PrefBlog

Timing the bond market is a mug’s game:

Analysts who spent the past year chasing the rally in Treasuries now risk getting caught flat-footed by a retreat.

For the first time in 2016, the yield on 10-year U.S. notes climbed above the weighted average of year-end estimates compiled by Bloomberg, after better-than-forecast labor data spurred traders to boost bets that the Federal Reserve will raise interest rates in 2016. The benchmark rate has jumped about 25 basis points since reaching a record-low 1.318 per cent on July 6, while the Bloomberg weighted average forecast, which places a greater emphasis on most recent projections, has fallen 20 basis points over the same period to 1.57 per cent.

The push and pull of global and domestic forces have caused both analysts and the Fed to recalibrate expectations in 2016. About $8.8-trillion (U.S.) of sovereign debt worldwide yields less than zero, which helps stem Treasuries selloffs by luring global investors. Yet within the U.S., a Bloomberg gauge of economic data surprises is at the highest level since December 2014, setting the stage for a possible Fed rate hike later this year.
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A JPMorgan Chase & Co. survey showed the highest level of neutral Treasuries positions since July 11 among all clients. That’s likely in part because many analysts remain convinced the rise in U.S. yields will be short lived despite an improving economy and hawkish comments from some Fed policy makers.

For interest-rate forecasters who chased the rally, all they can do is wait and see how the market reacts to the latest data, and what that might mean for the Fed’s moves in 2016. The problem they’ve found is it’s growing harder to find the link between the U.S. economy and the central bank’s actions.

“There’s no doubt: the Fed has been shifting the goalposts for at least two years, maybe more,” said Harm Bandholz, chief U.S. economist in New York at UniCredit. “That’s something that was not factored in for interest rates.”

We can always count on the Wall Street banks to scapegoat the closest warm body:

[Alberto] Statti, a trader with a taste for red wine and three-piece suits, had come from obscurity offering to buy hundreds of millions of dollars of bonds from Nomura. Yet his brokerage, Invexstar Capital Management Ltd., failed to come up with the cash for trades in May 2015, and the bank was now staring at its biggest-ever individual trading loss. Lombardo couldn’t get him on the phone.

“Resolve this thing today,” Lombardo said when he eventually contacted Statti by chat, according to a transcript included in the judgment of a lawsuit over the former’s firing. “Otherwise, we’ll both end up in the meat grinder.”

Statti never produced the cash, triggering a fallout that has been costly for Nomura. The Tokyo-based lender, whose London trading operations were already under pressure, lost more than $40 million on its dealings with Invexstar. The firm then blundered when it fired Lombardo after what a judge described Aug. 3 as a disciplinary process littered with “defects.”
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Nomura fired Lombardo for failing to tell his bosses about Invexstar’s souring trades soon enough. Judge DA Pearl agreed that the salesman had been “negligent” and slashed the amount of compensation he can receive from the suit.

Yet Lombardo’s supervisor, a managing director named Francesco Di Giura who was aware of the Invexstar trades, according to the judgment, received only a warning. This, along with a series of missteps in a process run by Mike Ward, the head of equity sales for Europe, the Middle East and Africa, and Morven Jones, head of debt capital markets for the same region, amounted to an unfair dismissal, the judgment shows.

The bank didn’t disclose key evidence to Lombardo during the internal probe, and its investigators didn’t compile a written report on the Invexstar losses, leading to confusion among Nomura executives running the process, according to the judgment. Jones, who oversaw Lombardo’s internal appeal, received “erroneous” information from Ward, who had approved the firing, all of which helped turn the process into “an overall muddle,” the judge wrote.

The whole process is amusing because:

Statti had accumulated failed trades worth $666 million when Lombardo contacted him under pressure from his Nomura bosses.
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Nomura shouldn’t have taken Invexstar on as a client, a process known as “on-boarding,” Lombardo said. The company was given electronic trading access, extended trading and credit limits when it it had almost no assets, while Statti wasn’t registered with the Financial Conduct Authority, he said.

Statti had run two trading firms before setting up Invexstar, Bloomberg reported in January. One, BLF Global Asset Management Ltd., collapsed in 2013 owing about 12 million pounds to creditors including JPMorgan Chase & Co. and Citigroup Inc. while the other, Bi-Elle Fund & Asset Management U.K. Ltd., ceased operations in 2008 with losses of 54 million pounds, U.K. Companies House filings show.

