It is fitting that just a few hours until the Fed’s second rate hike in two quarters, and one day after Goldman downgraded global stocks to Neutral for the next 3 months, not to mention with the results of the anticipated Dutch election due shortly, that global stocks as well as S&P futures are higher, while crude oil has finally managed to stage a rebound as the Dollar DXY index is fractionally in the red.

In addition to the Fed, a barrage of monetary policy decisions at the BOE, the BOJ, the SNB and Bank of Indonesia within the next 36 hours were further reasons for investors’ cautious stance.

East Coast traders return to their desks following a rather disapponting nor’easter, where they will be prompted bombarded by data over the next 2 days. Here is a quick summary of main events over the next 36 hours courtesy of Bloomberg:

• The Fed’s decision will be announced at 2 p.m. in Washington, followed by Chair Janet Yellen’s news conference a half hour later. Investors are focused on any hints of a change in the number of increases the central bank foresees this year.
• Wednesday’s vote in the Netherlands will deliver a reading on the state of populism in Europe as races in France and Germany heat up.
• The Bank of Japan is set to keep its rates and yield-curve policy unchanged in its policy decision on Thursday. The Bank of England, Swiss National Bank and Bank Indonesia are also expected to stand pat with policy decisions.
• U.S. Secretary of State Rex Tillerson travels to Japan, South Korea and China in his first visit to the region since taking office.
• U.S. President Donald Trump’s first budget outline for fiscal 2018 is expected on Thursday. He’s said he’ll seek a $54 billion boost in defense spending, paid for by an equal amount of cuts to non-defense agencies.

Asian stocks have consolidated much of their recent gains on Wednesday before an FOMC meeting that braved yesterday’s non-blizzard and which is expected to signal not only another 25 bps interest rate increase but also how many more hikes traders can expect during the remainder of the year. Though recent data, particularly out of China, has fueled a rally in Asian equities since the start of the year, Reuters notes that investors are expecting more headwinds for emerging markets due to an increasingly hawkish Fed. “The positive sentiment towards emerging markets is not sustainable as the interest rate differential advantage in Asia’s favor is likely to reduce in the coming months,” said Frances Cheung, head of rates strategy for Asia ex-Japan at Societe Generale in Hong Kong.

Having posted its second-biggest daily gain this year in the previous session, MSCI’s index of Asia-Pacific shares ex-Japan was up 0.2% near the day’s highs in cautious trading. Asian had a good start to the week thanks to positive news out of China and India. Strong data out of China this week sparked a fresh rally in Hong Kong stocks while Indian shares climbed to a record high on Tuesday as investors regarded Prime Minister Narendra Modi’s landslide victory in the northern state of Uttar Pradesh as an endorsement for his economic reforms. While recent economic Chinese data has been supportive, Premier Li warned at a press conference that China’s economy faces domestic and external risks this year, but added the country has many policy tools to cope with them.

“China’s economy had pretty good performance in January and February. March data will be crucial as investors are anxious for any hint on whether the recovery is sustainable,” said Linus Yip, strategist at First Shanghai Securities Ltd.

Bucking the trend, Japan’s Nikkei was down 0.2% while stocks in mainland China and Korea were fractionally lower, by 0.08 and 0.04 percent respectively. Hong Kong shares pared declines as Chinese Premier Li Keqiang played down the risk of a trade conflict. Speaking at a press conference after the close of the annual National People’s Congress, Li said it’s important for both China and the U.S. to keep talking to build trust. Furthermore, a worrying drop in global oil prices has cast doubt on how much Asian policymakers are likely to raise interest rates this year to maintain their premium over U.S. rates, with risks of another global tantrum rising.

The S&P is set to open higher, with E-minis trading 0.2% in the green in early Tuesday trading.

The big commodity story of the past week continues to be oil, and crude prices remain a dominant story in markets, with oil’s rebound helping underpin European stocks as investors wait for Wednesday’s expected U.S. interest rate increase. As Bloomberg notes,  WTI trades above $48.50/bbl as Tuesday’s API drop in U.S. crude stockpiles counters Saudi boost in production reported by OPEC. IEA says market is still working to clear surge in output from end of last year.  “The OPEC data sent us lower on the idea that there’s higher supply there, but we’ve flipped and now the APIs are suggesting inventories in the U.S. are ticking lower,” says Jasper Lawler, senior market analyst at London Capital Group. “The market is massively oversold and that’s been enough to trigger a bounceback.”

The swings in oil added some drama to financial markets that have entered a two-day period brimming with central bank decisions, European political drama and a raft of economic data. With the Federal Reserve seen as all but certain to raise rates, investors have been weighing how precarious energy prices will feed into the central bank’s path for future moves.

In currencies, the U.S. dollar was broadly unchanged against major rivals ahead of the FOMC meeting, and most attention will be focused on what Fed Chair Janet Yellen says about the future path of interest rates.  The dollar index was flat at 101.69, staying in a well worn recent range. The British pound led gains in the Group-of-10 currencies, rising by as much as 0.9 percent before trading 0.4 percent higher. The euro rose by 0.2 percent to $1.0623, following its 0.5 percent drop a day earlier.

“Of course, everyone is waiting for the Fed, so we’re expecting range-bound trading until we get some clear signals about expectations for the rest of the year,” said Kaneo Ogino, director at foreign exchange research firm Global-info Co in Tokyo. Markets are also awaiting a meeting of the Group of 20 finance ministers and central bankers in the German town of Baden-Baden starting on Friday, their first meeting since Donald Trump won the U.S. presidential election.

Bulletin headline summary from RanSquawk

• European equities trade modestly higher ahead of upcoming key risk events with energy and material names the notable outperformers
• Early FX trade has focused on GBP once again, with the early European hit on GBP yesterday reversed today, seeing 1.2200 reclaimed in Cable
• Looking ahead, highlights include FOMC rate decision, US CPI and Retail Sales, UK employment data and comments from ECB’s Praet

Market Snapshot

• S&P 500 futures up 0.2% to 2,367.25
• STOXX Europe 600 up 0.2% to 374.21
• MXAP up 0.06% to 145.77
• MXAPJ up 0.2% to 470.09
• Nikkei down 0.2% to 19,577.38
• Topix down 0.2% to 1,571.31
• Hang Seng Index down 0.2% to 23,792.85
• Shanghai Composite up 0.08% to 3,241.76
• Sensex down 0.01% to 29,440.36
• Australia S&P/ASX 200 up 0.3% to 5,774.00
• Kospi down 0.04% to 2,133.00
• German 10Y yield unchanged at 0.445%
• Euro up 0.2% to 1.0629 per US$
• Brent Futures up 1.4% to $51.64/bbl
• Italian 10Y yield fell 2.3 bps to 2.341%
• Spanish 10Y yield rose 0.8 bps to 1.879%
• Brent Futures up 1.4% to $51.64/bbl
• Gold spot up 0.3% to $1,203.16
• U.S. Dollar Index down 0.2% to 101.51

