Following up on last week's twelve WTF charts, we thought it might be appropriate to look at the current equity market's efficient discounting knowledge relative to eight historically correlated risk-asset markets. What do stocks know that these markets are 'inefficiently' believing in?
The stock market is not crashing yet, but there are lots of other market crashes happening in the financial world right now. Just like we saw back in 2008, it is taking stocks a little bit of extra time to catch up with economic reality. But almost everywhere else you look, there are signs that a financial avalanche has begun.
Asset price correlations across a wide spectrum of industries and asset classes are meaningfully lower than the last few months. ConvergEx's Nick Colas note that this is something completely unexpected: we’ve approached a “Normal” capital market over the last 30 days. S&P 500 sector correlations are below 80% relative to the index, foreign stocks are 77-87% correlated to U.S. stocks, and even domestic high yield corporate bonds are 56% dancing to their own tune. However, before we run off celebrating the return to a stock-picker’s market, it is worth noting one statistical point worth your time: when industry sector correlations have dropped below 80% from 2010 to the present, the subsequent one month, one quarter and one year returns have been below average, especially the shorter time frames.
We live in a world now which may be described as, "Nothing Matters."
The money pours in each month from America, Europe and Japan and overrides anything and everything else. With pre-payments and calls the estimated amount of money provided by the Fed for the world's monetary supply is approximately $100 billion every month. It is not just the American banks that are the recipients of the hand-out but the foreign ones who ship it back to Europe or buy European sovereign debt courtesy of Mr. Bernanke. I suspect that if the American taxpayers were aware of the scheme that the citizens would not be pleased but then what the Fed is doing is not generally part of polite conversation in America and so it is not discussed.
The investment environment is changing at a rate that's representative of global economic imbalances, fund flows, and geopolitical risks. We believe this decade will continue to witness greatly increased volatility and instability in the economies of the world and the global financial system. Very few past models are still valid (and most have been proved 'empirically' in real-time to be entirely fallacious). Such a situation has contributed to the extreme uncertainty that currently prevails. Our guiding principle is to help investors understand and navigate through all the complexities of an unstable, inflation-prone world. The following ten themes will be key drivers of financial market performance over the next 1 to 5 years.
Curious why the USDJPY is in freefall after hours? Thank Jack Lew, and the after the close release of the semi-annual "Report to Congress on International Economic and Exchange Rate Policies." Traditionally the place where many have looked to see if the US would declare China a currency manipulator (which will never happen for obvious reasons), this time there was a big Easter egg lying in wait for those who did a word search for "competitive devaluation" - namely that it was located in the section discussing Japan.
Gold was Bitcoin'd (or Baumgartner'd) as it suffered its biggest daily drop since LTRO2 on 2/29/12. The JPY rallied over 1% - its biggest rise in 7 weeks. 10Y Treasuries had their best day in 7 weeks. Macro data was absymal. But it was evident that the only thing mattered was a new high close for the Dow - as we noted 10 minutes before the close:
EURUSD must ramp over 1.31 for green DJIA
— zerohedge (@zerohedge) April 12, 2013
And thanks to some help from the old ramp standbys - HYG and VIX - they nearly made it (but not quite) as the Dow ended -0.08 points rallying 75 points off the lows on the worst macro data day in months, with the EURUSD ramping just the right amount over 1.31.
This must be bullish. While the rise in railcar loadings (whether driven by the rotation from pipelines to rail or a 'real' recovery in the economy) has been impressive off the lows and had got back to pre-recession levels, this year is not looking so good. The typical seasonal pattern - somewhat obviously - starts around mid January and rises all year tending to roll over around the start of November into holiday season. 1995 was the last year that intermodal railcar loadings rolled over notably away from this pattern. Since mid-January, 2013 has seen a notably different pattern from the norm - worse than 2009's abrupt plunge.
Earlier today, as part of our JPM earnings recap we observed that "VaR plunged from $106 to $62" and wondered if it was just just "another excel copy/paste error" which as we reported previously, is what JPM's internal audit attributed much of the confusion surrounding JPM's VaR calculation around the time the London Whale blow up nearly doubled the firm's VaR. Because it is always better to blame a clueless intern for botching Excel than to put the blame where it rightfully belongs. It turns out that as frequently happens, there was a dose of financial surreality behind the humor. As Bloomberg reports, the reason for the nearly 50% collapse in the company's reported maximum value at risk was because of, drumroll, yet another change in the model. 'JPMorgan said today it employed a new formula to judge the risk of its credit derivatives position, at least the fourth such model it’s used since January 2012. The portfolio was built by Bruno Iksil, known as the London Whale because his bets were so big they moved markets."
First there was Japan's 'capture' of the Senkakus and the looming troubles that small island will lead to with the Chinese. Then came the economic deflationary spiral, as the global devaluation of developed market currencies prompted Japan to start an aggressive currency war of their own. And now, with North Korea's sabre rattling growing ever louder, Fox News reports that following comments by Japan's Yoshihide Suga on "destroying any missile heading towards Japan," the North Koreans retorted with a threat that Tokyo would be the first target if they decide to play the nuclear card. Luckily, we have John Kerry on the spot, "if Kim Jong Un decides to launch a missile, whether it's across the Sea of Japan or some other direction, he will be choosing willfully to ignore the entire international community," as he weighed in on comments leaked yesterday that North Korea now had the know-how to arm a ballistic missile with a nuclear warhead - even if the weapons would lack reliability. Which is worse an unreliable nuclear missile or a reliable one? Though there is a silver lining, since if a broken window creates a Keynesian utopia, just think of the GDP-boosting greatness of a nuclear explosion in the heart of Roppongi.
Perhaps the most underfollowed story of the day is the blatant takeover of the Cypriot Central bank by the ECB, which as we reported earlier, has been ordered to sell their gold by the ECB's Mario Draghi, even though the disposition decision of the "independent" central bank of the now insolvent nation is supposedly theirs. First it was this:
- PANICOS DEMETRIADES SAYS CYPRUS CENTRAL BANK INDEPENDENCE UNDER ATTACK,
- DEMETRIADES SAYS GOVT WANTS TO SELL GOLD WITHOUT CONSULTATION.
And now we learn that not one, not two, but three board members of the central bank have called it a day:
- THIRD BOARD MEMBER OF THE CYPRUS CENTRAL BANK RESIGNS
We are sure there are at least a few more board members who can resign topped off by Panicos himself bailing, before the entire central bank implodes, and there is nobody left in charge of the now obsolete monetary policy apparatus. What happens then: will Goldman appoint a new "technocratic" Board and governor, or will the country finally confirm that all European lies about member bank Independence is just one big lie?