“I wasn’t made aware of Alberto Statti’s prior history by anyone,” Lombardo said in his statement, referring to Statti’s time at BLF. As a result, he “was handed a client to manage that I was led to believe was sound and had passed all required on-boarding checks,” he said.

So I don’t get it. Invexstar was able to put on trades with a gross value of $666-million despite having no assets and being run by a serial defaulter? And it’s the salesman who gets nailed for this? And the Chief Operating Officer and the Chief Risk Officer have both kept their jobs? I don’t get it.

We haven’t had any drone news for a while, but here’s a story about medical services in Madagascar:

A startup named Vayu late last week said its unmanned aerial vehicle had made the first long-range, fully independent flights carrying delicate blood and stool samples from remote villages to a lab. The basic technology isn’t new, but Vayu’s airborne experiment, over the mountainous terrain of Madagascar, could kick off a game-changing system of transport. UAVs could carry vaccines, medicines, and samples sensitive to temperature and pressure—to diagnose tapeworm, for example—for some of the one billion people who lack access to good roads.
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Vayu, founded in 2014 and based in Michigan, works in Madagascar together with the Stony Brook University Global Health Institute and with the support of local governments and the United States Agency for International Development (USAID). It is working on a drone that can fly for 100 kilometers (62 miles) and plans to use the technology in Papua New Guinea, Malawi, the Philippines, and Nepal.

The video is great!

Speaking of drones, they’re going to be put to work in BC on wildfire spotting:

Drones are about to be added to the fire fighting arsenal of the B.C. Wildfire Service.

Spokeswoman Erin Catherall says the service has conducted two seasons of trials and is ready to put the remotely controlled aircraft to work.

She says drones have already been an important part of the battle against recent wildfires in northeastern British Columbia because they are cheaper and safer than piloted aircraft.

They can also be used at night, when most helicopters and planes are grounded.

Catherall says that allows firefighters to identify hot spots for immediate action as soon as the sun rises.

… and those with an interest in IT are presented with a new opportunity:

The commercial drone industry is exploding, allowing businesses and operators to rapidly and cost-effectively capture data that wasn’t readily available to them before. While this is opening up new opportunities for companies, it also comes with new complications.
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There are cloud-based drone software providers like EagleView and DroneDeploy that make it easy for businesses to collect, process and analyze data by taking the information, storing it in the cloud, and sending back the results.

But [Josh] Bernstein [vice president of the emerging technologies division at EMC] believes businesses should build their own services and datacenters in house to get a competitive advantage in the market. “For example, if you and I are competing for crop surveillance and we are both using DroneDeploy or some other service, we are going to get the same results. On the other hand, if one of us brings that capability in house, we can arguably have a competitive edge and return more value to our customers over time,” he said. In order to bring this capability in house, businesses will have to find experienced IT people who know how to bring that knowledge into a new emerging market.

Assiduous Readers will remember that I have a long-standing concern about means-tested benefits and their cumulative effective marginal tax rate, which can be so high as to destroy any incentive for the recipient to earn any extra money at all. Bloomberg points out that there are also asset tests:

Susanne Brasset has $5 in her bank account. She’s scared to save more.

Brasset, a 39-year-old freelance photographer in Denver, has cerebral palsy, which limits her ability to work. To pay her bills, she relies on Social Security, which she gets because of her disability.

But the program monitors her bank accounts to make sure she’s not putting away too much money. With more than a few thousand in the bank, she’d be disqualified for the program, as well as for Medicaid and other crucial benefits. Unable to plan for the future, Brasset said her finances put her in a “constant state of anxiety and fear.”

“There’s more money I could be making,” she said. “But I’m discouraged by all the rules I need to adhere to.”

Brasset is caught in a bind familiar to many people with disabilities. Their well-being relies on government benefit programs, but these programs impose strict limits on how much recipients can earn and save. Rules intended to bar freeloaders end up keeping disabled people in a permanent state of poverty, unable to put money away for emergencies, retirement, and other life goals.

One of the basic precepts of foreign exchange markets is the concept of hedging. If you buy a ten-year forward contract on another currency, the rate will be determined by the spot rate as modified by the difference in the ten-year yields of government bonds in the two currencies. That’s the theory, anyway; in practice, the difference between the theoretical rate and the actual rate is the basis:

That quirk means the longstanding notion of the U.S. as a respite from negative yields in Japan and Europe is little more than an illusion. And with everyone from Jeffrey Gundlach to Bill Gross warning of a bubble in bonds, it could ultimately upend the record foreign demand for Treasuries, which has underpinned their seemingly unstoppable gains in recent years.

