Archive - Sep 18, 2013

"The government’s bailout plan destroyed capitalism. In a capitalist system, those who stood to gain–and already made off with large gains—would have to bear the risk. The bailouts represented a corruption of capitalism. Crony capitalism violates the spirit of democracy established by the Founding Fathers of the republic known as the United States." - Janet Tavakoli

All of the suffering and hardships the majority of Americans are experiencing today are directly related to the coup pulled off by the crony financial oligarchs in the fall of 2008, and all of the media and political minions that helped them do it. People realize we have become a Banana Republic and they have now lost all hope.

First, the bad news; the un-Taper-inspired collapse in the USD is not helping the JPY weakness that Abe desires and the NKY is now 200 points off its US day-session highs (though still green from yesterday) and the JASDAQ is red. But everywhere else there is much rejoicing... EM FX is back at 5 to 6 week highs with MYR, INR (fwds), and IDR all having major surges. Equity markets are green in general but the Philippines PSEi (+3%) and Indonesia's JCI (+4% but was +7.7% at one point) are an illiquid mess of over-exuberance. Gold, US Treasuries, and US equity futures are all holding gains or inching slightly better. Thai bonds are 22bps lower in yield, Indonesia -10bps, but Indian bonds for now are quiet. MSCI's AsiaPac Ex-Japan equity index is now back at highs from May 2011, having risen 12 of the last 16 days for a 9.7% gain. While the moves are large, they are not unprecedented and certainly don't signal a wholesale charge back in of new hot-money since volumes remain on the low side for now.

"It's Working..."

With incomes stagnating (real household incomes at 15 year lows) and gas prices hovering awkwardly near record highs (especially for this time of year), we thought a reflection on the inflationary impact of an always-activist Fed were nowhere clearer indicated than by the collapse in the amount of gas that the average US citizen can afford. Of course, there is a silver lining... the affordability of gas dropping means fewer miles driven, fewer miles driven means more walking, and more walking means less obesity... so the Fed's inflationary leakage into energy prices and implicit enabling of lower living standards of most Americans is good for a nation of fatties - always the optimists.

That which is unaffordable is unsustainable and will go away. The current system of higher education is profoundly unaffordable: it exists on an immoral foundation of student debt--$560 billion of which is Federal. Enormous expansions of student debt are required to keep the current system of higher education afloat. Thus, the key question: does the current higher education system exist to serve students, or does it exist to serve those employed by the system? Those with vested interests in the system will naturally answer “both,” but to answer this question fairly, we must ask if an alternative system that accredits each student could serve students more effectively than the current system of accrediting schools.

Putin had his NYT Op-ed. Syria's Assad, on the other hand, is going for the jugular using the "undisputed chemical weapons proof" route, aka YouTube.

With rumors this evening of the White House calling around for support for Yellen, Marc Faber's comments today during a Bloomberg TV interview are even more prescient.  Fearing that Janet Yellen "would make Bernanke look like a hawk," Faber explains that he is not entirely surprised by today's no-taper news since he believes we are now in QE-unlimited and the people at the Fed "never worked a single-day in the business of ordinary people," adding that "they don't understand that if you print money, it benefits basically a handful of people." Following today's action, Faber is waiting to seeing if there is any follow-through but notes that "Feds have already lost control of the bond market. The question is when will it lose control of the stock market." The Fed, he warns, has boxed themselves in and "the endgame is a total collapse, but from a higher diving board."

The equity market’s reactions to monetary policy inflection points, when (or if) the Fed takes the first step to normalize monetary policy following easing in response to recession, have been reasonably similar. As Barclays' Barry Knapp notes, irrespective of the pace of policy accommodation removal – the average policy normalization-related correction during the prior six business cycles is 8.9%. While our memories of an extremely volatile September – five years ago – remain fresh, the last four have been exceptionally tame. However, while another period of fiscal uncertainty seems likely, Knapp fears there is a key difference between this September and the surprisingly low volatility Septembers in 2009-12. In those periods, the Fed was either buying assets or had pre-announced a new program; this year, it is preparing to weaken the portfolio balance effect.

