So what are the scenarios for various potential outcomes? In simple terms we think a number close to or above 200k will intensify the tapering debate over the next few weeks. This is unlikely to be risk positive but there will be some offset from the strengthening of the recovery. However we think the tapering fear will dominate in a risk off trade. A number just above 150k might ease some of these fears but it won't completely eliminate them. A number between 75k and 150k will probably be the sweet spot for markets as the Fed will be pushed slightly off the agenda. Bonds will likely rally taking the risk complex with it. A number below 75k, although unlikely, would definitely reduce taper fears but might worry markets on growth and is unlikely to be as positive as a number between 75-150k. These scenarios are obviously fairly crude and have to be seen in conjunction with the revisions.
- Reports on surveillance of Americans fuel debate over privacy, security (Reuters)
- Apple to Yahoo Deny Providing Direct Access to Spy Agency (Bloomberg)
- Misfired 2010 email alerted IRS officials in Washington of targeting (Reuters)
- Spy vs Spy: Cyber disputes loom large as Obama meets China's Xi (Reuters)
- When NSA Calls, Companies Answer (WSJ)
- How the Robots Lost: High-Frequency Trading's Rise and Fall (BBG)
- Japan's Pension Fund to Buy More Stocks (WSJ)
- ‘Frankenstein’ CDOs twitch back to life (FT)
- China’s ‘great power’ call to the US could stir friction (FT)
- Toyota Tries on Corolla Look That’s Just Different Enough (BBG)
In our first Chart of the Day we present the Caracas stock exchange performance since 2012. It puts the action in the Nikkei (and BitCoin) to shame. It also explains why anyone selling $29.95 newsletters equating the "market" with the economy is a charlatan. Finally, it shows that in the great race to achieve a "wealth effect" utopia, one may not have toilet paper, but one will always have a soaring stock market.
To get a sense of the momentous volatility in Japan, consider that the Nikkei225 is more or less in the same numeric ballpark as the Dow Jones, and that each and every day now it continues to have intraday swings of more than 500 points! Last night was no different following swing from 13100 on the high side to 12548 on the low, or nearly 600 points, with all this ridiculous vol culminating in a close that was just red however for a simple reason that the rumor of the Japanese Pension Fund reallocation taking place hit shortly before the close sending the USDJPY higher by 200 pips... only for the news to emerge as an epic disappointment when it was revealed that the GPIF would raise its target allocation to domestic equities from 11% to... 12%. So much for the "Great Japanese Rotation."
The United States is estimated to have anything from 700 military bases around the world to more than 1000. Hans-Hermann Hoppe asks "how can democracy be a stable equilibrium if it is possible that it be transformed democratically into a dictatorship, i.e., a system which is considered not stable?" Empirically, democracies are anything but stable. Concluding it may be better to heed the advice of Erik von Kuehnelt-Leddihn and, instead of aiming to make the world safe for democracy, we try making it safe from democracy - everywhere, but most importantly in the United States.
One glance at the chart below and it is very clear that there is a glaring difference between the market's reaction to the Fed's QE and the BoJ's QQE. Aside from the magnitude and velocity of the equity market response that is, the Fed has been inherently volatility-suppressing (with VIX near all-time lows as stocks rise) while (aside from the last week or so), as the Nikkei surged, Japanese implied volatility also surged. As UBS' Larry Hatheway notes, fundamentally, Japan’s policy settings and preferences (moving from deflation to inflation, which is the stated objective of ‘Abenomics’) embed a great deal of implied volatility, only some of which has already manifested itself in asset prices. The proverbial cat has been thrown among the pigeons - scatter they must - the Fed’s QE has dampened volatility while the BoJ’s QE has boosted volatility. In sum, the price of success - where success is defined as ending deflation in Japan—is likely to be significant volatility in Japanese asset markets.
After everything that Barack Obama, the U.S. Congress and the Federal Reserve have tried to do, there has been no real economic recovery and now the U.S. economy is suddenly behaving as if it is 2009 all over again. A whole host of recent surveys indicate that the American people are starting to feel a bit better about the economy, but the underlying economic numbers tell an entirely different story. If we were going to have an "economic recovery", it should have happened in 2010, 2011 and 2012. Now we are rapidly approaching another major economic downturn.
