"Yellen is effectively admitting that 'liftoff' was an error," Don Luskin, chief investment officer at TrendMacro, noted in a report to clients before the opening bell. "It's one and done until the environment changes substantially.
We speak with Luskin about how the dramatic drop in crude oil prices has affected the global economy and how it will likely affect it in the future.
Financial analyst and our contributor Donald Luskin has described Donald Trump as a "black swan" over the political economy. He's referring to an outlier event that few anticipated and whose impact is impossible to predict. As the voting season begins in Iowa, this strikes us as a useful way for Republicans to think about the Trump candidacy.
"The current very strong relative attractiveness of stocks versus bonds puts a safety net under how far equities can fall," says Donald Luskin, chief investment officer at TrendMacro. "There's a natural hedge here. More panic in China should drive long-term bond yields lower as a safe-haven play, and that would make stocks look even more attractive on a relative basis."
I said people were going to anticipate the end of the Obama era. I didn't say it was going to happen in the first week of the year. This was obviously the roughest week in equity markets. But Donald Luskin noted in our paper that the 70% decline of oil prices over the last year represents $2.9 trillion of savings to consumers world-wide. This is enormous. You couple this with people seeing the end of the Obama era, and eventually we're going to get more discussion about tax reform in the Republican primary. I think that optimism starts coming back.
"Many of the headwinds that sparked the U.S. stock market's biggest swoon since 2011 are no longer weighing down the market like they did earlier this year, says Don Luskin, chief investment officer at TrendMacro.
"The big August correction was caused by the strong dollar, collapsing oil prices, a scary slowdown in China, and a Fed that seemed determined to hike rates despite it all," says Luskin. "Every risk factor driving the big correction has reversed for the better now."
"We went three years, two months and 21 days without a 10% correction in the (S&P 500), says Don Luskin, market strategist at TrendMacro. "It was overdue. That doesn't make it a bear market."
"China's move highlights the fragility of the global economy, and the Fed is always inclined toward a 'safety first' attitude -- so in the absence of any compelling reason to hike rates, this will be just one more reason not to," Donald Luskin, chief investment officer at TrendMacro, told USA TODAY. "China's move will have repercussions that may take time to play out, including an implicit strengthening of the dollar that would tend to lower inflation. The Fed will want to play wait-and-see. They've waited almost seven years. Why not a couple more meetings?"
Greek banks have for months been relying heavily on what is called "emergency liquidity assistance" from the European Central Bank for just more than 80 billion euros ($90 billion).
"It's a bit like printing euros for that one national bank," said Donald Luskin, chief investment officer at TrendMacro, who points out the loan comes at a higher interest rate since it's often backed by the flimsiest of notes. "But ELA doesn't come as an obligation or a risk of the Eurosystem."
"It's strange because normally the banks that take on the risk make the decisions, but in this case it's Greece with the risk, and the ECB making the decision," Luskin told CNBC.
"This is the ultimate pressure point the ECB has on Greece, it's the real thing," Luskin said. "If the ECB says no more ELA, then Greece goes back to the Stone Age."
I'm saying that, five years from now, if you adjust for today's dollars, we're going to be between $15 and $40. That's been our forecast all along and it still is.
However, it takes time for technology to play out. Right now there are frackers who can produce a barrel of oil for $23 and there are frackers who can produce a barrel of oil for $90. Somewhere in between there is a fracker who can produce a barrel of oil for $50. Right now he's the one for whom there is just enough demand. So that's why the price is where it is.
OPEC is no longer the swing producer. It's the American fracker who is the swing producer. American frackers have, at today's level of demand, a cost function that is between about $25 and $80. So, unless there is a demand collapse and I can show you all kinds of statistics that show that demand is actually growing, which is what you would expect when prices come down we're moving up through the cost structure.
"The Chicago floors were unique social environments that I treasured," said Donald Luskin, who traded on the Chicago Board of Exchange in the early-1980s and would go on to become a respected and veteran investment officer with Wells Fargo and BlackRock. "They were ladders of opportunity through which completely noncredentialed new entrants could get up close and personal with high finance."
Like Luskin, many current and former members lamented the gritty environment of the floor that built not only careers, but life skills.
