This one speaks for itself.
Below is a collection of interesting links and insights from today's news with analysis filtered through our macro lens. This installment discusses why the public have stopped paying attention to economists, an update on negative yielding government bonds, the BOJ's latest efforts to prop up their struggling economy, and Italy's plan to help their struggling banks.
"The predictions from economists about the consequences of Brexit were widely ignored. That shouldn’t be surprising. In recent years the public has lost faith the in the economics profession," economist Mark Thoma writes in The Fiscal Times. Thoma recounts the disagreements among economists, who can't seem to agree on why productivity has fallen, declines in the labor force participation, and what is the cause of inequality.
Bottom Line: We are equally skeptical of linear economic forecasters (both at the Fed and on Wall Street). Watch Hedgeye CEO Keith McCullough in the video below, "The 3 Most Overrated Economists in the World."
According to Fitch Ratings, "Investors' flight to safe assets following the UK's EU referendum on June 23 pushed the global total of sovereign debt with negative yields to $11.7 trillion as of June 27, up $1.3 trillion from the end-May total." Japanese government bonds make up a staggering two-thirds of the negative yielding bonds ($7.9 trillion).
Reuters reports that Japanese government and BOJ officials met for a second time post-Brexit in which "Abe urged Bank of Japan (BOJ) Governor Haruhiko Kuroda to ensure the central bank provides ample funds to the market to prevent any credit squeeze."
"A sense of uncertainty and worry about risks remain in the markets," Abe told the meeting. Finance Minister Taro Aso is also closely monitoring currency moves and responding flexibly to market developments in coordination with other Group of Seven economies. In other central-planning news, Chinese Premier Li Keqiang won't allow "rollercoaster" markets following Brexit.
Bottom Line: Central planners are pulling out all the stops to stem the post-Brexit bleeding. For the time being, investors seem to be buying into all the bloviating.
Apparently, the Italian government is considering injecting as much as 40 billion euros ($44 billion) to some of its banks, according to Bloomberg sources. "The government may support lenders by providing capital or pledging guarantees, said the person. The amount is still under discussion and no final decision has been taken, according to the people."
"Italian banks, hurt by 360 billion euros of non-performing loans, sluggish economic growth and record-low interest rates, are under pressure to clean up their balance sheets and restore investor confidence. The country was among the hardest hit by Friday’s market rout that wiped $2.5 trillion from global equity values, with some of Italy’s largest banks dropping more than 20 percent."
Bottom Line: With the ECB's negative interest rate policy, don't expect struggling Italian banks to be in the clear anytime soon. Avoid the region, #EuropeSlowing...
In this excerpt from The Macro Show earlier today, Hedgeye Senior Macro analyst Darius Dale lays out the bull case for Long Bonds (TLT) and explains why consensus has completely missed it.
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Takeaway: All The Right Moves; You're Hired; Benghazi Blame
Editor's Note: Below is a brief excerpt from Hedgeye Potomac Chief Political Strategist JT Taylor's Capital Brief sent to institutional clients each morning. For more information on how you can access our institutional research please email firstname.lastname@example.org.
"Whatever you are, be a good one."
Donald Trump is back on Hillary Clinton’s heels and rallied the faithful delivering an anti-globalization speech in the highly contested rustbelt region. Trump aptly chose a former steel town in western PA for another prepared speech - trashing Republican-backed (and formerly Clinton) at policies promoting free trade (NAFTA, TPP, China), while highlighting the need for an economic renaissance.
In the most detailed economic address he has given to date, Trump slammed Clinton for her insider mentality and for rigging the system, and lamented the downturn working-class families have experienced given the decline in American manufacturing. His shift towards a policy speech has all the right moves, but will a change in style win over a divergence in substance?
Trump’s presidential campaign continues to surprise as he takes integral steps - baby ones - in the right direction. Trump’s campaign announced a handful of new hires in its communications operations as he aggressively tries to match the first-rate team backing Clinton. Better late than never - and more hires are expected to be announced soon - including state directors, surrogates, speech writers and convention advisors.
With Cleveland fast approaching, the unconventional Trump has been hard-pressed by Republicans to move towards a more conventional campaign - we’ll see if these veteran hires put the Trump train back on track.