Do you wonder what to make of America’s soaring government debt and what it means for the future? Or, if you already have it figured out, are you interested in research that might challenge your position? Either way, you might like to see the results of this exercise:

1... Take each historic instance of government borrowing rising above America’s current debt of 105% of GDP.
2... Eliminate those instances in which creditors received a lower return than originally promised, due to defaults, bond conversions, service moratoriums and/or debt cancellations.
3... Of the remaining instances, consider whether and how the debt-to-GDP ratio was reduced.

In other words, let’s see what history tells us about today’s debt levels and what comes next. You may find the answer surprising.

It was only Monday that Goldman's Damien Couravlin was pounding the table and gold right under it. A quick, and historic, $70 move higher in gold in one day following Bernanke's most recent confirmation he really has no clue what he is doing in terms of monetary policy (if knowing quite well what he is doing for the S&P and its 1950 year end price target), was all that it took for Goldman to flip flop and now suggest that there is "risk to gold prices as skewed to the upside in the near-term, in our view."

Whether it was momentum traders doing what they do best, or just a market expecting Bernanke's "communication strategy" to pan out as expected, and follow through with more easing in demand for duration assets, is unclear and largely irrelevant, but as the following chart by JPM shows, net spec positions in UST futures are at their most short since May 2010 and are close to two standard deviations below their average since 2006. The chart shows a duration weighted composite of the net spec positions on the 10YR, 5YR, 2YR, the T-bond, the Ultra long bond and the Eurodollar futures - it is these specs that goes hurt the most by today's FOMC announcement. The question now is: will the scramble to cover shorts lead to a fresh push lower in yields (ending any talk of a rotation, great or otherwise), or following today's shock and awe move in the curve, will the move wider in rates continue.

It is undeniable that America is thoroughly addicted to fiat stimulus. Every aspect of our economy, from stocks, to bonds, to banks, and by indirect extension main street, is now utterly dependent on the continued 24/7 currency creation bonanza. The stock market no longer rallies to the tune of increased retail sales, growing export markets or improved employment expectations.  In fact, “good” economic news today is met with panic and market sell-offs! Why? Because investors and banks still playing equities understand full well that any sign of fiscal improvement might mean the end of the private Federal Reserve’s QE pajama party. They know that without the Fed’s opiate-laced lifeline, the economy dies a fast and painful death. All mainstream economic news currently revolves around the Fed, as pundits clamor to divine whether the latest signals mean the free money will flow, trickle, or dry up. At the edge of the Federal Reserve’s 100th anniversary, it is vital that we see the current developments for what they really are – history changing, in a fashion so violent they are apt to scar America forever.

13th 'up' day of last 15 for the S&P...  Quite a day (considering Bernanke said they "were avoiding sharp shocks"):

Gold's best day since January 2009
5Y Treasury's biggest yield drop since March 2009
USD's 3rd worst day in a year
Homebuilders biggest rise since June 2012
New all-time highs for Dow and S&P

Two things of note aside from this chaos - shorts were being pressed into the meeting (and were smashed higher on the news); and VIX, which had been bid going in, is diverging after the press conference from equity exuberance. Some of the exuberance faded in the last 30 minutes but significant gains are holding.

"We have got to turn the page on this kind of bubble-and-bust mentality that helped to create this mess in the first place, we have got to build a housing system that’s durable and fair and rewards responsibility for generations to come.  That is what we have got to do."

- Barack Obama, August 6, 2013

BOTTOM LINE: The FOMC unexpectedly decided not to taper the rate of its asset purchases at today's meeting, preferring to wait for further confirmation of improvement in the outlook. There was no change to the forward guidance on the federal funds rate. The Summary of Economic Projections showed a decline in the central tendency expectation for the year-end 2015 fed funds rate, and the 2016 rate suggested a cautious pace of rate hikes once they begin.