We have often spoken of the disconnect between Wall Street and Main Street. While asset prices are inflated by continued interventions of monetary policy from the Federal Reserve, boosting Wall Street profits and widening the wealth gap between the top 20% of Americans and the rest, "Main Street" continues to suffer a from a rising cost of living and falling wage growth. "How long can the disconnect last between Wall Street and Main Street?" There is no clear answer for that as consumers have shown a willingness to draw down savings rates to historically low levels while quickly returning to cheap credit forgetting the disaster that it caused them not so long ago. However, in reality, when you have a family to feed, clothe and house - it really doesn't matter what is logical, but what is necessary, regardless of the consequences down the road. Of course, for many American's today, the only real difference between now and the "bread lines" of the 30's is that the "bread" is delivered in the mail rather than at the "soup kitchen" on the corner.
Those who were closely following the S&P cash in the last seconds before the close, and who were eagerly looking forward to a satanic close of 1,666, were likely disappointed when in the last 5 minutes of trading the cash index ramped from 1,665 and easily crossed in and out of 1,666, with the final print pointing to a mid-1,667 close. And then something happened: instead of a closing print of 1,667.50, over one point of the cash S&P suddenly was wiped out for no reason, in turn leading to the satisfactory 1,666 closing print or exactly 1,000 points higher than the "generational" lows of 2009. Yet, refreshing the settlement of the S&P500 an hour later, showed that the final closing price was, indeed, 1667.47.
So what happened?
Well, you have to admit one thing - the United States Senate certainly has its priorities straight. Summing it up - what governments in Europe and the Land of the Free are telling us this week is:-
Beer and Populism: good.
Private property rights, freedom, privacy, business, price stability: bad.
Much has been made of equity inflows this week (though we note a significant outflow from high-yield bond funds - just as risk-on in its nature) and once again the money-on-the-sidelines fallacy is hawked at every opportunity. Two critical aspects are important to get past this 'fact' as some positive driver. First, money does not 'enter' the market, it is swapped (e.g. Person A's cash is used to buy shares from Person B; after the transaction the roles are swapped with Person B holding cash on the sidelines and Person A holding shares); and secondly, as Morgan Stanley's Gerard Minack notes, despite all the disclaimers – retail flows assume that past performance is a good guide to future outcomes. Consequently money tends to flow to investments that have done well, rather than investments that will do well.
While many may not recall that the US has been without an official debt ceiling for the past three months, or even that it has a debt target ceiling, the bonus period agreed upon in January to let the nation rake up some $400 billion in addition debt in the past few months, officially runs out tomorrow, May 19, when the debt limit will be restored to its previous level plus the debt that was incurred in the interim, which means around $16.735 trillion in total debt as of yesterday, plus the amount incurred today, excluding the debt not subject to the cap which is about $30 billion. And since no grand bargain is forthcoming in a world in which official governance is now almost universally in the hands of the world's central bankers and out of the hands of the theatrical career politicians, it means that the next deadline in the endless US debt ceiling saga will be the day when the extraordinary measures to extend the debt ceiling run out. Such a deadline will likely be hit in just over three months.
Whoever orchestrated the last two hour closing ramp sure has a satanic sense of humor, opting to close the S&P at 1666 or exactly 1000 points above the "generational" low. A late-day desperation to buy-buy-buy, triggered by an avalanche of stops being triggered in the DAX futures market (as it broke all time highs), sent stocks soaring. Treasuries had been weak all day (giving back yesterday's gains and more). The equity spurt was not accompanied by VIX or Credit or Oil or Copper but JPY's break of 103 was another trigger supporting the rise. But that doesn't matter. The release of weak IP and in-line CPI data on Wednesday seemed to trigger the 'change' as gold and silver diverged lower from copper and oil's surge, Treasuries rallied, and stocks and the USD surged thereafter. WTI crude ends the week unchanged (against a USD gain of 1.37%) with PMs down 6-7%. Volume was light today but that doesn't matter either.
Since "it just doesn't matter" anymore, we hope that soon financial network TV, plagued by the lowest ratings in a decade for the simple fact that nobody cares anymore what Federal Reserve Capital LP does, will at least invite some funnier guests, such as Bill Murray, to dispense hot stock tips.
Presented with little comment because frankly everything is now full retard. That is the Dax; This is the Dax on low-volume, mega levitation drugs, at 9pm on a Friday in Germany, when out of nowhere someone goes on a mega buying spree in the Dax futures, and sends global risk assets, and FX pairs, surging. Is Bernanke LBOing Germany? Or is Spain due for junk downgrade and this is the ultimate bad is good trade which sends global risk assets, and FX pairs soaring to fresh record highs across the board.
Inflation slowed in 24 (of 27) EU nations in April to leave the average EU rate at 1.4% (versus 1.9% in March). Greece entered deflation in March for the first time in 45 years and Latvia consumer prices fell 0.4% in April (versus +2.8% a year ago). This notable plunge, while 'helpful' for the average spender in the short-term, is a problem, as Bloomberg's Niraj Shah notes, sustained falling prices will increase the nation's debt burden. At the other end of the spectrum, Romania and Estonia both have inflation running above 4% and 3% respectively. Of course, none of this serial 'depression' matters, since Draghi has your back and Hollande says "the crisis is over."
Earlier this week, the CIA's Russian outpost was deeply humiliated when (in a calculated move following accusations that the US had not gottern appropriate Russian information on the two Boston bombers, and following the visit of John Kerry whose primary objective was to, unsuccessfully, get Russia to relent on Syria) Russia's FSB exposed and broadcast on live TV the arrest of its agents caught while attempting to recruit a Russian spy. Back then we suggested to "expect a prompt retaliation by the US" however it turns out Russia was not nearly done with embarrassing the US in what is becoming an obvious campaign to humiliate the US intelligence service, this time by going where very few clandestine operations go, at least during peacetime detente: by publicly exposing the head counterparty US spy. As Telegraph reports, "Russia's Federal Security Service has publicly revealed the identity of a man it calls the CIA station chief in Moscow, in what experts say is a serious breach of intelligence protocol."
The emir of Qatar is a busy man: in addition to providing funding and weapons to the mercenary group formerly known as Syrian "rebels" in order to boost his already incalculable wealth and promote his LNG interests in the region over those of Saudi Arabia, in the process isolating Russia as the marginal provider of energy to Europe and furthering western interests even if it means escalating the Syrian civil war, he is also diversifying his assets. And he is doing so in a way that would provide for a quick and painless getaway should things in his country turn sour (now that the US and Russian fleets are converging nearby, this is no longer a merely token possibility): by buying Greek islands. And now that the world has seen the "lead investors" step in, the uber-wealthiest are scrambling to ape one of the world's richest people and stake their own Greek island claim.
What happens to everyone in the ruling Elites and those desperately trying to join the ruling Elites when the debt-serfs stop paying and the tax donkeys drift away to lower-cost, lower-income lifestyles? If you think Tune In, Turn On, Opt Out sounds ludicrous, check back in four years (2017) and eight years (2021) and see how many of your fellow debt-serfs and tax donkeys have quietly abandoned the bloated cost-structure, debt and derangement of the Neofeudal Debtocracy's twisted consumerist dream.