Archive - Jun 2013

"Don't be afraid of the tapir. It's not scary"

Japan’s attack in the Currency War was SUPPOSED to make it more competitive in international trade

Kouvelis is leaving the Greek coalition government. Snap elections scenario is back with a vengeance

— Nikos Chrysoloras (@nchrysoloras) June 20, 2013

Since we lost the deer yesterday as it was run over by bond sellers, it appears everyone else came to the realization that QE cannot be infinite, that EU event risk never went away, and that China does have a credit bubble and so it is time for the monkey. Where-ever we look today there is carnage. The superlatives are all extreme but are the biggest since Europe collapsed in October/November 2011 (preceding the coordinated global central bank bailout) - 1-day and 2-day drops in stocks the biggest in 19 months, Gold and Silver's second largest 1-day drop in 20 months, investment-grade and high-yield credit's worst 1-day and 2-day widening in 19 months, EM currencies (e.g. MXN) worst day in 19 months, Copper's worst day in 19 months, and the heaviest volume day in S&P futures in 20 months. While stocks closed at the lows of the day, Treasuries did see some buying come in the last hour or so - which appears to be safe-haven scrambling - and EUR weakness (post IMF) was trumped by JPY strength (unwinds) to drag the USD off its highs into the close.

News for fringe low brow ZH conspiracy theorists...

Back by popular demand.

As a quick reminder, the old marketwide circuit-breaker system where a drop of over 2,400 points in the DJIA was needed to close the market after 2 pm no longer exists. Instead, the SEC revised its market-wide circuit breakers as follows...

But, but, but... the rally was all about earnings and fundamentals... not the Fed, right?

As we warned earlier in the week, Greece is notably missing its Troika goals and the issue just became a lot more critical. As The FT reports, the IMF is preparing to suspend aid payments to Greece over what it claims is a EUR 3-4 billion shortfall that has opened up. Between healthcare budget shortfalls, central banks refusing to roll-over Greek bonds, and amid signs that even the scaled-back privatization plans that Athens had agreed to being behind schedule, the IMF - following its own admissions of mistakes in the Greek bailout, has warned EU officials the shortfall will require it to stop aid payments by the end of July. The equity market is already reacting (as is EURJPY - EUR weakness against the big carry pair) to this re-awakening of EU event risk (and the awkward timing with Merkel's election so close) - with the Fed's comfort blanket somewhat removed.

In one month, the average 30 year fixed rate mortgage has jumped by over 60 basis points. What does this mean for net purchasing power? Well, as the chart below shows, assuming a $2000/month budget to be spent on amortizing a mortgage (or otherwise spent for rent), it means that suddenly instead of being able to afford a $425K house, the average consumer can buy a $395K house . This means that, all else equal, housing just sustained a 7% drop in the average equlibrium price based on what buyers can afford. But assuming the current selloff in rates continues, things are going to get much worse: we may be seeing 5%, 5.5% even 6% and higher mortgages in the immediate future. It also means that a buyer who could previously afford a $506K house with a $2,000 monthly budget at an interest rate of 2.5% will be able to afford only $316K if and when the average 30 Year fixed hits 6.5%: a 40% drop in affordability based on just a 4% increase in interest rates!

The FOMC lives in a fantasy world. The economy is not improving materially and deflationary pressures are rising as the bulk of the globe is in recession or worse.  The problem is that the current proposed policy is an exercise in wishful thinking.  While the Fed blamed fiscal policy out of Washington; the reality is that monetary policy does not work in reducing real unemployment.  However, what monetary policy does do is promote asset bubbles that are dangerous; particularly when they are concentrated in riskiest of assets from stocks to junk bonds. However, if you want to see the efficiency of the Federal Reserve in action it is important to view their own forecasts for accuracy. The reality is that Fed may have finally found the limits of their effectiveness as earnings growth slows, economic data weakens and real unemployment remains high. Reminiscent of the choices of Goldilocks - it is likely the Fed's estimates for economic growth in 2013 are too hot, employment is too cold and inflation estimates may be just about right. The real unspoken concern should be the continued threat of deflation and the next recession. One thing is for certain; the Fed faces an uphill battle from here.

With Bernanke seemingly getting his pink slip from Obama, the herd of academia is amassing for the prized job of winding down this catastrophe. From Yellen to Summers and from Geithner to Liesman, they all are equally qualified but as the following job description shows, it may not be as much fun as it seems.

This piece is timely as markets spit up the punch from Bernanke's bowl

Presenting the creeping take over of the world by "King Dollar" over the past year... or heatmaps for FX dummies.

Neither the ending nor its timing can be forecast with any accuracy. Markets may continue higher as this drama plays out with future Fed announcements and deceptions. Markets, however, cannot levitate forever. Eventually they coincide with reality, which in this case probably means another major market correction. Continuation and expansion of Fed liquidity may hold markets up or even drive them much higher. At some point the entire scheme crashes, probably when enough people recognize that the greater fool theory is in danger of exhausting the quantity of fools. All Ponzi schemes have limits. Participating in these markets is akin to playing a version of Russian roulette. If the chamber is empty, you make money. If not, you financially die.