Tue, 21st November 2017

Anirudh Sethi Report


Archives of “Economy” Tag

If QE was Mostly Placebo, What about the Unwind?

During the Great Depression, countries discovered their balance sheets.  Fiscal spending helped augment aggregate demand.  After the WWII, high income countries have typically run persistent deficits, resulting in the accumulation of debt.
During the Great Financial Crisis, central bank balance sheets were discovered.   Central banks bought a variety of assets, but especially their owngovernment bonds.   The idea was that the proximity of the zero bound (zero policy rate) could be overcome through the purchase of bonds and the expansion of the central bank’s balance sheet.
Some economists have argued that the bond buying by the Federal Reserve lowered the 10-year yield by as much as 85 bp.  We are skeptical.  The Fed did not simply buy long-term securities.  It is better to understand the asset purchases as an asset swap.  The Fed swapped reserves for the bonds.  It took duration out of the market, for sure, but this is not the same thing as getting beyond the zero bound.  Moreover, reducing the term premium of bonds is not the same as cutting the Fed funds rate.
This is important because the Fed has begun allowing its balance sheet to shrink, and some argue that this is tantamount to tightening of policy.  Indeed, Benn Steil and Benjamin Della Rocca at the Council on Foreign Relations warned that the Fed’s balance sheet reduction that has been announced is tantamount to a 100 bp hike in the Fed funds rate by the end of next year.

Norway’s $1 Trillion Wealth Fund Suddenly Considers Dumping $35 Billion Of Oil And Gas Stocks

One of the world’s largest sovereign wealth funds, and one which ironically amassed the overwhelming majority of their wealth via rich oil reserves, is now looking to sell off some $35 billion worth of energy stocks.  According to central bank Deputy Governor Egil Matsen, the move is intended simply to “spread the risks for the state’s wealth,” but one has to wonder whether the owner of 1.5% of the world’s stocks has decided that oil has now moved into a period of secular decline.  Per Bloomberg:

 Norway’s $1 trillion sovereign wealth fund proposed dumping about $35 billion in oil and gas stocks, including Royal Dutch Shell Plc andExxon Mobil Corp., to protect the economy of western Europe’s biggest petroleum producer.

The nation will be “less vulnerable” to a drop in oil by not being invested in stocks of companies in the industry, the Oslo-based fund said Thursday. The Finance Ministry said it would study the plan and decide at the earliest in “autumn 2018.”

“Our perspective here is to spread the risks for the state’s wealth,” Egil Matsen, the deputy governor at the central bank in charge of overseeing the fund, said in an interview in Oslo Thursday. “We can do that better by not adding oil price risk through the fund.”

While the fund says the plan isn’t based on any view on the future of oil prices or the industry, it will likely add pressure on oil producers, already struggling in a world where renewable energy is gaining sway.

In light of this news, here is a list of Norway’s 10 largest energy holdings (valuesin NOK) that you should probably look to lighten up on at some point before they do.


For The First Time Ever, The “1%” Own More Than Half The World’s Wealth: The Stunning Chart

oday Credit Suisse released its latest annual global wealth report, which traditionally lays out what has become the single biggest reason for the recent “anti-establishment” revulsion: an unprecedented concentration of wealth among a handful of people, as shown in Swiss bank’s infamous global wealth pyramid, an arrangement which as observed by the “shocking” political backlash of the past year, suggests that the lower ‘levels’ of the pyramid are increasingly unhappy about.

As Credit Suisse tantalizingly shows year after year (most recently one year ago), the number of people who control roughly half of the global net worth, or 45.9% of the roughly $280 trillion in household wealth, is declining progressively relative to the total population of the world, and in 2017 the number of people who were worth more than $1 million was just 36 million, roughly 0.7% of the world’s population of adults. On the other end of the pyramid, some 3.5 billion adults had a net worth of less than $10,000, accounting for just about $7.6 trillion in household wealth. And inbetween is the so-called global middle class – those 1.4 billion people whose rising anger at the status quo made Brexit and Trump possible.


As the report authors write, there is just one group to have benefited from the Fed’s post-crisis monetary policies: ” Our calculations show that the top 1% of global wealth holders started the millennium with 45.5% of all household wealth. This share was about the same until 2006, then fell to 42.5% two years later. The downward trend reversed after 2008 and the share of the top one percent has been on an upward path ever since, passing the 2000 level in 2013 and achieving new peaks every year thereafter. According to our latest estimates, the top one percent own 50.1 percent of all household wealth in the world.”

As the bank then laconically adds, “Global wealth inequality has certainly been high and rising in the post-crisis period.” And as the chart below shows, in 2017, for the first time ever, the richest 1% now controls just over half, or 50.1%, of global wealth.