Top Overnight News

• President Donald Trump made more than $152.7 million and paid $38.4 million in federal taxes in 2005, according to two pages of his federal income tax return for that year that were broadcast by MSNBC and posted online
• Dutch voters are heading to the polls in a general election that will provide the first gauge of the spread of populism into the core of Europe
• Oil Market Still Digesting Pre-Deal OPEC Output Surge, IEA Says
• EON Posts Record Loss as German Power-Plant Writedowns Mount
• Zara Owner’s Margin Shrinks to Lowest Level in Eight Years
• Walgreens Said Poised to Sell More Assets to Win Rite Aid Nod
• China Lodging 4Q Adj. Profit Per ADS Misses Est.
• Cellcom Won’t Pay 4Q Dividend as Competition Affects Results
• General Electric to Build 200 MW Power Plant in Ghana: Graphic
• Deutsche Securities Warned by Japan Over Bond Trading Collusion
• Osaka Gas Says LNG From Freeport Project to Be Price Competitive
• MoneyGram Says to Carefully Review & Consider Euronet Proposal
• Manulife Receives China Investment Company WFOE License
• Chevron Says Oil Well in Bay Marchand Field Shut After Spill
• Ant Financial Still ‘Highly Committed’ to Merger With MoneyGram
• Amazon Poses Opportunity, Not Threat in Australia: Kogan.com CEO

In Asia, markets traded mostly lower as global sentiment remained dampened by pre-FOMC caution. This weighed on Nikkei 225 (-0.2%) from the open, while ASX 200 (+0.3%) recovered amid resilience in commodity stocks, aside from the gold miners which suffered after the precious metal briefly dropped below USD 1200/oz. Shanghai Comp. (+0.1%) and Hang Seng (-0.1%) conformed to the lacklustre tone, although losses have been stemmed after the PBoC slightly upped its liquidity injections to a total CNY 60bIn. 10yr JGBs are only marginally higher despite a subdued risk tone and the BoJ’s presence in the market for a total of JPY 1tIn, with demand weak ahead of tomorrow’s BoJ announcement in which consensus is for the central bank to hold off on any policy tweaks.
Chinese Premier Li concluded the NPC in which he stated that the GDP target of around 6.5% is not low and is not easy to reach. Premier Li also ruled out systemic risks in finance system which he described as generally safe and added that China has many policy tools to cope with risks. PBoC injected CNY 10bIn in 7-day reverse repos, CNY 10bIn in 14-day reverse repos and CNY 40bIn in 28-day reverse repos. PBoC set CNY mid-point at 6.9115 (Prey. 6.9118).

Top Asian News

• Singapore 2017 GDP Forecasts Boosted in MAS Survey of Economists
• China to Let Investors Buy Onshore Debt via Hong Kong This Year
• INR Rally Continues Even as RBI Seen Intervening: Asian NDFs
• BOJ Bond Purchases Draw Higher Demand Before Fed, BOJ Decisions
• Chinese Shares Decline in Hong Kong as Oil Tumbles, Fed Ponders
• RBI Seen Intervening as Modi’s Win Sparks Rupee Rally: Roundup
• For Pound Traders, Brexit Giveth and Taketh Away: Markets Live
• Japan Ex-Econ Minister Amari Says Still Too Soon for BOJ Taper
• Premier Li Says China Supports Integrated Europe and Strong Euro

European equities trade modestly higher with energy and material names the notable outperformers with the former lifted by last nights unexpected drawdown in API inventories. Utilities are  underperforming, dragged lower by Eon, despite the Co. opening higher in the wake of their earnings as investors continue to remain concerned over the record losses at the Co. That said, markets are ultimately in wait-and-see mode as investors await the upcoming FOMC policy announcement and Dutch election. In fixed income markets, Bunds reside modestly in the green but with trade likely to remain subdued ahead of the aforementioned FOMC. More specifically, Gilts have continued to underperform their German peers with the latest jobs report out of the UK doing very little to sway prices whilst peripheral markets remain relatively subdued.

Top European News

• Och-Ziff Executives Said to Leave After $13 Billion Withdrawn
• Oil Rebounds on U.S. Stockpile Drop Report as Saudis Lift Output
• Croat Govt Meets With Agrokor’s Russian Creditors, N1 TV Says
• Zodiac Tumbles; Profit Warning Undermines Deal Valuation: Kepler
• French Bank Shares Could Lose 25% on Le Pen Victory, Citi Says
• Twitter Accounts Globally Posting Swastikas, Pro-Erdogan Content

In currencies, the Bloomberg Dollar Spot Index slipped by 0.2 percent. The British pound pared gains after wage growth slowed. A YouGov poll for The Times showed that 57 percent of Scottish voters want to remain inside the U.K. compared to 43 percent who seek independence. It traded 0.4 percent higher after jumping as much as 0.9 percent earlier. The euro rose by 0.3 percent to $1.0629, following its 0.5 percent drop a day earlier. Early FX trade has focused on GBP once again, with the early European hit on GBP yesterday reversed today, seeing 1.2200 reclaimed in Cable, while EUR/GBP was pushed under 0.8700, but tentatively so as yet. The UK employment report this morning highlighted wage growth slowing, but we saw the rate ease off to 4.7% and a higher than expected claimant count fall. Price action has since moderated. For the EUR, Dutch election risk has been relatively muted but should hamper the upside across the board. EUR/GBP we have already mentioned, but EUR/USD is naturally struggling south of 1.0650, with the upcoming FOMC rate announcement also keeping the USD supported despite a tailing off of UST yield in the mid curve. USD/JPY is looking heavy in this respect, but support from 114.50-20 propping up here for now.

In commodities, WTI gained 1.7 percent to $48.54 as of 10:03 a.m. in London. U.S. inventories fell by 531,000 barrels last week, the industry-funded American Petroleum Institute was said to report.
Gold climbed 0.3 percent to $1,202.24 an ounce after falling 0.4 percent Tuesday. Iron ore jumped 3.4 percent, adding to a 4.3 percent advance in the previous session. The notable moves in commodities in Oil once again, but this time in favour of the black stuff, which sees WTI back through USD48.00 and holding these levels in the wake of the surprise drawdown reported in the API late yesterday. Brent is pushing session highs ahead of USD52.00, but not too much price action anticipated here, or indeed across the board as Fed policy dominates (later) today. Copper rises a little higher amid the ongoing impasse at the Escondida mine, though operations in some areas ‘not connected’ to wage talks may resume. Base metals higher across the board in fact, with Zinc leading.

