Monday , July 15 2019
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Jeffrey P. Snider

Jeffrey P. Snider

As Head of Global Investment Research for Alhambra Investment Partners, Jeff spearheads the investment research efforts while providing close contact to Alhambra’s client base. His company is a global investment adviser, hence potential Swiss clients should not hesitate to contact AIP

Articles by Jeffrey P. Snider

What Has Markets Spooked? Probably Something To Do With That Huge Offshore Dollar Hole

3 days ago

Like a shark smelling blood in the water, I don’t care that the blood is in the water from leaking out of what will be a dead horse, if it isn’t deceased already. I pretty much intend to beat on it one way or another. The issue isn’t just fed funds, it’s why anyone cares about that market at all in 2019.
The answer, as even FRBNY admits this week (the dead horse), is how the monetary world is much more complex than you’ve ever been told. It’s not just a matter for correcting textbooks.
In school, college or earlier, it’s all very simple. The Federal Reserve as a central bank being central will move money rates around at its whim. As Ben Bernanke said in 2002, it possesses this thing called the printing press.
Only, in practice it’s mostly just bank reserves which are the primary mechanism.

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The Lying Statistics Behind Globally Synchronized Growth, And What It Could Mean For The Globally Synchronized Downturn

3 days ago

Numbers really don’t tell us much all by themselves. Context always matters. That’s why 19th century British statesman Benjamin Disraeli claimed there are three kinds of lies; lies, damned lies, and statistics. Numbers employed in isolation are either misleading or useless. In the 20th century, Darrell Huff wrote in his classic How To Lie With Statistics:
Averages and relationships and trends and graphs are not always what they seem. There may be more in them than meets the eye, and there may be a good deal less.
That’s always what struck me most about “globally synchronized growth.” Even while it is was in full swing during 2017, it was at best a midget. The numbers all looked good until you put them into some context; any context. There was a good deal less to it than how it was ever

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Much More Than Rate Cuts On (Dis)Inflation

4 days ago

Things have changed, obviously. Chairman Powell and the rest of the FOMC, the majority anyway, have come around to rate cuts. Where they were hawkish in December, noncommittal as late as May, they’ve been spooked into them over the last month or so. As it stands, the first one is less than three weeks away.
It’s not so much the lack of inflation any longer. No one should ever forget the 2018 story, the inflation hysteria which raged throughout much of last year and ended in a pile of confused regrets. The unemployment rate told of an economy on the verge of boiling over, beyond overheating in a good way. The Fed had to get ahead of those pressures else a new danger would emerge, more like 1975 than 2015.
But if it was the lack of inflation which first flip flopped the FOMC from hawk to

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Dollar Destruction Potential: From China ‘Outflows’ To The FOMC Considering QE5

5 days ago

Tucked away in a quiet little corner of the BIS publication library, a study was published in the organization’s September 2015 Quarterly Review. One of the biggest mysteries of that time was Chinese “capital flight.” It was breathtaking, and it would only get worse. What was really going on?
Many if not most mainstream stories focused on capital restrictions. There were plenty of published anecdotes about how wealthy Chinese billionaires were, by hook or by crook, trying to get their money out of the country while they still could.
Here’s one such story published early in 2017:
Analysts said that despite tighter scrutiny, the outflows were likely to remain strong for years to come, with companies and individuals looking for better investment opportunities while safeguarding their money

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As Chinese Factory Deflation Sets In, A ‘Dovish’ Powell Leans on ‘Uncertainty’

5 days ago

It’s a clever bit of misdirection. In one of the last interviews he gave before passing away, Milton Friedman talked about the true strength of central banks. It wasn’t money and monetary policy, instead he admitted that what they’re really good at is PR. Maybe that’s why you really can’t tell the difference Greenspan to Bernanke to Yellen to Powell no matter what happens.
Testifying before Congress today, in prepared remarks the Federal Reserve Chairman threw cold water on what was supposed to be the second half rebound. It still might happen, according to the FOMC’s models, but it is more and more “uncertain.”
“…it appears that uncertainties around trade tensions and concerns about the strength of the global economy continues to weigh on the U.S. economic outlook.”
The word itself is

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A Trickle of Belgian Colored Deutsche Bank Speculation

