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"Treasury-selling" Tuesday came and went and for the 2nd week in a row, bond yields rose (+2-3bps) following the 7th losing Monday in a row. Equity markets languished amid dismal volumes but were rangebound all day apart form AUDJPY and VIX-driven pumps to try and close green and keep the Tuesday dream alive (and the running count of new all-time highs). The USD jumped once again as EUR tested lower (near Draghi spike lows). Gold and silver saw a squeeze higher at the open this morning and maintained gains (as fears of CCFD unwinds spread) but copper rose as WTI crude touched 9-month highs then reversed sharply lower. As we forecast this morning, a mid-day VIX plunge and late-day JPY tumble (and another VIX plunge) sparked just enough exuberant buying panic among the machines to manipulate stocks to a green close and save the Tuesday plan. Stocks have fallen only 2 days in the last 3 weeks...
Thanks to free and abundant credit to those at the front of the line, home prices have soared in the last few years as "smart" hedge fund managers have bought homes-to-rent in a yield-grab with both hands and feet. This - as we have noted numerous times - priced out the 'real' buyer; who this time, instead of being driven by a "fear of missing out", would rather not play (only to be left holding the bag). Another unintended consequence courtesy of The Fed's "main-street-helping" actions that has destroyed the American Dream for a declining middle class. Fewer Americans think it's a good time to buy a home than at any time in the last 4 years... "recovery"!
Employment in the United States is becoming increasingly polarized, growing ever more concentrated in the highest- and lowest-paying occupations and creating growing income inequality. As the Dallas Fed explains, market changes involving middle-skill jobs in the U.S. are hastening labor market polarization. So-called "Routine" jobs have declined from 58% of employment in 1981 to 44% in 2011, while both types of non-routine jobs have expanded. Since 1990, none of the routine jobs lost in these downturns came back in the following expansions. This is a problem since middle-skill, routine jobs still account for almost half of all existing jobs; and as the Dallas Fed concludes, the pace of labor market polarization is unlikely to slow down anytime soon.
For the first time since early 2010, the risk of European investment grade credit is lower than that of the US. As BofA notes, recall that the European sovereign crisis escalated in the first part of 2010, as Greece had to be bailed out for the first time, and concerns spread to other countries in the periphery. However, that European spreads have now recovered - after trading at times more than 60bps weaker than US spreads - reflects more on differential technicals (flows) than fundamentals (reality). Credit spreads are currently driven mainly by technicals; this is not to say that technicals in the US credit market are not strong – they are – only that European technicals are stronger. Furthermore, with now completely divergent central banks, BofAML believes that European technicals are going to remain stronger for longer. As they conclude, "relatively stronger US fundamentals lead to relatively weaker technicals," - or put another way "good news is bad news" for US credit markets...
When one thinks of millionaires and billionaires, the countries USA, China and UK usually come to mind. And while in terms of absolute numbers of millionaires and ultra high net worth individuals (those with more than $100 million in assets) this would be correct (and since these countries also have the greatest number of poor people too, it merely confirms the record gap between the rich and poor), a very different view emerges when observing the world's uber wealthy not on an absolute but relative basis. In that case, when ranked by millionaires as a proportion of the population, the top three nations are Qatar, Switzerland and Singapore where millionaires account for more than 10% of all households, while a ranking of the most UHNW individuals per 100,000 households gives Hong Kong, Switzerland and Austria in the top three spots.
A computer program called “Eugene Goostman,” has reportedly become the first artificially created human being to fool more than 30% of judges that he is a real person (the Turing Test). It is thought to be the first computer to pass the iconic test. Though other programs have claimed successes, those included set topics or questions in advance. The computer program claims to be a 13-year-old boy from Odessa in Ukraine. This is particularly interesting in light of a recent piece from the MIT Technology Review titled, "How Advanced Socialbots Have Infiltrated Twitter," which demonstrated the ability of Twitterbots (i.e., fake computer generated Twitter accounts) to not only gain more followers than actual human users, but to also infiltrate social groups within Twitter and exercise influence within them.