"Everyone there is trying to take advantage of everyone else. It is dog eat dog. ... Yet the acts of kindness and friendship and generosity that emerge from the combat create a kind of camaraderie I've never experienced anywhere else," said Luskin, who is chief investment officer at his own firm, Trend Macrolytics.
The ECB's move is "not as big a deal as it seems," TrendMacro CIO Donald Luskin wrote in a note, especially in light of Wednesday morning's announcement that the ECB had authorized Greece's central bank to use "Emergency Liquidity Assistance" for Greek banks as needed.
"If you put both of today's policy moves together, what it means is that the Greek government -- not the Eurosystem -- will be on the hook for the collateral. But there will still be a funding mechanism for the banks, in case there is a serious run on them. That's the important thing," Luskin wrote.
Don Luskin, chief investment officer at TrendMacro, says the bad market action tied to sinking oil prices will eventually play out and exhaust itself.
"The instabilities are upon us -- in spades; the big losers are identifying themselves," says Luskin. "It seems that's all markets are focusing on now. But the instabilities are short-term, and we think we'll get through them without a lot of damage. On the other side beyond the instabilities is an enormous stimulus to global growth in the form of liberation from a decade of the highest oil prices in history. In the US, just the drop in gasoline prices represents a tax cut almost equivalent to abolishing the payroll tax. Be patient, be alert -- in this instability will emerge great opportunity."
The geographic shift of the Ebola crisis to U.S. soil in recent days has also put investors on edge, as concern about the spread of the virus and its potential impact on economic growth mounts but with no clear answers evident.
"This is the authentic black swan, the one nobody expected," says Don Luskin, chief Investment officer at TrendMacro. "Markets are experiencing the shock of recognition with Ebola."
"People waited in line to buy Alibaba because they think CEO Jack Ma is the smartest man in the world," says Donald Luskin, chief investment officer at TrendMacro. "Hey, everybody -- the guy you think is the smartest man in the world thinks it's a good time to sell stocks. And you want to buy? Really?"
Still, Luskin doesn't think the Alibaba-all-the-time storyline caused a market top. Instead, he says the booming-BABA narrative "signaled that a correction was long overdue." ...Luskin, for one, doesn't think Alibaba marks a major top, the one that leads to a full-fledged bear-market drop of 20% or more.
Big round numbers like 1900 are often tough to barrel through easily..
Don Luskin, chief investment officer at TrendMacro, says the recent market weakness is history.
"Round numbers are meaningless, but it's meaningful to make all-time highs," says Luskin. "The winter correction is over. Spring has sprung. It's going to be a very good year. The sector rotation out of growth stocks that had everyone scared in April is over, and in fact has reversed itself. "
Fallout from the sanctions -- and from Russia's destabilization of Ukraine -- could be far-reaching. The worst-case economic scenarios are fairly awful, says Donald Luskin, chief investment officer for Trend Macrolytics.
"We think the feasible worst-case is a war of strong trade sanctions, depriving Russia and Europe of mutual trade," he says. "That would hit both sides hard -- Russia, because if derives 12.3% of GDP from exports to Europe, and Europe because it sources a significant share of its natural gas from Russia."
"To have only a 6% correction is a great sign of strength," says Donald Luskin, chief investment officer at TrendMacro. "It is telling us that U.S. stocks might have been tired but didn't want to go down. They just took a little nap."
..."The economy is not sprinting, but it's finally back on its feet," Luskin says.
Now that Bernanke has tapered twice in succession and in equal $10 billion increments, it could reduce Yellen's flexibility if circumstances change, warns Donald Luskin of Trend Macrolytics.
"Bernanke has handed Yellen a fait accompli, an established policy trend that will be difficult for her to contradict," he told clients.
Lorcan Roche Kelly, chief Europe strategist at TrendMacro, a US fund advisory firm, said the euro-area GDP numbers were at odds with ECB lending data, which showed continuing reductions in credit to small and medium- sized companies.
Without increasing credit to this critical sector, any return to vigorous growth was nearly impossible.
Now we come to what happened at last week's ECB announcement and presser. Most of the subsequent commentary focused on the main refinancing rate cut, the hint of a negative deposit rate, and the commitment to spur lending to small- and medium-sized companies.
