Notes From Underground: A Guide For The Perplexed? (Maimonides)

Friday’s unemployment data showed the addition of 138,000 jobs, weaker than the ADP report. Even though the RATE dropped to 4.3% the all-important average hourly earnings rose by a tepid 0.2% and April’s data was lowered by a tenth of a percentage point. Many readers e-mailed me as to why the S&Ps and NASDAQ continued to rally in the face of weak economic news from the U.S. The BOND rally made sense as investors continued to cover short positions, but what is perplexing is the continued strength in the precious metals and the currencies despite a strong U.S. equity market.

The entire risk-on/risk-off paradigm is breaking down. Even the relationship of a Strong NIKKEI/weak YEN is decoupling. I posit this point as a possibility: The U.S. TRADE DATA was also released on Friday, which showed that the deficit continued growing, a source of angst for the Trump mantra of “Make America Great Again.” Nobody HAS DISCUSSED THE TRADE DEFICIT IN ANY MEANINGFUL TRADING SENSE FOR YEARS, but in an administration that’s trying to roll back Pax Americana, it may be time to begin weighing the U.S. trade numbers in entering currency positions.

There are two points I made back in January that support this view. The first was to pay attention to a quote from former Ford Motors CEO Mark Fields: “Currency manipulation is the mother of all trade barriers.” The other point I made highlighted the difficult Trump would face in dealing with Washington and Pax Americana’s entrenched bureaucracy. The TRUMP agenda is bogged down in partisan politics thus negating the immediacy of the enactment of health care and tax reform and yet the equity markets power on.

The continued central bank liquidity additions are very powerful, but I pose this query to my readers: Can ETFs rehypothecate their stock purchases? Meaning, can the purchased stock be lent out as collateral? If ETF assets cannot be rehypothecated then the power of ETFs is enhanced because short-sellers will have difficulty borrowing stocks, removing a powerful player form market participation. The same query applies to the Swiss National Bank. Can they lend their assets? If not, think about the powerful impact of all that stock disappearing into the vault of the SNB. This is a question that came to me in trying to guide the perplexed. There’s much to think about.

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14 Responses to “Notes From Underground: A Guide For The Perplexed? (Maimonides)”

  1. David Richards (@djwrichards) Says:

    If the supply of stocks becomes truly limited, then when the next meaningful stock correction arrives, there will be limited short-sellers available to buy the drop. A market that falls in the backdrop of no short covering and huge passive investing is potentially devastating and new territory (and don’t forget about some increasingly popular “WMD” index-tracking ETFs loaded with leverage & derivatives). In addition, the SNB has a history of taking terrible positions in the long run such as its big loss in the Euro and inopportune gold trade. So don’t be too surprised if the SNB loses big again on stocks. After all, the SNB are government employees, not traders or pros. Something else to perhaps think about.

  2. kevinwaspi Says:

    Interesting point, but I believe ETFs are allowed to loan securities.
    See https://www.ishares.com/us/literature/brochure/securities-lending-unlocking-portfolios-en-us.pdf

    • Yra Says:

      Professor–thanks as we think through this–now how about the central banks as ther is an article tonight discussing the huge REIT position they are accumulating–there is definitely a changing dynamic and I am striving to discover—in genuine intelligence and not artificial

      • David Richards (@djwrichards) Says:

        It disturbs me if Western central banks move to hoard real estate and equities instead of traditional reserves like US Treasuries, currency and gold. Are they perhaps planning or positioning in advance for a reset? As the primary directive of every entity is to survive & grow, they will position themselves accordingly. Are they expecting a US Treasury default (whether soft or hard)? Monetary/currency reform? Why not gold? Why did the SNB oppose the Swiss referendum to mandate it hold more gold as reserves? (at the time, gold was nearly $200 lower than now). In contrast, the PBOC Indian and Russian central banks are bulking up on gold. Apparently the lines are drawn with future influence at stake.

  3. kevinwaspi Says:

    ECB Does: https://www.ecb.europa.eu/mopo/implement/omt/lending/html/index.en.html
    No specific mention of SNB or BOJ, but Clearstream says, “To avoid the creation of a collateral shortage through this significant withdrawal of high-quality liquid assets (HQLA) from the market, the ECB actively encourages Eurozone national central banks to reinject the securities into the market via securities lending. ”
    http://www.clearstream.com/clearstream-en/products-and-services/global-securities-financing/global-liquidity-hub-icsd-services/securities-lending-and-borrowing/securities-lending-for-central-banks

    Finally, this piece about the BOJ increasing their lending of JGBs:
    http://asia.nikkei.com/Markets/Tokyo-Market/BOJ-s-government-bond-lending-surges-as-market-dries-up

    • yra harris Says:

      Professor—this refers to the LSAP of bonds both corporate and public sovereigns but the ECB has not been a buyer of equities as far as I am aware

  4. yra Says:

    From Yra—-be alert to news out of the Persian Gulf as Saudi Arabia and Egypt and others have cut ties to Qatar for aiding and abetting Iran’s support for anti-Sunni political moves–comes very soon after meeting with Trump so await some words from Secretary Tillerson and Secretary of Defense Mattis–oil has moved up on the news as have Mexican Peso and Canadian Dollar.While I always caution against buying Gold on the outbreak of war–it is a trade not an investment—the beginnings of political realignments can signal seachanges in the geo-political landscape—where will Turkey align and what about Russian efforts in Syria—lots in play

    • David Richards (@djwrichards) Says:

      Greetings from Singapore. Warning and apologies in advance for an expat’s pseudo-political comment, but if you want to shore up the Sunnis to balance Iran et al, maybe you should exhume Saddam and resurrect his Ba’ath regime and hope much of ISIS rejoins Ba’ath, rather than place more burden on the taxpayers and blood of American boys. So far in the 21st century, US geopolitical policymakers seem to have a bipartisan record of shooting themselves in the foot, not unlike the SNB at times. So this time, why not send just the sons & money of the policymakers who fumbled the football. Their mess to cleanup or leave be. I thought the US recently had an election in which those who wanted more nation-building & military confrontation were supposed to have voted for the other candidate who lost?

      • yra harris Says:

        David–good post and in the words of Colin Powell well before the invasion of Iraq—-like Pottery Barn,if you break it you own it—so many certainly own this.The entrenched bureacracy /deep state is far more powerful then most realize–I advise reading the great work by Graham Allison on bureaucratic politics and I also see that Allison has a new book out on China

  5. Arthur Says:

    Yra, what’s your opinion about “climate change” / Paris agreement? Thanks!

    • Yra Says:

      Arthur–I take a Pasqualian approach—if I leave the world a better place then I found it what can it hurt.But I believe the market is getting the environment in a better place and their are so very large monied groups doing the needed investment.Not like in the 1970s and 80s when it seemed that the large money was buying up some of the better technology and shelving it –the best thing for green technology was very high fossil fuel prices–market functions do work

  6. frenzyoptions Says:

    I have contacted SPDR and asked them the quetion.

    Here’s the reply:

    “SPY is structured as a UIT (Unit Investment Trust). UITs are not permitted to partake in securities lending.”

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