6 days ago

In October 2011, the bank’s Chairman bristled at the characterization. His was not going to be a “bad bank” as many in the financial media had been saying. Pierre Mariani, chief executive of Belgium’s Dexia, preferred instead to call it the “residual bank.”
No matter the label, the firm was being bailed out for the second time by the Belgian government in combination with French authorities. Any assets which could be sold at a reasonable (meaning not terrible) price would be. There were already investors lined up for the pieces of Dexia’s balance sheet unencumbered by stupidity.
It’s always a complex story with these things; in this case a little less so at least from an overview. What someone might call “reach for yield” in later years, banks across Europe not just Dexia came out of 2008

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Embroiled by Fed Funds, FRBNY 143 Months After BNP Finally Says ‘Offshore’

6 days ago

It was a poignant moment that has gone totally unappreciated. Lost in the noise about subprime mortgages, on August 9, 2007, what actually happened that day represented perhaps the best example of how things worked. Or suddenly didn’t.
On the occasion of the 10th anniversary, I recounted the tale of BNP Paribas. You’ve heard of Lehman and Bear Stearns, countless stories about Countrywide and Wachovia. Maybe even something about money market funds. This one French bank’s contributions weren’t really all that remarkable; which is what made it so deadly.
Reuters filed a single report at 2:44am ET on August 9, 2007, detailing the relatively non-specific plans of BNP Paribas to halt NAV calculations for three of its funds. The world hasn’t been the same since.
If the world hasn’t been the same,

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The New Hysteria: Rate Cut Rationalizing

7 days ago

Even though it was everywhere, one of the primary things that struck me about the peak period for Reflation #3 was how ridiculous it got. If you have a strong argument, there’s no need for so much hyperbole. But it wasn’t just that, it had become openly ridiculous.
Interest rates had nowhere to go but up, “they” said. Fine, it was always possible. But inflation, we were repeatedly told, was the only outcome, the definite product of skillful monetary handling leading to a biblically tight labor market. And to prove it, there would be no data just the strongest possible wording?
There was scarcely a day that didn’t go by without some anecdotal story of the labor shortage. If it had been real, there wouldn’t have been any need for them. The data on its own would’ve more than sufficed. The

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Hard Times In The Eurodollar Straits

7 days ago

As of trading on Friday, federal funds for the third time is now back to above where all this began. For much of 2017 and Reflation #3, the effective federal funds rate (EFF) remained steady at 16 bps above the RRP “floor.” Apart from month-end dumpings, it was consistent and predictable; the best of times, or at least what passes for them in this day and age.
As of July 5, 2019, FRBNY puts EFF at 2.42%. To give the relevant context, in case you haven’t been following, that 17 bps spread today includes three “technical adjustments” to IOER. In other words, IOER, the so-called ceiling, is 15 bps lower than it was for EFF being higher than when this all started.
There’s a lot that is going wrong in those 17 bps (or the 15, however you want to look at it).

It isn’t the payroll reports which

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Lagarde and Germany, How It Keeps Getting Worse

7 days ago

Maybe this was inevitable. After all, it is how things work in a lot of other places. When all is lost, that last thing that happens is the lawyers come in and pick through the bones.
Christine Lagarde has been nominated to replace Mario Draghi as the next head of Europe’s central bank. She has a very long and distinguished career, currently as head of the IMF. Largarde, however, is no banker. Nor is she an Economist.
Having worked as a lawyer first and then a politician, it remains to be seen whether or not her lack of formal training in Economics ends up being a benefit. It was the Economists who led the world into this state, and then left the global economy in the clutches of its aftermath. Perhaps trying someone else outside of the discipline may get things back on track.
While that’s

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I’d Like To Solve The Puzzle: Nastier Number Four, The New Lows in Germany

10 days ago

The European slump had been a combination of several transitory factors. At least that’s what they had kept saying. ECB officials and staff Economists didn’t use that specific word, so far that’s the exclusive domain of the Federal Reserve. Regardless of semantics, the message was clear: the 2018 economy ended on a sour note but that was nothing to be worried about, soon to be forgotten.
In January 2019, various private Economists pitched in. One working for JP Morgan, Greg Fuzesi, estimated that the low level of water in the Rhine and other waterways was responsible for taking 0.7 percentage points away from 2018 German GDP.
The implication was clear – in theory. Dissipating also “temporary shocks in the auto and pharmaceutical industries” along with a little more rain and Germany would

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Post-Landmine Payrolls

10 days ago

It’s never about a single payroll report. Even still, there’s something significant in how the “good” ones aren’t measuring up the way they used to. According to the Bureau of Labor Statistics (BLS), the US economy gained 224k payrolls in the month of June 2019. Well above consensus, the headline is being described as relieving some of the growing economic anxiety.