Year-over-year inflation in Venezuela accelerated to 35.2% - up from 20.1% YoY in December. Goldman is concerned as the 6.1% MoM (the highest on record) in May means inflation is now endemic and the economy could easily veer from the current stagflation equilibrium into the dangerous and slippery road to hyperinflation. In a sentence that rings all to close to home, they sum up: All in all, we are increasingly concerned with the inflation and monetary dynamics in Venezuela as the classical Sargent and Wallace (1981) “unpleasant monetarist arithmetic” of severe fiscal dominance brought about by growing monetization of fiscal deficits and very weak policy credibility could easily degenerate in a recessionary hyper-inflationary spiral. That must mean it is time to buy the Caracas Stock Index (+72% YTD, +600% since Jan 2012)?
"Zero hour" - the day you can mark on a calendar when the price of real metal breaks away forever from the quoted price on media's ticker. The "zero hour" scenario is the ultimate emperor-has-no-clothes moment. Hans Christian Andersen’s original 19th-century tale The Emperor’s New Clothes has become a 20th- and 21st-century touchstone for obvious truths overlooked by the masses. It is almost a cliche. But it is singularly appropriate for our purposes today. The "emperor" here consists of central banks, commercial and investment banks and the commodities exchanges. The day everyone recognizes them as being buck naked — or in this case, stripped of the gold they claim to hold — will be "zero hour." At root, zero hour will come when everyone knows gold supply can no longer meet gold demand.
The disclosures involving this (and the prior) administration's Big Brother surveillance state, which would make Nixon blush with envy are now coming fast and furious (one wonders - why now: even that bastion of liberalism the NY Times, has turned against Obama). Although while the Guardian's overnight news that Verizon (and most certainly AT&T as well among others) was cooperating with the NSA on spying on US citizens, so far at least the internet seemed, if only to the great unwashed masses, immune. That is no longer the case following news from the WaPo exposing PRISM, a highly classified program, which has not been disclosed publicly before. "Its establishment in 2007 and six years of exponential growth took place beneath the surface of a roiling debate over the boundaries of surveillance and privacy." What PRISM does is to allow the NSA and the FBI to tap directly "into the central servers of nine leading U.S. Internet companies, extracting audio, video, photographs, e-mails, documents and connection logs that enable analysts to track a person’s movements and contacts over time."
With Greek government bonds at multi-year highs (up 300% in the last year), the Athens Stock Index still up 100% in the last year, and leaders all over the Euro-zone proclaiming the crisis is over (and that Greece has "made big strides"); we thought it perhaps useful to look at the reality behind the propagandized talk and manipulation. The sad truth is Greece is rapidly dissolving into a 'fourth world' nation with unemployment rates (broad and youth) at unprecedented levels, poverty widespread, and homelessness rife. Perhaps, as Germany today stated that there will be no more debt reduction for Greece, it is 'math' in the first image that the TROIKA and the Greek representatives should pay special attention to...
The fact of the matter is, QE policies are really not so different from how central banks functioned back in the “old-normal” days of the earlier 2000s. They still just bought an asset and paid for it by increasing the money supply. One critical difference is that in order to increase the money supply by as much as they did, the central banks of the world had to change the scope of assets they were willing to buy. Herein lays the rub. By expanding its range of acceptable assets, the Fed created a market for these assets that did not exist. As a result it maintained their prices above which the market deemed necessary to clear – an essential occurrence in market economies. Instead, by expanding its asset purchases through quantitative easing policies, the effects we see are unreasonable prices among some financial assets, and a housing sector unable to sell its unsold inventory.
The major compression in VIX into the close combined with a complete lack of JPY-based carry-driver for the equity market comeback today has many asking just what happened? Though the mechanism for quote-stuffing or momentum ignition in this case is unclear - one thing is absolutely crystal clear - today's total and utter explosion in the quote volume for SPY options provides more than a little concern for just what this market has become. As Nanex notes, over 1.1 billion quotes for SPY Options were posted today as 'quote spam' seems to be serving as some kind of parasitic momentum spark. The point here is that just as the market's flash-crash occurred on a day in which quote-stuffing in cash stocks hit a record; so today we got the inverse flash-smash higher in stocks from a surge in quotes on the far-more levered options market. Just look at these charts!!