Global Markets Stabilize Following Thursday Meltdown

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.

Fed's Bullard Explains His FOMC Dissent: Disagrees With Tapering In Light Of Deteriorating Economy

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.

32 Facts That Show How Men Are Being Systematically Emasculated In America Today

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?

Market Tops Form "At The Margin"

Yesterday, Federal Reserve Chairman Ben Bernanke likened monetary policy to landing a jet on an aircraft carrier which reminded ConvergEx's Nick Colas of a few choice 'Top Gun' quotes...  "Son, your ego is writing checks your body can’t cash" seems most appropriate. But Colas' review of a recent academic paper on the social dynamics of how long people applaud - and why they stop - is perhaps useful in comprehending the market's reaction.  The funny thing about the work is that the distribution of ‘Clapping duration’ looks pretty much exactly like the P/E ratio of the U.S. equity market going back to the 1800s.  Why do people start and stop their applause or buy into a stock market?  It all happens "at the margin" in both cases, and just a few people putting their hands in their pockets is enough to get the rest to stop.  In the end, this is a simple analysis, but one which speaks to capital markets as essentially large “Social networks”, and that is an intuitively appealing construct.  Attention and engagement ebb and flow based on macro confidence, micro financial results, and other fundamental inputs.  Valuation becomes an analysis of whether more or fewer investors will be clapping next month or next quarter.  But one thing is for sure – you want to be among the first people to clap and quit when the noise is the loudest.

Guest Post: The Wealth Effect Shifts Into Reverse

And so the wealth effect shifts into reverse. Fewer people can afford mortgages, so home prices stop rising, making homeowners feel less rich. Stock prices stop rising (or, like today, start going down) and the record number of people who have been buying on margin see their exciting gains melt away. They feel both less rich and suddenly very stupid. Most of them will spend less, and the recovery will stop in its tracks. Which means it’s time to think about the next big announcement...

 

Which Chinese Banks Have The Biggest Default Risk?

With China’s credit-to-GDP ratio over 200%, it appears, as Barclays notes, that the PBoC is acting in line with the government’s efforts to deleverage, rebalance and position the economy towards a path for sustainable growth. Though they expect that the PBoC is likely to stabilize the interbank market in the near term (perhaps by more of the same 'isolated' cash injections), short-term rates are likely to remain elevated, at least for a while, possibly leading to the failing of some smaller financial institutions. With the small- and medium-sized banks having grown considerably quicker than the larger banks, having been more aggressive on interbank business (i.e. alternative channels to get around lending constraints), the following banks are at most risk of major disturbance of the funding markets remain stressed leaving the potential for retail bank runs or greater fragmentation in the commercial bank market.

Brazil Protests Return With A Vengeance: Up To A Million Take To The Streets

If the Brazilian government thought that caving yesterday to popular demands against a $0.10 bus and subway fare hike would be enough to placate the millions and see a peaceful dissolution to the protests that had gripped the country in the past two weeks, it found out in less than 24 hours that ceding to the angry mob only emboldens the public to demand more (and with a list a grievances including corruption, violence, police repression and failed politicians the list of demands is sure to escalate). Sure enough, the very next day, the public emerged with newfound energy and momentum, as 300,000 people took to the streets of Rio de Janeiro and hundreds of thousands more flooded other cities in the largest protests yet.

Guest Post: China’s Arctic Strategy

China has certainly been busy since it won observer status at the May Arctic Council summit in Kiruna, Sweden. China is clearly after more than simply investment and trade opportunities as it continues to display its obsession with securing energy and other supplies where the U.S. Navy cannot or will not go. Unfortunately for Moscow, not only China but also the other new Asian members will seek to maximize their influence in the Council for many of the same reasons. The Arctic may be Russia’s home, but it can no longer be its castle.

NSA Secret Warrantless Spying Rules Revealed

The Guardian has done it once again, this time presenting two July 2009 documents signed by none other than Eric Holder which lay out under what conditions the NSA is allowed to make use of information "inadvertently" collected from domestic US communications without a warrant. The documents detail the procedures the NSA is required to follow to target "non-US persons" under its foreign intelligence powers and what the agency does to minimize data collected on US citizens and residents in the course of that surveillance. "The documents show that even under authorities governing the collection of foreign intelligence from foreign targets, US communications can still be collected, retained and used."

