While volumes have been very low the last couple of days, as one would expect given the seasonals, market schizophrenia has been very surprising. Financials went from worst to first and managed to pull out a rather edifying 1.2% rally in the last 20 minutes of today - now up almost 3% since Friday's close. High Yield Bond ETFs also diverged notably from the equity markets.
For those wondering why David Tepper will be strangely missing from CNBC for his annual pre-QE cheerleading appearance, we now have the answer. As Institutional Investor reports, the Appalloosa head man, who was long everything but mostly financials in the form of BofA and Citi last year, and managed to get out just in time before the wipe out which left his colleages at Paulson and Co. dazed following a 34% YTD loss, has decided to invest in a strange asset: cash. "Sources say he has gone 30 percent to 40 percent in cash, which is very high for him. Some of his cash is invested in U.S. Treasuries, which have in turn risen in value in recent weeks." II clarifies: "Keep in mind that Tepper had about 30 percent in cash entering 2009, shortly before he started buying up banks such as Bank of America before anyone else had the guts to do the same and racked up triple-digit gains by the end of the year." And in a very odd development for the man known to take aggressive risks ahead of everyone else, we learn that "he will remain cautious until there is improvement in the European bank crisis. Of course, if the markets tank, you can be sure he’ll be aggressively scouring for bargains." Alas, the markets refuse to tank on generic expectations that the second market start to tank, dip buying materializes on vapor volume and expectations that the Fed will once again kick the middle class in the gonads only to make stock chasers whole. Yet if even Tepper is staying on the sidelines, just what informational advantage does the HFT momentum pursuing crowd have?
Access to Fed backup support “leads you to subject yourself to greater risks,” Herring says. “If it’s not there, you’re not going to take the risks that would put you in trouble and require you to have access to that kind of funding.” All of this might conceivably make citizens revolt against an entity that uses their money to secretly fund the “Wall Street aristocracy.” It might make them vote for a Gary Johnson or a Ron Paul, someone who favors dismantling the Fed. Or not. When a story as big as this one generates a bare minimum of media coverage, you know it’s probably headed for that huge waste bin in the corner of the parking lot. The one marked Bailout Fatigue.
While it is all too clear that a year from today, right about the time QE4 is gearing up for deployment, QE3 will have had absolutely no impact on the economy (in the upside case; the downside case would imply millions in job losses primarily in the financial sector courtesy of record low 2s10s and even lower Net Interest Margins, aka Carry Trades), just as QE2 ended up doing nothing not only for the US economy but for the stock market as well, what is somewhat disturbing is that the only primary purpose of Operation Twist, namely the lowering of 10 Year bond yields in order to make consumers "weathier" through cheaper refis, has already failed. Presenting Evidence A: 10 Year Treasury Yields (inverted axis where lower yields are plotted higher) and the MBA Refi Index, which today dropped by 6.3%, the third week in a row, sending the Refi index to 3169.4 from 3915.5 in the beginning of August. As the chart makes all too obvious, the correlation between the two series has been as close to 1 as possible... at least until talk of QE3 via Operation Twist not only picked up but was made virtual fact through Wall Street's wholehearted acceptance of more monetary easing. What has happened recently is a substantial break between dropping yields and increasing refinancings. It thus begs the question: if an ever flatter 2s10s curve, the explicit objective of Op Twist which has gotten priced in in the past several weeks, has no impact on the housing market currently languishing in a historic depression, then just why is the Fed focusing on lowering long bond yields even more?
The good old Iraq playbook is being played to the dot, just less than a decade later, and now with Iraq neighbor off by just one letter: Iran. According to Haaretz, the UN Security council "denounced Iran's failure to abide by United Nations resolutions demanding an end to the possible weaponization of its nuclear program. The Denouncement comes after International Atomic Energy Agency submits a report claiming Iran continues to make advances in uranium enrichment beyond its needs for medical applications. The United States, Germany, France and Britain joined forces in exposing Tehran's advanced 20-per-cent uranium enrichment, which is considered military weapons grade. Tehran said its enrichment program was needed for medical and civilian uses. But the UN said Tehran has not been transparent and failed to cooperate with the Vienna-based International Atomic Energy Agency (IAEA), which recently submitted a report that Iran continued to make advances in uranium enrichment beyond its needs for medical applications." Whether the US, pardon the UN, will follow up with ever escalating following directives that ultimately lead to nothing short of a land invasion is unknown for now, but if history tis any precedent, the answer is a resounding yes. Furthermore, today's decision should be taken in context with the major article in the WSJ "US Eyes Covert Plan to Counter Iran in Iraq" which does nothing but set the scene for what will inevitably follow in a few weeks or months. Expect a flare up in anti-Iran rhetoric in the next few days.