Looking at today’s calendar, the big releases start at 8:30am and include the February CPI report where the market consensus is for 0.0% mom and +0.2% mom for the headline and core respectively. At the same time we will also get the latest retail sales data for February where the consensus is for a +0.1% mom headline print and +0.2% mom ex auto and gas print. Due out at the same time will be the March empire manufacturing print where a modest decline is expected. Later we will then get the NAHB housing market index print for March and January business inventories. All of this comes before the FOMC meeting this evening followed by Yellen’s press conference shortly after. The other focus today will of course be the Dutch election.

US Event Calendar

• 7am: MBA Mortgage Applications, prior 3.3%
• 8:30am: Empire Manufacturing, est. 15, prior 18.7
• 8:30am: US CPI MoM, est. 0.0%, prior 0.6%; CPI Ex Food and Energy MoM, est. 0.2%, prior 0.3%
  • 8:30am: US CPI YoY, est. 2.7%, prior 2.5%; CPI Ex Food and Energy YoY, est. 2.2%, prior 2.3%
  • 8:30am: Real Avg Weekly Earnings YoY, prior -0.63%;  Real Avg Hourly Earning YoY, prior 0.0%
• 8:30am: Retail Sales Advance MoM, est. 0.1%, prior 0.4%; Ex Auto MoM, est. 0.1%, prior 0.8%; Ex Auto and Gas, est. 0.2%, prior 0.7%; Retail Sales Control Group, est. 0.2%, prior 0.4%
• 10am: NAHB Housing Market Index, est. 65, prior 65
• 10am: Business Inventories, est. 0.3%, prior 0.4%
• 2pm: FOMC Rate Decision
  
• 4pm: Total Net TIC Flows, prior $42.8b deficit; Net Long-term TIC Flows, prior $12.9b deficit

* * *

DB’s Jim Reid concludes the overnight wrap

As the east coast gets back to normal today we’re set for a busy day of US data (CPI the highlight) with a likely Fed hike and Dutch election thrown in for good measure. To start with today we’ll preview the FOMC and Dutch election.

With a Fed rate hike virtually nailed on today thanks to some skilful Fed speak over the past two weeks, the main focus for the market will be the dots. DB’s Joe LaVorgna expects the median 2017 “dot” to remain at 1.375%, because it would take four of the six policymakers currently at the median to raise their forecasts, which he thinks is a lot given the uncertainties over Trump’s fiscal policy. However he does expect about one or two policymakers to increase their year-end 2017 fed funds projection, and this could impact next year’s median forecast. Only two participants currently at the 2018 median of 2.125% need to raise their forecasts for the 2018 median to rise to 2.375%. In addition, only one of the two Fed officials currently at the 2019 median of 2.875% would need to raise their forecast for the median to increase to 3.0% or possibly 3.125%. So Joe believes there is roughly a one in three chance that the 2017 median dot goes up 25 bps to 1.625%, but the 2018 and 2019 median dots will likely increase. Joe is overall of the opinion that a ‘dovish hike’ is going to be tough with the dots edging up and a Committee that is getting more confident in its outlook which Chair Yellen will want to  emphasize. So all eyes on 6pm GMT.

Today also brings the Dutch elections which DB’s Jochen Moebert fully previewed in this week’s Focus Europe (pages 15-18 of https://goo.gl/QBifW6). Exit polls will be available soon after polls close at 21:00. The latest polls suggest established parties have slightly gained ground at the expense of the right-wing PVV and other Euro sceptic parties. Although the PVV have lost the lead in the polls they are still expected to come second in a tight race. However their current opinion polling is around half the 30% our economists think is necessary for the other parties to be unable to ignore them in forming the coalition. So a Euro friendly coalition is likely but the PVVs success (or lack of it) relative to their recent polling might give us clues as to how pollsters are doing in capturing non-establishment movements after poor performance with Brexit and President Trump. A big outperformance might renew fears of a Le Pen victory in France or at least increase the probabilities. Obviously the opposite is also true. So for us that’s the subplot to this election. If we take the latest poll from each of the 5 main pollsters (I&O, Ispos, TNS and Peil published yesterday and Monday), the average is just under 15% for the PVV (range: from 10.7% to 16.0%) and just under 18% for the VVD (from 16.0% to 19.3%). There are 3 other parties in the low teens (the best of these are CDA who are only slightly behind PVV). So for PVV and populism not finishing first will be a disappointment relative to a few weeks ago but now with support supposedly waning maybe hanging onto second and only 2-3% behind the VVD will be par.

Ahead of today’s main events markets have been fairly reluctant to really get going so far this week. That said Oil has been doing its best to keep everyone on their toes. The main news yesterday was the monthly OPEC report which revealed that Saudi Arabia’s production had increased in February to the tune of about 263k barrels a day to more than 10 million barrels again which reverses around a third of the cuts the kingdom had made in January in the wake of the OPEC agreement. In conjunction with OPEC also raising their forecast for non-OPEC supply growth in 2017, WTI tumbled to an intraday low yesterday of $47.09/bbl (about -2.70% on the day) which is the lowest price since the end of November. However the report prompted a rare public response from Saudi Arabia with the energy minister issuing a statement saying that the kingdom “assures the market that it is committed and determined to stabilising the global oil market by working closely with all other participating OPEC and non-OPEC producers”. WTI has actually ended up doing a complete u-turn since and is back to $48.56/bbl this morning which is pretty much where it closed on Monday with some suggestion that the API data showing a drop in US crude inventories last week also helped provide some support.

The turnaround for Oil did however come too late in the day for risk assets. With the energy sector alone down -1.10% the S&P 500 closed -0.34%, albeit on volumes some 20% below the usual average reflecting the impact of the storm. It’s worth noting that the index hasn’t closed down more than 1% in 105 sessions now which is the longest streak since 1995. In Europe a similar drag from energy stocks saw the Stoxx 600 finish -0.31%. Commodity-sensitive and EM currencies also suffered with the Russian Ruble (-0.59%) and Norwegian Krone (-0.54%) standing out. Sterling also fell -0.54% albeit for a different reason following that confirmation from Parliament which cleared PM May for the triggering of Article 50. A Bloomberg report yesterday suggested that the EU is considering forcing May to wait until June before discussing negotiating the formal Brexit terms. That throws up a few issues not least limiting the amount of time May will have to complete negotiations. Our FX colleagues reiterated yesterday in their FX daily that Sterling has room to fall much further given that; (i) financial fair value metrics point much lower, (ii) longer-run valuation metrics are not stretched, (iii) inflows are drying up, (iv) growth expectations are not pricing hard Brexit and (v) political risks have yet to materialize. Their H2’17 target is 1.14 in GBP/USD. A link to the report is attached here https://goo.gl/wbStod.

