Author: Sirhc

Courtesy of Yahoo Finance, by Julia La Roche Reporter

Influential bond investor Jeffrey Gundlach, the CEO of $150 billion DoubleLine Capital, sees a scenario where U.S. stocks get crushed in the next recession — and likely won’t recover for quite some time to come.

Even with Wall Street benchmarks just days removed from new record highs, the bearish investor declared that “the pattern of the United States outperforming the rest the world has already come to an end.”

In an exclusive interview with Yahoo Finance, Gundlach noted that 2019 was one of the “easiest” years ever for investors in “just about anything… Just throw a dart, and you’re up 15-20%, not just the United States, but global stocks as well.”

For several reasons, Gundlach warned that pattern isn’t likely to last forever. He added that investors should consider a pattern he highlights in his “chart of the year,” which divides the world into four regions — the United States, Japan, Europe, and Emerging Markets — and looks at the major stock market indices.

And what that shows is a pattern where the Nikkei 225 (^N225), the Euro Stoxx 50 Index, and the MSCI Emerging Markets index all peaked before a recession — but never recovered to pre-recession levels. The same fate might befall the S&P 500 Index (^GSPC) in the U.S., according to Gundlach.

“So, where are we today? Today, we have the S&P 500 is killing everybody else over the last ten years, almost 100% outperformance versus most other stock markets,” he explained to Yahoo Finance.

“My belief is that pattern will repeat itself,” said Gundlach, who has spent much of 2019 warning of a downturn ahead of the 2020 elections.

“In other words, when the next recession comes, the United States will get crushed, and it will not make it back to the highs that we’ve seen, that we’re floating around right now, probably for the rest of my career, is what I think is going to happen,” he added — suggesting that a recovery won’t be seen for years.

While the 60-year old bond king expects a rotation into non-U.S. stocks, he also believes that the U.S. dollar, which has been “remarkably stable” in 2019, will eventually weaken as investors start to worry about the massive federal debt spending.

“I think in the next recession the dollar will fall because of the deficit problem United States, and that investors will be better served to own foreign stock markets instead of the U.S. stock market in dealing with the next recession,” Gundlach added.

New York Fed Adds Another $97.9 Billion In Liquidity Yesterday – Concerns Grow of Year-End Financial Crisis

40% Of Fed’s Balance Sheet Reduction Wiped Out In Just 2 Months

◆ The New York Fed added $97.9 billion in temporary liquidity to the financial system yesterday.

◆ The Federal Reserve Bank of New York continues to pump massive liquidity amid very heavy demand by banks for year-end funding; the $97.9 billion involved overnight repurchase agreements, or repos, worth $72.9 billion and the balance via 42-day repos.

◆ The repo market shook the financial world in September when an unexpected rate spike choked short-term lending, spurring the Federal Reserve to intervene.

◆ Interventions ensure markets have enough liquidity and short-term borrowing rates do not spike violently and create a liquidity crisis on Wall Street and the global financial system.

◆ The New York Fed has now pumped nearly $3 trillion into unnamed trading houses on Wall Street in just over two months to ease a liquidity crisis that has yet to be credibly explained.

◆ Massive currency injections signal there are significant problems in the plumbing of the interbank lending market and wider financial system

Authored by Sven Henrich via NorthmanTrader.com,

What happens if you toss $97.9B in liquidity at an extended market and it sells off anyways? Maybe nothing, but maybe everything.

The unholy alliance surely has succeeded in elevating asset prices in recent weeks, indeed prices have exceeded the level I suggested as a potential key target in April in Combustion, 3102 on $ES:

Today $ES hit 3157 or 1.7% above that level I outlined then.

Back then I discussed an apex of trend lines possibly converging in October 2019. October came and went and the Fed went full repo and QE and markets kept ascending relentlessly. Until today.

And guess what. Despite all the rallying $ES still hasn’t managed to recapture its broken 2009 trend line. It still hasn’t overcome its 2007 trend line. And it still hasn’t overcome its broken 2019 trend.

No Sir. What this rally has done to run relentlessly toward a trifecta apex of trend lines. When? This morning. In pre-market:

Got within 20-25 handles of that apex peak point and on a negative monthly divergence again.

Now there’s nothing that says we can’t get above it with all this liquidity, but I note $ES got near the apex and suddenly rejected even with $97.9B in liquidity thrown at it.

This convergence of trend lines ends this month. It may simply mean nothing by the end of the month or it may mean everything. It’s simply too early to tell. If it means everything then it may be game over for this bull run.

If it’s a meaningful level then even a basic .236 fib level retrace risks a move ultimately toward 2584. A proper technical move toward the .382 fib would target 2,218. Again, way too early to tell, I’m just outlining the potential technical ramifications.

So December will be critical to get a better sense of the validity of this chart.

Perhaps of note the rejection today came at key trend line resistance points in the form of throw overs. The throw overs occurred last week during the shortened low volume holiday week.

The broad all market ETF $VTI:

The rejection today then leaves its megaphone structure technically still intact.

Note $SPX hit its highest RSI readings in 2019 on the recent rally hence it became very much overbought. As long as this channel remains intact the game can continue and there are plenty support levels below on a proper technical retrace, think the 50MA, thing the July highs, think the lower trend line. All of these could offer support for coming rallies.

All we can say for certain now is that $ES reached a massively important confluence area and so has the larger market.

