Dec 17, 2017. First Messenger
In October of this year, astronomers in Hawaii sighted an object hurtling through space unlike anything they had ever seen. Below, from NASA…
The first confirmed object from another star to visit our solar system, this interstellar interloper appears to be a rocky, cigar-shaped object with a somewhat reddish hue. The asteroid, named Oumuamua by its discoverers, is up to one-quarter mile (400 meters) long and highly-elongated, perhaps 10 times as long as it is wide.
Oumuamua varies in brightness by a factor of 10 as it spins on its axis every 7.3 hours. No known asteroid or comet from our solar system varies so widely in brightness, with such a large ratio between length and width.
These properties suggest that ‘Oumuamua is dense, composed of rock and possibly metals, has no water or ice, and that its surface was reddened due to the effects of irradiation from cosmic rays over hundreds of millions of years.
Pan-STARRS team dubbed it ‘Oumuamua (pronounced oh MOO-uh MOO-uh), which is Hawaiian for “a messenger from afar arriving first.”
Because of its odd shape and other qualities, some speculated that it was an interstellar alien spacecraft. This week, the Break Through Listen project, (a search for extraterrestrial life funded by Russian billionaire Yuri Milner), focused the Green Bank Telescope in West Virginia on the object in an attempt to capture even the faintest radio transmissions before it slingshots away from Earth. No signals were detected.
Even astronomical black swans fail to create a ripple of volatility. It’s all just destined to collapse into a black hole.
Now, on to the markets. The rocket scientists at a major TBTF US bank came up with an end of 2018 target on the SPX of 3000. They considered interest rates across economic jurisdictions, global trade flows, the impact of technological advances. There were bottom-up analyses of earnings per share, top down estimates of GDP. Historical comparisons; odds assigned to possible unknowns. All the data was run through the model. They came up with a year end call of 3000 (versus Friday’s close of 2675).
I did a little of my own analysis, the results of which are on the chart below. Ironically, I came up with the same result:
They use computers. I drew a line. They charge hundreds of thousands of dollars for research. I do this stuff when I wake up early on Sunday morning. HEY, how about a little brokerage for the effort before MiFid kicks in?
Speaking of valuable research, and NOT in a sarcastic way, below is a chart from Bianco Research.
( www.biancoresearch.com chart used with permission, thanks JB)
Clearly, the curve continues to crash to new lows, with both 2/10 and 5/30 pressing on 50 bps (51.5 and 53.0 respectively). The red/gold euro$ pack spread (2nd to 5th year) is half that, closing Friday just below 26. Inflation figures and forward growth estimates just don’t seem to spur any premium in long end yields. You know it, I know it, the Fed knows it. In fact, while the infamous Fed quarterly projections ratcheted up 2018 growth to 2.5% from 2.1, and took unemployment down from 4.1 to 3.9%, the inflation forecast was left unchanged at 1.9%. When the Fed first hiked from zero in 2015, the ten year yield was around 2.25%. On Friday, after this week’s hike to 1.25-1.5% range, the yield closed at 2.35%. The range in tens over the year was just over 50 bps, from 2.62 high to 2.06 low.
In my scientific research, I have come up with yet another theory on why the curve is flattening. It’s embedded in the chart below:
Yes, that’s right. The Greeks (with the help of the Russians) have engineered the flattening of the US yield curve by artificially suppressing the yield on the Greek ten year note, cutting it nearly in half this year from near 8% to just under 4% this week. For now, we’ll ignore the inconvenient fact that the US economy is 100 times larger than Greece’s. Look at the chart. Lock step.
Obviously I’m just kidding. It’s always good to remember that correlation is not equal to causation. However, I will also note that the Greek ten year yield has now converged to China’s, and that Chinese long rates have moved in the opposite direction, going up rather than down. Speaking of China, this snippet is from the Mises Institute:
Chinese growth of 6.5% per annum came with more than 14% annual growth in money supply. Total debt has quadrupled since the financial crisis, and official messages of “measures to curb indebtedness” have shown a different reality. China has added more debt in 2017 than the The European Union, the US, UK, and Japan combined. The IMF estimates debt as a proportion of Gross Domestic Product may rise from 235% to almost 300% by 2022.
This increase in debt would not be a concern if it yielded solid economic returns, but the latest figures show that more than 40%of the Hang Seng Index components are adding debt to repay interests, and China needs now four times more debt to generate the same growth as in 2007.
I think 2018 will be a pivotal year. Trends of a flattening curve which threatens to invert, and rising equity markets are probably not compatible in the long term. While there had previously been focus on Japan’s huge debt metrics, the situation in China is garnering more attention; a deceleration from rapidly expanding growth will reverberate globally.
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| 12/8/2017 | 12/15/2017 | chg | |
| UST 2Y | 179.4 | 183.6 | 4.2 |
| UST 5Y | 214.5 | 215.4 | 0.9 |
| UST 10Y | 238.1 | 235.1 | -3.0 |
| UST 30Y | 277.3 | 268.4 | -8.9 |
| GERM 2Y | -73.9 | -71.6 | 2.3 |
| GERM 10Y | 30.7 | 30.1 | -0.6 |
| JPN 30Y | 81.9 | 80.0 | -1.9 |
| EURO$ H8/H9 | 37.5 | 38.5 | 1.0 |
| EURO$ H9/H0 | 13.0 | 12.5 | -0.5 |
| EUR | 117.74 | 117.48 | -0.26 |
| CRUDE (1st cont) | 57.44 | 57.33 | -0.11 |
| SPX | 2651.50 | 2675.81 | 24.31 |
| VIX | 9.58 | 9.42 | -0.16 |
https://solarsystem.nasa.gov/planets/oumuamua/indepth
https://www.space.com/39100-interstellar-object-oumuamua-alien-life-search.html
https://mises.org/wire/why-we-should-worry-about-china
http://www.alhambrapartners.com/2017/12/15/chart-of-the-week-ummmm/