Meanwhile credit markets continue to feel a bit sluggish. The CDX IG and iTraxx Main indices were 1bp and 1.5bps wider yesterday while US HY spreads were 10bps wider in cash terms. In fact US HY spreads have now widened for 8 sessions in a row and in that time are 42bps wider and at the widest level now (at 408bps) since February 8th. US HY energy spreads were also 13bps wider yesterday and at 475bps are now at the widest level since December 8th. Those moves in credit also came despite a backdrop of stronger rates with 10y Treasuries and Bunds finishing -2.6bps and -2.5bps lower respectively.

This morning in Asia it’s been a similarly subdued session. While the Nikkei (-0.25%), Hang Seng (-0.05%) and Kospi (-0.13%) are modestly in the red, the ASX (+0.09%) along with bourses in China (Shanghai Comp +0.08%) are a touch firmer. The latter coming while China premier Li Keqiang is making final remarks at China’s NPC. Li told his audience that he doesn’t want to see a trade war with the US, emphasised that China will maintain basic stability in the renminbi and is not looking at depreciating the currency in order to boost exports.

Moving on. With regards to the data yesterday, in the US the main highlight was the February PPI report. Headline PPI was reported as rising a bit more than expected during the month (+0.3% mom vs. +0.1% expected) lifting the annual rate to +2.2% yoy while the same could also be said for the ex food, energy and trade print (+0.3% mom vs. +0.2% expected). Meanwhile the NFIB small business optimism reading came in at 105.3 for February which was down a tad from the 105.9 in January. Closer to home there were no surprises in the final revisions to the February CPI report in Germany with headline inflation confirmed at +0.7% mom and +2.2% yoy. The ZEW survey was also released and showed a rise in the current situations index this month to 77.3 from 76.4, albeit a slight miss versus expectations for 78.0.

Before we wrap up, yesterday our European equity strategists published a report looking at what’s being priced for global growth. While some investors expect an acceleration in US GDP growth over the coming quarters to lead to further upside for equities, Tom Pearce on DB’s European equity strategy team argues that much of the good news is already in the price. European equities, which are up by 9% over the past six months, have continued to track global PMIs, which have just seen the largest rise in nearly five years. Even if US GDP growth were to hit 4%, this would be consistent with only marginal further upside for global PMIs and, hence, European equities. What is more, our strategist thinks the most likely scenario is a slight fade in global PMIs over the coming months. This would point to a pull-back of around 5% for European equities. A link to the report can be found here. https://goo.gl/oT6fCf.

Looking at today’s calendar, this morning in Europe the early data due out is from France where any final revisions to the February CPI report will be made. Thereafter we will get the January and February employment data in the UK before Q4 employment data for the Euro area is released. Over in the US this afternoon the calendar is packed. The big releases are due out shortly after lunch and include the aforementioned February CPI report where the market consensus is for 0.0% mom and +0.2% mom for the headline and core respectively. Our US economists are forecasting +0.1% and +0.2%. At the same time we will also get the latest retail sales data for February where the consensus is for a +0.1% mom headline print and +0.2% mom ex auto and gas print. Due out at the same time will be the March empire manufacturing print where a modest decline is expected. Later in the afternoon we will then get the NAHB housing market index print for March and January business inventories. All of this comes before the aforementioned FOMC meeting this evening followed by Yellen’s press conference shortly after. The other focus today will of course be the Dutch election. It’s worth also keeping an eye on Brexit Secretary David Davi

In a setback for Dutch firebrand Geert Wilders, the first Dutch exit polls are out and his Partij voor de Vrijheid, or Party for Freedom, has only won 19 seats, tied with most of the secondary parties, in line with polls that were predicting a sharp drop off in support in recent days. The winner: prime minister Mark Rutte’s PVV, or People’s Party for Freedom and Democracy, with 31 seats.

Other exit polls show a similar breakdown:

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Europe Elects @EuropeElects

Netherlands, Ipsos exit poll:

VVD-ALDE: 21%
CDA-EPP 13%
PVV-ENF 13%
D66-ALDE 13%
GL-G/EFA 11%
SP-LEFT 9%
PvdA-S&D 6%#DutchVote #TK2017

4:04 PM – 15 Mar 2017

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Developing.

Authored by Michael Shedlock via MishTalk.com,

Despite a massive rally in the stock market, Illinois public pension liabilities continue to grow.

GARS, the Illinois General Assembly Retirement System, is only 13.52% funded, down from 17% funded in 2013. How long can GARS last?

Meanwhile, Illinois has accrued a combined net pension liability of roughly $130 billion on which it assumes a 7% return.

Effectively, that is an interest liability of $9.1 billion a year even though that liability technically does not bear interest.

This is a guest post from Michael Lucci at the Illinois Policy Institute.

Interest on Illinois’ Pension Debt is $9.1 Billion Per Year

Illinois isn’t covering the interest payments on its pension debt. Those interest payments total $9.1 billion a year.

This is the reason Illinois’ pension debt continues to grow. As with personal credit card debt, until the interest is paid off none of the actual debt gets erased. Illinois’ pension debt is so large that it’s unlikely payments will cover the interest on the pension debt until 2028, according to a November 2016 special pension briefing from the Commission on Government Forecasting and Accountability.

Illinois politicians have known for years about the state’s pension crisis, even if they have not taken serious steps to address the problem. Gov. Bruce Rauner recently spoke out on the cost of interest on the pension debt. Former Gov. George Ryan weighed in as well, saying:

“First off, the biggest problem we got with the budget right now is the interest they are paying on the debt. If I were the governor, … I’d say we are never going to be able to pay the full debt back, so let’s eliminate half the debt right now and write it off.

 

“If that’s not constitutional, it might be worth changing the constitution. That would dramatically reduce the amount of interest that they’re paying. The bond ratings would go up and the interest would go down.”

Ryan seemed to be referring to the annual “interest cost” on Illinois’ pension debt, which is about $9.1 billion per year, or $25 million per day. The portion of interest cost that isn’t covered each year is simply added to the debt.

Why Illinois’ pension debt keeps growing

Illinois has about $78 billion in assets on hand to pay for pensions. But the present value of the state’s accrued liability is $208 billion. That leaves a difference of $130 billion, which is money the state owes – but doesn’t have.

Illinois pension math assumes an annual investment return rate of just over 7 percent on $208 billion in pension assets. If pension assets end up returning less than 7 percent per year, then the actual pension liability will end up being much larger than is currently assumed.

However, $130 billion of that accrued pension liability doesn’t exist, which is considered the pension debt. This debt does not bear interest like a bond does – but it functions the same way in reality. Because $130 billion is missing, Illinois will automatically miss out on the 7 percent annual investment return on that nonexistent $130 billion. This “missed” investment return is about $9.1 billion per year, and is essentially the interest cost on the $130 billion pension debt.

