by Zero Hedge - January 23rd, 2017 5:30 pm
For months we’ve warned that declining used car prices could spell disaster for subprime auto securitizations (see “Slumping Used Car Prices Spell Disaster For Subprime Auto Securitizations“). While it’s always difficult to predict the exact timing of when bubbles will burst, a combination of record-high lease returns in 2017 and 2018, combined with rising interest rates could imply that the auto bubble is on the precipice.
As Bloomberg recently pointed out, strong used car pricing is a critical component required to prop up the overall auto market. While American’s love their brand new cars, if used car prices become too soft then substitution can hurt new car sales. Add to that the impact of falling residual values on the finance arms of the auto OEMs and you have all the ingredients required for an auto market meltdown.
A glut of used vehicles has started to depress prices. That trend will intensify as Americans will return 3.36 million leased cars and trucks this year, another jump after a 33 percent surge in 2016, according to J.D. Power. The fallout has already begun, with Ford Motor Co. shaving $300 million from its financial-services arm’s profit forecast for this year.
“Ford is the canary in the coal mine,” said Maryann Keller, a former Wall Street analyst who’s now an auto industry consultant in Stamford, Connecticut.
This drag may be hitting the rest of the industry, too. A National Automobile Dealers Association index of used-vehicle prices declined each of the last six months of last year. If used values weaken more than anticipated, it can lead to losses across the industry, hitting carmakers, auto lenders and rental companies.
Unfortunately, the volume of lease returns is only expected to grow even more in 2018 with returns expected to approach 4mm units.
As J.D. Power points out in it’s most recent “NADA Used Car Guide Industry Update,” the flood of lease returns is driving used car prices lower.
Of course, how we got here is fairly obvious. The majority of Americans buy cars based on one factor: monthly payment. And when it comes to managing your monthly payment to the lowest level possible, leasing is the way to go. Per the Bank Rate calculator below,
by Zero Hedge - January 23rd, 2017 5:05 pm
The world changed the night of November 8th when Donald Trump rode a wave of populist anger to become the president elect of the United States of America. Many readers of our investor letters know that Trump’s victory was not a surprise to Artemis… as I observed with fascination how many of friends and family from my birth state of Michigan, most of whom voted for Obama the last two elections, reluctantly admitted in private they were supporting Trump. I cautioned, both in writing and during a speaking engagement at the EQDerivatives Conference in May, that the market was dramatically underestimating the probability of a Trump victory given socio-economic factors and age demographics in swing states like Michigan and Florida. What the consensus failed to see is that the election was not between a Democrat and Republican, but rather a Globalist and a Populist. America wanted a populist of one vintage or the other. The Democratic party didn’t lose the election in November, but in the summer, when they suppressed their alternative populist candidate in favor of an oligarch. This is just the beginning – I’ll double down this a passage from my June 2016 Letter to Investors.
What Trump Means for Volatility Trading
Trump is a boost to volatility traders (but not traditional hedging or tail risk) because of his inherent unpredictability. Never before in history has a president been so able and willing to shift a policy debate with a tweet. In a world where we have gotten used to parsing Fed statements for methodically planned hints on policy shifts, Trump is a protectionist bull in a china shop. Trump will keep the price of uncertainty high, and high uncertainty is very good for the business of dynamic volatility trading, but oddly poses a challenge for traditional hedging and tail risk funds.
Uncertainty and volatility are not the same thing. 2016 was a year of low volatility but historically high uncertainty. For example, although the VIX index averaged only 15.82 in 2016 (36th percentile of observations) investor hedging drove the expectation of vol to historic highs as measured by skew, implied volatility premium, and volatility forward premium.
Traditional hedging and tail risk will struggle in an environment where markets remain calm and the cost of uncertainty remains high. Dynamic volatility
Trump Wins The Unions: Teamsters Praise TPP Withdrawal, Labor Chiefs Describe “Incredible” Meeting With Trump
by Zero Hedge - January 23rd, 2017 4:45 pm
Shortly after Donald Trump made good on one of his core campaign promises on Monday morning by signing an executive order formally withdrawing the U.S. from the Trans-Pacific Partnership free-trade deal, Trump told labor union leaders that he would renegotiate the North American Free Trade Agreement “at the appropriate time.”
The remarks came at the start of a meeting at the White House with leaders of construction, carpenters, plumbers and sheet metal unions, during which Trump pledged to stop trade deals that harmed American workers.
