Friday Bullet Points

* So the BOJ was unched in the end.  Macro Man's not waiting up for the Kuroda press conference at 3.30 am NY time, but the hot rumour is that the BOJ will delay their forecast for attaining the inflation target by 6 months.   A bow to the inevitable, perhaps, but also maybe a first foray into building a case for further easing down the line.   Back to no-man's land for USD/JPY; in the near term, it feels like if that one is going to rally, it will be a dollar move, not a yen move.

* It's not often that potentially the most important economic story of the year has no impact on markets, but such was the case yesterday.   Although China's abandonment of the one-child policy will have no impact on near-term growth (or markets), in the very long term the country has done itself a service by hopefully mitigating the impact of its quasi-inverted population pyramid.  An increase in the working-age population by 2050 is necessary to avoid a potential Japan-type scenario, and the two-child policy will hopefully broaden the population of future age cohorts.

China's demographics come in stark contrast to India's, which are much more favourable for long-term growth; the question for India is whether it has the political will to establish the infrastructure and legal framework to achieve high levels of economic growth and a mass increase in living standards.


The US, meanwhile, has a bit of an issue with its largest age cohorts approaching retirement, though the younger population remains large enough in relative terms to keep the balls in the air for a good while yet.



It's a stark comparison to, say, Germany, which is a vision of what China could be/could have been in 25 -30 years or so.   It's also a clear example of why taking in as many (mostly young) refugees as possible is a good long-term plan; boosting the lower age cohorts through immigration will offer the sort of long-term economic support that nature just couldn't manage.

(All charts from http://www.indexmundi.com/)

* Yesterday's price action was a little odd.   US fixed income carried on from Wednesday, US equities tried to sell off but couldn't, European bank stocks got mullahed on the Deutsche Bank news....so of course EUR/USD corrected higher.  How very FX!  Still, the 2nd vs 10th ED contract spread mentioned here on several occasions finally looks to be breaking out.

*  Maybe it's a coincidence, maybe not, but Microsoft did its biggest-ever bond offering yesterday across the curve- seven different tenors from 3 years to 40 years.  In the old days IBM was famous for top-ticking the bond market with large corporate deals, and Apple launched its first-ever issue just before the taper tantrum in 2013.

* Private sector credit growth in Australia rose 6.7% y/y in September, its highest growth rate since the end of 2008.  Granted, the increase in credit is still puny by the standards of Australia's modern economic history, though the sort of numbers recorded for most of the last 30 years are clearly unsustainable ad infinitum. The market's pricing roughly a 40% chance of another rate cut next week...that looks a little high from Macro Man's perch, and he's be leery of selling AUD into a hole here.

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amplitudeinthehouse
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October 30, 2015 at 7:50 AM ×

Last comment , Macro Man...Mr No, I love you! May the American and English elite perish hell!

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Anonymous
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October 30, 2015 at 10:03 AM ×

if there is a trend you can't fight, is demographics. stronger than the steel curtain.

excellent article dude.

ciao f

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Anonymous
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October 30, 2015 at 12:16 PM ×

The problem is that even if they scrapped all population control policies, they'd not increase births by much. Possibly not at all. See cases Japan, South Korea, Taiwan. The only way to boost fertility rates is to adopt Nordic style child support/daycare, public all-expenses-paid education, work reform and change in attitude. It's the last that might be the most difficult. Once a nation has in their minds that a good family has one child, the attitudes are almost impossible to change.

Immigrants won't solve the problem either, just postpone it. The average migrant from Africa and Middle East (the only ones Europe will ever get) will take 5-10 years to employ, work in a low-skill low-pay profession, and live almost as long as the average "native". They won't be net contibutors to any pension scheme. Even their fertility rates will plummet and approach those of natives, making the problem even worse.

Short and mid-term immigration can be very positive for economic growth, however. At the very least gives us some time to fix the real problem.