But our pal Lorcan Roche Kelly of TrendMacro emphasised something different in his latest note:
- Most critically, in his speech at the press conference, ECB President Mario Draghi also gave the longest forward commitment yet to the continuation of weekly fixed-rate full-allotment refinancing operations by the ECB: they will now continue until July 2014. As forward guidance goes, this is a pale shadow of the Fed's policies, but it is a major step for the ECB.
- This move is not exactly another long-term refinancing operation (LTRO). Rather, it is a long-term commitment by the ECB to provide limitless liquidity every week, on a short-term basis.
- It is roughly analogous to a 15-month LTRO that banks can access on a weekly basis.
- It renders meaningless much of the free option given by the 3-year LTROs. The two 3-year LTRO operations only extend for five and seven months, respectively, beyond the new commitment from the ECB.
- This may well lead to increased early repayments of the current outstanding 3-year LTROs. For banks the upside to remaining in the operations has been largely removed today.As the terms are fixed until July 2014 at the earliest, banks can now be assured of funding when they need it in the short to medium term, without being forced to access it immediately -- as happened in the 3-year LTROs.
Draghi's recent comments are being mainly interpreted as a double-down on austerity. That's not wrong and it remains unfortunate, but there are several complicating factors that are nonetheless worth remembering.
One is simply that Draghi probably needs to keep reiterating the importance of budget constraints for internal political reasons (giving himself cover at the Bundesbank).
Another is that Draghi has long been more concerned with structural changes in labour markets and economies than in broad-based austerity for its own sake, as Lorcan notes. Draghi is generally against tax hikes, for instance, and would prefer spending cuts. Of course, this particular nuance isn't exactly comforting given the brutal choices faced by the countries on the periphery.
In a note put out yesterday, Lorcan Roche Kelly of Trend Macrolytics has a slightly contrarian take on what the ECB should do tomorrow. First of all, he does think there will be a rate cut, whereas previously he was skeptical.
BUT, he argues that a rate cut isn't the right tool for the job, and won't accomplish anything because of how broken everything is. Instead, the ECB needs to open up new channels to extend credit to Small and Medium Sized Enterprises, especially in the periphery where traditional monetary policy channels are impaired.
For a broad example of what the ECB could do that would actually be effective, he writes:
It may be that these moves are enough to prompt action from the ECB -- such as increasing collateral eligibility of SME credits, or so-called "structural operations" through the national central banks. If they were, then that would certainly be much more positive for the euro area than a rate cut.
As usual with the ECB, this Thursday the rate announcement is made 45 minutes before the press conference starts. An announcement of a rate cut is a likely signal that the ECB is going to do nothing more. Conversely, no rate cut announcement should not necessarily be viewed as a time to sell. The data -- especially the inflation data -- demands a reaction from the ECB. If it -- correctly -- chooses not to use the interest rate tool, then anything else it chooses will have more of the "big bang" properties that can give the ongoing rally new legs. On the other hand, if the ECB does nothing at all, we will have the seen the top in the peripheral debt rally, at least until the ECB finally responds.
Analyst Lorcan Roche Kelly, of Trend Macrolytics, said Mr Dijsselbloem's comments risked discouraging investment in Europe.
''Any reason anyone should leave more than EUR 100,000 in a euro area bank after [his] comments? Any at all?'' he tweeted.
The European Central Bank Thursday...announced that if Cyprus didn't finally iron out a deal with international creditors by Monday, then the ECB would cut off emergency funding to the country's banks.
"This is a hard deadline of Monday evening on the continued existence of the Cypriot banking system as we know it," said Lorcan Roche Kelly, chief Europe strategist at research firm Trend Macro in Ireland. "While it was never likely that it would survive intact, the ECB has this morning forced the issue."
This is all being played out against the threat of ELA being cut from Monday. ...It's worth noting that quite a few of the people we talked to this morning didn't see it that way and expected an eventual fudge. But others we respect, such as Lorcan Roche Kelly at Trend Macro, see this as a very hard line -- why else would the ECB have mentioned Monday, 25 March 2013 in their release.
