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Rabobank: We’re In A Charlton Heston Movie, But Which One?

We are all in a Heston movie regardless – we just don’t know which one yet…

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This article was originally published by Zero Hedge

Rabobank: We’re In A Charlton Heston Movie, But Which One?

By Michael Every of Rabobank

We’re in a Charlton Heston movie: which one?

A reference to Charlton Heston means I lose readers who, despite having the sum of human knowledge at their fingertips, don’t know much recent history. Yet we are all in a Heston movie regardless – we just don’t know which one yet. That’s because markets, who also have the sum of human knowledge at their fingertips, don’t know much recent history either. I will run through the news Heston-ally, and suggest what that means for the movie we are all in.

Let’s start with the good news on Covid. Bad as it gets, we are not in 1971’s ‘The Omega Man’, about the last-survivor of a Sino-Soviet biological war.

However, the Fed flagged QE tapering. Philip Marey expects a formal announcement in November, with the actual start in December. FOMC Chair Powell expects tapering to end around mid-2022, implying a $20bn reduction in QE per meeting. The Fed’s dot plot shifted upward and moved closer to a first rate hike in 2022, with the participants evenly split between zero and 1-2 hikes; after 2022, it’s a steady pace of 3 hikes per year. The economic projections suggest the FOMC is still confident inflation spikes will be over by Q4 2022 – despite a record 73 ships waiting at LA/LB ports. (For the full report, please see here.) The market reaction, after initial confusion, was short US yields up,…and longer yields down and USD up. Recall how Minsky debt dynamics work – the change in the change is what matters; recall how pyramid schemes work; and recall how each previous attempt to normalize away from QE in an economy stronger than it is now has worked out. Taper tantrum fears? Not in DM, because there is no sign of any strength – thus the flattening curve. But for EM, inflation, stagflation, and policy-error deflation all now stalk the land. (Brazil just hiked rates to 6.25%, as expected: see here for more). See the key scene of 1968’s ‘The Planet of the Apes’ – with a lag.

In October we could also see both a US government shutdown and a debt default if the spending and debt bill approved by the House of Representatives yesterday does not pass the Senate. As Philip also notes, this is a game of chicken in which the Democrats try to force the Republicans to share the blame for suspending the debt limit in light of the midterm elections in 2022. He adds that this stand-off is completely unnecessary, and if the Republicans don’t blink, the Democrats can still raise the debt limit and adopt a spending patch through budget reconciliation. However, this will raise the internal pressure in the Democratic Party regarding Biden’s legislative agenda by adding another time constraint (see here). See the chariot race in 1959’s ‘Ben Hur’- but which charioteer is President Biden?

“China’s Evergrande to be saved!” says Bloomberg, quoting someone else. “Saved” means being split into three firms and nationalized, with no indication of which investors get how much money back. Given today the struggling firm has to repay $83.5m to USD debt holders, who won’t want cement, unfinished flats, or a nudge-nudge-wink-wink, we shall soon find out. Few observers saw a direct risk of a Lehman moment, despite the dynamic referred to above at play, because there are no truly free actors in Chinese markets. However, this ‘salvation’ is in line with a “Marxification” of the economy. The implications for China and the world are something markets refuse to consider because it would give them indigestion. See the end of 1973’s ‘Soylent Green’ – when markets prefer to see the ‘soy’ and the ‘green’.

Energy prices continue to soar, despite official assurances the authorities saw this coming, aren’t surprised, and have clear plans for what to do about it. UK energy firms are toppling, and European economies that were preaching the need for immediate shifts in climate policy are suddenly subsidizing fossil fuels again to prevent a looming 1970’s recessionary-style energy-price shock. Which means other people have to pay more instead. Russia is meanwhile laughing all the way to the bank. See 1976’s ‘The Two-Minute Warning’ – and if you are conversant in Cockney, see 1953’s ‘The Pony Express’.

The Biden administration is reportedly to nominate Saule Omarova to run the Office of the Comptroller of the Currency, the bureau within the Treasury that charters, regulates, and supervises all national banks and thrift institutions and the federally licensed branches and agencies of foreign banks in the US. Omarova is a law professor who has criticized crypto, and advocates for the government to have a much larger role in banking. That comes after the SEC’s Gensler’s comments this week on stablecoins. See 1974’s ‘Earthquake’ or 1975’s imaginatively titled ‘Airport 1975’.