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abee crombie
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October 30, 2015 at 12:19 PM ×

China has a huge problem in that they will likely be the first developing economy to get old before they get rich. At least they know it. Thats also why lots of ppl are dying to play China health care stocks, though there really are only a few good names, Sinopharm being the most common one I've come across so far (a Fosun company). As for the elimination of the 1 child policy, I think they talked about it before but its good its official now. MJN is a nice play on that...big chinese infant formula division

I was just thinking of AUD & CAD. I'm still bearish longer term, but they are looking nice for a bounce. And with the Surprise index already near lows, sentiment is probably all one way

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Anonymous
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October 30, 2015 at 12:44 PM ×

MM you probably appreciate just as much as I do the massive damage China's one child policy has done to its social and demographic fabric. I mean guys this is not trivial. Not only are you dealing with a society that's extremely male dominated, but it's hierarchical also. I bring up these two things to help explain the following:
A man in China who is middle class, gets married. His wife comes from a middle class family also. Yet despite her education, her earning potential there is minimal. Her parents and his parents have no contemporary skills. They will need support in the future, but guess what? So do his. Now my friend is supporting his in-laws, his parents, his wife as well as a child. This entire burden could have and should have been shared among many siblings on both sides. Instead one person will end up supporting 8. Although longer term, to me this is an impending crisis.

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Anonymous
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October 30, 2015 at 1:27 PM ×

Just to return to the FED and December. Does anyone know if the FED has ever actually raised the interest rate in December ever?
Maybe I have it wrong ,but I thought the Fed went to extra lengths to ensure dollar liquidity in the December holiday season. If that is right I can't see the logic between two actions which would appear to be contradictory in outcome.

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Anonymous
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October 30, 2015 at 2:38 PM ×

Oh, my...Someone is buying next year's April $VIX calls at the 75(!!!) strike.

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Anonymous
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October 30, 2015 at 2:53 PM ×

I don't buy the myth of demographics. Most of the countries mentioned just want "discount" workers, period. After years of being told Japan will implode because of the way their "financial engineering" has addressed the problem of their low birth rates, Japan is doing just fine. Abe even said he will not take in any refugees. No other country puts their citizens first. Just add demogaphics to the propagandists tools of globalism including climate change, diversity and multi-culturalism.

Tell me which country Central Bank is doing better...

http://imgur.com/k1lGznV

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Macro Man
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October 30, 2015 at 3:26 PM ×

Probably not the one that's seen nominal GDP shrink over the time period covered by your chart.

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Anonymous
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October 30, 2015 at 3:50 PM ×

You guys are too pessimistic about China. Yes the demographic trend is not pretty. But then as a developing country there is one advantage: you still got low-hanging fruit to pick. I am talking about productivity here. Using per capita GDP as a measurement, China's productivity is about 12% of the US productivity. So there is so much room to grow and it should not be that hard in the long term. Compared to Germany and Japan, they are rich but they do not have many low-hanging fruits left.

Now back to the market, I agreed with many here that Spoo should have dropped by now. But the fact that it isn't makes me wonder what kind of incentives for bulls to continue buying at this level. The most likely ones I can come up with are to chase performance and seasonality. I would like to build some short positions from here. But I wonder if I miss anything because market usually has good reason for not going to where we think it should go.

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washedup
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October 30, 2015 at 4:33 PM ×

anon 3:50 - chinese wages PPP adjusted are around 65% of the US now, so 12% productivity seems pretty s@#ty - fwiw I thought that number was more like 33% - that also explains why no one is dying to set up toy factories there anymore.

The demographics issue is suddenly relevant because of their stated claim to transform into a consumption led economy - just one problem - there is a big difference between a developing country that rapidly builds a bunch of infrastructure to export to the gringos, vs one that patiently waits for a motley growing mix of rice farmers, and fired steel mill workers to grow rich enough to afford iPhones. That difference amounts to 4-5% of GDP growth potential - thats not pessimistic, just realistic. The export led FAI model of growth, funded by govt loans for SOE blessed factories, is really easy to execute for a centrally planned dictatorship - the aspirational consumption led model is much harder - in fact, 3-4% CAGR growth, which is what I expect them to do over the next decade, for an already middle income country with a debt to GDP of 250% would actually be quite creditable.

As for spoos - I suppose the incentive is apparently just for fund managers to not be hedged into year end incase they are made to look stupid again - whether or not that actually happens, if everyone believes it will then its self fulfilling - as some of the wiser posters have suggested, perhaps the best move would be to be uninvolved for now and hope that a seasonal rally sets up better risk/reward.

