Archive - May 2013

It doesn't take an Econ Ph.D to realize that what Japan is trying to do: which is to recreate the US monetary experiment of the past four years, which has had rising stocks and bonds at the same time, the first due to the Fed's endless monetary injections (and pent up inflation expectations) and the second due to quality collateral mismatch and scarcity and shadow bank system funding via reserve currency "deposit-like" instruments such as TSYs, is a problem. After all, those who understand that the BOJ is merely taking hints from the Fed all along the way, have been warning about just that, and also warning that once the dam breaks, and if (or when) there is a massive rotation out of bonds into stocks, it is the Japanese banks - levered to the gills with trillions of JGBs - that will crack first. Apparently, this elementary finance 101 logic has finally trickled down to the BOJ, whose minutes over the weekend revealed that members are pointing out "contradictions" in the Kuroda-stated intent of doubling the monetary base in two years, unleashing inflation, sending the stock market soaring, all the while pressuring bondholders to not sell their bonds. As the FT reports, "According to the minutes of the April 26 policy meeting, released on Monday, a “few” board members said the BoJ’s original stance “might initially have been perceived by market participants as contradictory”, causing “fluctuations in financial markets”.

• ‘Cov-lite’ loans soar in dash for yield (FT)
• Cambodian police clash with thousands of garment workers, 23 hurt (Reuters)
• Obama Accepting Sequestration as Deficit Shrinks (BBG)
• Having done nothing to restore confidence in a fragmented market, the SEC turns back to main street fraud (WSJ)
• Europe's austerity-to-growth shift largely semantic (Reuters)
• Germany thwarts EU in China solar fight (FT)
• In EU-China dispute, Beijing warns of trade  (FT)
• U.S. Oil Boom Divides OPEC (WSJ)
• Record Cash Sent to Balanced Funds (BBG)
• Hilsenrath: Fed Wrestles With Market Expectations About Pace of QE (WSJ)
• Worse-Than-Cyprus Debt Load Means Caribbean Defaults to Moody’s (BBG)
• States Raise College Budgets After Years of Deep Cuts (WSJ)
• U.K. Banks Cut 189,000 With Employment at Nine-Year Low (BBG)

First, the important news: in a few hours the Fed will inject between $1.25-$1.75 billion into the stock market. More importantly, it is a Tuesday, which means that in order to not disturb a very technical pattern that will have held for 20 out of 20 Tuesdays in a row, the Dow Jones will close higher. Judging by the futures, this has been telegraphed far and wide: it is a Ben Bernanke risk-managed market, and everyone is a momentum monkey in it. In less relevant news, the underlying catalyst for the overnight rip higher in risk was the surge in the USDJPY, which left the gate at precisely Japan open time, and after languishing at the round number 101 support for several days, did not look back facilitated by what rumors said was a direct BOJ intervention via a Price Keeping Operation in which banks bought ETFs directly. This was catalyzed by the usual barrage of BOJ and FinMin individuals engaging in post-crash damage control and chattering from the usual script.

Imagine the scenario : Cameron makes a promise to tell the EU to shove it where the sun doesn’t shine and then probably yell at the top of his voice: “I want my money back” (sorry David, that one’s already been said, a long time ago now…dead and buried, in fact). 

What is the outlook for Fed policy? Can Japanese officials stabilize the bond market? Is the ECB going to adopt a negative deposit rate? What are the latest inflation readings? Is the soft landing still intact for China?

It seems that the BoJ has decided that the equity market rally (for now) takes precedence over a JGB market 'intervention'. After oscillating around unchanged for much of the late morning, Japanese stocks are testing the highs after the break - up around 1% (dominated by Consumer Goods and Industrials up around 2% as Utilities are hammered -4.75%). The problem is that Japanese government bonds are becoming the high beta correlated unintended consequence of this effort. While stocks are near their earlier highs, JGB futures are notably lower relatively speaking. JPY is not helping as the correlation to that devaluer-of-first-resort seems to have faded. Of course, to the clueless onlooker, a 0.50 drop in the price of a JGB would seem negligible, but as we have discussed, it is relative to the capital reserved to cover these swings. Today's move is a 3-Sigma swing in price for what is still considered high-quality repo-able collateral (for now).

A big part of the reason that per capita CO2 emissions are higher in North America than in Europe is our urban structure--in particular the vast suburbs that surround most city centres. Big suburbs are only possible due to easy money. With no easy money, working families would not aspire to owning (alongside their bank) a huge home with a vast lawn and with neighbours within 5 m. Without easy money there wouldn't be two or three cars in the driveway... Governments like this model of city development - it gives people hope, which helps keep the system going. ... So having created the template for massive CO2 emissions, the authoritarians wish to deny responsibility and shift the blame to their debt-serfs. Because the debt-serfs are refusing to absorb the costs, the authoritarians decry their denial of science. Hence, if you really care about global warming, end the Fed.

What's the next stunt he will pull?

Update: rumor of Price Keeping Operation in Japan. If correct, this means that the BOJ's $70 billion per month injection is no longer sufficient, that the BOJ's credibility is being actively questioned - by far the biggest stigma for any central bank anywhere - and pass-through financial entities have to artificially prop up the market by buying ETFs in order to preserve the galloping rate of increase or else face a collapse such as that seen in the past several days.