“People like a simple narrative,” said Jeffrey Rosenberg, the chief investment strategist for fixed income at BlackRock Inc., which oversees $4.6 trillion globally. “But there isn’t a free lunch. You can’t simply talk about yield differentials without talking about currency differentials.”
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In a strange twist, the fact that yields on 10-year Treasuries are still way higher than those in Japan or Germany is part of the reason foreigners are having such a hard time actually profiting from the difference. Negative interest rates outside the U.S. have caused a surge in demand for dollars and dollar assets, pushing up the cost to get into and out of the greenback at the same exchange rate to levels rarely seen in the past.

Ten-year yields in the U.S. are currently 0.23 percentage point below a basket of bonds from Australia, France, Germany, Italy, Japan, Spain and Switzerland on a hedged basis, versus 1.4 percentage points above on an unhedged basis, according to data compiled by BlackRock. At the start of the year, hedged Treasuries yielded over a half-percentage point more.

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Georgi Kantchev, Christopher Whittall and Miho Inada write a good piece in the WSJ titled Are Negative Rates Backfiring? Here’s Some Early Evidence:

Recent economic data show consumers are saving more in Germany and Japan, and in Denmark, Switzerland and Sweden, three non-eurozone countries with negative rates, savings are at their highest since 1995, the year the Organization for Economic Cooperation and Development started collecting data on those countries. Companies in Europe, the Middle East, Africa and Japan also are holding on to more cash.

Economists point to a variety of other possible factors confounding central-bank policy: Low inflation has left consumers with more money to sock away; aging populations are naturally more inclined to save; central banks themselves may have failed to properly explain their actions.

But there is a growing suspicion that part of problem may be negative rates themselves. Some economists and bankers contend that negative rates communicate fear over the growth outlook and the central bank’s ability to manage it.

“People only borrow and spend more when they are confident about the future,” says Andrew Sheets, chief cross-asset strategist at Morgan Stanley. “But by going negative, into uncharted territory, the policy actually undermines confidence.”

When BC imposed its 15% tax on foreign real estate buyers, I think they did it with the deliberate intention of creating uncertainty – otherwise, they would have allowed deals struck in good faith prior to the deadline to close under the old rules. Now the chickens are looking for a place to roost:

At least 427 deals are likely to collapse due to the new measure, according to Dan Morrison, president of the Real Estate Board of Greater Vancouver, citing responses from 27 brokers to an e-mail inquiry. The group didn’t calculate the value of those sales, though they would be worth about C$404-million ($307-million) based on the average purchase by a foreign buyer of C$946,945.

That may just be the tip of the iceberg.

“It’s a domino effect,” said Elton Ash, Western Canada regional executive vice president for Re/Max Holdings Inc. Not only will foreign buyers be hit but also Canadians who had contracts to sell and had already put offers on their next house, he said. Morrison said the effects could take years to play out given some deals involve the sales of condos still being built.
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The new tax violates several treaties and agreements that Canada holds with at least 28 other countries, including the U.S. under the North American Free Trade Agreement, according to Barry Appleton, managing partner of law firm Appleton & Associates, who specializes in international law and has launched claims in Canada under NAFTA.

Jobs, jobs, jobs!

Payrolls climbed by 255,000 last month, exceeding all forecasts in a Bloomberg survey of 89 economists, following a 292,000 gain in June that was a bit larger than previously estimated, a Labor Department report showed Friday. The jobless rate held at 4.9 percent as many of the people streaming into the labor force found jobs.
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The labor force participation rate, which indicates the share of working-age people who are employed or looking for work, increased to 62.8 percent from 62.7 percent.

Wage growth offered more promising signs of acceleration, with average hourly earnings rising a more-than-forecast 0.3 percent from a month earlier, the most since April, to $25.69. The year-over-year increase was 2.6 percent in July, the same as in June.

The average work week for all workers also increased by 6 minutes to 34.5 hours in July from 34.4.

Meanwhile, in the frozen North:

Canada’s economy lost 31,000 jobs in July, due to a big drop in public administration positions as well as declines in Ontario and among younger workers.

Full-time work plunged by 71,000 spots and part time employment rose by 40,000.

The jobless rate rose to 6.9 per cent from 6.8 per cent in June, Statistics Canada said in its monthly labour report released on Friday.

