Archive - Sep 17, 2012

Since QEternity was announced, the spread between the 30Y mortgage and 10Y Treasury has collapsed from an already very tight (in anticipation of QE3) level to simply incredible levels. Following our comments on Friday about the relative 'safety' of mortgages over Treasuries, the compression from over 60bps pre-Ben to a mere 22bps now is incredible and just highlights how entirely distorted any signaling from any rate market has become. The point remains that lower absolute mortgage rates (which are notably not as exuberant as this relative risk spread would suggest) have not in the recent past provided notable pick-up in the new home sales (which is where real growth in the economy comes from) and furthermore, the benefits to the consumer of further mortgage rate cuts (based on recent JPMorgan work) is around $5bn per annum for every 25bps improvement in the mortgage rate (a drop in the ocean for a consumer who spends $11 trillion per year).

First Afghanistan a few hours ago, and now...

• PROTESTORS TRY TO STORM U.S. CONSULATE IN LAHORE: EXPRESS TV

So: Egypt, Libya, Tunisia, Morocco, Sudan, Lebanon, India, Balgadesh, Indonesia, Afghanistan and now Pakistan. Anyone left out?

When you have central planners printing inverse-wealth (because money printing dilution by definition means less wealth for everyone), who needs that cornerstone of old school economics: trade. Certainly not Japan (which has been diluting its futures to prosperity for the past 30 years and somehow failing each and every time) and China, both of which are now starting to feel the consequences of the collapse in political relations as a result of the senseless spat of the Senkaku Islands (recorded in its full visual glory here). As the NYT reports, "major Japanese companies closed factories in China and urged expatriate workers to stay indoors Monday, after angry protests flared over a territorial dispute, which threatened to hurt trade ties between the two biggest Asian economies." What does the idiotic escalation in unprovoked Japanese tensions over a rock in the East China Sea (note: not West Japan Sea) for the bottom line of Japan? In a word: Lots.

Following this morning's dismal Empire manufacturing 'growth' data (which generated zero impact in equity futures thanks to QEternity 'policy' having dampened the market's beta to any and every macro data points) we note Morgan Stanley's findings that while monetary policy can provide a temporary boost to valuations (driving investors quickly into higher beta and into value over growth), in fact over medium-term horizons (i.e. more than a week or two), it is in fact growth that dominates the drivers of equity performance. Since growth in our advanced 'new normal' economy means debt (and realistically has meant more debt for over 30 years), and with even the most exuberant of Fed heads seeing only modest growth over the next few years, perhaps the hubris of the last few days in the equity markets will dissolve into reality sooner than everyone hopes (i.e. before November) as the realization of Koo's impotent Fed comes to pass and the fiscal cliff remains unresolved.

Today's horrible piece of news, which at least on the surface was supposed to send the market soaring, comes courtesy of the Empire Fed Manufacturing Index, which printed at -10.41, the lowest print since April 2009, down from -5.85, and well below expectations of -2.0. The Index print confirmed the biggest 6 month drop since records began. The components painted a dire picture for jobs, with the employment index sliding from 16.47 to 4.26, New Orders tumbling from -5.50 to -14.03, while, wait for it, prices rose, from 16.47 to 19.15. Re-stagflation here we come. Market for now seems confused - since QE is priced into infinity, it is unclear if this latest datapoint confirming a recessionary economy, QE can't be more-er infiniter. Best to not respond to this, or any other macro news at all, which is precisely what the market has done. For those who missed it, not only has Bernanke doomed the global economy to stagflation and imminent food riots, while making the richest 0.001% richer than ever, he has completely broken any linkage between the economy and the market.

Marc Faber, one of the few analysts, to have predicted the current crisis correctly and to have protected his clients in the process, remains very bullish on gold. In another excellent Bloomberg interview, Faber said that “the trend for gold prices will be steady but the trend for the dollar and other currencies will be down. So in other words gold in dollar terms will trend higher.”  “How high it will go, you will have to call Mr Bernanke and at the Fed there are other people who actually make Mr Bernanke look like a hawk and so they are going to print money.” Faber is on record as to the importance of owning physical gold and he again warned about the importance of owning gold but not storing it in the U.S.  “You ought to own some gold but don’t store it in the U.S., the Fed will take it away from you one day,” Faber astutely noted. He said that Bernanke is a money printer and this could lead to massive inflation and the Dow Jones at 20,000, 50,000 or 10 million. Faber cheerily predicted that the “the Federal Reserve’s monetary policy will destroy the world” and “eventually we will have a systemic crisis and everything will collapse.”

Stocks in Europe traded lower throughout the session, as market participants were seen booking profits following last weeks gains after the Fed announce a radical open ended QE program. Equity indices were led lower by the telecommunications, as well as utility related stocks. It is also worth noting that peripheral stock indices underperformed their core-EU counterparts, with some noting fast money and system accounts selling equities and instead turning to fixed income. As a result, Bunds have edged higher, with yields touching on highest level since April. Also, this week’s supply from France and Spain, as well as Germany, lead to modest spread widening. In the FX space, flows were light so far this session, as such both EUR/USD and GBP/USD are seen little changed as we enter the EU session. Going forward, there are no major economic releases scheduled for the second half of the session and volumes are expected to be thin given the Rosh Hashanah holiday.

Yesterday it was US embassies in Egypt, Libya, Tunisia, Morocco, Sudan, Lebanon, India, Balgadesh, Indonesia, and others that were besieged and/or attacked. Today, we finally add Afghanistan to the "and others" list. From the LA Times: "Rioters infuriated by an anti-Islam video clashed with police in the Afghan capital on Monday, setting cars and tires ablaze and chanting anti-American slogans. Police blocked off the traffic circle closest to the U.S. Embassy and other diplomatic missions, and most Westerners working in Kabul were ordered by their organizations to try to stay out of public view. Monday’s unrest broke out when about 1,000 people gathered near an American base on the capital’s eastern edge and began marching toward the city. Police fired shots into the air to try to disperse the crowd, but the protesters continued to surge forward." In other words, just another American appreciation day.

• Anti-Japan demonstrators protest in New York City (China Daily) ...and the propaganda: Younger generation feels wave of emotions (CD)
• And the retaliation: Obama to launch auto trade case against China (Reuters)
• Spanish Banks Bleeding Cash Cloud Bailout Debate (Bloomberg)
• Chicago teachers extend strike (Reuters); Emanuel Promises He’ll Sue to End Chicago Teacher Strike (Bloomberg)
• China hurts own credibility with Xi's vanishing act (Reuters)
• European Squabbling on Euro Crisis Solution May Test Rally (Bloomberg)
• Two South Africa mines reopen, most don't (Reuters)
• Finance Industry Warns of ‘Cliff Effect’ in ECB’s Bond Plan (Bloomberg)
• China struggles to cure the violent ills of health system (Reuters)
• QE3 is for Main Street, except... it isn't: QE3 hit by mortgage processing delays (FT)
• Probe focuses on JPMorgan's monitoring of suspect transactions (Reuters)
• As explained here before: Spanish Bonds Decline as EU Policy Makers Clash on Bank Plan (Bloomberg)

News may come, and news may go, but the fiscal policy implementation vehicle known as the market, and now controlled by the Political Reserve don't care. For those who do, here is what has happened in the past few hours and what is on deck for the remainder of the week.