivity of the matter.

We’ll update you as events unfold here, but don’t be surprised if markets suffer another mini-panic if we get bad news from China.

***Finally, partisan politics could upset markets

The debt ceiling deadline is this Friday.

Last night, Senate Republicans voted against a House-backed bill that would have suspended the debt limit. They objected to how the bill was attached to a broader spending bill pushed by Democrats.

From Bloomberg:

Without a shift in position by one of the two parties, the decision to combine the temporary funding measure and the debt ceiling leaves the U.S. on course for a government shutdown and defaults on federal payments as soon as next month.

According to the Bipartisan Policy Center, without a suspension or raising of the ceiling, there will be a risk of default between Oct. 15 and Nov. 4.

Moody’s Analytics suggests that a prolonged shutdown, were it to happen, would cause another recession, destroying approximately $15 trillion in household wealth and 6 million jobs.

Our politicians are aware of this and don’t want to be responsible, so what we’re seeing is partisan brinksmanship. However, the closer we get to Friday without that solution, the greater the risk of more market volatility.

But remember, we saw this in 2011, when the debt ceiling showdown led to a downgrade in U.S. AAA sovereign credit, and again in 2018 as U.S./China trade tensions were growing. Both times brought plenty of anxious hand-wringing, yet both times we moved past it.

Bottom-line, fasten your seatbelt as these three issues work themselves out. It could get worse before it gets better – but it will get better.

Have a good evening,

Jeff Remsburg

The post Volatility Roars Back appeared first on InvestorPlace.

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Owner-Equivalent Rent Shock On Deck As Actual Rents Surge By Most On Record

Owner-Equivalent Rent Shock On Deck As Actual Rents Surge By Most On Record

Another month, another record surge in US rents to a new all time…

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Owner-Equivalent Rent Shock On Deck As Actual Rents Surge By Most On Record

Another month, another record surge in US rents to a new all time high.

According to the Apartment List national index, US rents increased by 2.1% from August to September, and although month-over-month growth has slowed slightly from its July peak when the sequential growth rate was 2.6%, rents are still growing much faster than the pre-pandemic trend. Since January of this year, the national median rent has increased by a staggering 16.4%. To put that in context, rent growth from January to September averaged just 3.4% in the pre-pandemic years from 2017-2019.

While even the smallest cooldown in rent growth is a welcome change for renters, Apartment List's Chris Salviati notes that it’s important to bear in mind that prior to this year, the national index never increased by more than 0.9 percent in a single month, going back to 2017. "Furthermore, we have now entered the time of year when rents are normally declining due to seasonality in the market. In September of 2018 and 2019, for example, rents fell by 0.1 percent and 0.3 percent, respectively."

That said, we have a ways to go before US rent - where the median just rose above $1,300 for the first time ever - decline; and with rents rising virtually everywhere, only a few cities still remain cheaper than they were pre-pandemic, and even these remaining discounts are unlikely to persist much longer. At the other end of the spectrum, Apartment List finds 22 cities among the 100 largest where rents have increased by more than 25 percent since the start of the pandemic. That said, there are some early signals that tightness in the market may be beginning to ease: the vacancy index ticked up this month for the first time since last April. And in Boise, ID, which has seen the nation’s biggest price increase since the start of the pandemic, rents finally dipped slightly this month.

The chart below visualizes monthly rent changes in each of the nation’s 100 largest cities from January 2018 to September 2021. The color in each cell represents the extent to which prices went up (red) or down (blue) in a given city in a given month. Bands of dark blue in 2020 represent the large urban centers where rent prices cratered (e.g., New York, San Francisco, Boston), but those bands have quickly turned red as ubiquitous rent growth sweeps the nation in 2021. In 2020, 60 of these cities saw rent prices rise from August to September, but this year, 97 cities got more expensive in September.

In a glimmer of hope for Americans locked out of not only the housing but the rental market, one of the few markets where rents did not increase this month was Boise, ID. Since last March, rents in Boise are up by a staggering 39%, making the city the archetype for rental market disruption amid the pandemic. This month, however, the median rent in Boise fell by 0.1%. While such a small dip certainly doesn’t offer much relief to Boise renters, it may at least signal that the market is finally starting to stabilize. Spokane, WA, another city that has experienced skyrocketing rent growth this year, saw an even more notable decline this month, with rents down 1.8 percent.

Unfortunately, Boise and Spokane represent the exception rather than the rule -- in most of the cities where rents had been growing quickly, that growth is continuing. Tampa, for example, saw rents jump by another 3.9% this month, and the city now ranks 2nd for cumulative rent growth since the start of the pandemic at 36%. Excluding Boise and Spokane, the other eight cities in the chart above experienced rent growth of 3.5%, on average, from August to September, as affordable Sunbelt markets continue to boom. Of particular note, four of the ten cities with the fastest rent growth since last March are suburbs of Phoenix.

A more tangible indicator that demand destruction may be setting in, is that vacancy rates have posted their first increase since March. Indeed, as Apartment List notes, much of this year’s boom in rent prices can be attributed to a tight market in which more and more households are competing for fewer and fewer vacant units. The vacancy index spiked from 6.2% to 7.1% last April, as many Americans moved in with family or friends amid the uncertainty and economic disruption of the pandemic’s onset. Since then, however, vacancies have been steadily declining. For the past several months, the vacancy index has been hovering just below 4%, significantly lower than the 6% rate that was typical pre-pandemic.

This month, however, the vacancy index ticked up slightly, from 3.8 percent to 3.9 percent. Although this is a very minor increase, it represents the first increase of any magnitude since last April. While a few more months of data would be needed to confirm an inflection point, if vacancies are back on the rise again, it would signal that tightness in the rental market is finally beginning to ease and that rent growth will also continue to cool.

Finally, where there may be light at the end of the tunnel in real-time data, we have yet to see the pig even enter the python when it comes to the CPI's Owner Equivalent Rent data series. As shown below, the Apartment List data normally has a 4 month lead to the OER series, which means that as actual rents soar by over 15% Y/Y, OER is either going to skyrocket in the coming quarters or the BLS will have to come up with some very fancy hedonic adjustments why rental inflation should exclude, well, rental inflation.

Tyler Durden Tue, 09/28/2021 - 18:25
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