The "catalysts" in the new normal have become so hilarious that losing money in the centrally-planned market can be simply viewed as the price of admission to witness the most entertaining circus spectacle in capital "markets" history. Behold: the 8pm open of Japanese trading. Apparently, somehow, the fact that a market has reopened is not only news, but is massively sell the Yen news, at least by Mrs. Watanabe, and since every US algo is correlated to the USDJPY, this means a surge in the E-mini. But perhaps what those sneaky algos are discounting is that tomorrow is a Tuesday. And as every dart chasing monkey with an E-trade terminal knows: nobody ever loses money on Tuesdays betting on the Stalingrad & Propaganda 500 index any more.

Many are still wondering who (or what) stole the jam from the Japanese stock market's doughnut just three short days ago. Some blame an out-of-control bond market; others fear members of the BoJ recognizing they have blown the bubble too big too soon; still more fear the jawboning on JPY devaluation that has seemingly about-faced recently. The reality is - none of these were surprises or new to the marketplace. But in this world of free-flowing totally fungible central bank liquidity, we suspect the following chart is the real answer. Simply put, the S&P 500's bubble just couldn't keep pace with the Nikkei 225's and with USDJPY unable to support the relative price appreciation difference - the six-sigma richness of Japan to the US was just too much. Two-and-a-half months of 'outperformance' undone in 3 days leaves the question - is it over?

Peak collateral is just a notion - one we have discussed in detail many times (most recently here). The notion that at the time we want yield and growth we are running out of collateral which is supposed to underpin the high yielding assets and loans. Such a shortage would cause the ponzi-like growth that is necessary to sustain a bubble, to stall and then implode. We think our lords and rulers know this and have decided that it must not be allowed. And this – the need for collateral – is the reason for the endless QE. If this is even close to the mark, then recent murmurings about the Fed tailing off its bond buying will prove to be hollow. The Fed will quickly find it cannot exit QE without precipitating precisely the disorderly collapse, to which it was supposed to be  the solution.

Moments ago, the British foreign secretary William Hague tweeted that the arms embargo to the Syrian rebels has officially ended. The irony is that as has been known for a long time, and as the FT itself reported ten days ago, the Syrian "rebels" who actually have been Qatari mercenaries, have been receiving weapons shipments for years from the wealthy Persian Gulf country, with the implicit knowledge of both Europe and the US. So why the rush by France and Britain to allow weapons armaments to resume by official channels, even if it means even more weaponization of the Assad regime by Russia and China, more bloodshed, and more death?

Simple: natural gas.

in early May, several weeks before the government directly addressed the people pleading for the Indian population to "contain its passion for gold", the Reserve Bank of India issued a directive prohibiting the granting of advances (i.e., loans) against all non specifically minted gold coins sold by banks (excluding loans against gold ornaments and other jewelry).  Ironically, without imposing specific dimensional limitations, there was the risk that India may boldly go where only a bunch of financially illiterate, click-baiting media dilettantes, desperate to pitch the idiotic idea of a "trillion dollar coin" made out of platinum to bypass the debt ceiling limit (at least until the Treasury was forced to firmly crush this nonsense with a just as idiotic public statement), and arbitrage RBI directive loophole to create a massive coin, against which banks would subsequently lend out cash. Today, any hope that India may indeed be the first real source of a trillion dollar coin, one made out not of platinum but gold, were crushed, following a clarification by the central bank that there is a firm, 50 gram weight limit on all permitted "specially minted gold coins."

Western central banks have got themselves horribly wrong-footed as a result of not adjusting their anti-gold policies to allow for the realities of Asian gold demand. Though their dealings are shrouded in secrecy, there is compelling evidence that much – if not most – of Western central bank gold has been quietly sold over the last three decades. More recently members of the Shanghai Cooperation Organisation, a common security and trading bloc led by Russia and China, and future members (India, Iran, Afghanistan, Mongolia, Belarus and Sri Lanka), with their citizens numbering over 3 billion people, have together cornered the global market for physical supply, without even taking account of demand from the rest of South East Asia’s gold-hungry population. The result is that gold markets are now failing to clear. The ability of the Western central banks to supress gold prices appears to be ending.

For the the latest "unintended casualty" of Bernanke and his ZIRP policy, we look at corporate pension funds, which as WaPo reports, are finally starting to crack under the weight of pervasive central planning, brought to the brink by none other than the Chairman's "good intentions." On the surface this makes no sense: after all pension funds invest in assets - the same assets that Bernanke's policy of serial cheap credit funded bubble creation are supposed to inflate. And they do. The only problem is that pension funds also have offsetting matching liabilities: or the amount of money a company has to inject in order to cover future retiree obligations. And in a period of low discount rates brought by a record low interest rate environment, these liabilities painfully and relentlessly increase when discounting future cash needs. Quote WaPo: "Assets held by pension plans of the firms that make up the Standard & Poor’s 500-stock index increased by $113.4 billion in 2012, according to a report by Wilshire Associates, a consulting firm. But largely because of low rates, company liabilities increased even more: by $173.6 billion. That left the median corporation’s pension plan 76.9 percent funded, with just over $3 of assets for every $4 of liabilities."