Republicans delivered the final Benghazi Committee report that criticized the Obama Administration's handling of the 2012 terrorist attack, while Clinton's campaign continues to classify the findings as discredited conspiracy theories. Either way, there are no new significant revelations about the role played by Clinton.
So what’s all the fuss about? The 800-page report is concerning - yet somewhat vanilla - but it's sure to add fuel to the Republican fire throughout the election as they blame Clinton for security lapses leading to the tragic event.
Takeaway: We see 20%-40% downside for shares of Kroger from current levels. Not to mention the massive potential pain ahead for pensioners.
Earlier this spring, I presented my short call on Kroger (KR), arguing that America’s largest supermarket chain was feeling the increased pressure of an intensely competitive food retail environment. That’s the plain vanilla rationale behind my bear case. But there’s more.
One of the more distressing risks lurking beneath the surface—one that represents a threat not only to shareholders, but to pensioners as well—is Kroger’s exposure to a large number of multi-employer pension plans (MPPs). The company intentionally keeps these plans in an underfunded status and this has the potential to backfire on the company. In addition to increasing annual costs, the company’s total exposure to these plans, in another downturn, is potentially debilitating.
Kroger’s woes are emblematic of an affliction plaguing pension funds across the country. It’s the same old story – chronic underfunding, as the swelling ranks of retirees overtake a smaller base of currently contributing employees.
To underscore the issue at hand, MPPs are the primary source of retirement income for over ten million active, inactive and retired workers and their survivors. A number of these pension plans, much like their state-run brethren, are severely underfunded. In a report to Congress in 2013, the Pension Benefit Guaranty Corporation (PBGC) estimated that MPPs have $757 billion in pension benefit liabilities, $391 billion of which are unfunded obligations. No small potatoes.
Takeaway: Brexit worries prompted investors to pull funds from all but three asset classes last week.
Editor's Note: Below is a complimentary research note originally published June 23, 2016 by our Financials team. If you would like more info on how you can access our institutional research please email email@example.com.
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Investment Company Institute Mutual Fund Data and ETF Money Flow:
In the 5-day period ending June 15th, Brexit worries prompted investors to withdraw funds from every asset class but investment grade bonds, municipals, and ICI's other bond category which took in +$469 million, +$1.6 billion, and +$512 million respectively. Total equity mutual fund and ETF flows came in at -$6.0 billion while total bond mutual funds and ETFs were virtually flat with a -$2 million outflow. With the Brexit vote ongoing today, we expect another weak survey next week which will capture more jitters ahead of this volatility event. Year-to-date, Bond ETFs have been the best category with +$3.7 billion in subscriptions on average each week (versus a weekly mean in 2015 of just +$571 million). Municipal bond funds have also been high grossing with +$1.3 billion in subscriptions per week versus just a +$313 million average last year.
In the most recent 5-day period ending June 15th, total equity mutual funds put up net outflows of -$5.9 billion, trailing the year-to-date weekly average outflow of -$2.7 billion and the 2015 average outflow of -$1.6 billion.
Fixed income mutual funds put up net inflows of +$1.5 billion, trailing the year-to-date weekly average inflow of +$2.4 billion but outpacing the 2015 average outflow of -$475 million.
Equity ETFs had net redemptions of -$167 million, outpacing the year-to-date weekly average outflow of -$864 million but trailing the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net outflows of -$1.5 billion, trailing the year-to-date weekly average inflow of +$1.4 billion and the 2015 average inflow of +$1.0 billion.
Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.
Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2015 and the weekly year-to-date average for 2016:
Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.
Most Recent 12 Week Flow within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2015, and the weekly year-to-date average for 2016. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:
Sector and Asset Class Weekly ETF and Year-to-Date Results: There wasn't a large standout in sector SPDR ETFs this week, but the materials XLB ETF saw the largest percentage outflow of -2% or -$68 million.
Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.
The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$6.0 billion spread for the week (-$6.0 billion of total equity outflow net of the -$2 million outflow from fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is -$2.8 billion (negative numbers imply more positive money flow to bonds for the week) with a 52-week high of +$20.2 billion (more positive money flow to equities) and a 52-week low of -$19.0 billion (negative numbers imply more positive money flow to bonds for the week.)
Exposures: The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:
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