There was a time when the Fed's QE was, at least on paper, supposed to generate jobs (the broad inflation will come on its own, in due course). After all, the prospect of injecting $85 billion in liquidity into a market with the sole goal of pushing the stock markets that benefit the purchasing power of about 10% of the population would hardly have received broad approval even by the co-opted Congress. So, to all those who still naively claim Fed is not the sole reason for the market's relentless march higher, those billions in liquidity must go into the economy, and specifically into job creation, right? As a result, we decided to back into what the average private sector job has ended up costing the US population in pure dollar terms (which in turn ultimately manifests itself in terms of unsustainable government debt and pent up inflation) via the Fed's monetary pathway. Well, according to the ADP data released earlier, in which a paltry 130K private sector jobs were created in a month in which the Fed, as always, injected $85 billion, the bottom line came to a whopping $654K per job! And taking the average job growth throughout 2013, this number, as can be seen on the chart below, is a laughter-inducing $553K!
Another day, another broken market microstructure:
- *BATS OPTIONS HAS DECLARED SELF-HELP VS INTL SECURITIES EXCHANGE
- *NASDAQ OMX PHLX HAS DECLARED SELF HELP AGAINST ISE, ISE GEMINI
Perhaps we should rename the US equity (stock and options) markets - NasdaCare
It's painfully obvious that real estate valuations are once again at asset-bubble extremes. Defenders of current real estate valuations can draw upon an array of justifications, but they boil down to the same one used to justify valuations in every asset bubble: this time it's different.
In yesterday's stage-setting drama, "coming in mid-November" replaced of the often heard "plead the fifth" as response of choice for Marilyn Tavenner (CMS Administrator). Today brings the main event, amid another server crash, as Kathleen Sebelius (HHS Secretary) takes the stand to explain healthcare.gov's shortcomings and how great it will all be at some point in the future if we just have some patience, spend a few more billions of taxpayer money on lines of code, and ignore the fact that the website is just the start of the problems with Obamacare... Her initial remarks (released early - below) are almost exactly the same as her testimony to Congress (and a carbon copy of Tavenner's remarks): “I want to assure you that HealthCare.gov can be fixed, and we are working around the clock to give you the experience that you deserve.”
If there was another reason for the Fed to keep its foot 'through' the floor, it is the fact that despite a record growth in the Fed balance sheet YoY, CPI (ex food and energy) dropped to 1.7% and missed by its biggest margin in 14 months. This is the 2nd lowest print in two-and-a-half years. Perhaps most dismally, real hourly wages rose at only 0.9% year-over-year - around half the rate of inflation. Overall, energy costs rose the most MoM (+0.8%) while Apparel fell 0.5% MoM (its biggest drop in 6 months as we suspect the JCP-driven sales deflation has begun already); and given Sebelius' testimony today we note that healthcare costs are up 2.4% YoY (almost triple the rate of wage increase).
As we mentioned earlier, if there was one thing that would guarantee an 1800 print in the Stalingrad and Propaganda 500 index today, it was a 0 or negative ADP print. Well, it wasn't that bad. But it was close: with a paltry 130K private jobs created in October, this was a monthly plunge in private (i.e. non-government) payrolls, well below expectations, and substantially lower than the September 166K print which also was revised lower to 145K. It was also the 4th consecutive monthly decline starting with a 190K print in June, and it's all downhill from there. Finally, this was the 7th ADP miss in the past 8 months. We can't wait as the spinmasters do all they can to explain how private payrolls were affected by a government shutdown.
Remember when minutes before the September FOMC announcement everyone was absolutely certain the Fed would announce tapering, only to leave a lot of very angry traders fuming? Fast forward one month when everyone is absolutely certain, again, that there is no way the Fed can announce anything even remotely suggesting a taper. One wonders though: since the Fed has by now burned all credibility bridges, and since the capital market bubble is now far greater than it was when both Stein and Bernanke, implicitly, warned about a building asset bubble (a chorus which has now been joined by JPM, Pimco and BlackRock) in early 2013, would today not be the best opportunity for the Fed to once again stun the market with a dramatic policy U-Turn, just to teach those momentum wave-riding vacuum tubes who is in charge? Probably not. However, as Lloyd Christamas noted, there is a chance. Deutsche Bank's Jim Reid explains why.