Meanwhile, there are those who are frightened that foreigners might want to buy what we’re selling:

Realtors say it’s still too early to tell how much the B.C. government’s recent 15-per-cent tax on Vancouver-area residential properties purchased by people who aren’t permanent residents will fuel demand for Toronto housing. There are concerns the tax will lead foreign buyers to purchase homes in the GTA market instead.
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The province’s tax adds another layer of angst to the Toronto market, already in the midst of double-digit price gains, fierce bidding wars and what the local real estate board called the “troubling trend” of a shrinking supply of resale homes on the market.

Unease has been growing over skyrocketing real estate prices in both markets. The Bank of Canada recently issued warnings about unsustainable growth, while the federal government has struck a working group to issue recommendations on how to make Vancouver and Toronto’s housing more affordable.

On July 26 I passed on some support for the thesis that it wasn’t trade that was destroying jobs, it was tech. And now George Anders of Forbes argues that tech isn’t all that bad:

2.Tech’s positive impact on employment is much more striking if we also look at a wide range of white-collar professions where software advances improve individual workers’ productivity to the point that demand for their services soars.

3.A case in point: market research. Turn the clock back to 2010, when cheap, efficient services such as Qualtrics and SurveyMonkey weren’t yet ubiquitous. The U.S. got by with just 262,000 market research analysts and marketing specialists then. Splash in new technology that puts online polling and digital marketing within reach of everyone, and — voila! Employment in this category leaps 93%, to more than 506,000.

4.Another example of software’s ability to generate jobs: event planners. If you need to stuff envelopes and make dozens of phone calls, full-scale event planning is a luxury that only rich people (and Jennifer Lopez’s clients) can afford. Digitize everything, and opportunities increase faster than you can say: “Come to our Thursday night meetup.” Employment in this category has climbed 54%, to 87,400, with the creation of 31,000 net new jobs.

Meanwhile, it appears that vegan food startup Hampton Creek Inc. has been naughty:

In late 2014, fledgling entrepreneur Josh Tetrick persuaded investors to plow $90 million into his vegan food startup Hampton Creek Inc. Tetrick had impressed leading Silicon Valley venture capital firms by getting his eggless Just Mayo product into Walmart, Kroger, Safeway, and other top U.S. supermarkets within about three years of starting his company.

What Tetrick and his team neglected to mention is that the startup undertook a large-scale operation to buy back its own mayo, which made the product appear more popular than it really was. At least eight months before the funding round closed, Hampton Creek executives quietly launched a campaign to purchase mass quantities of Just Mayo from stores, according to five former workers and more than 250 receipts, expense reports, cash advances and e-mails reviewed by Bloomberg. In addition to buying up hundreds of jars of the product across the U.S., contractors were told to call store managers pretending they were customers and ask about Just Mayo.
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“We need you in Safeway buying Just Mayo and our new flavored mayos,” Caroline Love, Hampton Creek’s then director of corporate partnership, wrote in an April 2014 e-mail to contract workers known as Creekers. “And we’re going to pay you for this exciting new project! Below is the list of stores that have been assigned to you.” Love’s memo also referenced a key competitor: “The most important next step with Safeway is huge sales out of the gate. This will ensure we stay on the shelf to put an end to Hellmann’s factory-farmed egg mayo, and spread the word to customers that Just Mayo is their new preferred brand. :)”

So the key takeaways, as they’re called in these degenerate days, are:

• Never trust a vegetarian
• Especially, never trust anybody who sells “mayo” without eggs in it.

Because that’s what they tried to do:

Hampton Creek Foods Inc., the healthy-food startup backed by investors including Bill Gates, can’t refer to its vegan-friendly sandwich spread as mayonnaise because it doesn’t have eggs in it, U.S. regulators said.

The company’s Just Mayo and Just Mayo Sriracha also contain ingredients that “are not permitted by the standard of identity for mayonnaise, such as modified food starch,” the Food and Drug Administration said in a warning letter to Hampton Creek, whose investors also include Silicon Valley luminaries Peter Thiel and Vinod Khosla. The letter was dated Aug. 12 and was posted online Tuesday.

“The use of the term ‘mayo’ in the product names and the image of an egg may be misleading to consumers because it may lead them to believe that the products are the standardized food, mayonnaise,” the FDA said.

It looks like Carney has new instructions:

In what one bank dubbed a “sledgehammer stimulus,” the BoE cut interest rates 25 basis points to 0.25 per cent and said it would buy 60 billion pounds ($79-billion) of government bonds with newly created money over the next six months.

