What ails Japan, the United States, and many other countries is financial deleveraging. Much talk about “Japanification” over the past year or so because the Federal Reserve response to deleveraging has been to compress BOJ policies into a shorter overlapping timeframe… giving the scenario a look and feel of the Japanese experience. Aside from this policy compression, there’s nothing new in the policy brew. The monetary policy compression and fiscal insanity has arguably made the next step—a tax increase—even more imminent than when Japan instituted their consumption tax.
Central banks can salve financial system wounds, but they must heal on their own. The problems of the financial sector reflect adjustments going on at the household level. This implies that these problems will be resolved organically by debt reduction, capital losses, and rescaling of capacity.
Oil prices were higher again on Friday, in a renewed frenzy of risk appetite, as Fed Chairman Ben Bernanke gave investors the signal they had been looking for. Speaking from Jackson Hole, Wyoming, he essentially told investors that the Fed will step in if the economic recovery appears to be in serious trouble. As a result of his comments, traders and investors dumped the US dollar, which is considered a “safe haven,” and they bought equities and commodities, including oil. The fact that prices were still oversold and near support certainly did not hurt. Traders saw buying oil as a low-risk purchase, and then the Fed seemed to guarantee it. - Cameron Hanover
While no one can say when the big spike in gold will occur, one can say accurately that, given the systematic frailty, it could literally happen on any given day. That’s what happens when scams are unveiled. Remember Bernie Madoff? How many people do you think tried to give him money the day after he was arrested, versus desperately scrambled to get their money out of his sticky web? The answers are “No one” and “Everyone” – that’s what happens when people lose faith in a currency.
The primary key variable when it comes to determining the future direction of US market is no longer corporate fundamentals and technicals, nor the US economy itself, as much as the daily gyrations in the Japanese Yen, which defines the move in the S&P on a tick for tick basis. As such, what the BoJ will do is likely far more relevant to US capital markets (or the sad joke that passes for them these days) than anything the Fed can pull out of its hat. And while there has been much posturing out of various Japanese administrations that deflation will not be tolerated (presumably unlike the past 20 years), and that FX intervention is near, few actually believe anything coming out of the BoJ or the Finance Ministry these days. Yet looking at what domestic Japanese investors are doing may provide a better clue as to what is in store for the Yen. As Barclays points out, in time of heavy FX intervention, such as the last period between 2002 and 2004, Japanese holdings of foreign securities tend to surge: a good example being precisely that period, during which Japanese holdings of US Treasuries increased by $320 billion, to go side by side with a BoJ which was actively selling Yen and buying up Dollars. In essence, investors there were frontrunning (or at worst investing side by side with) the BOJ. And as weekly data demonstrate, Japanese investors are once again gearing up for intervention, having purchased $60 billion of foreign securities in July and $75 billion so far in August, the highest number in half a decade. While the BoJ's talk is cheap, Japanese investors appear to have decided that at prevailing JPY levels the BoJ has no option but to start its intervention regime.
This week's CFTC Commitment of Traders action, presented in visual form. Some highlights: net spec long positions in wheat futures on the CBOT and the KCBOT hit fresh records, at 36.7k and 67.6k: is more food inflation on the immediate horizon? Net spec shorts in US Treasury Bonds, and LT Us Treasury Bonds, while still just negative at -5.8k, and -2.6k, respectively, are at the highest they have been in 2010: keep an eye on this metric as a positive inflection point may be the contrarian signal to sell. At least those concerned about the price of chocolate may rest easy: Cocoa ICE futures dipped to the lowest net spec total for 2010, at 8,092k. In currencies, the JPY posted the second highest net long exposure for 2010 at +51,069 Net Spec, an increase of 1,000 from a week prior, and a far cry from the -55.7k recorded on April 13. EUR net positions also droppe notably, after hitting a 2010 high of -3,731k, the net spec contracts have declined to -21.6k as of August 24.
In this week's update on technical chart formations, Goldman's John Noyce has nothing optimistic to tell clients. Noyce observes that while the market may have entered a short-term consolidation period with the 1,038-1,045, "looking further out the setup on the weekly charts of the S&P and the VIX, plus those for broader asset markets - fixed income in particular – make us think that a sustained bounce is unlikely and that broader risks remain on the downside." Yet the most interesting chart formation is the imminent flattening of the 2s30s... not here, but in the UK. Will the Julian Robertson "suicide" trade shift across the Atlantic?