US President Biden and French President Macron are attempting to build bridges burned over AUKUS. The French ambassador is now to return to DC, and Biden to come to Europe for talks next month. However, word on the street is that France, and French agriculture, now have the excuse to kick the planned Australia – EU FTA into the long grass even if the rest of the EU is in favour. The UK has also been sent scuttling from any thoughts of joining the USMCA. However, geopolitics leads and trade usually follows in today’s atmosphere. Japan’s outgoing PM Suga has also been exceptionally forthright, stating China’s rapidly growing military influence and unilateral changing of the status quo could present a risk to Japan. That’s ahead of a first in-person Quad meeting to be held on Friday at the White House. See 1976’s ‘The Last Hard Men’ (and for those who prefer fantasy to Western, see ‘“Orcs”, Elves/Hobbits, and Dragons’).

In short, the overall market backdrop is perfect for Heston. Yes, the world has changed dramatically from the epoch where a card-carrying member of the NRA and the Republican Party could be a major Hollywood celebrity. But today is again epic; and gritty; and dystopian; with disease; and economic crises; energy crises; political crises; geopolitical crises; ideological crises; inflation; stagflation; and the backdrop of a shift in the global financial architecture. Not that this doesn’t mean most markets, and modern movies, don’t want to ignore it all and keep partying on as in 1992’s “Wayne’s World”, in which Heston also made a guest-appearance. Try doing that with less QE, less gas, less crypto, and more Marxism and geopolitical risks though.

It’s been quite a ride. I loved every minute of it.” Charlton Heston (1923 – 2008)

Tyler Durden Thu, 09/23/2021 – 10:25

Author: Tyler Durden

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Economics

Visualizing The World’s Biggest Real Estate Bubbles In 2021

Visualizing The World’s Biggest Real Estate Bubbles In 2021

Identifying real estate bubbles is a tricky business. After all, as Visual Capitalist’s…

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Visualizing The World’s Biggest Real Estate Bubbles In 2021

Identifying real estate bubbles is a tricky business. After all, as Visual Capitalist’s Nick Routley notes, even though many of us “know a bubble when we see it”, we don’t have tangible proof of a bubble until it actually bursts.

And by then, it’s too late.

The map above, based on data from the Real Estate Bubble Index by UBS, serves as an early warning system, evaluating 25 global cities and scoring them based on their bubble risk.

Reading the Signs

Bubbles are hard to distinguish in real-time as investors must judge whether a market’s pricing accurately reflects what will happen in the future. Even so, there are some signs to watch out for.

As one example, a decoupling of prices from local incomes and rents is a common red flag. As well, imbalances in the real economy, such as excessive construction activity and lending can signal a bubble in the making.

With this in mind, which global markets are exhibiting the most bubble risk?

The Geography of Real Estate Bubbles

Europe is home to a number of cities that have extreme bubble risk, with Frankfurt topping the list this year. Germany’s financial hub has seen real home prices rise by 10% per year on average since 2016—the highest rate of all cities evaluated.

Two Canadian cities also find themselves in bubble territory: Toronto and Vancouver. In the former, nearly 30% of purchases in 2021 went to buyers with multiple properties, showing that real estate investment is alive and well. Despite efforts to cool down these hot urban markets, Canadian markets have rebounded and continued their march upward. In fact, over the past three decades, residential home prices in Canada grew at the fastest rates in the G7.

Despite civil unrest and unease over new policies, Hong Kong still has the second highest score in this index. Meanwhile, Dubai is listed as “undervalued” and is the only city in the index with a negative score. Residential prices have trended down for the past six years and are now down nearly 40% from 2014 levels.

Note: The Real Estate Bubble Index does not currently include cities in Mainland China.

Trending Ever Upward

Overheated markets are nothing new, though the COVID-19 pandemic has changed the dynamic of real estate markets.

For years, house price appreciation in city centers was all but guaranteed as construction boomed and people were eager to live an urban lifestyle. Remote work options and office downsizing is changing the value equation for many, and as a result, housing prices in non-urban areas increased faster than in cities for the first time since the 1990s.

Even so, these changing priorities haven’t deflated the real estate market in the world’s global cities. Below are growth rates for 2021 so far, and how that compares to the last five years.

Overall, prices have been trending upward almost everywhere. All but four of the cities above—Milan, Paris, New York, and San Francisco—have had positive growth year-on-year.