Illinois’ type of payment plan, which fails to cover interest, is called “negative amortization.” The debt principal continues to grow because the pension payment does not cover the interest cost. The portion of the interest payment that isn’t covered is added to the debt.

As actuary Tia Goss Sawhney explained, a full pension payment is made up of three parts:

Full payment = Employer normal cost + interest cost + principal reduction payment

However, Illinois’ scheduled pension payments are too small to cover the normal cost and interest cost, causing the unfunded liability to go up. For example, in fiscal year 2018, Illinois will make an $8.9 billion pension payment, which will cover the $2.1 billion employer normal cost and $6.8 billion of annual interest cost. However, the annual interest cost is actually $9.1 billion, meaning that after the employer’s portion of the normal cost, Illinois will come up $2.3 billion short on the interest payment. The unpaid portion of the interest cost is added to the debt, just as if a person didn’t cover the full interest payment on a home loan or credit card. In Illinois’ case, that $2.3 billion shortfall will be added to the pension debt.

The reason the principal reduction payment is negative is because the debt grows.

Illinois needs a constitutional amendment to allow for real pension reform

As Ryan pointed out, Illinois’ pension math might never add up without reducing the $130 billion pension debt, which the Illinois Constitution currently protects from being restructured. Even though Illinois is already overtaxed, and pension costs are driving up taxes more each year, the state still can’t cover the interest cost on the pension debt until 2028. On top of that, many local communities like Chicago have pension problems that are even more severe than the state’s problems. And the math gets even worse if Illinois doesn’t hit investment returns of 7 percent per year.

A golden rule of finance is this: Debt that can’t be paid won’t be paid. The state should develop a contingency plan to repeal the Illinois Constitution’s pension protection clause and restructure pension obligations to pull Illinois out of a potential death spiral should the need arise. Such a plan should preserve benefits for government workers with modest pensions while means-testing the richer pension benefits. This would almost certainly be challenged as a violation of the contracts clause of the U.S. Constitution, and the U.S. Supreme Court might ultimately decide the matter.

Illinois might be one serious recession away from a financial death spiral. A deep recession would reduce the value of pension assets while also causing tax revenues to decline. Illinois’ pension obligations would increase just as tax revenues dried up. After such a recession ended, out-migration would likely surge as Illinoisans increasingly realized the impossibility of financing their government’s spending promises. If financial assets fall and do not recover, Illinois’ pension math might be doomed.

The battered ship of Illinois’ finances is lurching toward a rocky shore. Lawmakers should develop a contingency plan for an emergency situation, and be prepared to enact it in order to salvage the state’s finance.

Michael Lucci

Start Mish Comments – Death Spiral

Lucci noted: “Illinois might be one serious recession away from a financial death spiral.”

He is too optimistic. Illinois’ pension is in a financial death spiral whether a recession hits or not.

Despite a massive rally, state of Illinois pension liabilities grew. It will not take a recession for a crisis to hit. Illinois is in a crisis now.

That crisis will be obvious to everyone when a big correction hits the stock market. Like it or not, a big correction is guaranteed at some point.

Blowing Bubbles

Thanks to the monetary policies of the Fed, ECB, Bank of China, Bank of Japan, and central banks in general, stock markets have now surpassed the 1929 high in bubbliness.

Only the dot-com bubble was bigger.

John Hussman has an excellent write-up of the bubble in When Speculators Prosper Through Ignorance.

Pater Tenebrarum at the Acting Man blog continues the discussion with Speculative Blow-Offs in Stock Markets – Part 2

Destructive Bubbles

Central banks’ seriously misguided attempts to fight routine consumer price deflation, fueled very destructive asset bubbles that eventually collapse.

Worse yet, many pension plans did not even benefit from the speculative boom, but they sure will participate in the next collapse.

GMO 7-Year Forecast

As of the end of 2016, GMO forecast real (inflation-adjusted) losses in both US stocks and bonds for the next seven years!

Things are so bubbly now, that GMO now foresees nominal losses in US equities. At this juncture, even gains of say 3.5% for the next seven years would sink the system.

Pension Reality

Public unions are already screaming for tax hikes to bail them out. Giving in to such an approach would do nothing but further drive businesses and wealthy Illinoisans out of the state, compounding the problem.

It’s time to admit reality: The Illinois pension system is insolvent, and not just at the state level. Illinois cities are also impacted.

Illinois Cure

• At the municipal level, we need bankruptcy legislation so that cities and municipalities can shed liabilities in bankruptcy proceedings.
• At the state level, we need pension reform. I propose taxing pension benefits above a certain level at a high enough rate to make the system solvent.

How likely is that?

For the answer, please recall my opening remarks: GARS, the Illinois General Assembly Retirement System, is only 13.52% funded, down from 17% funded in 2013.

Illinois is in a pension crisis. Forced admission of that fact will soon be thrust on Illinois politicians who will undoubtedly have an eye on your pocketbook. In fact, they already do: Mary Pat at Stump reports Illinois wants to tax ALL THE THINGS!

National Problem

Lest you think only Illinois is affected by this mess please consider:

1. Dallas on Verge of Bankruptcy Due to Pensions; Just a Matter of Time (For Dallas, Houston, LA, Oakland, Chicago, etc)
2. Criminal Witch Hunt in Dallas Pension Fiasco
3. In Search of a Fix (When None is Possible): What Happens?

National Cure

Every state in the union will be affected as soon as the stock rally subsides. Even flat returns for seven years would bankrupt most state pension systems.

Corrupt states like Illinois will never address the problem properly.

We need national bankruptcy legislation to allow municipal bankruptcies in every state, national right-to-work legislation, and the end of prevailing wage laws to lower cost burdens on cash-strapped cities and states

While Rachel Maddow drones on with the coherence of Janet Yellen, losing thousands of viewers by the minute, the MSNBC anchor was promptly scooped not only by the White House which revealed her “secret” one hour in advance, but also by the Daily Beast which reported that its contributor David Cay Johnston had obtained the first two pages of Trump’s 2005 federal income tax return, allegedly receiving them in the mail, and posted his “analysts” on his website, DCReport.org.

According to the documents, Trump and his wife Melania paid $38 million in total income tax, consisting of $5.3 million in regular federal income tax, and an additional $31 million of “alternative minimum tax,” or AMT.

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The_Real_Fly @The_Real_Fly

Clean copies of Trump’s tax returns

10:03 PM – 14 Mar 2017

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The White House statement confirmed the finding:  “Before being elected President, Mr. Trump was one of the most successful businessmen in the world with a responsibility to his company, his family and his employees to pay no more tax than legally required,” the White House said in a statement. “That being said, Mr. Trump paid $38 million dollars even after taking into account large scale depreciation for construction, on an income of more than $150 million dollars, as well as paying tens of millions of dollars in other taxes such as sales and excise taxes and employment taxes and this illegally published return proves just that.”

