Archive - May 2013

Yesterday afternoon, following the rout in the US stock market, we made a spurious preview of the true main event: "So selloff in JGBs tonight?" We had no idea how right we would be because the second Japan opened, its bond futures market was halted on a circuit breaker as the 10 Year bond plunged to their lowest level since early 2012, hitting 1% and leading to massive Mark to Market losses for Japanese banks, as we also warned would happen. That was just the beginning, and suddenly the realization crept in that the plunging yen at this point is not only negative for banks, but for the entire stock market, leading to what until that point was a solid up session for the Nikkei to the first rumblings of a ris-off. Shortly thereafter we got the distraction of the Chinese Mfg PMI which dropped into contraction territory for the first time since late 2012, and which set the mood decidedly risk-offish, although the real catalyst may have been a report on copper from Goldman's Roger Yan (which we will cover in depth shortly) and whose implications may be stunning and devastating and may have just popped the Chinese credit bubble (oh, btw, short copper). And then all hell broke loose, with the Nikkei first rising solidly and then something snapping loud and clear, and sending the index crashing a massive 1,143 an intraday swing of 9% high to low, leading to an over 200 pips move lower in the USDJPY, and leading to a global risk off across the world.

UPDATE 1: They are panicking... BOJ injected 2 trillion yen ($19.4 billion) into the financial system to stem volatility following a circuit breaker in JGB futures trading.

UPDATE 2: Nikkei 225 is now down 1500 points from its highs and down 1150 (over 7%) from yesterday's close

UPDATE 3: The Final closing data is a disaster with JPY surging back to 101.50 (carry trades getting baumgartner'd everywhere), stocks down over 7%, and 10Y JGBs swinging from +11bps at the open to -6bps at the close for the second biggest range day in a decade...

All the time it is just the quadrillion JPY second-largest bond market in the world that is experiencing volatility on an unprecedented scale, the BoJ and her partners in crime are more than willing to 'officially' say "please do not worry." But when the equity market - that barometer of everything good and holy about Abenomics starts to crater, you can bet the excuses will come fast and furious. Today's drop of over 1500 points (over 9%) from the earlier highs is the largest drop for the Nikkei 225 since March 2011. The Nikkei 225 just lost the all-powerful 15,000 level and is suffering another VaR shock with a 6-sigma move today. In fact given the price levels this drop is on par with the post-Lehman moves in 2008. The question now (with US equity futures also fading fast -20 points and JPY crosses getting hammered) is how will the Japanese risk appetite for peripheral European crap hold up with this crimping in their plan as Japanese bonds and stocks dump?

Our country has entered a period of Crisis. We may or may not successfully navigate our way through the visible icebergs and more dangerous icebergs just below the surface. The similarities between the course of our country and the maiden voyage of the Titanic are eerily allegorical...

For the first time since October 2012, HSBC's China PMI (Flash) printed at a sub-50 level (49.6) missing expectations (50.4) quite notably. This is the worst two-month drop in 17 months. This is problematic for the PBoC who are being arbitraged left, right, and center and know that any stimulus will merely serve to exacerbate the problems they face (as we noted here that China simply cannot function with 'moderate' growth). Every one of the main index's 11 sub-indices is signaling 'problems' - from slower rates of output, slower new orders, employment dropping at a faster rate, stocks rising, and output prices falling. As HSBC notes, "The cooling manufacturing activities in May reflected slower domestic demand and ongoing external headwinds. A sequential slowdown is likely in the middle of 2Q, casting downside risk to China’s fragile growth recovery." Of course, none of this should come as any surprise to ZH readers - as we noted here, Chinese power consumption grew at its slowest rate since May 2009.

Well, they've finally done it.

As the following chart of the day from Bloomberg shows, as of this week, hedge funds have made "the biggest bet ever" against gold by taking Comex gold shorts to all time highs.

"Time in the digital era is no longer linear but disembodied and associative. The past is not something behind us on the timeline but dispersed through the sea of information." In effect, change no longer flows linearly like time anymore, it flows in all directions at once. History and meaningful context are both fatally disrupted by this non-linear flow of time and narrative. If the causal chains of history and narrative are disrupted, then how can anyone fashion a meaningful context for actions and narratives, and effectively frame problems and solutions? If everything is equally valid in a non-linear flood of data, then what roles can authenticity, experience and knowledge play in making sense of our world? "We're essentially the victims of a marketing and capitalist machine gone awry... we no longer are the active source of our own experience or our own choices. Instead, we succumb to the notion that life is a series of product purchases that have been laid out and whose qualities and parameters have been pre-established."

