It seems high-yield credit was on to something as we noted last night (here and here). Today's matrix-like collapse in equity perceptions of decoupling and central bank largesse sets up for more of the same as we suspect the ECB will hold off from acting until post-Greek-election to ensure the M.A.D. 'game' remains in place and with rates where they are, Bernanke will have to come up with some magical wording for his next QE raison d'etre. Today's 2.5% drop in the S&P 500 back below its 200DMA, its largest single-day drop in seven months, and the accompanying flood into safe-havens has left Gold and Treasury Bonds now outperforming Stocks for the year (with the Dow red YTD). S&P 500 e-mini futures volume was it highest of the year as we sit at the edge of the waterfall level from last July/August's plunge. Gold's 4% gain is the biggest day since January 2009. Treasury yields plunged to new all-time record lows with 30Y showing a 2.50% handle and 10Y a 1.43% handle. All the high-beta hope names were crushed with financials down 3.7% - their largest fall in 7 months (with the majors even more). VIX jumped 2.6 vols to close above 26.5% at 7 month highs. What is perhaps most disconcerting is the total lack of bounce into the close now two days-in-a-row - deer, meet headlights.
There was one thing that the Roller-Upper-Of-Sleeves-In-Chief forgot to mention in his 1 pm rehearsed oratory today: the highlighted number below. And certainly the chart below showing the relative change in US GDP and debt. Since we can only assume the president was too busy pontificating on other very important things, we are happy to fill in the hole.n only assume he was too busy covering other important things, we are happy to fill in the holes.
The balance sheet recession that seems to have correctly diagnosed the problem facing Japan (and now Europe and the US) - explicitly causing debt minimzation as opposed to profit maximization - seems to be taking hold. However, it appears this death-knell for credit-created growth is now being seen in China - as AlsoSprachAnalyst interprets "people are not borrowing, but selling assets to pay down debts, and/or holding cash". What is most worrisome is that while the focus of the world has been on European bank runs (for fear of bank failure and redenomination risk), 21st Century Business Herald now notes that these bank runs have spread to China's industrial and construction-heavy city of Wuyishan. Queues were seen on various branches of China Construction Bank, Agricultural Bank of China, and Industrial and Commercial Bank of China. One local resident told the reporter that the city “has gone crazy”.
While the analogs to 2011 and 2010 have come thick and fast and our early January call for a three-peat has proved all too correct so far, the last few days are starting to really scream 2011 chaos regimes as Gold, Stocks, Treasuries, and the USD are now mimicking the 'reaction function' of investors faced with a world on its own. Just as last year, Treasury yields were first to go, then stocks and gold diverged as the USD surged. Ironic that this is occurring on the day when Gold and 30Y Treasury bond prices are now outperforming the S&P 500 YTD.
I am a child of an age laden with illusory wealth, and have benefitted (for a short time at least) from the financial fakery of our economic system, as have many Americans. Most of us have not had to suffer through the unmitigated poverty, hopelessness, and relentless fear that are pervasive in harsher days. All our problems could be cured with money, especially government money, and as long as the greenbacks were flowing, we didn’t care where they came from. Ultimately, though, the ease of our well-to-do welfare kingdom has set us up for a cultural failure of epic proportions. Anytime a society allows itself to be conditioned with dependency, its fate is sealed. We do not know what crisis really is. Many Americans barely have an inkling of what it entails. We imagine it, in films, in books, and in our own minds, but the fantasy is almost numbing. We lose sight of the tangible grating salty rawness of the worst of things, while imagining ourselves to be “aware”. Most people today are like newborns playing merrily in a pit of wolves. Preppers, on the other hand, are those who seek to understand what the rest of the public goes out of its way to ignore. They embrace the reality and inevitability of disaster, and suddenly, like magic, they are able to see its oncoming potential where others cannot (or will not). The price they pay for this extended vision, however, is high…
In one of the best clips we can remember, Rick Santelli and Gary Kaminsky show just what happens when the kool-aid-drinkers are allowed to speak frankly about our predicament. Instead of constant silver-lining-seeking or trotting out failed truism after failed truism, the two men (who notably have been actual market participants as opposed to mere observers) take on the uncertainty and unpredictability that weighs heavy on our global economies as governments break the rules time and time again - and took advantage of crisis "getting away with anything". Focusing back on what could happen if the market were allowed to think for itself, Kamintelli deface the edifice of central banker largesse and blame it for the actual demise we face - noting that it is now clear that whether it is QE or actual rate easing, using jobs as the argument for excessive intervention is a failed concept. On a Friday that seems to have devolved into a low volume sideways nudge in equities, this is six minutes well spent as they ask and answer the question: "Have rates been too low for too long?" and how those who played by the 'rules' continue to be the ones who are penalized. There is hope for recovery if the market is allowed to find its own level - "it will get better, but the deleveraging pain still has to be taken all over the world."
Today's "do a shot" keywords of choice: "jobs", "congress", "economy", "fair", "speculators", "pass this bill", "cash for clunkers", "Stuxnet", "Solyndra" and "sugar drinks". Obviously, if we have any readers left alive after this sermon, it will be a victory for the bulls.
Perhaps the only thing more spectacular than being punk'd by a rogue shareholder who uses the proxy statement of one of the world's biggest financial firms as a public venue for some quite disturbing humor, is that nobody in the US has decided to do this to the hated US financials firms. Yet.
Depending on whether you look at broad liquid risk markets or narrow manipulated 'repressed' illiquid markets, your take on today's European action will be different. Equity markets were crushed. Corporate and Financial credit spreads blew wider. Volatility (Europe's VIX) exploded over 36%. So far so good? But Italian and Spanish bonds rallied. It seems EUR96 was the line in the sand that the ECB (or their proxy banks) decided was enough for Spanish 10Y bonds and that was where they were defended to (though we are suspicious why ECB would step in now after 4 months absence). There was eventually some notable divergence between underperforming Spain and outperforming Italy by the close (+40bps on the week vs +27bps). We suspect that much of the sovereign outperformance was a combination of Sovereign CDS-Bond basis traders (buying bonds and buying protection in Spain to lock in that wide spread) and a replay of the short financial credit, long domestic sovereign credit trade (as in banks will underperform the sovereign if things hit the fan/wall). That is the flow that was evident when looked at across markets. All in all, a terrible end to an awful week and hopefully we have helped explain why sovereigns outperformed (technicals) as CDS remain at wides and stocks at lows.
In perhaps the under-statement of the year, BofA's Economics group note that "May's unemployment report was a disappointment" with evidence of a weather reversal and weakness concentrated in construction, leisure, and temporary help. Pointing out that "This is the recovery of fits and starts", BofA believes we are entering a slow patch in the second half of the year. They do not see this report as sufficient to prompt Fed action in June, but it makes August QE increasingly likely. The weakness in the US data is overlapping with an intensifying crisis in Europe, which means the risk-off trade continues.
Just in case someone did not get the earlier BLS-doctored message, the final two economic indicators of the day just printed and were... drumroll... misses. Because remember: not only the 1%ers but the 99ers have to be begging Bernanke to print. And so he will: ISM Manufacturing prints at 53.5, down from 54.8, and expectations of 53.8. Prices Paid plunge by 13.5, but the kicker: 5 out of the ISM's 10 sub indices are now in contraction territory.. And the cherry on top: Construction Spending unchanged from an upward revised 0.3 to 0.3, obviously, missing expectations of a jump to 0.4. Looking forward to the Tim Geithner Op-Ed: "Welcome to the recession."