Set aside 224k being anything like good in a wider historical context, it doesn’t even stack up for recent times. Last year, for example, from February to August the monthly payroll change beat 250k in four out of those seven months. This year, dating back to January’s “blowout” above 300k, that hasn’t happened even once during the latest five months.
That’s a meaningfully long time to go without something better. The last time

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Contracting Factories, Curiously Rebounding Inbound Cars, And the Confirmed End of Decoupling

12 days ago

The US manufacturing sector may not be in as bad a shape as its German or Japanese counterparts, though it appears to be catching up on the downside. The Census Bureau reports today that new orders for all types of goods in all industries fell 1.6% year-over-year (unadjusted) in May 2019.
This was the first minus sign for the broad category which includes both durable and non-durable goods manufacturing. Orders hadn’t fallen on annual basis since 2016.

It is further evidence that the supply chain is being forced to adjust to the inventory pile up from the end of last year. Despite the unemployment rate, the slowdown in consumer spending has persisted. With inventory levels running too high, retailers and wholesalers are starting to order less new product while they try to work through

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The 10s Back To A 1-handle Again; New Information That Isn’t New

13 days ago

The benchmark 10-year US Treasury yield closed below 2% for the first time since Donald Trump was elected President. Having flirted with that level several times over the past week, today the most-watched interest rate on the planet finally breached this one startling round number. And it comes during a week which by every conventional account should have been hugely positive.
Despite what has been called a trade truce between the US and China, the bond market has been unimpressed in every way imaginable. Not only is this 10-year yield back sporting a 1 handle, Germany’s federal 10-year bund is way ahead in the race to becoming Japan. It finds new record lows, record negative lows, seemingly a few times consistently every week.
At -35 bps in “yield”, the German market like the UST market

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How To Properly Address The Unusual Window Dressing

13 days ago

Unable to tackle effective monetary requirements, bank regulators around the world turned to “macroprudential” approaches in the wake of the Global Financial Crisis. It was mostly public relations, a way to assure the public that 2008 would never be repeated. A whole set of new rules was instituted which everyone was told would rein in the worst abuses.
Among the more prominent of these was Basel 3’s leverage ratio. Of the banks that failed or nearly failed more than ten years ago, they did so with what seemed to authorities hidden leverage. Their capital ratios, for the most part, were fine. Yet, the amount of leverage each institution had employed was beyond imprudent.
The reason for what may seem to be a contradiction was simple: regulatory arbitrage. Banks found a way to game the

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Toward Rate Cuts: What If The Landmine Was Real?

14 days ago

It was supposed to be the Chinese government who was going to rescue the global economy. Once the rationalizations ended and officials around the world realized there was serious economic weakness building at the end of 2018 instead of a globally synchronized inflationary recovery, the green shoots of 2019 were going to be in one big part a fiscal stimulus boost.
It didn’t happen over in China. From PMI’s to FAI’s, the Communist government remains largely absent. That’s the difference with “managed decline.”
With the Chinese on the sidelines, other governments are picking up the pace. In this one case, there is no obvious reason why. I doubt it is intended stimulus. Regardless, US state and local governments are absolutely binging, spending on construction projects at a breakneck pace.

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The Domestic PMI Picture, Still A Dollar Shortage

14 days ago

This green shoot didn’t wilt so much as it exploded into a fireball. FRBNY’s Empire State Manufacturing Index had captured the landmine in its initial 2019 readings. Starting from 21.4 (this version uses zero rather than 50 as its dividing line) in November 2018, by January the index had dropped 17.5 points in just two months. It then stabilized and by April was moving up again.
This rebound or green shoot pushed the PMI to 17.8 by May, almost retracing the entire landmine aftermath. No doubt it was one of the most widely cited statistics inside policy circles. One “cross current”, at least, seemed to have abated.
Two weeks ago, however, FRBNY reported the index’s largest plunge on record. Falling 26.4 points just in June 2019, it left the headline at -8.6. It was the first contraction