According to the White House, participants included North America’s Building Trades Unions President Sean McGarvey, Laborers’ International Union of North America President Terry O’Sullivan, SMART sheet metal workers’ union President Joseph Sellers, United Brotherhood of Carpenters President Doug McCarron and Mark McManus, president of the United Association that represents plumbers, pipefitters, welders and others. The union meeting also included several local union officials and follows a gathering of 12 chief executives of large companies at the White House to discuss revitalizing the U.S. manufacturing economy.
“We’re gonna get ‘em working again, right?” says Pres Trump, hosting photo op with union leaders in the Oval.. “Great meeting,” he said. pic.twitter.com/aCq5ZLGpfC
— Mark Knoller (@markknoller) January 23, 2017
“This is a group that I know well,” Trump said referring to the union bosses, adding “we’re going to put a lot of people back to work” and “stop the ridiculous trade deals.”
When Trump said the administration “just officially terminated TPP,” it prompted applause from the labor chiefs (and this time it certainly wasn’t by paid members of the studio audience), who later described their meeting with Trump as “incredible.”
Union leaders speak to WH reporters and described meeting with President Trump as “incredible” pic.twitter.com/7lSJW0UiJP
— shannon A (@shogustus) January 23, 2017
Trump also added that he doesn’t blame former President Obama for decades of bad trade deals, which – at least mathematically – makes sense.
But even more notable, was the dramatic pivot by the US labor unions, historically stalwart democrat supporters, who have suddenly emerged as big supporters of Trump policies, and perhaps no one more so than AFL-CIO President Rich Trumka who said TPP withdrawal is “a good first step toward building trade policies that benefit workers.”
by Zero Hedge - January 23rd, 2017 4:44 pm
In Treasury Secretary nominee Steven Mnuchin’s written responses to Senate questions, he made it clear that the “strong dollar” policy may not always be his priority as he noted “an excessively strong dollar may be negative in the short-term.”
“The strength of the dollar has historically been tied to the strength of the U.S. economy and the faith that investors have in doing business in America,” Mnuchin said in written responses to questions from U.S. senators obtained by Bloomberg News.
“From time to time, an excessively strong dollar may have negative short-term implications on the economy.”
Additional headlines include:
- *MNUCHIN REPLIES TO SENATE IN DOCUMENT OBTAINED BY BLOOMBERG
- *MNUCHIN: TREASURY HAS RANGE OF TOOLS TO ADDRESS UNFAIR TRADE
- *MNUCHIN: WILL ENSURE WEALTHY TAXPAYERS CAN’T GAME TAX SYSTEM
- *MNUCHIN: WILL ADDRESS ISSUE OF CURRENCY MANIPULATION
- *MNUCHIN: `EXCESSIVELY STRONG’ USD MAY BE NEGATIVE IN SHORT TERM
- *MNUCHIN: U.S. IMF FUNDS MUST BE USED IN LINE WITH POLICY GOALS
- *MNUCHIN: WOULD ENFORCE EXISTING SANCTIONS AGAINST IRAN, RUSSIA
- *MNUCHIN: WOULD CONSIDER ALL OPTIONS FOR INFRASTRUCTURE SPENDING
The reaction is clear in USDJPY…
The Dollar Index has dropped below 100 for the first time The ECB’s December meeting…
by Zero Hedge - January 23rd, 2017 4:05 pm
Was it really that easy – Buy The Election (hope), Sell The Inauguration (reality)?…
The Dow continues to cling to unchanged for 2017 (small caps red)…
Since the inauguration…
VIX was the main play thing in American markets again (but The Dow ended down for the 6th day in the last 7… NOTE – the overnight futures ramp dragged cash up to perfectly tag stops at Trump Address highs…
Europe’s VIX spiked most in 4 months today, above 17…
Notably, Treasury VIX remains notably elevated relative to Equity VIX post-Trump…
With SKEW at over 146, markets have only been more fearful of a collapse twice in its 27 year history…
Breadth remains divergent for the S&P 500…
But Kuwait is in panic melt-up mode…
Bank stocks dropped once again (contining the trend of up-down-up-down started since the beginning of 2017)…
Notably XLF – the US financials ETF – has fallen to key 50-day moving average…
QCOM was crushed but it didn’t really help AAPL…
While the biggest Emerging Market ETF ripped higher today (as the dollar dropped), we note that it suffered a ‘death cross’...