Even as real estate bubbles continue to grow, there is an element of uncertainty. Debt-to-income ratios continue to rise, and lending standards, which were relaxed during the pandemic, are tightening once again. Add in the societal shifts occurring right now, and predicting the future of these markets becomes more difficult.

In the short term, we may see what UBS calls “the era of urban outperformance” come to an end.

Tyler Durden
Sat, 10/23/2021 – 22:00

Author: Tyler Durden

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Precious Metals

JPMorgan Turns Positive On Crypto, Sees “A Bullish Outlook For Bitcoin Into Year-End”

JPMorgan Turns Positive On Crypto, Sees "A Bullish Outlook For Bitcoin Into Year-End"

The launch of the first Bitcoin ETF, BITO, even if based…

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JPMorgan Turns Positive On Crypto, Sees “A Bullish Outlook For Bitcoin Into Year-End”

The launch of the first Bitcoin ETF, BITO, even if based on futures, was the culmination of seven years of anticipation for bitcoin bulls and it certainly did not disappoint: the leaks and the actual news propelled the cryptocurrency to a new all time high above $66,000 (with some profit-taking to follow).

Yet despite the clear impact on the price of bitcoin, which has more than doubled from its July lows, not everyone is uniformly bullish on the impact of the first bitcoin ETF. As JPM’s Nick Panigirtzoglou writes in his latest widely-read Flows and Liquidity note, “the bulls are seeing this ETF as a new investment vehicle that would open the avenue for fresh capital to enter bitcoin markets” while the bears “are seeing the new ETF as only incremental addition to an already crowded space of bitcoin investment vehicles including GBTC in the US, ETFs listed in Canada since last February which have been already accessible to US investors, regulated (CME) and unregulated (offshore) futures, and plenty of direct investment options using digital wallets via Coinbase, Square, Paypal, Robinhood etc.”

For its part, JPM – not surprisingly – falls into the skeptics’ camp (we say not surprisingly because for much of 2021, the largest US bank has been publishing bearish note after note, as we have repeatedly detailed, urging clients to ignore the largest cryptocurrency and if anything, to take profits. In retrospect, this has been a catastrophic recommendation for anyone who followed it). 

According to the JPMorgan quant, the launch of BITO by itself will not bring significantly more fresh capital into bitcoin due to “the multitude of investment choices bitcoin investors already have. If the launch of the Purpose Bitcoin ETF (BTCC) last February is a guide, as seen in Figure 1, the initial hype with BITO could fade after a week.”

Here, once again, JPM’s superficial “analytical” approach shines through and we are confident that Panigirtzoglou, who has been dead wrong about bitcoin for the past year, will once again be wrong in his take on BITO. Instead, for a much more nuanced – and accurate – view of the daily happenings in bitcoin ETF land we recommend Bloomberg’s inhouse ETF expert, Eric Balchunas who points to what is clearly an unprecedented, and rising demand for crypto ETF exposure (one can only imagine what will happen when Gensler greenlights an ETF based on the actual product not spread-draining and self-cannibalizing futures). Indeed, as Balchunas pointed out on Thursday, BITO – which is “maybe too popular for its own good”, has already “used up 2/3 of its total bitcoin futures position limits, only about 1,700 contracts ($600m) left bf it hits 5k total. Could hit in next day or two.”

But what about the ramp in bitcoin prices in recent weeks? Surely the anticipation of the ETF launch was the main catalyst? Well, according to JPM the answer is again no, and instead the JPM strategist writes that “while we accept that bitcoin momentum has shifted steeply upwards since the end of September, we are not convinced the anticipation of BITO’s launch was the main reason.”

Instead, as the Greek quant explained before (see “JPMorgan: Institutions Are Rotating Out Of Gold Into Bitcoin As A Better Inflation Hedge“) he believes that rising inflation concerns among investors “has renewed interest in inflation hedges in general, including the use of bitcoin as such a hedge.”

As he further explains, “Bitcoin’s allure as an inflation hedge has been strengthened by the failure of gold to respond in recent weeks to heightened concerns over inflation, behaving more as a real rate proxy rather than inflation hedge.” This is actually correct, and as we have shown previously gold indeed correlates much more closely to real rates that nominals, although in recent months, even real rates suggest that gold prices should be notably higher, perhaps confirming ongoing precious metal price suppression of the kind we have previously documented to be emanating from the BIS.

In any case, JPM also updates a chart we showed previously, the shift away from gold ETFs into bitcoin funds, which was very intense  uring most of Q4 2020 and the beginning of 2021, has gathered pace in recent weeks.