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The Asian PMI Picture of A Dollar Shortage

14 days ago

It’s actually one of the few areas that has been studied in mainstream Economics. The links between global financial upset and broader economic consequences are pretty well understood. Trade gets shut down, therefore economies which are highly dependent upon the exchange of goods experience the effects first. When you see these bellwethers under pressure, it’s a bad sign.
The mysterious part is where these financial problems might come from. It’s one of the more uncomfortable aspects of the 2019, being in agreement with Economists who can clearly see that “trade wars” just aren’t significant enough to be this much of a disruption. In addition, it’s a huge stretch to believe that worries over a few billion in future US tariffs on Chinese goods would’ve produced such a decline in trade

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The Road To July Rate Cut Runs Through the Brazilian Zone

17 days ago

The way I look at the global economy, there are basically five different zones. The first is the US and the second is Europe. China might be third on this list but often second if not first in terms of what’s driving marginal changes. In behind those is Japan, not what it once was but still often a bellwether for those changes. Lastly, there is the developing world (as well as any small DM economies not otherwise assigned).
Standing in for the final group, I often turn to Brazil as a proxy. It is one of the most highly developed and in sheer size already one of the largest in the world.
In those other zones, economic data has been weak but not yet minuses in the big overall accounts like GDP. Though German manufacturing conditions, for example, are already equivalent to recessionary

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Inflation Undershoots, Inflation Expectations Sketch Out Growing Downside

17 days ago

For the third time in the last five months, inflation expectations have matched record lows. To hear officials and Economists talk, you’d think they were at or nearing record highs. The unemployment rate, after all, is at a 50-year low point which by mainstream reckoning should mean the cusp of an epic wage-driven breakout.
According to the University of Michigan’s Surveys of Consumers, it’s just not there. In fact, it’s never been there. Like bond yields, there has only been conspicuous lack of any evidence to back up the claim the labor market is tight. The entire LABOR SHORTAGE!!! (which has curiously disappeared this year) was based on cherry picked anecdotes and never anything more.

Even if you don’t particularly care for consumer surveys, there’s the same consensus from market-based

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An Easy Bipartisan Solution: Hate the Unemployment Rate

17 days ago

With the Democratic Party staging the first of its national debates, The New York Times found time to embed a reporter amongst a group of Trump voters in the swing state of Michigan. Situated to watch the show, and given how the election of 2016 turned out, the Rust Belt is on the minds of both parties. It doesn’t seem, though, as if either can really access the energy motivating rather more fluid voting blocs.
Candidate Trump won by saying the unemployment rate was fake; thereby touching a nerve unspoken outside of America’s workforce. It has manifested in several ways during his first term, but the most interesting (I would say regretful) dynamic has been his total embrace of the same economic metric he once ruthlessly mocked.
From an inside perspective, it’s an easy sell. The

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The RHINO Conundrum of UFO Non-believers

19 days ago

In 2005, Ben Bernanke kicked up quite a bit of controversy, or what qualifies as drama in the dry space of top-level Economics. It was Alan Greenspan who really started the conversation, practically begging for someone to offer an answer. Long-term interest rates were not behaving the way they were supposed to; the maestro’s true swan song was his “conundrum.”
Bernanke saw what everyone else did; there was suddenly a whole lot of monetary and financial activity going on outside the US. Even Greenspan had come to realize there was a relationship between it and his interest rate puzzle. His successor, Bernanke, simply provided the only explanation he could given the ideological constraints of modern Economics.
For the next Federal Reserve Chairman, it had to be a “global savings glut.” For

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Manufacturing Cross-Currents

19 days ago

ACT Research, the leading publisher of commercial vehicle industry data in North America, reported last week that freight rates in for-hire trucking had declined in May. It was the fourth month in row when prices had been pressured. More and more, there is a downturn growing in the transportation sector.
Commenting on freight rates, Tim Denoyer, ACT’s VP and Senior Analyst said:
May’s Pricing Index was the fourth consecutive negative, after 30 straight months of expansion. This confirms our expectation that the annual bid season is not going well for truckers…The softness coincides with several other recent freight metrics, with the drop likely due in part to rapid growth of private fleets and the slowdown in the industrial sector of the economy
Broad economic weakness can manifest in any