- Morning Humor from Hilsenrath - Fed Balance Sheet Not Seen Returning to Normal Until at Least 2019 (WSJ)
- Health Policies Canceled in Latest Hurdle for Obamacare (BBG)
- Was there anything RBS was not manipulating? RBS Said to Review Currency-Trading Practices Amid Probe (BBG)
- Sebelius to Testify Before House Panel (WSJ)
- And more humor: Spain's Statistics Institute Confirms End of Recession (WSJ) ... and now we await the triple dip
- Finally some credible reporting on Yellen's "foresight" - Yellen feared housing bust but did not raise public alarm (Reuters)
- Japan government moves closer to Fukushima takeover (FT)
- China to step up own security after new NSA allegations (Reuters)
- Blackstone Vies With Goldman in Spain Rental Housing Bet (BBG)
- In new U.S. budget talks, Republican proposal has flipped the script (Reuters)
The overnight fireworks out of China's interbank market, which saw a surge in repo and Shibor rates (O/N +78 to 5.23%, 1 Week +64.6 to 5.59%) once more following the lack of a follow through reverse repo as described previously, and once again exposed the rogue gallery of sellside "analysts" as clueless penguins all of whom predicted a quick resumption of Chinese interbank normalcy, did absolutely nothing to make the San Diego's weatherman's forecast of the overnight Fed-driven futures any more difficult: "stocks will be... up. back to you." And so they were, despite as DB puts it, "yesterday saw another round of slightly softer US data that helped drive the S&P 500 and Dow Jones to fresh highs" and "the release of weaker than expected Japanese IP numbers hasn’t dampened sentiment in Japanese equities" or for that matter megacorp Japan Tobacco firing 20% of its workforce - thanks Abenomics. Ah, remember when data mattered? Nevermind - long live and prosper in the New Normal. Heading into US trading, today the markets will be transfixed by the FOMC announcement at 2 pm, which will likely say nothing at all (although there is a chance for a surprise - more shortly), and to a lesser extent the ADP Private Payrolls number, which as many have suggested, that if it prints at 0 or goes negative, 1800 on the S&P is assured as early as today.
The first and last time a critical data center for Obamacare crashed this past Sunday night, leading to healthcare.gov becoming completely inaccessible and thus halting enrollment (assuming there had been any in the first place but of course allowing the government to blame any lack thereof on Verizon), we said "whether or not Verizon fixes the glitch any time soon, or merely lets it linger, one thing is becoming obvious: the Obamacare delay, which was hard fought by the Teaparty, and which was so opposed by the administration leading to the grotesque 16 day government shutdown, has all but become a reality with every passing day. Only instead of someone actually taking responsibility, said delay will be scapegoated on Verizon's data centers, faulty fiber-optic and copper cables, Cisco switches, Syrian hackers, millions of lines of faulty (Fortran?) code, inept contractors, end users who never read the Help.doc file, and everyone and everything else. Just never the government itself." Once again, we were proven correct when overnight the Connecticut state healthcare exchange, "Access Health CT", announced that the Obamacare data hub was "experiencing an outage" on Tuesday evening. The culprit - Verizon once again. Which answered our question: not Syrian hackers or Cisco but, conveniently, Verizon Terremark.
If ever there was a few minutes of television to confirm the deep-seated disconnect between reality and the ivory-tower academics pulling the levers behind the curtain, CNBC's Rick Santelli just exposed it. For once, simple questions were enough to allow none other than Nobel-Prize-winning economist Eugene Fama to show Santelli (who did his best not to explode in incredulity) that the "smartest people in the room" just don't get it (just as they didn't get it in 2007). Santelli was gracious and polite as he asked what the great professor's thoughts were on QE... (and the entire brief clip is worth watching in its entirety) but his conclusion is perhaps the most stunning (and left Santelli almost silent)... when asked the impact of the Fed 'Tapering' or even selling down its $4 trillion in assets, Fama calmly says "it's basically a neutral event... It's No Big Deal!" Indeed, professor, that is so clear...
The last two weeks have seen US equity markets on a one-way path to the moon, breaking multi-year records in terms of rate of change and soaring to new all-time highs. However, away from the mainstream media's glare, another 'market' has been soaring - but this time it is not good news. Chinese overnight repo rates - the harbinger of ultimate liquidity crisis - have exploded from 6-month lows (at 2.5%) to 4-month highs (6.7% today). The PBOC even added liquidity for the first time in months yesterday (via Reverse Repo - at much higher than normal rates) but clearly, that was not enough and the banks are running scared once again that the re-ignition of the housing bubble in China will mean more than 'selective' liquidity restrictions.
"It's gotten pretty frothy," is how one portfolio manager describes the behavior in internet-based companies currently as signs of pre-2000 exuberance can be seen in Silicon Valley and the nearby area. As WSJ reports, home prices in San Francisco and surrounding counties rose more than 15% in the past year. Office rents in San Francisco are 23% above their 2008 peak. As SnapChat, Pinterest, and Twitter are set to join such illustrious names as RocketFuel; asset managers are careful to remind suckers investors that it's not at all like 1999 - companies going public are more mature, the leadership teams more seasoned, the business models more proven - but the "reach for growth" at all costs echoes Kyle Bass' remarks that "financial memory is no longer than two years," with even younger and more revenue-deprived companies come to market at massively elevated multiples.
Debt always matters because it must always be paid for by someone - even if the borrower defaults, of course, the debt is simply “paid” by the lender. As China Financial Markets' Michael Pettis notes, this is why the fact that debt in China seems to be growing much faster than debt-servicing capacity implies slower growth in the future. The author of "Avoiding The Fall", explains that if the debt cannot be fully serviced by the increase in productivity created by the investment that the debt funded, unless it is funded by liquidating state sector assets it must cause a reduction in demand elsewhere, most probably in household consumption. Therefore, in spite of all the hope among global stock-buying hope-mongers, this reduction in demand implies slower growth in the future and, of course, a more difficult rebalancing process.