In this week's Big Interview, the WSJ's Simon Constable interviews Robert Shiller who flat out says that an economic double dip may be "imminent." This compares to his earlier warning that he saw the chances of a double dip at over 50%. Guess that probability has now doubled. Notably, Shiller also believes that when the NBER looks back at the data, Q3 of this year will mark the beginning of the second dip of the recession. Ironically, since up to now the previous recession has never actually officially ended, very soon the NBER will merely confirm that the recession which started in December 2007, will have continued for three years, in what is possibly the longest recession on record. Furthermore, those looking to sell houses are advised not to listen to the interview, as the co-creator of the Case-Shiller Home Price Index also added that he is worried housing prices could decline for another five years. He noted that Japan saw land prices decline for 15 consecutive years up to 2006. Following up on this week's weakest new home sales data in history this should probably not come as a big surprise to most. Also for bond fans, Shiller confirmed Rosenberg's view that bonds are not in a bubble. Hopefully Mr. Shiller bond prophecying skills in bonds are better than in houses, where it was mostly in hindsight in early 2007 when the bubble had already popped.
Selling the opening rally worked again. How easy is this becoming? The bears were on their way to the bank after the Intel pre-announcement but I don’t think they stayed on the Fidelity green path. Everyone got short and then the Bernanke prepared statement said the Fed stands ready to act. When traders realized that INTC was going to reopen flattish, the buyers came back in a big way. Did anyone notice that the key 1040 level held on the S&P 500? How about that VIX? It held below Wednesday’s peak. What’s next? There are overhead down trend lines that have to be taken out in
order to change the short-term trend.
Presumably this is in response to the ongoing lock out of Michael Mayo, who as Fox Business previously reported claims Citi is cooking its books by misreporting its deferred tax assets, by Citi management. We assume the letters are of a congratulatory nature, and commend Citi management on alleged ongoing fraud, also sharing tips on how the firm's HFT traders can flash dash its worthless stock to a few trillion/share, guaranteeing that unlike in daily isolated flash crashes none of the transactions will be D/K'ed.
Banana Ben absolutely wants to do a massive QE2 program. The only thing holding him back is gold is near an all time high. What he wants is gold much lower and stocks much lower to give him cover... He is scared to do it here and he is right to be scared because such a reaction would be the end of the Fed right then and there. The Fed will be gone anyway within a few years in my opinion but it’s going to fight hard to survive and if you want to make money in this market you need to understand that. The most powerful institution in the world is fighting for its survival. Never forget that. So what is he going to do? I believe that the Fed and government are doing a lot more than people think to manipulate all markets behind the scenes. After all, they have publicly announced their manipulation in many other ways so does it make any sense whatsoever to assume they aren’t doing a plethora of other things behind the scenes? Of course not. I think that with the Fed in a bind they will accelerate and become ever more aggressive in behind the scenes games. This will make markets even more volatile and extraordinarily challenging. This is financial war make no mistake about it. The only way in my opinion to survive this is to buy all dips in precious metals, agriculture and oil. It is in these three areas that I expect to see the most price inflation as money eventually figures out the end game. The end game is more and more people will eventually wake up to the fact that the markets are a hologram put in front of you by the magicians at the Fed. That what constitutes real wealth in the years ahead will be owning food, energy and a means of exchange that will be accepted should a black market economy arise as it has in virtually all nations at one time or another throughout history. - Michael Krieger
David Rosenberg has provided his typically succinct summary of the day's heavy dataflow, starting with the GDP number, parsing though Bernanke's speech, and concluding with a broad overview of where the market is heading, which is now so disconnected form a bond-implied FV in the upper 700s it is no longer funny.
As readers will recall, yesterday we highlighted the HFT-driven flash crash in Core Molding (CMT) after an algo very obviously went insane and took the stock price to $0.0001 in the span of one second. Today, courtesy of our friends at Nanex, we get a transposition of the events at 14:19 in all their visual glory, together with a succinct explanation of everything that went wrong.
While there is nothing to suggest a fundamental improvement in the economy, and judging by the latest batch of data the economy is in fact continuing to deteriorate, we have so far seen a substantial sell off in bonds across the curve, with the 2s10s steepening by 11 bps (just in time for the bull flattener bandwagon to enjoy some out-of-steepener rotation pain). So what is the catalyst for the selloff? Francesco Garzarelli's note to Goldman clients titled "Forecast Reached, Risks Now Balanced", in which he implicitly advises to take profits on USTs, sent earlier may provide some clues...
A major campaign is in process to attempt to push stocks higher via the AUDJPY, whether in cooperation with the BOJ and FRBNY, and Europe close or not, as the spread between the ES and the AUDJPY suggests that stocks are materially lagging (10-15 ES points). The trade right now, which takes advantage of Mr. Sack's generosity with taxpayer capital, is to buy ES and sell the AUDJPY as broken market provide numerous convergence opportunities.
The ECRI Weekly came in at an annualized -9.9%, once again straddling the critical -10% boundary. Of course with two previous downward revisions, it appears the index' creators have taken up the government's favorite data fudging ploy of downward revising prior data, as the past week's -10% now ends up being -10.1%. No doubt next week this week's -9.9% will be revised to a worse number. But by then all the beneficial impact of the better number will be long forgotten.