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The Speed of Sour: LIBOR Now Inverted, Too

20 days ago

Last week, for the first time since February 2008, the LIBOR curve inverted. The 3-month tenor has been on the move downward for some time. The 1-month rate has been gentler in its slope. Last Thursday, the two finally crossed. As unnatural as inversion in the UST curve or elsewhere, it’s another sign of imminent rate cuts.
I am somewhat reluctant to point out how it was on August 9, 2007, when this same thing happened for the first time last time around. It doesn’t mean we are repeating 2008, only that the market perceives substantial negative factors which are going to lead the Federal Reserve to begin reducing the interest it pays on its money alternatives soon.
Almost certainly at the end of next month.

The stock market view of all this is predictably one of near giddiness – more

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From Their Lips To No One’s Ears

20 days ago

I thought this one needed a separate notation, though the same subject as the previous article. We’re still talking about the foreign repo pool, or monetary policy’s original reverse repo. It’s basically a way for overseas official governments and central banks to tell the Fed’s New York branch they’re uncomfortable with the dollar condition.
How US central bankers interpret that signal is a matter for, I guess, psychologists. What I wrote before was:
In other words, the Fed removed restrictions on the size of investments in it, foreign central banks couldn’t find similar dollar capacities in the private sector, and for some reason decided they needed an increasingly robust dollar liquidity buffer. There are many different ways to say dollar shortage, and Potter manages to get almost all

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When You Can’t Hear Yourself: The Other Reverse Repo

20 days ago

A lot of times, what becomes most frustrating about all of this eurodollar business is trying to get other people out of the conventional mindset to open up to the idea that there is something more going on. It’s the myth of the “maestro”, how there is just no way these Ivy League Economists could be missing something so big. After all, you’d figure even if they screwed up once (2008) it was absolutely assured they were going figure out how to fix (QE) what was wrong.
At other times, what’s most maddening is how officials say the very thing that’s wrong (chronic and global dollar shortage) and then don’t realize the magnitude or the implications of what they’ve just said.
Before getting to that, we have to back up and start with the Fed’s other reverse repo. Yes, there’s actually two of

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Federal Funds Is Not Falling With The Rest of Them

21 days ago

It’s difficult a lot of times to easily and succinctly describe what’s going on inside a monetary system that; 1. Spans the entire world, easily jumping across if not erasing geographical boundaries; 2. Is located in the shadows, leaving us with no direct data or statistics; 3. Often works in a dizzying array of complexities. I have to believe that even a competent and talented writer would have a lot of trouble with this eurodollar thing.
The short version is really just this: funding markets are increasingly afraid of something. In looking around and surveying the landscape, I have to believe this something is the potential for a global collateral bottleneck. That’s why, I think, China’s markets are linking up in eurodollar terms, too. April 17 is a new and worse May 29.

For a lot of

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Baoshang Isn’t China’s Lehman, So Why Does April 17 Show Up All Over Global Markets?

21 days ago

One month ago, on May 24, Chinese regulators stunned the world by announcing the first bank restructuring in modern China’s history. Based in Inner Mongolia, Baoshang Bank was seized because of what the PBOC and China Banking and Insurance Regulatory Commission said was “severe credit risk.” Initial reports attempted to link Baoshang’s struggles to financier Xiao Jianhua who disappeared in 2017.
As usual, there is always some truth in the narrative. Though much of the world had never heard of the bank before last month, the government’s appropriation was a long time coming. Baoshang had first reported a capital shortfall almost two years ago.
The question is, though, why now?
Warren Buffett famously said you only find out who is swimming naked when the tide goes out. I care much less about

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Japan’s Bellwether On Nasty #4

24 days ago

One reason why Japanese bond yields are approaching records like their German counterparts is the global economy indicated in Japan’s economic accounts. As in Germany, Japan is an outward facing system. It relies on the concept of global growth for marginal changes. Therefore, if the global economy is coming up short, we’d see it in Japan first and maybe best.
I wrote in April last year how Japanese Industrial Production was a true bellwether:
The positives are far fewer than the negatives. They correspond easily with these obvious “reflation” episodes we find all over the world created by the abatement of destructive eurodollar impulses unleashed in intermittent fashion (nothing goes in a straight line).
Therefore, Industrial Production in Japan just may be the best “reflation” indicator

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