While health insurers all tumbled on the the Aetna, Humana deal blockage, only Aetna held on to losses…
Trumphoria is stalling as financial conditions have tightened post-election…
The 30Y Treasury yield fell back below 3.00% – notably, the 30Y yield has gone nowhere since 2 days after the election…
Treasury yields fell across the curve with the long-end outperforming…(note bonds did sell off after Europe closed)
Two words – “policy error”?
The Dollar Index extended its losses from Friday afternoon, stalling at Fed rate-hike lows…
Yen and Sterling strength were the heaviest weights on the dollar index today but everything was bid against the greenback…
While not the perfect analog, one wonders if the post fiscal year spike in the USD is starting to fade once again…
Crude slide despite USD weakness but copper gained…
Gold closed at its highest since Nov 17th…
Bonus Chart: Turning Japanese?
by Zero Hedge - January 23rd, 2017 3:55 pm
In September 1986, The Economist weekly newspaper published its first-ever “Big Mac Index”.
It was a light-hearted way for the paper to gauge whether foreign currencies are over- or under-valued by comparing the prices of Big Macs around the world.
In theory, the price of a Big Mac in Rio de Janeiro should be the same as a Big Mac in Cairo or Toronto.
After all, no matter where in the world you buy one, a Big Mac generally consists of the same ingredients– two all beef patties, special sauce, etc.
A Big Mac currently sells for 49 pesos in Mexico, for example; at the current exchange rate, that’s about $2.23 US dollars.
Meanwhile in Switzerland, a Big Mac sells for 6.50 francs, or roughly USD $6.35.
This means that a Big Mac in Switzerland costs 2.8x as much as the exact same burger in Mexico.
Obviously there are a LOT of differences between Switzerland and Mexico that would ordinarily lead to some difference in price.
But 2.8x is clearly excessive, suggesting that the Mexican peso is undervalued relative to the Swiss franc.
It shows that the US dollar is currently OVERVALUED against almost every currency in the world.
Canada. Russia. UK. South Africa. Turkey. Poland. Colombia. Philippines. Euro Area. Australia.
The average price of a Big Mac in each of these countries is dramatically cheaper than in the United States.
The Economist’s data show, for example, that the average Big Mac price in the US is $5.06.
(By the way, that’s 17% higher than the average US price of $4.37 that the newspaper reported in January 2013… not that there’s been any inflation.)
In Canada, however, the paper reports an average price of $6 Canadian dollars, or USD $4.51 at current exchange rates.
This suggests that the Canadian dollar is about 11% undervalued relative to the US dollar.
In the Euro area, the average price of a Big Mac is 3.88 euros, about $4.06 based on current exchange rates.
That implies the euro is 20% undervalued against the US dollar.
In places like Malaysia, South Africa, and Russia, it’s even more extreme, with local currencies 60%+ undervalued against the US dollar.
It’s important to understand what this
by Zero Hedge - January 23rd, 2017 3:42 pm
Presented with no comment…
by Zero Hedge - January 23rd, 2017 3:19 pm
As JPM writes in its intraday update, the “Trump/Ryan enthusiasm is starting to quietly fade as investors appreciate the enormous logistical and mathematical hurdles associated w/realization of their agenda. The nature of the Trump White House is such that investors should get used to avalanches of headlines, tweets, etc. on a daily basis but very little of this stream of consciousness barrage is likely to be incremental – platitudinous promises about slashing taxes “massively” or cutting regulations “by 75% or more” are increasingly being ignored as markets wait for specifics on the “Big 3” (tax reform, deregulation, and infrastructure spending). Tax reform continues to account for the bulk of the Trump/Ryan enthusiasm but enormous uncertainty exists around this issue (timing, revenue offsets, forced vs. optional repatriation, 35% vs. 20 or 15% when the average cash/effective rate is already ~23-25%, etc.).”
Yet while investors are becoming somewhat disenchanted with the tax reform and infrastructure spending aspects of the Trump agenda, little has so far been said about the deregulation aspect of Trump’s proposals, and it is here that another potential source of upside, especially to small US businesses – the primary source of job creation – resides.
As JPM’s Michael Cembalest reminds us in his latest note “The Rules of the Game: on regulation and deregulation”, the updated WhiteHouse.gov website states the following: “the President has proposed a moratorium on new federal regulations and is ordering the heads of federal agencies and departments to identify job-killing regulations that should be repealed.”