Is This Why The PBOC Is Not Coming To The Rescue?

We have warned a number of times that China is a ticking time-bomb (and the PBoC finds itself between a housing-bubble rock and reflationary liquidity injection hard place) but the collapse of trust in the interbank funding markets suggests things are coming to a head quickly. The problem the administration has is re-surging house prices and a clear bubble in credit (as BofAML notes that they suspect that May housing numbers might have under-reported the true momentum in the market since local governments are pressured to control local prices) that they would like to control (as opposed to exaggerate with stimulus). As we noted here, while the PBOC may prefer to be more selective with their liquidity injections (read bank 'saves' like ICBC last night) due to the preference to control the housing bubble, when they finally fold and enter the liquidity market wholesale, the wave of reflation will rapidly follow (and so will the prices of precious metals and commodities).

CME Hikes Gold Margins By 25%

How very unexpected. And how, judging by today's massive selloff, it is almost as if someone knew in advance this would happen. Can JPMorgan just restock its vault with whatever gold it needs to meet its massive delivery demands (at three year low prices) so some normalcy can return to the market?

Guest Post: Artificial Abundance, Moral Hazard And The Fed's Doomsday Machine

The Fed has created a Doomsday Machine. The Fed has nurtured moral hazard in every sector of the economy by unleashing an abundance of cheap credit and low interest mortgages; the implicit promise of "you can't lose because we have your back" has been extended from stocks to bonds (i.e. the explicit promise the Fed will keep rates near-zero forever) and real estate. An abundance based on the central bank spewing trillions of dollars of cheap credit and free money (quantitative easing) is artificial, and it has generated systemic moral hazard. This is a Doomsday Machine because the Fed cannot possibly backstop tens of trillions of dollars of bad bets on stocks, bonds and real estate. Its power is as illusory as the abundance it conjured. This loss of faith in key institutions cannot be fixed with more cheap credit or subsidized mortgages; delegitimization triggers a fatal decoherence in the entire Status Quo.

Liquidation - Stocks, Bonds, Commodities Collapse

Since we lost the deer yesterday as it was run over by bond sellers, it appears everyone else came to the realization that QE cannot be infinite, that EU event risk never went away, and that China does have a credit bubble and so it is time for the monkey. Where-ever we look today there is carnage. The superlatives are all extreme but are the biggest since Europe collapsed in October/November 2011 (preceding the coordinated global central bank bailout) - 1-day and 2-day drops in stocks the biggest in 19 months, Gold and Silver's second largest 1-day drop in 20 months, investment-grade and high-yield credit's worst 1-day and 2-day widening in 19 months, EM currencies (e.g. MXN) worst day in 19 months, Copper's worst day in 19 months, and the heaviest volume day in S&P futures in 20 months. While stocks closed at the lows of the day, Treasuries did see some buying come in the last hour or so - which appears to be safe-haven scrambling - and EUR weakness (post IMF) was trumped by JPY strength (unwinds) to drag the USD off its highs into the close.

Stocks Plunge As IMF Tells Greece To Plug Holes Or It Pulls The Plug

As we warned earlier in the week, Greece is notably missing its Troika goals and the issue just became a lot more critical. As The FT reports, the IMF is preparing to suspend aid payments to Greece over what it claims is a EUR 3-4 billion shortfall that has opened up. Between healthcare budget shortfalls, central banks refusing to roll-over Greek bonds, and amid signs that even the scaled-back privatization plans that Athens had agreed to being behind schedule, the IMF - following its own admissions of mistakes in the Greek bailout, has warned EU officials the shortfall will require it to stop aid payments by the end of July. The equity market is already reacting (as is EURJPY - EUR weakness against the big carry pair) to this re-awakening of EU event risk (and the awkward timing with Merkel's election so close) - with the Fed's comfort blanket somewhat removed.