Remember how small Greece was and how it wasn't relevant to US stocks... until suddenly it got close to breaking up the EU and the world's markets slumped. Remember how small subprime was? Remember how Lehman was not a 'big' bank? We hear the same "why would that impact us?" chatter now about the China rehypothecation scandal and we suspect the outcome will be just as dramatic a "whocouldanode" moment for many. The problem, as this chart so simply explains, is "more warrants than the volume of the underlying physical commodities have been issued in the repo business" and that is a problem for every foreign bank that was tempted into China's carry trade (which is "every" bank).
For all those analysts who thought the debt binge of the previous decade marked end of the Age of Leverage, well, not so fast. It turns out that memories are short and government printing presses are powerful, and this combination has turned the “Great Deleveraging” into a minor speed bump on the road to something even more extreme. It was just six years ago that soaring consumer spending, massive trade deficits and generally excessive debt caused the biggest crisis since the Great Depression, and here we are back at it. The details are slightly different but the net effect is the same: inflated asset prices, growing instability and rising risk of a systemic failure capable of pulling down pretty much the whole show.
As we showed a week ago, it is not just the coincident housing signals confirming that the latest artificial bounce has faded, but both upstream and downstream indicators. Specifically, we showed that lumber prices - that one component so critical in the building of new homes and a traditional leading indicator - have cratered. That's the upstream indicator. As for the downstream, we go to Bank of America which finds that not only has home improvement store spending declined substantially since the dead housing bounce peak last summer, but that furniture spending according to BofA estimates, is now once again negative: the first such drop since early 2012.
Yet again, headlines are scrolling fast with details of another school shooting; this time at Reynolds High School in Oregon. It is unclear how many students were shot or injured but police report the shooter is dead. However, in a clear indication of the growing anger among the American people at the frequency (and responses) to these shooting sprees, one father of a student trapped in the school explained that his wife was "in culture shock;" being from Iran, he said, "if this happened there, all the families would show up with guns and take care of it."
In a week dominated by headlines of heroes and D-Day celebrations, we suspect President Obama was hoping for a patriotic bump in his ratings... but as The Hill reports, people in the United States say President Obama paid too high a price for the release of Army Sgt. Bowe Bergdahl, and largely disapprove of the administration’s handling of the swap, according to a pair of new polls. Only 34% of those polled (by USA Today/ Pew) backed Obama's decision as 'the right thing' but more crucially, it appears the President's ongoing push towards tyranny that is most worrisome as 72% said Obama should have informed Congress before making the deal.
Just like in April of last year, the simplest explanation why bond yields continue to defy conventional wisdom and decline is also the most accurate one. According to a revised calculation by JPM's Nikolaos Panigirtzoglou, the reason why investors simply can't get enough of Treasurys is about as simple as its gets: even with the Fed tapering its QE, which is expected to end in October, there is still much more demand than supply, $460 billion more! (And this doesn't even include the ravenous appetite of "Belgium".) This compares to JPM's October 2013 forecast that there would be $200 billion more supply than demand: a swing of more than $600 billion! One can see why everyone was flatfooted.
You know things have got a little too strange when the largest government bond market in the world saw no futures trades in the morning session last night. We may complain in the US of falling volumes but none, zero, zip, nada is about as low as it gets; and that is how many trades occurred in the 20Y futures contract in Japan (and 10Y cash bond market). This is not the first time as Mizuho warned in Nov 2013 that "to all intents and purposes, there is no JGB market." And this lack of trading on a day when major macro data printed far worse than expected... well played Abe... you entirely broke your bond market.
In effect, those who join the majority thrashing around the spot where the food has been consumed are guaranteed to go hungry. We submit that the stock market is like a fish tank, and the majority are thrashing around precisely where the yield/alpha has been consumed and the risk of starving (losing money) is greatest. Now that the majority is tightly packed into a market devoid of yield/alpha, this concentration sets up the inevitable collapse of valuations perfectly.