The Italian parliament is currently voting whether to make the first, massively watered down, faux-austerity program into law. As reported earlier, this vote is widely expected to pass as it has practically zero measures left in it that are actually austere. It will, therefore, be followed up by another vote in a month in which Italy will be forced by the ECB to repeat the same spectacle all over again. Then again... And again. In the meantime, we fully expect robots to add at least 5-10 ES points on the non-news that is the inevitable favorable result.
tyrants, of all-out forcible insurrection in the name of freedom and change. From a celestial perspective, however, ‘revolution’ denotes one complete orbit of a planetary body around its center, as in the earth’s revolution around the sun. In other words, after a revolution, you end up right back where you started. Same word, two completely different meanings– on one hand you have change, and on the other you have more of the same. This is exactly what has happened after Egypt’s revolution this year....When you think about it, this is how things usually work out in politics. How many people have campaigned on the ‘change’ platform, only to end up following the same path as the last guy? As the saying goes, ‘the more things change, the more they stay the same.’ Egypt is due to hold parliamentary elections in a few months’ time. It’s questionable whether Tantawi will give up his supreme, unchecked power… but whatever happens, one thing is clear: a new power elite will emerge in Egypt that helps itself to wealth and privilege at the expense of everyone else. This is the great weakness in any political system: ‘government’ is based on the idea that some individual or organization is awarded power than no human being should possess– the power to kill, to declare war, to steal, to defraud, to counterfeit.
In a move that will surprise exactly nobody, the Senate Budget Committee ranking member Jeff Sessions has signaled that "Republicans would oppose the jobs plan President Obama is expected to announce Thursday, saying it would only put the United States further in debt at a time when the debt is already weighing on the economy." So while nobody even knows yet just what the full presidential proposal to create "millions of jobs" looks like in its entirety, we do already know it will almost certainly not happen courtesy of a republican controlled congress. As a reminder, the US is currently supposed to be laboring under a regime of austerity (more in its latest, and vastly watered down Italian iteration than real cost cutting but still) and thus it will be rather complicated for the GOP to explain why the party is cutting with one hand and spending more with the other. As such, any hopes for a quick and decisive passage of laws to build more bridges to nowhere are about to be dashed. From The Hill: "There’s no doubt in my mind that the debt that we’ve now incurred is already weakening our economy,” Sessions said on the Senate floor. “It comes to a point that you can’t keep borrowing in a futile attempt to stimulate the economy when the increased debt itself is weakening the economy.” Cue Keynesians of all shapes and sizes kicking and screaming how more stimulus this time will be different and how one last Heroin injection is really all it takes.
I've been asked to comment on the work of a few noted deflationists who are calling for a top in commodity prices here. Their argument is pretty clear cut: Because inflation is a function of available money plus credit (their definition), and because credit has fallen, deflation is what comes next. When looking about for things to deflate in price, commodities are an obvious candidate for attention because they have risen so much over the past decade. In this view, three things have to be true: i) Demand for commodities has to fall below supply. After all, as long as demand exceeds supply, prices will typically rise. ii) Money, including credit that would normally be used to buy commodities, has to shrink. That's the definition of deflation that we're analyzing here. iii) People's preference for money has to be greater than their preference for 'things,' with commodities being very obvious 'things.' That is, faith in money has to be there or people will prefer to store their wealth elsewhere. These are all just versions of the old supply/demand argument for commodity prices, except that our consideration also includes the important element of the Austrian economic view of demand for money.
European reformist think tank, Open Europe, which has so far been spot on in its very skeptical assessment of the drunken, meandering rumble that various European authorities have engaged in over the past two years to mask that the EUR is predicated by a failed and discredited model, has released its comprehensive assessment of today's German Constitutional Court ruling. For anyone even remotely close to trading the EUR pairs, or their derivatives: stocks and bonds, this is a must read. In a nutshell: "Giving the Bundestag’s Budget Committee the final say over the use of the bailout fund is welcome from a democratic point of view, but will add another element of uncertainty to the eurozone crisis. However, so far the Budget Committee has consistently taken the government line on the bailout, albeit reluctantly, and it remains to be seen whether it dares to exercise its new power. The calls for the whole Bundestag to have a greater say in the dispersion of financial aid are, therefore, likely to continue.... the wording used by the Court also seems to suggest that joint debt in the eurozone could be constitutionally allowed if it involved a stronger German say over other member states’ fiscal policies. This could set Europe up for a major clash of national democracies in future, should Eurobonds be deemed necessary to hold the Single Currency together in the long term. Controversially, the Court did not give an opinion on the legality of the ECB’s bond purchase programme – despite the potential implications this programme has on price stability and the ECB’s independence. This unsettling question is likely to resurface in future." Expect this court to feature far more prominently in the months to come.
As Chazz Evans just noted, QE3 can not come soon enough, and it can certainly not be big enough. Wall Street, bonuses entirely contingent on this fiction becoming fact, is therefore more than happy to shape Fed opinion, and confirm that QE3 is now priced in to such a degree that a disappointment will raise the terrifying specter of bloodthirsty, demonic hyperdeflation once again. Below, via Bloomberg, is a summary of what the various Wall Street "strategists" also known as groputhink lemmings, because none of these said Op Twist was coming as recently as a month ago, think is coming out of the Fed as soon as 2 weeks from today...
Today's first Fed speech is out, this one by Chicago Fed dove, Chuck Evans who was recently interviewed by Russian speaking, guitar playing, arch-Keynesian Steve Liesman and dropped the first QE3 bomb a week ago, in which he basically says what he said before, namely that "very significant amounts" of added accommodation are needed. In other words: more of the same, and this time it will be different. After all 12 Fed presidents and 1 chairman can't all be insane all the time.