Archive - Jun 16, 2014

Market extremes generally share a common formula. One part reality is blended with one part misguided perception (typically extrapolating recent trends as if they are driven by some reliable and permanent mechanism), and often one part pure delusion (typically in the form of a colorful hallucination with elves, gnomes and dancing mushrooms all singing in harmony that reliable valuation measures no longer matter). This time is not different.

This entire bailout farce is now beyond simply criminal and purely ridiculous: as of this moment, GM has recalled more than double the number of cars it sold in all of 2013, or, another way of putting it, more than the total number of cars it sold in 2013 AND 2012 combined.

Treasuries oscillated in a 3-4bps range all day to end flatter with 30Y -1.5bps and 2Y +1.5bps as stocks flip-flopped around like Charlie Sheen in a Phat Phong whorehouse. Trannies resumed their post-Iraq drop (-0.3% today) but high-beta honeys sent Russell 2000 up 0.4% with the S&P and Dow unchish. Stocks recoupled with bonds after 2 attempts to spark new all time higherer highs. Ahead of this week's FOMC, the USD weakened as EUR gained and oil, gold, and silver all slipped in a highly correlated manner. VIX rose 0.4 vols to 12.6 - notably decoupling from the S&P as Iraq/Fed uncertainty prompted some hedging. The now ubiquitous buying panic took hold at 330ET and Russell closed at highs of the day.

As a helpful hint for the Federal Reserve - who appear concerned about "financial instability" - we thought the following chart might suggest where to look for 'irrational' investors...

With Iraq having succumbed to sectarian violence worse than anything observed in recent history, which accordint to many was merely exacerbated by US neocon ambitions to feed the ravenous military industrial complex, one can easily discard the opinion of all those on both sides of the argument - first those who said a US intervention was critical, as well as those who demanded a pull out. In fact, the only person who has preserved any credibility, and has not been "surprised" by the recent developments - is the man who said to never get involved in the first place - Ron Paul. But what about those who were tasked with implementing US foreign policy, flawed as it may have been: America's veteran troops.

Back in Feb 2013 we introduced the "Brent Vigilantes" and reminded traders how stock markets (and macro economies) react to shifts in the oil price with the two trading together to a 'tipping point' at which point strocks belief in growth breaks. We further confirmed that this is even more worrisome in the case of an oil price shock which strongly suggests that VIX at 12 is not pricing in the volatility that we have seen in the past when the oil complex starts to shake.

Bad data, don't worry, the central bank's got your back; Good data, don't worry, the central bank promised to stay easier for longer and longer (no matter how good things appear from the data). That's the meme that has driven the short-end of the world's largest bond markets to record lows. And then, just as the world's bond traders think they have the central banks understood, the Bank of England drops a tape-bomb...

For the moment, it is hard to see how anything can be salvaged in Iraq. You can be sure that Obama will be blamed both for pulling out in 2011 and then not going back to war, to protect our two trillion dollar previous investment. We have to imagine that distrust for civilian control of the US military by a corps of rising officers will reach never-before-seen depths. It may not be expressed right away, but the knock-on effects of political breakdown in the Middle East could go long and far in upsetting US politics. The defeat of Eric Cantor is just the beginning of what could be the unraveling of the federal system.

Fresno police have arrested a 64-year-old man suspected of cooking methamphetamine in his apartment at a retirement community. KFSN-TV reports Robert Short was pulled over as part of a routine traffic stop late Saturday and officers found meth in his car. Investigators then went to Short’s apartment in the California League-Fresno Village, where they found a half pound of meth, heroin and materials for a meth lab.

Writings on the wall...

With Germany taking a commanding (and somewhat shocking) 3-0 lead at half-time over European partners Portugal in the FIFA World Cup, the following image of the 'elites' enjoying the game could well be the analogy of the last few years...

First the good news. According to the "Sickness Absence" survey of 330 firms, conducted by the EEF, or the UK's manufacturing association, the number of days taken off work through sickness is at a record low. The survey found that over the past two years overall levels of worker absence reached a record low of 2.1%, equal to 4.9 days per worker per year. Now the bad news: while short-term absence is indeed at record low levels, long-term absence has increased, with almost two fifths of companies saying long term absence has increased in the last two years. Among the problems associated with long-term absence: mental health problems. Finally, the hilarious news. Since every organization these days has a clear and present agenda, the EEF being no exception, it was quick to scapegot the increase in long-term absence on what else - the same bogeyman that everyone in Europe now hates, one which despite constant pleas to crush it continues to be perpetually elusive: austerity.

While we noted last week the death of the Japanese bond market as government intervention has killed the largest bond market in the world; it is now becoming increasingly clear that the dearth of trading volumes is not only spreading to equity markets but also to all major global markets as investors rotate to derivatives in order to find any liquidity. Central planners removal of increasing amounts of assets from the capital markets (bonds and now we find out stocks), thus reducing collateral availability, leaves traders lamenting "liquidity is becoming a serious issue." While there are 'trade-less' sessions now in Japanese bonds, the lack of liquidity is becoming a growing problem in US Treasuries (where the Fed owns 1/3rd of the market) and Europe where as JPMorgan warns, "some of this liquidity may be more superficial than really deep." The instability this lack of liquidity creates is extremely worrisome and likely another reason the Fed wants to Taper asap as DoubleLine warns, this is "the sort of thing that rears its ugly head when it is least welcome -- when it’s the greatest problem."

Let’s be blunt here. The Fed has engaged in the single largest monetary experiment in history, betting the US economy and banking system on misguided theories that have little to no evidence of success.