Tops are only known in hindsight and we are far from confirming anything here, but at least we know where we are relatively to several key trends. And for today at least all of these trends have asserted themselves in form of resistance and if they prove meaningful it may be game over for this liquidity soaked  bull run.

ZeroHedge by Tyler DurdenMon, 12/02/2019 – 08:33

One week after the Fed’s first 42-day term repo which for the first time allowed dealers to lock in funding into the new year and which was 2x oversubscribed, confirming a growing scramble for year-end funding, traders were keenly looking ahead to the result from today’s second 42-day repo which matured on January 13. And, as we noted last week, year-end liquidity fears remain front and center as the $25 billion operation proved to be roughly 40% below the required size to satisfy all liquidity demands.

Dealers submitted $42.550BN in bids for the 42-day op ($29.750BN in Treasurys, $1BN in Agency, $11.8BN in MBS paper), resulting in an oversubscription of the $25BN in available repo.

This was modestly below the $49.050 billion submitted in the first 42-day repo operation conducted on November 25:

It remains a key question for funding markets why, even with QE4 in place and now daily overnight and short-term repo operations in place, banks continue to rush to lock in year-end liquidity, where some fear a similar explosion in overnight repo rates as was observed on Dec 31, 2018 when General Collateral soared amid a widespread liquidity shortage. Indeed, as Bloomberg put it, “even with the Fed’s commitment to continue providing liquidity to the financial system around year-end, the market is still showing concerns. This is due to banks’ year-end balance-sheet constraints related to capital surcharges and other regulatory requirements.”

The clearest indication that despite the massive liquidity injections that have taken place since mid-September liquidity remains scarce was today’s initial print in the overnight General Collateral rate, which rose from 1.60% to 1.68%, the highest since the Fed cut rates on Oct 31.

So what is it about quarter and year-end that is forcing banks to shore up their balance sheets with liquidity? As a reminder, while most US bank have a GSIB surcharge of around 2%-3%, JPMorgan remains an outlier – and is perceived as the “riskiest” bank – with its 4.0% surcharge. It’s also the reason why the bank has been quietly pulling liquidity away from funding markets ahead of quarter-end periods.

For those curious how the Fed calculates the GSIB surcharge, Bank of America provided the following handy schematic:

Two weeks ago, when commenting on why it expects to see sharp year-end liquidity pressures, BofA said that funding markets are currently very stable but the bank sees risks of repo pressure into year-end, as the Fed faces two funding issues into Y/E:

1. a low level of reserves requiring ongoing large Fed repo injections
2. dealer repo intermediation constraints stemming from the GSIB surcharge.

The way these issues are linked is through the Fed’s short-term repos; Fed repos pressure dealer balance sheets larger while GSIB constraints encourage dealers to shrink the overall size of their market making activities.

Separately, and in keeping with the recent tradition, the Fed also completed an overnight repo operation, which however showed less funding demand, as “only” $72.9 billion in securities were pledged in exchange for overnight liquidity with the Fed, well below the limit of $120 billion. Yet another troubling observation: while many have expected the total notional on overnight repos to decline over time, the daily use of the overnight repo has stabilized in the $60-$80 billion range and has failed to decline over the past month.

Courtesy of Zero Hedge by Tyler DurdenMon, 12/02/2019 – 10:05

As the Federal Reserve remains unable to stoke inflation (because it refuses to measure it correctly) and refuses to factor in asset price inflation…

… it has now considered launching a new rule that would let inflation run above its 2% target to make up for lost inflation, reported the Financial Times.

Though the Fed’s policies are to protect big Wall Street banks and keep liquidity ample in the financial system, its policies have overwhelmingly created deflation through supporting zombie companies and blowing financial bubbles.

So to “make up” for lost inflation, the Fed will temporarily increase the target range above 2%, also known as “symmetric” overinflation. The policy would “make it clear that it’s acceptable that to average 2 percent, you can’t have only observations that are below 2 percent,” according to Eric Rosengren, president of the Federal Reserve Bank of Boston, who recently spoke with FT.

Fed members have expressed concerns that reverting the federal funds rate to the zero lower bound will drive inflation expectations lower, a real risk of Japanification, something Albert Edwards is especially concerned about.

Officials have also lamented that the since the fed funds rate is so low compared to history, any recession could make monetary policy ineffective, though there is always the reality that the Fed will merely unleash negative interest rates during the next recession.

Meanwhile, Fed members have been experimenting with new monetary tools ahead of the next downturn. Janet Yellen said the new rule could be like “forward guidance,” which enabled the Fed to pressure short-term interest rates lower. This eventually allowed longer-term rates to fall as well.

Rosengren said, “future committees might not be as comfortable with that formulaic approach. This is why I prefer something that is a little bit more flexible, maybe not as constraining, but makes it a little clearer that we should be having [some inflation readings] over 2 percent.”

Fed governor Lael Brainard, spoke with reporters last week, said the new rule is to complex to elaborate on with the public. She said if inflation drops, the Fed should allow inflation to run hot, perhaps in a range of 2 to 2.5%.

In plain English, the Fed is afraid that its its own policies are Japanifying the US economy and in response is willing to… drumroll… double down which will somehow push inflation run above target, when in reality it will simply unleash even more deflation!

The strategy clearly shows the Fed is making up policy as it goes ahead of the next recession, where monetary policy will be less effective than ever before. The silver lining: risk prices will be at all time high as the world careens toward the next global recession.