To find what is perhaps the best analogy of the mentality behind today's global capital markets and the perhaps the entire US economy as well, one has to travel to Zhongxiang in Hubei province, where a university entrance exam for 800 students did not go quite as expected. Telegraph reports: "When students at the No. 3 high school in Zhongxiang arrived to sit their exams earlier this month, they were dismayed to find they would be supervised not by their own teachers, but by 54 external invigilators randomly drafted in from different schools across the county. In short: everyone was hoping to continue a historical tradition and simply cheat, but the proctors finally and shockingly pulled the plug. End result: hundreds of test takers who had no idea what to do when the system is not rigged. "Outside, an angry mob of more than 2,000 people had gathered to vent its rage, smashing cars and chanting: "We want fairness. There is no fairness if you do not let us cheat."
European equity markets closed down for the fifth week in a row for the first time since Summer 2011's European crisis. The 3.75% loss on the week in the broad (S&P 500 equivalent) Bloomberg Europe index is the biggest drop in 13 months to close the week unchanged on the year. Italy and Spain were the worst performers - down around 4.5% to 5% on the week - even as sovereign spreads held in only 9bps wider on the week. Europe's VIX surged to 24% - its highest close in 4 months. Greece's problems are emerging once again - smashing the EUR down over 2% in the last 3 days - its worst drop in 11 months as GGBs (and Greek stocks) plunge.
While the headlines will note the 2.50% level's importance (given its highest rate since the August 2011 debt crisis), it is the belly (5Y and 7Y) that is being crushed.
UPDATE: As POMO ended, Treasuries took a rapid leg higher in yields (and equities gave up their bounce)...
The overnight 'China didn't explode and Japanese stocks gapped higher magically' rally in stocks is gone... The selling continues - even as Treasuries remain a little more quiet than the last few days. Bonds are seeing 5Y and 7Y (the belly) still sold even as the long-dated 30Y is modestly bid. Homebuilders are getting monkey-hammered - now down 9.5% from pre-FOMC levels. There was some bid in HY (CDS) credit this morning but chatter is that we are seeing the much-warned-about selling of high-yield bonds (as opposed to lifting of hedges alone) - which perhaps explains the moves in longer-dated Treasuries as spread-based money managers unwind. Oil prices are rolling over fast as the USD rallies on the back of EUR weakness (Greece among other things) but Gold and Silver are bouncing. Financial CDS are now wider on the year - dramatically dislocated from financial stocks. It seems the 100DMA (1567) and previous all-time highs (1576) are the next supports.
Four words: financialization, debtocracy, diminishing returns. The entire global economy, developed and developing nations alike, is now dependent on cheap, abundant credit for everything: for "growth," for asset inflation, and ultimately for central state deficit spending, which props up all the cartels, rentier arrangements, fiefdoms and armies of toadies, lackeys, apparatchiks and embezzlers that suck off the Status Quo. The wheels fall off the entire financialized debtocracy wagon once yields rise.There's nothing mysterious about this.
The "XXXXX is not YYYYY" jokes aside, Europe's union of nations is beginning to separate increasingly between the haves and the have-nots. The sad truth, as Bloomberg's Niraj Shah notes, is that recession/depression has pushed Spanish and Italian GDP-per-capita below the EU average in purchasing power terms - just like Cyprus, Slovenia, and Greece. Irish GDP per capita was 29% above the average, while Greek and Portuguese per capita output were 25% below. Output per head for the EU ranged between 47% (Bulgaria) and 271% (Luxembourg) of the average. With today's news that retroactive ESM recaps are unlikely, the banking-sovereign symbiosis of Spain and Italy will increasingly come under pressure and with productivity so dismal, there is little hope for now.
We are astounded with the number of people saying that the Fed didn't say anything new. These people must be living in Borneo and far out into the jungle. The Fed came out and said as clearly as any Fed has ever said; "We are going to unwind the trade." Yes, sure, there was the usual huff and puff about a change in market conditions could change our viewpoint but that is not relevant. What was relevant is that the Fed stated and quite clearly that, "The party is over." Because we live in a global economy we will now also get impacted by China and Europe. The flow of money had protected our shores but now we will be exposed and the recession in Europe and the growth rate in China, probably around a real 3.5%-4.0%, is going to come bouncing into America. Liquidity has been the one and only god and the Fed has now told you that this god is going to close up shop.