Japanese government bonds (JGB) futures have been halted once again this evening as the market opens down over 1 point. 10Y yields smash 11.5bps higher to 1.00% and 5Y yields add 6bps to 47bps. These are quite simply unprecedented moves in what 'was' a safe asset class and impresses yet another VaR shock on the market (as we detailed here). What this means practically is that Japanese banks push further into insolvency land (as we explained here) today's move wipes out another 1.5% of blended Tier 1 capital off the entire Japanese banking industry. Since the 10Y JGB yield lows of 32.5 bps on April 5, the move is rapidly approaching a full percentage point, or the parallel shift amount that the IMF warned would lead to 10% and 20% MTM losses for regional and major banks respectively. Today's jump in 10Y yields continues the post-BoJ regime of greater-than-six-sigma moves... something no risk model can withstand for three weeks. Just a good job the BoJ didn't have anything at all to say about this totally disorderly fiasco yesterday.

"Never attribute to malice that which is adequately explained by stupidity"

Forget "Peak Oil" and "Peak Credit" ... Are We On the Downslope of "Peak Intelligence"?

Do you need a break from public policy buzzwords? Are you happy to go back to the days when cliffs were discussed occasionally on the National Geographic channel but not analyzed ad nauseum on CNBC? Are you tired of reading about austerity, austerians, anti-austerians and austeresis? You’ve come to the right place. “How long have we been deleveraging?” – I’ll answer “zero years.” As in, what deleveraging? We haven’t even gotten started yet.

Anchoring is "our tendency to grab hold of irrelevant and often subliminal inputs in the face of uncertainty." In the absence of reliable knowledge about the future, investors have a tendency to anchor onto something – anything – to help them predict future market returns. And what better anchor to use for future market returns than prior ones? This is where the story gets more intriguing. When looking at the UK stock market in discrete 20-year blocks, the period from 1980-1999 is the only one in the last 300-years in which inflation-adjusted returns averaged between 8% and 10% per year. Investors seem to be anchoring their market predictions to recent returns of the past, therefore buying ‘the index’ expensively, inclusive of a grotesque bubble of credit. One can expect this to end in a train wreck.

In a letter to Congress (below), AG Eric Holder admitted that the administration deliberately killed American Anwar al-Awlaki (the radical Muslim cleric) in a drone strike in September 2011 adding, as the NY Times reports, "the decision to target Anwar al-Awlaki was lawful, it was considered, and it was just." As RT notes, there was collateral damage, as it has been widely reported but rarely acknowledged in Washington that two other US citizens - Samir Khan, and al-Awlaki's teenage son, Abdulrahman al-Awlaki - were executed in that same Yemen strike. With Holder’s latest admission, however, a fourth American - Jude Mohammed - has also been officially named a casualty of America’s continuing drone war; bringing the total 'known' Americans killed under the US Drone War to 4 since 2009.

With Greece suffering the biggest economic depression in decades, all so a few rich men can preserve their wealth and not have their EUR-denominated savings wiped out (even if the alternative means finally being able to rebalance externally using the Drachma instead of forcing internal rebalancing via unemployment and plunging wages), it was only a matter of time before we found out just how humiliating the conversion of the entire economy to a "gray", non-tax paying one would be for the citizens of Greece.  As the NYT reports, in just the past two years, the numbers of Greeks engaging in prostitution as a last course source of income has more than doubled: according to the National Center for Social Research, the number of people selling sex has surged 150 percent in the last two years.

"The economy is amazing right now - employment is recovering, innovation is going and housing is reviving.  What's not to love?"  This was a statement we heard in the media to justify the recent rise in the stock market. However, back in the real world, what is clear from the two composite indexes is that the broad economy, and by extension underlying employment, has clearly peaked and has began to weaken.  This is well within the context of historical trends and time frames.  While the mainstream analysts and economists continue to have optimistic views for a resurgence in economic activity by years end the current data trends, both globally and domestically, suggest otherwise.