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Polemic
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October 30, 2015 at 4:59 PM ×

I blame using GDP as a measure of polulation happiness. And population happiness is the actual end goal. If we always target growth and to grow we need to constatly drive the population ponzi scheme then it's a cure of destructive addiction for the wrong diagnosis.

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abee crombie
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October 30, 2015 at 5:55 PM ×

"I agreed with many here that Spoo should have dropped by now. But the fact that it isn't makes me wonder what kind of incentives for bulls to continue buying at this level. The most likely ones I can come up with are to chase performance and seasonality. I would like to build some short positions from here. But I wonder if I miss anything because market usually has good reason for not going to where we think it should go."

Last year everyone chased AAPL into YearEnd. This year it looks like Nasdaq 100 / software & services sector.. i have my eye on eu health care and Japan /EU cyclicals, the latter should play catch up if we go into melt up mode. For bottom pickers, some mREITs and MLPs still look interesting imo

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washedup
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October 30, 2015 at 7:10 PM ×

@MM - "Probably not the one that's seen nominal GDP shrink over the time period covered by your chart"

Just saw this - LMAO.

Pol - that is correct - rich populations that sacrifice mental peace for material prosperity are destined to achieve neither. I also find it somewhat amusing that for all its stated struggles with wealth inequality, the US does not seem to exhibit much happiness inequality - Americans at all income levels are quite miserable, some just eat more expensive ice cream when they are depressed.

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Leftback
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October 30, 2015 at 11:08 PM ×

Hmm. October is in the books. Two more months to go in the performance steeplechase. How about the following EoY scenarios:

1) A brief and small 1-2 day correction to open the month, then a low volume melt-up begins.
2) USDJPY and Spoos drift up again, tech and small caps lead. Just like July. Happy-Clappy time.
3) All the crap (Biotech etc.) that was bid this Summer gets bid again, mainly on short covering.
4) People finally realize rates will stay low, REITs and MLPs finally get some love as PMs dash from trash and look for yield.
5) Brazil, Russia, EM closed end funds etc all get dumped one last time during tax selling season. Bargain time.
6) Bucky reaches uncomfortable heights and there is one more sickening puke in crude oil prices.
7) US fixed income mainly goes nowhere. Some of the other havens, gilts, bunds are slowly being sold.
8) Peripheral spreads compress again, making Southern European bank stocks a good bet into EoY.
9) Precious metals and miners have a fairly miserable time of it into EoY, the CEFs offer some bargain pricing.
10) MM and LB post another irresistible musical offering that describes the market's mood.

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Anonymous
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October 31, 2015 at 3:04 AM ×

http://realmoney.thestreet.com/articles/10/30/2015/buy-sp-500-and-take-18-month-vacation

LB ... this guy says all you have to do is buy the SP500 and lie in the hammock for the next 18 months.

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Booger
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October 31, 2015 at 11:01 AM ×

AUD: agree with Abee, probably not a good risk:reward going into rba rate decision Tues. I would rather wait for a pop if there is no rate cut and short from there. If there is a rate cut, it will just drop and consolidate as there is unlikely to be a follow through rate cut in the next few months.

NZD: interesting that there is a spec long interest developing. Will be watching for better levels to short that too.

Has anyone been watching nat gas ? That has me very interested atm approaching $2. A commodity reaching 15 year lows with nothing positive about it gets me excited. Around 1.8 or the first bullish daily candle below 2.0 could be a good entry for at least a short covering rally.

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Anonymous
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October 31, 2015 at 4:04 PM ×

US inflation expectations, 5-year forward rates:

http://imgur.com/EeSwTal

Note to Yellen: Go ahead, raise rates. I dare you.

Sometime in the not too distant future we will suddenly realize that we never really understood what the central banks were doing nor what their so called models or data really meant. Everyone in the game that I speak to is nervous.

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Anonymous
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October 31, 2015 at 5:36 PM ×

It has been painfully obvious that DM central banks will NEVER raise rates. Why? Because if they do, their sovereign nations will go bust. Japan, USA, the UK et al CANNOT AFFORD TO PAY THE INTEREST ON THEIR DEBT AT "NORMAL" RATES. PERIOD.

People, wake up, please. This is not difficult to understand.

The outcome is simple: continued lies about official inflation, further financial repression, and manipulation of all financial markets for a VERY long time.