As the Beast notes, 2005 was the year that Trump, then a newly minted reality star, made his last big score as a real-life real estate developer, when he sold two properties, one on Manhattan’s west side and one in San Francisco, to Hong Kong investors, accounting for the lion’s share of his income that year.

“It is totally illegal to steal and publish tax returns,” the White House statement concluded. “The dishonest media can continue to make this part of their agenda, while the President will focus on his, which includes tax reform that will benefit all Americans.”

But the real story here is that there is no story: what MSNBC confirmed is that Trump made more money than some of his critics said he made in the period in question, and more importantly, that he paid a generous effective income tax rate, well above the 14.1% rate paid by Mitt Romney, and even higher than the 13.5% federal tax rate paid by Bernie Sanders in 2014.

Sadly for Maddow, with this attempt at a “blockbuster” story which has quickly backfired, she may well have killed the great distraction that was the trope of Trump’s tax returns, and which the rest of the “resistance” press hammered on every now and then.

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Mark Dice

✔@MarkDice

It took over 30 years for someone to top @GeraldoRivera for biggest over-hyped live TV epic fail in history. You did it Rachel Maddow !

 

end

The GPO chair of the House Intelligence Pane states after hearing closed door testimony that there was not an actual tap of the Trump Tower.  That will not go over to well with the Trump camp.

(courtesy zero hedge)

GOP Chair Of House Intel Panel: “I Don’t Think There Was An Actual Tap Of Trump Tower”

In the starkest denial of Donald Trump’s allegations yet that the Trump Tower had been hacked by the Obama administration, the GOP’s Chair of the House Intelligence Panel, Devin Nunes, confirmed what he said last week, namely that his panel has still not received any evidence that President Trump was wiretapped during the election campaign. “As I told you last week about the issue with the president talking about tapping Trump Tower, that evidence still remains the same, that we don’t have any evidence that that took place.” Nunes told reporters.

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House intelligence chair: “We don’t have any evidence…I don’t think there was an actual tap of Trump Tower.” http://cnb.cx/2nspQNY 

11:58 AM – 15 Mar 2017

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It is not the first time Nunes has stated that there is no evidence to suggest Trump was wiretapped.  However, today for the first time he took a formal position, in effect accusing Trump of fabricating his allegation, saying that “in fact, I don’t believe just in the last week of time, the people we’ve talked to, I don’t think there was an actual tap of Trump Tower.”

Additionally, also today Jeff Sessions said he did not give Trump a reason to believe he was being wiretapped.

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Attorney General Jeff Sessions says he did not give Trump a reason to believe he was wiretapped. http://cnb.cx/2nspQNY 

12:05 PM – 15 Mar 2017

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While previously FBI Director James Comey urged the DOJ to refute Trump’s statement because of a lack of evidence, the agency has not done so. The DOJ was expected to turn over to the House Intelligence Committee any information backing up Trump’s claim by Monday, however it has since requested for more time.

Meanwhile White House press secretary Sean Spicer on Tuesday said Trump is “extremely confident” that the Justice Department will produce evidence to back up his assertion. He said Trump believes the evidence will “vindicate him.”

“I think there’s significant reporting about surveillance techniques that existed throughout the 2016 election,” Spicer said.

 

END

Goldman Sachs’ alumni taking over the White House as banker Donovan has the key deputy Treasurer position

(courtesy zerohedge)

Trump Nominates Another Goldman Banker For Key Treasury Position

In the latest creeping takeover by Goldman Sachs of the White House, overnight the White House announced that Donald Trump will nominate another Goldman Sachs banker, James Donovan, for a key financial post as deputy Treasury secretary, the White House said on Tuesday, adding another alumnus of the Wall Street investment bank to his administration. Donovan joins his former peers, Treasury Secretary Steven Mnuchin and chief Economic advisor, Gary Cohn, who are also former Goldman executives who occupy senior economic posts within the administration.

Donovan’s work at the bank as a managing director has included work on corporate strategy, investment banking and investment management, the White House said in a statement.  He is expected to work on the Trump administration’s domestic policy agenda at Treasury.

In a note from Capital Alpha’s Ian Katz following the announcement, the strategist writes that Donald Trump and his team are “shrugging off” concerns they’ll be accused of turning the administration into a “Goldman Sachs reunion.” He adds that with other appointments, including Justin Muzinich, formerly of Morgan Stanley, and former BlackRock exec Craig Phillips as counselors to Treasury Secretary Steven Mnuchin, the Treasury lineup now has “a distinctly financey feel”; that’s good for the finance industry as the team “speaks its language, understands its issues.”

Sadly, as history has shown, what’s “good for Wall Street” ends up being rather bad for Main Street.

Additionally, Trump also nominated David Malpass – who served as a former economist at Bear Stearns prior to its 2008 collapse and most recently served as an economic adviser to Trump’s campaign – as its nominee for Treasury undersecretary for international affairs, a key economic diplomacy post. Malpass is also a former official in the Ronald Reagan and George H.W. Bush administrations.

The White House also named former national security and federal law enforcement official Sigal Mandelker to the Treasury’s top sanctions post as undersecretary for terrorism and financial intelligence. A former law clerk for Supreme Court Justice Clarence Thomas, Mandelker later held a series of criminal prosecution positions at the Department of Justice and advised the Secretary of Homeland Security during the George W. Bush administration.

While the swarm of Goldman bankers at the White House is indisputable, what is perhaps more notable is that Goldman appears to no longer have as much an interest in populating central banks as the executive branch, suggesting that the key policy going forward will be, as many have suspected, not monetary but fiscal, unless of course Congress is unable to come to an agreement on any one core issue, in which case we estimate that many of the new Goldman hires will quietly depart over the next year as they realize that their agenda will be difficult to implement under Trump.

end

Intelligence sources reveal how Obama was able to spy on Trump:  he used British agents who have 24/7 access to the NSA data base. They would then forward the conversations over to Obama.

such crooks

(courtesy Mac Slavo.SHTFPlan.com)

 

Intelligence Sources Reveal: Obama Used British Agents For Trump Wire Tap Surveillance

Authored by Mac Slavo via SHTFplan.com,

While President Obama has vehemently denied issuing direct orders to the Justice Department or other domestic agencies to monitor President Trump during the 2016 election campaign, it is common knowledge that the National Security Agency has the ability to access video and audio from any number of devices in real time. In fact, according to Edward Snowden and documented in the recently released Snowden motion picture, U.S. spy agencies can simply flip a switch to watch or listen in on anything going on in a particular room by turning on a particular device’s cameras and microphones.

Here’s how it works:

The technology is real, but according to legal scholars, would have been illegal to use on Donald Trump or his surrogates without a warrant or probable cause indicating links to terrorist organizations.

