The point here is that we can only sustainably distribute the nation's surplus that is left after capital investment. Borrowing or creating vast sums of money to paper over the fact that we're spending more than we generate in surplus fosters an entirely illusory sense of wealth and prosperity. Eventually the interest owed on debt crowds out all other spending, and the debt-based system implodes. Borrowing money to fill the gap between what we want to spend and what we generate in surplus incentivizes fraud and speculation and creates a pernicious sense of entitlement: we can have it all, everyone can have everything they want, and there is no need for sacrifice, thrift or hard choices.
"When you start seeing a slowdown, that's a reason to believe it's going to accelerate," is how Bob Shiller responds to a question of the slowing rise in home prices. While Cramer demands we focus attention of the 'earnings' of the homebuilders and what they are saying, Shiller prefers to look at the data. The always pragmatic professor notes he is "not worried about a slowdown" because he is "more worried about bubbles" that appear to be back in the US housing market. "In some cities it's looking bubbly now," Shiller adds, remarking on the fundamental speculative shift in homeownership to the hedge funds on the own-to-rent bandwagon (that we noted last night appears to be coming to an abrupt end for the smarter money). The biggest drivers of future gains, Shiller adds, are 'recent gains' (which are fading), and employment (which is awfully slow) suggesting "there might be a slowdown ahead."
While a mortgage-related lawsuit and/or a settlement was long in the making, and was well-known to most in the industry, it is the monetary aspect of the resolution that is slowing down the outcome. Because if the NYT is correct, not even taking credit for all its fake "earnings" in the form of a complete reserve release would save JPM: "Underscoring the breadth of the scrutiny, the people said, JPMorgan and the Department of Housing and Urban Development briefly discussed the possibility of striking a wide-ranging settlement to conclude many of the looming mortgage investigations from federal authorities and state attorneys general. But the housing agency floated a price tag of about $20 billion for the settlement, the people said, effectively derailing settlement talks with JPMorgan lawyers, who were stunned by the size of the proposed penalty and expected to pay a fraction of that sum."
As if you needed any more evidence of how disconnected, entitled, irrational and sociopathic the heads of financial firms in America are these days, along comes AIG’s CEO Robert Benmosche to dispel any lingering doubts. In a highly disturbing interview with the Wall Street Journal, Mr. Benmosche compares the murder of black people in the deep south based on racial prejudice and hate to the vast majority of Americans expressing disgust with the fact that Wall Street decided to suspend capitalism when it was in their best interests in order to give themselves trillions of dollars. He actually compares an environment where the rule of law was often completely suspended to allow the murder of a disenfranchised racial group, to widespread public anger about the suspension of the rule of law to benefit the wealthiest, most connected people in the nation.
The mixed demand for near cash-equivalent paper continues, with today's $33 billion 2 Year Note selling at a yield of 0.348%, stopping through the 3.55% When Issued by a solid 7 bps. That was the good news. The not so good news was that once again, the Bid to Cover was modest at best, down from 3.21 to 3.09, well below the 3.47 TTM average, and one of the lowest in the past four years. As we have noted repeatedly in the past, the Bids to Cover for virtually all auctions have been declining in recent months, and today was no exception. Additionally, while the Direct take down was stable at 21.8%, or just short of the 23.3% TTM average, it was the Indirects that continue to buy the near absolutely minimum, taking down another 25.4% in September, on top of the TTM average, and far below historical volumes. The balance, or 52.5% was once again allotted to Primary Dealers. Overall, nothing to write home about, especially since the bonds will be promptly converted into HQ collateral, and the cash infusion will allow those who bought the bonds to go ahead and reinvest the proceeds in other far riskier assets, even as the velocity of collateral picks up a tad at least until the bond is also monetized by the Fed.
With yields down for 11 of the last 13 days, 10Y Treasuries are trading at their lowest interest rate since August 13th. The 5Y yield has collapsed 45bps since September 6th when the 10Y briefly broke above the 3.00% Maginot Line. This is the largest absolute decline in interest rates in a 13-day period since the summer of 2011 and the US downgrade... it seems Ray Dalio might be on to something...