As reported yesterday, Greece has stormed right back to the top of the crisis charts, not only due to the previously reported news that the IMF may be withholding further payments until Greece finally gets its house in order (three years later one can forget this will happen), but because as a result of the fallout surrounding the national broadcaster ERT, the coalition government is now in tatters. Moments ago any hopes that some political stability may be preserved were crushed following news that the Democratic Left official Vassilis Economou, who spoke libe on Greek Skai TV which is still in operation, said the party decided to withdraw its ministers from the coalition govt of Prime Minister Antonis Samaras. And there goes the fake sense of calm that has permeated the south of Europe ever since last summer's nail-biting Greek elections, which concluded in the best possible way for Germany. This time around, however, the last thing Merkel needs two months ahead of her reelection is a resurgence in the peripheral crisis, timed perfectly to coincide with the end of the carry trade, which will mean only the ECB is left to pick up the pieces.
There was a time when portfolio insurance guaranteed that events like Black Monday would never happen. Then Black Monday happened precisely due to portfolio insurance. Some years later, the credit-driven housing boom made modeling of declining home prices at rating agencies (and everywhere else) redundant. Then the (first) housing and credit bubble popped leading to the biggest housing market crash in US history. Fast forward to today, when ETFs were supposed to be the "greatest thing since sliced bread" and providing an ultra-low cost alternative to mutual fund and other market exposure "for the people", were supposed to revolutionize investing. Until days like yesterday. To wit from the FT: "The losses for ETFs today were far beyond what the most sophisticated financial risk models could have predicated for worst-case scenarios," said Bryce James, president of Smart Portfolio, which provides ETF asset allocation models.
- Turmoil Exposes Global Risks (WSJ)
- China Money Rates Retreat After PBOC Said to Inject Cash (BBG)
- Fed Seen by Economists Trimming QE in September, 2014 End (BBG)
- Booz Allen, the World's Most Profitable Spy Organization (BBG)
- Abe’s Arrows of Growth Dulled by Japan’s Three Principles (BBG)
- China steps back from severe cash crunch (FT)
- Smog at Hazardous as Singapore, Jakarta Spar Over Fires (BBG)
- U.S. Weighs Doubling Leverage Standard for Biggest Banks (BBG)
After Thursday night's global liquidation fireworks, the overnight trading session was positively tame by comparison. After opening lower, the Nikkei ended up 1.7% driven by a modest jump in the USDJPY. China too noted a drop in its ultra-short term repo and SHIBOR rate, however not due to a broad liquidity injection but because as we reported previously the PBOC did a targeted bail out of one or more banks with a CNY 50 billion injection. Overnight, the PBOC added some more color telling banks to not expect the liquidity will always be plentiful as the well-known transition to a slower growth frame continues. The PBOC also reaffirmed that monetary policy will remain prudential, ordered commercial banks to enhance liquidity management, told big banks that they should play a role in keeping markets stable, and most importantly that banks can't rely on an expansionary policy to solve economic problems. Had the Fed uttered the last statement, the ES would be halted limit down right about now. For now, however, communist China continues to act as the most capitalist country, even if it means the Shanghai Composite is now down 11% for the month of June.
As noted previously, in the latest FOMC decision the St. Louis Fed's James Bullard joined the ranks of the dissenters currently held only by Kansas Fed's George. Today he explains why: it appears that he had an issue with what most have already pointed out: the Fed's lowering of its economic forecasts, even as it represented a "tapering" of monetary injections. To wit: "The Committee was, through the Summary of Economic Projections process, marking down its assessment of both real GDP growth and inflation for 2013, and yet simultaneously announcing that less accommodative policy may be in store." In other words the debate can end: Bernanke did signal tapering.
What is wrong with men in America? Why isn't our country producing lots of strong, independent, hard working men of character like it once did? Well, many believe that it starts at a very young age. Society has told them that it is okay to be a "slacker". Today, far too many of our young men are far more interested in their various addictions (beer, drugs, sex, video games, gambling, etc.) than they are in starting a family. In America today, the percentage of men in prison is at an all-time high, the percentage of men with a job is near an all-time low and the percentage of children living without a father is at an all-time high. Do we have a crisis on our hands?