In turn, by putting upward pressure on bitcoin prices, JPM argues that this shift away from gold ETFs into bitcoin funds likely triggered mean reversion  across bitcoin futures investors which had reached very oversold conditions by the end of September. This is shown in Figure 3 via the bank’s position proxy based on CME ethereum futures. Looking at Figure 3, JPMorgan now claims that “there had been a steep decline in our bitcoin futures position proxy” which pointed to oversold conditions towards the end of September triggering a bitcoin rebound. This rebound appears to have accelerated over the past days ahead of BITO’s launch with the blue line in Figure 1 fully recapturing all the previous months’ unwinding. In other words, the price ramp into the bitcoin ETF launch was just a coincidence. Yeah right, whatever.

Where JPM is however right, is in its assumption that a significant component of bitcoin futures positioning encompasses momentum traders such as CTAs and quantitative crypto funds. Previously, the bank had argued that the failure of bitcoin to break above the $60k threshold would see momentum signals turn mechanically more bearish and induce further position unwinds; it also claims this has likely been a significant factor in the correction last May in pushing CTAs and other momentum-based investors towards cutting positions. At the end of July, these momentum signals approached oversold territory at the end of July and have been rising since then in reversal to last May-July dynamics. The shor-tterm momentum signal has exceeded 1.5x stdevs, a z-score that we would typically characterize as overbought for other asset classes but still below the exuberant momentum levels of January 2021.

So with both With Figure 3 and Figure 4 pointing to exhaustion of short covering and more crowded bitcoin positioning in futures, Panigirtzoglou sees bitcoin relying more on other flows outside futures to sustain its upswing. To him, this elevates the importance of monitoring Figure 2, i.e. the importance for the current shift away from gold ETFs into bitcoin funds to continue for the current bitcoin upswing to be sustained.

In our opinion, the main problem for bitcoin over the previous two quarters had been the absence of significantly more fresh capital as shown in Figure 5 and Figure 6. Figure 5 shows our estimate of retail and institutional flows into bitcoin with an overall downshift in Q2 and Q3 of this year. Similarly, Figure 6 shows that the previous steepening in the pace of unique bitcoin wallet creation has largely normalized returning to pre-Q4 2020 norms, again implying an absence of significantly more fresh capital entering bitcoin.

And yet, despite this latest (erroneous) attempt to downplay the impact of the bitcoin ETF, which JPMorgan says “is unlikely to trigger a new phase of significantly more fresh capital entering bitcoin”, by now too many JPM clients are invested in the crypto asset as Jamie Dimon (whose opinions on bitcoin have been an absolute disaster for anyone who traded on them) recently admitted, and so while tactically staying bearish on the impact of BITO, not even JPM’s house crypto “expert” can objective stay bearish in general, and as he concludes, “istead, we believe the perception of bitcoin as a better inflation hedge than gold is the main reason for the current upswing, triggering a shift away from gold ETFs into bitcoin funds since September.”

So with Bitcoin now perceived as the best inflation hedge among non-traditional assets, Pnaigirtzoglou concludes that this gold to bitcoin flow shift “remains intact supporting a bullish outlook for bitcoin into year-end.”

 

Tyler Durden
Sat, 10/23/2021 – 19:10


Author: Tyler Durden

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Economics

Different CPIs

A recent exchange [1] on Econbrowser regarding forecasts of CPI reminded me that — even among the official series — there’s more than one CPI. Figure…

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A recent exchange [1] on Econbrowser regarding forecasts of CPI reminded me that — even among the official series — there’s more than one CPI.

Figure 1: CPI-all urban (blue), and CPI-wage earners and clerical workers (red), s.a., in logs 2020M02=0. NBER defined recession dates shaded gray. Source: BLS, NBER and authors calculations.

 

Figure 2: Year-on-year inflation rates for CPI-all urban (blue), and CPI-wage earners and clerical workers (red), s.a., calculated as log-differences. NBER defined recession dates shaded gray. Source: BLS, NBER and authors calculations.

Inflation for the bundle that wage earners/clerical workers has outpaced that for all-urban, by about 0.6 ppts by September.

Interestingly, the weights for the two CPI bundles indicate that wage earners/clerical workers have a higher weight on food, food away from home, and private transportation, and less weight on housing, than all urban consumers. As elevated housing costs feed into the CPI housing components, the places might switch.

Author: Menzie Chinn

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