Update: Reuters confirms that the new island was in fact not a hoax: "The earthquake was so powerful that it caused the seabed to rise and create a small, mountain-like island about 600 meters (yards) off Pakistan's Gwadar coastline in the Arabian Sea."
As reported earlier, Pakistan and India were both shaken by a strong 7.8 magnitude earthquake with numerous aftershocks. While the damage and the casualties from the quake are not fully known yet although according to Raza news agency the latest death toll is at 45, one quite stunning development has emerged, quite literally, out of the sea. As Pakistani's The News reports, an entire island emerged off the country's Gwadar coast in the aftermath of the quake. "According to DIG Gwadar Moazzam Jah, the island's altitude is 20 to 40 feet and width around 100 feet. Talking to Geo news, the DIG said that the island emerged at a distance of 350 feet in the sea from the Gwadar coast."
Risk assets remain under pressure, BofAML's MacNeill Curry warns and with equities vulnerable to a deeper correction, a close below 1700 (on the S&P 500) would confirm a near-term top and a correction to 1653 (the 10-month trendline support). This morning's action is very much focused on the 1,700 level with this latest rebound not being seen in Treasury yields which continue to push lower (driven by VIX on POMO excitement). As Curry adds, Treasury yields should continue their downside correction with 2.668% as interim support but sees 2.46% as possible.
Whether this also means that the fund is bearish on overall growth, bullish on deflation, and very bullish that in the Taper is not only off the table but there is potential for even more easing by the Fed, is unknown. What is known is that once the piggyback crew jumps on the Bridgewater bandwagon, which is now saying rates will drop (ostensibly leading to the end of the Great Rotation and perhaps the start of the Great Unrotation out of stocks and into bonds), expect to see some substantial price realignment between the two main assets classes: stocks and bonds.
Markets, risk assets in particular, do not like political dis-unity. The FOMC seem dis-unified; delivery differing messages. Comments by Dudley and Fisher were not just marginally different, but rather stark contrasts. Trust in the Fed and in its’ communication strategy have been tarnished. Markets are now confused as to when, why, and how the Fed will be able to change course. When the taper is in full-swing that equities and bonds will drift to lower prices. However, the immediate trade may require paring risk, and rebalancing portfolios, i.e. stocks down, bonds drifting higher in price (risk off).
Following UMich confidence's biggest miss on record, the Conference Board misses expectations printing at its lowest since May 2013 as the last data was revsied higher. This is the largest MoM drop since March. Crucially, the headline index was saved by a surge in the "present situation" as expectations for the future plunged. As a reminder, Consumer Confidence has an awkward 4 year 4 month pattern of dysphoria to euphoria (though at progressively lower levels) and today's data merely confirms that the cycle of exuberance may have been broken.
This should be fun. With Rouhani in the house, Nobel-Peace-Prize-winner President Obama will address the oh-so-supportive-of-his-wars United Nations this morning. As AP reports, seeking to build on "diplomatic opportunities" is expected to signal his openness to discussions with Iran (even a wink in his direction would work since there has been no face-to-face contact in 30 years). Also high on Obama's agenda at the U.N. was rallying Security Council support for a resolution that would establish consequences for Syrian President Bashar Assad's regime if it failed to adhere to a U.S-Russian plan to turn over its chemical weapons. And we wonder if he'll mention them nasty Republicans wanting to shut his government down?
If anyone had reservations about the monthly Case-Shiller report, or at least the logic in the methodology used by the S&P data collectors, we present Exhibit A, which should solidify any such doubts. Below we show Detroit "home prices", which according to the just announced July NSA data, soared even higher, to level of 90.8, which just happens to be a 17% increase Y/Y, and the highest print since August 2008. Bankruptcy? Pfft - who cares when the government is funding Blackstone REO-to-Rent made-to-flip purchases.