The Chart That Everyone Is Talking About

Something has changed…

For months high yield bond yields have been compressed alongside rising stock prices as the flood of global liquidity from central banks.

ECB buying has driven European junk bond yields below those of US Treasuries and in turn that has pressured global high yield risk lower – despite a rise in leverage to record highs.


However, the last two weeks have seen a big shift in flows as investors have fled high yield funds and pushed into investment grade and Treasuries.


Foreign bank lending to China hits record high, despite debt worries

Lending to China by international banks hit a new high in the first half of 2017, as Beijing’s deleveraging campaign led to tighter domestic credit conditions, pushing corporate borrowers offshore.

Foreign banks can typically charge higher interest rates on loans to Chinese borrowers than to those in their home markets, boosting the banks’ profits. But increased exposure to China also carries risks, as economists warn that extraordinary debt growth since 2008 is likely to produce rising defaults.

“Expansion into China will support Hong Kong banks’ margins but could also expose risks. An increase in China exposure without adequate controls and capital buffers could … be negative for banks’ ratings,” Sabine Bauer, senior director for financial institutions at Fitch Ratings in Hong Kong, wrote in a new report.

China’s central bank has tightened monetary policy this year, while the banking regulator introduced new macro-prudential regulations that limit banks’ ability to expand lending.

This combination has raised funding costs for corporate borrowers, pushing them offshore in search of better terms. In addition to bank loans, offshore bond sales by Chinese issuers have also surged this year.

Coming week may determine fate of TPP and shape global trade

For seven days spanning this week and next, leaders and ministers from Asia and the Pacific region will gather in Danang, Vietnam, then in Manila, for meetings of the Asia-Pacific Economic Cooperation and the Association of Southeast Asian Nations. But the focus will be on what happens on the sidelines of both events, where the future direction of global trade may very well be decided.

 Back from the dead

In the wings of the APEC meetings in Vietnam, ministers from the 11 remaining nations in the Trans-Pacific Partnership will look to reach a broad agreement on the trade pact.

The deal is back from the ashes: the initial TPP deal was agreed in early 2016 by 12 members including the U.S., but was thrown into uncertainty when President Donald Trump decided to pull the world’s biggest economy out of the pact.

While it is true that without the U.S., the economic impact of the agreement will be much smaller — the so-called “TPP 11” only makes up 13.5% of the world’s gross domestic product and 15.2% of global trade volumes, as opposed to 38.2% and 26.5% with the U.S. — the 11 nations remaining saw good reason to keep the spirit of free trade alive and have spent months scrambling to save the deal.

Because the U.S. secured numerous concessions during its negotiations, the remaining countries have been busy hashing out which terms from the original pact to suspend now that Washington has left the table. There were initially around 70 such requests, but after months of negotiations by working-level officials, that list has significantly been narrowed down.

TPP ministers from the 11 nations have started further talks on the issue in Danang to decide whether to rubber stamp the deal.

After the TPP talks, center stage for trade negotiations will move to ASEAN and East Asia summits in Manila, where nations participating in the Regional Comprehensive Economic Partnership, or RCEP, will hold talks. The initial plan was to reach an agreement on the creation of a free trade zone among 16 countries in the Asia-Pacific region by the end of 2015. But two years on and talks have so far borne no fruit.

The 16 RCEP nations held their 20th meeting in South Korea in mid-October to pave the way for a potential agreement in Manila, but they are finding it difficult to reach common ground.

“It is not likely that we will reach an agreement on the deal within this year,” said a senior official attending the meeting who asked not to be named. “We are trying to narrow differences, but the process is not easy. In particular, it is hard to agree on the level of openness in each market.” Negotiations in Manila are expected to yield few results, but pro-trade experts are hoping for the TPP talks to have positive knock-on effects on the RCEP.

 High standards

The key differences between the TPP and RCEP trade pacts (other than their member nations) is their scope, as well as their standards. In its initial form, TPP was touted as a “trade deal for the 21st century”, seeking to remove tariffs on more than 99% of items traded among member nations by unifying rules across a range of areas. TPP was also lauded for including worker protection and environmental conservation in its scope, unlike previous free trade agreements.

RCEP on the other hand is less ambitious and has a narrower scope, with ASEAN nations more focused on signing off the deal than chasing bigger economic gains. It is more flexible than the TPP, taking into account the differences in economic development of its members. Countries like Japan and Australia are calling for RCEP to have similar high standards to the TPP, such as on labor and environmental protection, while countries like India and China are growing weary of such deals. The hope for those seeking higher standards for RCEP is that if TPP talks can be concluded in Vietnam, that might pressure the reluctant members of RCEP to agree to more TPP-like standards.

