Sunday, May 13, 2018

The Armageddon Rally

Tomorrow, the U.S. moves its embassy in Israel to Jerusalem. One day before the holy month of Ramadan begins. Having failed to ignite WWIII every other way, Trump seems to have found the magic bullet...

Of course leading into the launch of Armageddon, markets rallied RISK ON as Trump reneged on the Iran treaty, a move seen as precusor to war with Iran. 

ZH: The U.S. Chooses Path To Nuclear Proliferation and War
The whole world loses because nuclear proliferation is a disaster waiting to happen and Iran will now have a strong incentive to proceed with a weapons program to defend itself from Israel and the United States.

If Iran does so, it will trigger a regional nuclear arms race with Saudi Arabia and Egypt undoubtedly seeking weapons of their own."

In the fucked up world we live in, a risk on rally makes perfect sense in the context of these burgeoning risks. However, the chasmic divergence between U.S. Go Daddy rallies and Emerging Markets has made its way to the front page of the Wall Street Journal: 

WSJ: Rising Dollar Hammers Emerging Markets

"Emerging markets added on $7.7 trillion in new debt last year, including bonds and other types of loans, with about $800 billion of that denominated in foreign currencies"

The debt that emerging markets have issued in dollars—which was cheaper for them when US rates were low—is likely to face the most pressure, analysts say. Emerging markets were holding a record $6.3 trillion in dollar-denominated debt last year"

Where it gets interesting, is that the dollar gave back some gains late this past week, contributing to the ebullient mood and pulling the dollar-denominated EM bond basket back from the brink. 

However, the local currency denominated debt did not fare as well, and though the price patterns are identical year over year, the BTFD mentality is diverging:

"Any sudden declines in emerging markets last year were usually met with a rush of buyers looking to add these assets at a cheaper price...That kind of rapid snapback that benefited Brazil last year has been missing during the recent rout"

But really, what changed in the past year that could have caused 'BTFD' failure?

What we are witnessing is RECORD unprecedented divergence between Treasury issuance and Federal Reserve divestiture. Just as the tax cut is starting to require massive new issuance, the Fed is pulling back from the market. Which is reducing global liquidity. Contrary to Idiocratic belief, there is no such thing as *free* money:

"President Donald Trump's $1.5 trillion of tax cuts have to be funded somehow. Step forward ever more U.S. Treasury bills and notes

The Federal Reserve is only making matters worse. Over the next two years it will reduce its balance sheet by over $1 trillion."

This is starting to show up in global markets. 

Unusually, the minutes published April 3 of the Reserve Bank of Australia's policy decision said higher U.S. money market costs had driven short-term domestic borrowing costs higher.

It also pointed out this had been happening in other regional markets, without naming them, though the likely culprits are Hong Kong and Singapore.

Asian Contagion

Higher U.S. rates are starting to feed through across the major Asia money centers"

The Hong Kong and China property markets, which have a lot of dollar funding, should be monitored very carefully to gauge the impact of changes in U.S. rates. The bubble in the former is truly spectacular -- the median property price is 19 times average income."

"Prices in the top end of residential real estate in the city have dropped 7.6 per cent over a six-month period to March, making Vancouver the second-worst performer during that period among global cities"

Recently I noticed that the casino is ebbing and flowing with the Fed balance sheet. For example, this past week, the Fed was a net buyer:

In summary, the Donny, who is as dumb as a human can be and still fog a fucking mirror, is imploding the global asset bubble.

But as long as Go Daddy keeps rallying, this will all be fine.