According to Cemablest, this initiative would be welcomed by small businesses which have expressed rising concerns about regulation since 2009. Similarly, in a 2014 survey by the National Association of Manufacturers, 88% of respondents felt that regulations were affecting their business, by far the #1 concern in the survey. Why might this be the case? While most administrations add to new regulations, the regulatory pace of the last 8 years substantially exceeds its two predecessors.
Cemablest further notes that while it is hard to measure the cost of regulations, in part due to their magnitude and complexity, some agencies try: according to the US Office of Management and Budget, the cost of new regulations passed since 1980 are around $250 billion per year. Other estimates are substantially higher: the latest review from the
by Zero Hedge - January 23rd, 2017 2:47 pm
One week after RBC’s Charlie McElligott pointed out that the “someone is going to get hurt badly” in the upcoming clash between leveraged and real money investors in 5Y bonds, whose divergent opinions on the future of interest rates, and thus inflation, has reached record levels…
… and was was picked up overnight by Bloomberg, today the cross-asset strategist focuses on something broader, namely the creeping rotation out of consensus reflation trades, driven by “concerns surrounding Trump’s ability/willingness to implement a “border-adjusted tax” system” which was at the core of much of the USD appreciation.
So is it time to finally “sell the inauguration”?
Below we lay out McElligott’s latest thoughts with the rotation picking up steam, as the USD weakens further:
* * *
Today shows continued paring-back of “consensual reflation” trades that dominated performance tables in 4Q16, with the Bloomberg USD Index being the largest z-score mover in all global Forex markets today (-1.25 z vs 90 day return). The ongoing concerns surrounding Trump’s ability / willingness to implement a “border-adjusted tax” system” is at the core of this, because it was at the core of much of the USD appreciation thesis. In turn, as highlighted a week and half ago, we’re seeing popular ‘reflation’ trades under pressure. Posit my “crowded trade” and “risk thermometer” monitors, each sorted by the prior 3m return (and the opposite intra-day performance):
ONGOING WONKINESS WITH POPULAR TRADES: Certainly more of a mixed-bag on the ‘short’ side…but no doubt seeing PNL whipsaws over the past week +.
Since I highlighted the US Dollar as “the single-largest macro input risk to the buyside” in the “Big Picture” morning note Jan 11th, the two most-common trade-weighted USD indices are both down ~1.7%. Over that same period of time, so too are the many popular thematic “reflation” trade expressions (many of the same trades as highlighted above): ‘small cap’ equities, ‘high beta’ equities, ‘early cycle’ stocks, equities ‘value’ factor, ‘cyclical beta,’ ‘cyclical vs defensive’ pairs are all LOWER in concert.
(The same too can be said of popular macro trades built-around the same “long Dollar / long reflation” framework, where we also see similar reversals off the back of the USD-unwind since the highs on Jan 11th: for example, consensual
by Zero Hedge - January 23rd, 2017 2:25 pm
This is really the best paragraph I have read so far in 2017:
The world is awash in bullshit. Politicians are unconstrained by facts. Science is conducted by press release. So-called higher education often rewards bullshit over analytic thought. Startup culture has elevated bullshit to high art. Advertisers wink conspiratorially and invite us to join them in seeing through all the bullshit, then take advantage of our lowered guard to bombard us with second-order bullshit. The majority of administrative activity, whether in private business or the public sphere, often seems to be little more than a sophisticated exercise in the combinatorial reassembly of bullshit.
It’s from The Bull$hit Syllabus, which was created by University of Washington Professors Carl Bergstrom and Jevin West, who are trying to combat The Bull$hit. The syllabus includes questions and standards for data scientists to think about and use.
They believe that with the advent of “Big Data” and tools to deal with it, the amount of BS in the world has really risen too much. It has become too easy for BS to be taken out of context, and to be spread and made to go “viral.” Big Data has given us ginormous datasets to study and manipulate. While we might not be quick to draw conclusions from a smaller data set, we have become very comfortable putting credence to implications and patterns in big data sets. Bergstrom explains:
Before big data became a primary research tool, testing a nonsensical hypothesis with a small dataset wouldn’t necessarily lead you anywhere. But with an enormous dataset, he says, there will always be some kind of pattern.
“It’s much easier for people to accidentally or deliberately dredge pattern out of all the data,” he says. “I think that’s a bit of a new risk.”
He is also skeptical of machine learning algorithms. They often give very strong results, but the data they analyze and draw from is not questioned often enough:
Can an algorithm really look at a person’s facial features and determine their preponderance for criminality? Yeah, maybe not. But that was the argument of a paper actually published just a