But while domestic spy agencies like the NSA and CIA can’t actively monitor a citizen on U.S. soil, there is a very convenient work-around that has been used for over a decade to accomplish this task without technically breaking the law.

According to three intelligence sources who spoke with Judge Napolitano, this is exactly what President Obama did to then-candidate Donald Trump.

Steve Watson of Infowars.com explains:

Three separate intelligence sources believe that former President Obama veered ‘outside the chain of command’ and employed British surveillance agents to conduct surveillance on Donald Trump’s team prior to the election, according to a legal analyst.

 

Judge Andrew Napolitano revealed on ‘Fox & Friends’ this morning that the sources spilled the details to him as the controversial case continues to dominate headlines.

 

“Three intelligence sources have informed Fox News that President Obama went outside the chain of command,” Napolitano said. “He didn’t use the NSA, he didn’t use the CIA, he didn’t use the FBI, and he didn’t use the Department of Justice.”

 

“He used GCHQ.” Napolitano explained.

 

“What the heck is GCHQ? That’s the initials for the British spying agency. They have 24/7 access to the NSA database.” The Judge explained.

 

Napolitano noted that this was done to secure plausible deniability. In other words, even if the Obama administration did spy on Trump, there may never be a way to prove it.

 

“So by simply having two people go to them saying, ‘President Obama needs transcripts of conversations involving candidate Trump, conversations involving president-elect Trump,’ he’s able to get it, and there’s no American fingerprints on this. ”Napolitano added.

Video:

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.@Judgenap: Three intel sources have disclosed that Pres. Obama turned to British spies to get surveillance on Trump

7:56 AM – 14 Mar 2017

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 end

Real earnings  ( Earnings – inflation) tumbles for the second straight month.  This is important to Yellen who needs to see real wage growth

(courtesy zero hedge)

What Wage Growth? Real Earnings Tumble For Second Straight Month

Despite the surge in consumer confidence and exuberance at what lies ahead, real wages for America’s average joes declined year-over-year in February (down 0.3%). This is the first consecutive monthly drop in real wages since 2011(which forced Bernanke to to hint at and then unleash QE2 later that year).

 

 

So not only is The Fed hiking into the weakest GDP growth outlook since 1987, now they are hiking into declining real wage growth (something that has previously driven The Fed to a massively dovish stance).

end

 

Retail sales falter:

(courtesy Bloomberg)

U.S. Retail Sales in February Post Smallest Gain in Six Months

Bloomberg

March 15, 2017, 8:30 AM EDT

U.S. retail sales in February posted the smallest gain in six months, indicating a tempering of the consumer spending that’s been carrying the economy.

Purchases rose 0.1 percent, matching the Bloomberg survey median estimate, after a 0.6 percent increase in the prior month that was stronger than previously reported, Commerce Department figures showed Wednesday. Just four of the 13 major retail categories saw gains in February sales.

Receipts dropped at electronics and appliances stores, apparel outlets and car dealers, a sign of more moderate consumption in the first quarter. While purchases may have been restrained by a temporary slowdown in individual tax refunds, robust confidence, healthy job growth and steady incomes may provide some fuel for a recovery in spending.

February was “relatively weak, and one of the reasons is the delay of tax refunds,” Eugenio Aleman, senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina, said before the report. Still, “confidence numbers are through the roof and if employment continues to grow it’s only going to strengthen the consumer.”

Estimates for retail sales in the Bloomberg survey ranged from a 0.3 percent decrease to a 0.5 percent advance. The January reading was previously reported as a 0.4 percent rise.

The figures used to calculate gross domestic product, which exclude categories such as food services, auto dealers, home-improvement stores and service stations, rose 0.1 percent. That followed the prior month’s 0.8 percent increase in the so-called retail control group.

A separate report Wednesday from the Labor Department showed inflation is slowly emerging. The consumer-price index rose 0.1 percent after a 0.6 percent jump in January. Compared with a year earlier, the CPI was up 2.7 percent, the most since March 2012.

The pickup in price pressures at the start of the year led to the biggest drop in inflation-adjusted spending since 2009, according to separate Commerce Department data earlier this month.

Tax Refunds

Part of the reason for the weaker retail sales figures, which aren’t adjusted for changes in prices, may be due to a change in the law that affects tax refunds. The Internal Revenue Service said that some filers wouldn’t receive refunds until the last week of February.

About $127 billion in refunds were processed this year through the week ended Feb. 24, about 10.5 percent less than in the same period in 2016.

The Commerce Department’s report also showed retail sales excluding automobiles and service stations increased 0.2 percent.

Industry data earlier this month showed car sales in February were little changed from a month earlier. Cars and light trucks sold at an annualized 17.5 million pace, based on Ward’s Automotive data.

Sales at stores that sell electronics and appliances slumped 2.8 percent, the most since December 2011. Receipts at gasoline stations fell 0.6 percent, while sales dropped 0.5 percent at clothing chains and 0.2 percent at general merchandise stores.

Internet-based purchases rose, while sales of furniture, personal-care products and building materials also increased.

-END-

 

Homebuilders are now completely confident as Trump will ease the burden on permitting:

(courtesy zero hedge)

Homebuilders Have Not Been This Confident Since The Peak Of The Last Housing Bubble

Builder confidence in the market for newly-built single-family homes jumped six points to a level of 71 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). This is the highest reading since June 2005 – the ultimate peak of the last housing bubble.

What happens next?

“Builders are buoyed by President Trump’s actions on regulatory reform, particularly his recent executive order to rescind or revise the waters of the U.S. rule that impacts permitting,” said NAHB Chairman Granger MacDonald, a home builder and developer from Kerrville, Texas.

“While builders are clearly confident, we expect some moderation in the index moving forward,” said NAHB Chief Economist Robert Dietz. “Builders continue to face a number of challenges, including rising material prices, higher mortgage rates, and shortages of lots and labor.”

All three HMI components posted robust gains in March. The component gauging current sales conditions increased seven points to 78 while the index charting sales expectations in the next six months rose five points to 78. Meanwhile, the component measuring buyer traffic jumped eight points to 54. Looking at the three-month moving averages for regional HMI scores, the Midwest increased three points to 68 and the South rose one point to 68. The West dipped three points to 76 and the Northeast edged one point lower to 48.

Of course, “It is difficult to get a man to understand something, when his salary depends upon his not understanding it!”

end

 

Tomorrow the Debt ceiling is re instated at 20.1 trillion. They have burned through $2. billion dollars per day. They will reach this level in a few days once their cash treasury account runs out. Carson Block agrees with Trump that they will not have enough votes to obtain a new debt ceiling as they need 237 votes and will get 207 votes as the Tea party members will vote against it.