It also launched two schemes, one to buy 10 billion pounds of high-grade corporate debt and another – potentially worth up to 100 billion pounds – to ensure banks keep lending even after the rate cut.
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Finance minister Philip Hammond welcomed the rate cut and said he and Carney had “the tools we need to support the economy as we begin this new chapter and address the challenges ahead.”

Bloomberg published some vignettes of those affected by the Vancouver property bubble:

One of those benefiting is a luxury car dealership run by Caleb Kwok, 37, general sales manager at Vancouver’s MCL Motor Cars. It’s selling Bentleys, Jaguars, Aston Martins and Range Rovers so fast that it has had to extend its hours and boosted staff by nearly a third.

“For not being a real big-time city, there sure are a lot of luxury cars in Vancouver,” Kwok says as he walks around the downtown showroom where a special edition, C$250,000 Range Rover SVAutobiography with two-tone paint, reclining rear seats, and tray tables for drinks is about to be driven off by a customer.
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She listed it in April for C$1.288 million, appealing to local Chinese buyers with the lucky number eight. Within 24 hours, four bids came in. They sold within just a few days to a young family for C$1.5 million, no conditions.

“It was surreal,” the retired Air Canada flight attendant said from a boat near her new home in Qualicum Beach, a town of 10,000 people on Vancouver Island a 1-1/2 hour-ferry ride from the city. “It happened so fast. You can’t believe how many people have done the same—moved to Qualicum and the islands. People are flooding in from the mainland with cash in their pocket.”

She bought her new house for less than half of what she got for her old one, part of the flow of “halfers” from Vancouver, as brokers call them. The new property is double the size at 4,000 square feet and has five bedrooms, a view of the water, and half an acre of garden.

And the Canadian economy is getting more dependent upon a distorted housing market:

Canada is in the midst of one of its weakest expansions ever, and only the housing boom keeps it from getting worse.

That’s one of the key takeaways from Friday’s GDP report. Two years since oil prices started plunging, Canada’s economy is almost completely reliant for growth on bank lending and the hot Vancouver and Toronto housing markets.

Real estate and financial services now account for 20 percent of the economy, levels not seen in the data since the early 1960s. That could be a problem, with household debt at a record and policy makers scrambling to slow price gains that are making homes unaffordable for all but the wealthiest buyers.

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Well … I won’t say it makes a crash inevitable, but I’ll say that’s a red flag!

West coast readers will be pleased to learn that I have solved the problem of Vancouver housing affordability:

Calgary’s housing market is bracing for more pain as persistently weak oil prices, mounting layoffs and slowing population growth continue to keep buyers on the sidelines.

Home resales in the city fell 12.6 per cent in July from the same time last year, the Calgary Real Estate Board reported. It was the 20th consecutive month of annualized sales declines as purchases of detached homes dropped to their lowest level since 1996.

“We’ve certainly got a softer market than we did a year ago,” said Diane Scott, a broker with Royal LePage.

Benchmark resale prices dropped 4.2 per cent from last July and were down more than 5 per cent from their peak in October, 2014. Detached home prices fell 3.4 per cent from last year to $502,300.

Among condos, a surge of new listings has left the market with more than six months’ worth of supply, pushing the benchmark price down 6.6 per cent from a year earlier to $277,000. Condo sales were down 21 per cent from a year earlier and were 53 per cent below peak levels in 2014.

You’re welcome. It has been hypothesized that real-estate is a source of strength for the dollar:

Toss in the rest of the country, which certainly attracts some foreign buying despite having generally much less exciting conditions than the Vancouver and Toronto markets, and “maybe total flows into Canadian real estate is $2-billion [a month], and maybe even slightly higher,” [Nomura Securities foreign-exchange strategist] Mr. [Charles] St-Arnaud said via e-mail.

To put it in perspective, net inflows of foreign investment in Canadian securities (stocks, bonds and the like), which certainly have a significant effect on the currency, have averaged about $15-billion a month this year. Inflows from the export of energy products – always a big deal for currency traders, who grossly oversimplify the Canadian dollar as a petro-currency and thus reflexively link its value closely with the price of oil – have been about $5-billion a month. The foreign inflows in the housing market might not be big enough to be driving the currency’s gains this year (up 12 per cent against the U.S. dollar since mid-January), but in a year when Canada’s overall exports have generally struggled (down 3.4 per cent year over year), they are big enough to be providing meaningful support.