This will all fall apart, however, if TPP 11 is watered down to the extent that it does not live up to its billing as a trade deal for the 21st century. Remaining bones of contention are believed to include investor-state dispute settlement provisions — which would allow foreign investors to take action against a TPP country perceived to have breached investment rules — along with labor and environmental issues. Jacinda Ardern, New Zealand’s new prime minister, has said that her government would “do [its] utmost” to amend the ISDS provisions, while Vietnam and other countries that have yet to refine their laws on labor and environmental matters appear wary of the current TPP rules. Suspending too many terms, including these, would run counter to the spirit of the pact.

“The whole goal of the TPP was to set high standards for the region,” Michael Froman, who led Washington’s TPP negotiations under former President Barack Obama before the country’s withdrawal, said in a recent interview with the Nikkei Asian Review. “And so to reopen, renegotiate and weaken the standards undermines one of the main purposes.”

Another challenge for the TPP 11 is that only Japan and New Zealand have ratified the deal domestically, meaning that even after all 11 countries do agree on the deal, domestic pressures could delay its implementation.

But regardless, the upshot is that if this wide range of countries can agree on a free and fair multilateral trade deal in an age where protectionism is seemingly on the rise and where the U.S. is favoring bilateral deals, they could set the tone for the future of trade negotiations.

“If we are able to reach a deal, not only would we have a multilateral free trade bloc in the Pacific rim, but it will send out a very strong message to the world,” Kazuyoshi Umemoto, Japan’s lead TPP negotiator, said after talks between negotiators in Urayasu, Japan in early November. “We are working on the assumption that this deal can have a huge impact on the global economic system.”

WTI/RBOB Drop After Surprise Gasoline Build

WTI held above $57 heading into the API print on the heels of Saudi chaos but both WTI/RBOB kneejerked lower after API reported a lower than expected crude draw and a surprise gasoline build.


  • Crude -1.562mm (-2.45mm exp)
  • Cushing +812k
  • Gasoline +520k (-1.85mm exp)
  • Distilates-3.133mm

Following the previous week’s big gasoline draw and notable crude draw, the last week  – according to API – saw a surprise gasoline build and smaller than expecred crude draw. Also of note was a big build in stocks at Cushing.

WTI/RBOB were quiet heading into the print and kneejerked lower as the data hit…

“There’s no doubt that we got a little bit overbought,” Phil Flynn, senior market analyst at Price Futures Group Inc. in Chicago, said by telephone to Bloomberg.\

Investors remain focused on tensions in Saudi Arabia, as “the market pays more attention to geopolitical risk.”

The Central Bank Bubble: How Will It Burst?

Alberto Gallo of Algebris Investments steps up to take his shot at the $64,000 (more like trillion) question in a report published this week“The Central Bank Bubble: How Will It Burst?”

Gallo manages the Algebris Macro Credit Fund described as “an unconstrained strategy investing across global bond and credit markets, and with lead responsibility for Macro Strategies” on the company’s website.


Gallo sets the scene as follows.

Most investors are still playing the game, and in the same direction. We estimate there are currently around $11tn in negative-yielding bonds and over $2tn in strategies that explicitly or implicitly depend on stable volatility and asset correlations. If low interest rates and QE have been the lever pushing up prices of dividend and coupon-paying assets, central banks are the fulcrum.

This fulcrum is slowly shifting: the ECB has just announced a reduction in its bond purchase programme, the Bank of England is likely to hike this month – even in the face of economic weakness –the Fed will likely hike rates again in December, and the PBoC has recently warned of asset overvaluation.

One of our favourite parts of the report is “The Magic Money Tree” infographic which explains how QE has benefited a plethora of investment strategies and created the current bubble to end all bubbles.

Coinbase Adds A Record 100,000 Bitcoin Traders In One Day

Back in the summer of 2015, one tracked the euphoria of the Chinese stock market bubble by the number, usually in the hundreds of thousands, of new brokerage accounts that were opened on any one given day.

And while that bubble has long since burst, the tradition of measuring new account openings has remained, and nowhere more so than in the biggest momentum instruement of the day, bitcoin.

Following a 7x increase in the price of bitcoin this year alone, which earlier today topped $7,000 for the first time ever (before sliding as much as $600) the broader public is now truly on board, and as one of the world’s biggest US cryptocurrency exchanges reports in its daily usage update, there were 11.9 million Coinbase users as of November 1, shortly after the CME announced it would introduce bitcoin futures by the end of 2017.