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October 31, 2015 at 6:08 PM ×

Thirst for income and yield will only continue to grow. Often long-term drivers are ignored in the short-term.

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Anonymous
admin
October 31, 2015 at 6:47 PM ×

Planet Money...

"After the financial crisis, the Federal Reserve created $3 trillion dollars. The goal was to try and keep the economy from collapsing. Now, as the economy recovers, the Fed is trying to figure out the best way to make that money vanish.

The Fed can usually just change the numbers in their system. And poof! The money is gone. This time, they'll need a new trick. Today on the show, how the Fed plans to make trillions of dollars disappear."

http://www.npr.org/sections/money/2015/10/23/451228005/episode-659-how-to-make-3-trillion-disappear

Kevin Ferry asks: "How can that not be bad?"

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Anonymous
admin
October 31, 2015 at 9:14 PM ×

Now they lie so much, they forget...

Commerce Department and third quarter growth GDP of 1.5 percent:

But how Commerce got to that 1.5 percent number is truly amazing.

Of the 1.5 percent, 0.45 of a percentage point came from increased health care spending. In other words, mandatory ObamaCare payments caused about one-third of the third-quarter GDP growth.

Without that forced spending, GDP growth would have been just 1 percent annualized.

But that ain’t all.

Increases in durable-goods spending contributed 0.48 of a percentage point to that 1.5 percent GDP number. Without that increase — on products like cars, refrigerators and planes, which are long-lasting — annualized third-quarter GDP would have been just 1.02 percent.

Here’s the bizarre part: Sales of durable goods have been in a free fall.

The Census Bureau, part of Commerce, reported earlier this week that durable goods sales in September fell 1.2 percent, after a 3 percent decline in August.

The only other month in the third quarter is July. And durable goods sales rose 2 percent in that month.

But how does an increase of 2 percent (in July), a decline of 3 percent (in August) and a drop of 1.2 percent in September add up to durable goods contributing 0.48 of a percentage point to the third-quarter GDP?

http://nypost.com/2015/10/29/the-commerce-departments-gdp-numbers-dont-make-any-sense/

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Bruce in Tennessee
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November 1, 2015 at 12:41 PM ×

anon @ 9.14:

Yes, I've been looking at this too and pondering...I spoke with my insurance agent about my Blue Cross insurance for next year last week. BC requested and received a 36% increase in fees for 2016, and after talking with her, this seems to be a nationwide trend for next year. I do recall the implementation of the consumption tax in Japan, and its effects just before the tax went into effect, and later. However, this bump in fees is just an added expenditure to be budgeted for, and will be with us for 12 months. I doubt there will be a December boost...

...In the old days, we'd have just called this a tax increase, and cut back on what we budget other items....might just have that effect for the new year......??

...ZIRPfinity?

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Anonymous
admin
November 1, 2015 at 5:41 PM ×

Anon @4:04pm

"San Francisco Federal Reserve President John Williams said on Friday that low neutral interest rates are a warning sign of possible changes in the U.S. economy that the central bank does not fully understand."

OK, I get it.

Sarah Horowitz, Board of Directors, New York Federal Reserve

http://www.newyorkfed.org/aboutthefed/orgchart/board/horowitz.html

Horowitz is an Obama crony who lost 340 million in taxpayers money running NY Obamacare co-op Harvest Republic

http://dailycaller.com/2015/09/30/exclusive-obamacares-failed-new-york-co-op-drew-most-consumer-complaints/

http://www.washingtonexaminer.com/insurer-with-nys-worst-record-of-complaints-gets-340m-obamacare-loan/article/2522229

http://www.washingtonexaminer.com/insurer-with-nys-worst-record-of-complaints-gets-340m-obamacare-loan/article/2522229

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Anonymous
admin
November 1, 2015 at 9:57 PM ×

Food for thought: there have been 606 global rate cuts since Lehman...

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Anonymous
admin
November 2, 2015 at 1:04 AM ×

I realize this has nothing to do with the market but...

Q4,’15 EPS estimate declines 2.2% in October, as 2016 forecast falls 1.8%

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Leftback
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November 2, 2015 at 3:28 AM ×

Spooz slightly lower overnight, and JPY slightly stronger. Indicative of a weak start to the new trading month. Three weeks to options expiration. Sentiment fairly strong at the moment. Time for some market weakness before vol sellers return in force?

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