TREND MACRO, Lorcan Roche Kelly: "Reports on depositors being in the firing line have been circulating for weeks, and so it is not a surprise that the bail-in has been announced. However, the risks -- beyond upsetting Cypriot depositors -- are unknown. The rather bold assumption on the part of the Europeans is that this will have little effect. They may well be right. There have been rumors of a depositor bail-in for weeks and there have been no signs of flight. The ECB has promised to back-stop any disruption -- that is a promise that we can rely on. However, the risk is that depositors outside Cyprus will take fright and start to leave their banks. The euro has no single treasury backing it. Therefore, more than any other currency it has to rely on trust to maintain its value. With this deal, the euro area is testing the trust of both the markets and ordinary depositors. It seems likely that it will pass the test, but the judgement is out of its hands. Bank deposit flight can be [handled]. Trust in the currency cannot so easily be restored."
The government hopes that the 10-year issue and another long-term offering later this year will make it eligible for help from the ECB's still-untested program of bond purchases, known as Outright Monetary Transactions, which would in turn help push its borrowing costs lower. "If there is some clarification forthcoming from the ECB as to whether Ireland has reached the bar required to qualify for OMT, then Ireland should be home and hosed on exiting the bailout program this year," said Lorcan Roche Kelly, chief European strategist at research firm TrendMacro.
There's a debate in Ireland happening tonight designed to help reduce the massive debt burden the country is still facing since the collapse of the country's banks in the financial crisis... Lorcan Roche Kelly of Trend Macrolytics has emailed us a fantastic explainer of what's going on in Ireland. This is the clearest explanation we've seen yet, and we're very grateful for Lorcan's clarity on this. Be sure to follow him on Twitter @lorcanrk.
In the wake of the collapse of the Irish property market, two of the worst Irish banks -- Anglo Irish Bank and Irish Nationwide Building Society -- were nationalized and turned into a new institution called Irish Bank Resolution Corporation (IBRC) with the intention of working the institution down over a number of years.
The new institution had funding needs of over EUR 30 billion that were met by the government -- as owner of the institution -- writing a debt instrument called a Promissory Note. This note was repoed through the Irish Central Bank through a mechanism called Extraordinary Liquidity Assistance (ELA). Under ECB rules, ELA is outside normal ECB lending and is done at a national central bank level with ECB oversight.
The terms of the Promissory notes require payment at the end of each March of EUR 3.1 billion from current spending.
The current government -- elected in 2011 -- promised to reform the Promissory notes to end the arrangement requiring EUR 3.1 bn annual payments.
In the approach to to next payment -- due in 8 weeks the government has promised not to make the payment.
Two weeks ago a government proposal to exchange the prom notes with longer term debt on the Irish Central Bank balance sheet was rejected by the ECB.
Today's developments are the government trying to skin the cat another way. First, they are ending IBRC. After the passage of the legislation currently in front of the Dáil, it will no longer exist.
The IBRC assets will be moved to NAMA (Ireland's bad bank). The prom note will be replaced at the Irish Central Bank with NAMA issued bonds that are covered by a government guarantee.
The NAMA bonds will be structured like normal bonds -- only requiring annual interest payments until the end of their term -- and so will lead to reduced current expenditure in the short term.
However, this deal still has to be given the ok from the ECB who have oversight of the Irish Central Bank. They may make their decision tomorrow, if so it will be announced by Mario Draghi at the ECB press conference at 1:30 GMT.
The government and Honohan need to find a way to restructure the notes in a way that leaves the net impact on the money supply at zero. Otherwise Ireland's central bank could be accused of printing money, a policy opposed by the ECB.
A central bank commitment to hold Irish government bonds for 15 years "in this case would be for fiscal policy reasons, which makes it monetary financing, which is a no-no," said Lorcan Roche Kelly, chief Europe strategist at Trend Macrolytics LLC.
We chatted with analyst Lorcan Roche Kelly of Trend Macrolytics to get his take.
Well the big picture is that the ECB is the only central bank that's acting relatively "tight" right now. The Fed will be on hold for awhile. Japan is doing new easing. The Bank of England is likely to do more under Mark Carney. You get the picture.
...The LTRO paydown will cause the ECB balance sheet to shrink (!) next week. A shrinking balance sheet is rare in this day and age, but as Roche Kelly notes this shouldn't really be characterized as a tightening, since the ECB's policy stance remains the same. If banks need money, it's no more expensive than it was before, so there shouldn't be any real-world economic constraint by this balance sheet shrinkage.