(courtesy Carson Block/Bloomberg)

Carson Block: “The Possibility Of US Default Is Greater Than Anyone Seems To Realize”

 

Authored by Carson Block via Bloomberg.com,

Euphoria has been pervasive in the stock market since the election. But investors seem to be overlooking the risk of a U.S. government default resulting from a failure by Congress to raise the debt ceiling. The possibility is greater than anyone seems to realize, even with a supposedly unified government.

In particular, the markets seem to be ignoring two vital numbers, which together could have profound consequences for global markets: 218 and $189 billion. In order to raise or suspend the debt ceiling (which will technically be reinstated on March 16), 218 votes are needed in the House of Representatives. The Treasury’s cash balance will need to last until this happens, or the U.S. will default.

The opening cash balance this month was $189 billion, and Treasury is burning an average of $2 billion per day – with the ability to issue new debt. Net redemptions of existing debt not held by the government are running north of $100 billion a month. Treasury Secretary Steven Mnuchin has acknowledged the coming deadline, encouraging Congress last week to raise the limit immediately.

Reaching 218 votes in favor of raising or suspending the debt ceiling might be harder than in any previous fiscal showdown. President Donald Trump almost certainly wants to raise the ceiling, but he may not have the votes. While Republicans control 237 seats in the House, the Tea Party wing of the party has in the past has steadfastly refused to go along with increases.

The Republican Party is already facing a revolt on its right flank over its failure to offer a clean repeal of the Affordable Care Act. Many members of this resistance constitute the ultra-right “Freedom Caucus,” which was willing to stand its ground during previous debt ceiling showdowns. The Freedom Caucus has 29 members, which means there might be only 208 votes to raise the ceiling. (It’s interesting to recall that, in 2013, President Trump himself tweeted that he was “embarrassed” that Republicans had voted to extend the ceiling.)

It may be unrealistic to expect Democrats to save the day – at least initially. House Democrats may be more than happy to sit back and watch Republicans fight among themselves. If the Democrats eventually ride to the rescue, it probably won’t be until after a period of Republican-on-Republican violence.

Nobody wants the Treasury to reach the point where it has to prioritize payment of interest over other obligations – a threshold where creditworthiness and market confidence will have begun to retreat. The bond market already seems to be reacting to this possibility, sending yields higher and prices lower, even as the S&P/Dow/Nasdaq have been on a tear and are showing scant concern over the potential turmoil.

In an ideal world, all sides would come together and not play politics with the debt ceiling again. Clearly that’s not the world in which we live. America’s partisan divide may now be so wide that a default will occur. That isn’t my base case scenario, but we will probably come down to the wire

end

 

Throughout the past several weeks, I have been telling you the bricks and mortar operations in the uSA are in trouble especially malls.  Department store sales did falter badly last month with today’s reading of 5.6% down year over year.

It seems that there is blood on the table and the bankers will be going after debt instruments on these malls.

(courtesy zero hedge)

The Next “Big Short” Tumbles To 13-Month Lows As Dept Store Sales Crash

This arcane financial instrument appears to be quickly becoming ‘ground zero’ for the “next big short” of this bull cycle.

Last week we introduced the CMBX Series 6 as potentially the next ‘big short’ – a credit derivative contract that allows betting against securities backed by malls in weaker locations where stores could close in quick succession, triggering debt defaults. Based on fundamentals, the trade indeed appears justified: “Sold in 2012, the mortgage bonds have a higher concentration of loans to regional malls and shopping centers than similar securities issued since the financial crisis. And because of the way CMBS are structured, the BBB- and BB rated notes are the first to suffer losses when underlying loans go belly up.”

“These malls are dying, and we see very limited prospect of a turnaround in performance,” according to a January report from Alder Hill, which began shorting the securities. “We expect 2017 to be a tipping point.”

 

Cracks have started to appear. Prices on the BBB- pool of CMBS have slumped from roughly 96 cents on the dollar in late January to 87.08 cents last week, index data compiled by Markit show.

And now a few days later, we see Department Store sales crashing by the most on record. One particular chart revealed in the latest monthly Bank of America debit and credit card spending report shows that things may be about to get a whole lot worse for America’s department stores, as well as malls where they are for the most part the anchor tenants.

And today’s official retail sales data confirms the collapse – department store sales down 5.6% YoY.

And, as we would expect, CMBX S6 BBB- tranche prices have tumbled further – to their lowest since February 2016…

Bloomberg followed up our post with a not-so-subtly-titled “Wall Street Has Found Its Next Big Short” in which it writes that “Wall Street speculators are zeroing in on the next U.S. credit crisis: the mall…. It’s no secret many mall complexes have been struggling for years as Americans do more of their shopping online. But now, they’re catching the eye of hedge-fund types who think some may soon buckle under their debts, much the way many homeowners did nearly a decade ago.”

The trade, as we discussed before, is not so much shorting the equities where a persistent threat of a short squeeze has burned the bears on more than one occasion, but going long default risk via CMBX or otherwise shorting the CMBS complex.

Like the run-up to the housing debacle, a small but growing group of firms are positioning to profit from a collapse that could spur a wave of defaults. Their target: securities backed not by subprime mortgages, but by loans taken out by beleaguered mall and shopping center operators. With bad news piling up for anchor chains like Macy’s and J.C. Penney, bearish bets against commercial mortgage-backed securities are growing.

To be sure, as we first noted last week and as Bloomberg confirms, the activity surrounding CMBS shorting has soared:

In recent weeks, firms such as Alder Hill Management — an outfit started by protégés of hedge-fund billionaire David Tepper — have ramped up wagers against the bonds, which have held up far better than the shares of beaten-down retailers. By one measure, short positions on two of the riskiest slices of CMBS surged to $5.3 billion last month — a 50 percent jump from a year ago.

 

The trade itself is similar to those that Michael Burry and Steve Eisman made against the housing market before the financial crisis, made famous by the book and movie “The Big Short.” Often called credit protection, buyers of the contracts are paid for CMBS losses that occur when malls and shopping centers fall behind on their loans. In return, they pay monthly premiums to the seller (usually a bank) as long as they hold the position.

 

This year, traders bought a net $985 million contracts that target the two riskiest types of CMBS, according to the Depository Trust & Clearing Corp. That’s more than five times the purchases in the prior three months.

Whatever the case, here’s what the endgame might look like. About two hours north of Manhattan, in Kingston, New York, stands the Hudson Valley Mall. It used to house J.C. Penney and Macy’s. But both then left, gutting the complex. In January, the mall was sold for less than 20 percent of the original $50 million loan. Mortgage-bond holders exposed to the loan were partly wiped out.

“When a mall starts to falter, the end result is typically binary in nature,” said Matt Tortorello, a senior analyst at Kroll Bond Rating Agency. “It’s either the mall is going to survive or it’s going take a substantial loss.”

end

Well that is all for today

I will see you tomorrow night

H