Archive - Jun 2014

Violence has escalated in Iraq in recent weeks as the Sunni Islamist militant group ISIS has seized control of numerous cities and continued its advance toward the capital, Baghdad. Here is [Onion's] primer to help understand the ongoing developments in the troubled nation

Having been told that there's no bubble in low quality credit, valuations are 'normal' in stocks, low volatility does not mean complacency, and there's no inflation (it's all noise you idiot); VIX was monkey-hammered to new cycle lows back to a 10-handle (lowest since Feb 2007). This smashing of vol led to a surging of "most shorted" stocks with the S&P hitting new all-time record highs. Post-FOMC, the S&P 500 rose 10 points, 10Y -4bps, 2Y unch, gold was unch, and the USD was -0.1%.

After 2 days of weakness following the SCOTUS decision against them, Argentina unveiled a plan to restructure their debt - swapping existing foreign law debt to local law (more manipulatable and less legally enforceable) bonds, though Citi warns "implementing [the swap] may be technically challenging.". This 'voluntary swap' action is not a clear 'default event' but CDS spreads surging to over 3000bps and longer-dated bond prices tumbling once again suggest the market believes the path is clear as holdouts will once again hold out. As we explained here, there are five main scenarios and it appears, given these actions - that Argentina is playing hardball and will restart negotiations over the debt exchange. As Jefferies warns, "there's a high chance of default," but Argentina's economy minister Kicillof explained "everyone stay calm, the reconstruction of Argentina is not jeopardized." This plan was then ordered in violation of the anti-evasion policy SCOTUS set in place.

Don't worry about the surging food and gas prices you face each and every day... Janet Yellen says "it's just noise" and is actually "evolving exactly as they expected." It is this kind of mind-blowingly ignorant of the facts statement that has the central banks of the world losing more and more credibility (just take a look at the dot plot's 0.5 to 4.25% rate expectations for 2015). The following exchange between Yellen and Liesman is simply priceless in its ignorance.

What is there to add here: clearly the central-planning academics at the Marriner Eccles building are doing a great job at pushing the Russell 2000 to, well, 2000. Oh wait, this was an article about the Fed's GDP "forecast." Lol.

The short-end of the Treasury curve is unch but the longer-end is flattening notably with 10Y -4bps from pre-FOMC. S&P futures are surging (because why not) on the news that there's more taper, less growth, and higher rates than expected. Perhaps the most critical aspect is the collapse in VIX, which is now 1 vol lower than when Dudley warned of "complacency" at almost a 10-handle. Gold is up modestly higher nd the USD Index is down..

While trying to avoid 'foot in mouth' disease, Janet Yellen begins another press conference. We wish her luck in explaining how great the new is that they are tapering and yet have slashed growth expectations for the year... key will be any comments on complacency (as VIX collapses to a 10 handle)...

Nine minutes after the release of the new 'most important' data of the year, The Wall Street Journal's Jon Hilsenrath has unleashed a briefer than normal 530 word summary of what "common knowledge" we should understand from Janet Yellen's latest statement. While the Fed is a little less optimistic about the outlook for economic growth in the short-term, Federal Reserve officials nudged up their projections for short-term interest rates in 2015 and 2016 in a modestly hawkish manner. Taken together, the Fed's new interest rate forecasts imply slightly more aggressive credit tightening plans taking shape in the next two years than previously thought.

Perhaps the one most important, if completely meaningless chart (because it will be revised countless times in the next year and the final outcome will be anything but what the Fed is predicting) that everyone was looking for in today's FOMC forecast materials, is the so-called "dots" - the Fed's estimates of where the Fed Fund's rate will be at the end of 2016. The big picture: the median Fed Funds rate forecast for 2016 was raised from 2.25% to 2.5% which means that preliminary fears about a lowering of the terminal growth rate appear to be, for now at least, overblown. As for the individual dots, and how they compare to the April statement, here is the chart.

With modest positive growth adjustments expected, a continued taper (of $10bn), and no "rate-hikes-are-imminent" warnings, the FOMC statement provides more dovish confidence...

• FED REPEATS LOW RATE LIKELY FOR CONSIDERABLE TIME AFTER QE ENDS
• FED SAYS HIGHLY ACCOMMODATIVE POLICY `REMAINS APPROPRIATE'
• FED TAPERS BOND BUYING TO $35 BLN MONTHLY PACE FROM $45 BLN

But...

• FED: 2014 GDP GROWTH OF 2.1%-2.3% VS 2.8%-3.0% IN MARCH

So everything's fine, taper is on... but we are slashing growth this year dramatically. Pre-FOMC: S&P Futs 1933, Gold $1271, 10Y 2.62%, 2Y 0.46%

Now that virtually everyone has figured out what we first said in 2012, namely that in the New bizarro Normal, the best trading strategy - the only way to generate alpha in a world in which hedge funds no longer can - is going long a basket of the most shorted names, one has to wonder how any hedge fund replicating, 13F-chasing service can remain in business. After all, the last thing anyone wants to do is copycat hedge fund groupthink in a world in which hedge funds have underperformed the S&P 500 for 6 years in a row, especially a world in which one can buy the SPY with virtually no fees instead of paying some bloated billionaire 20% for the privilege of underperforming the Federal Reserve-managed S&P500. Still, there are those who, for some inexplicable reason, believe in the infallibility of hedge funds and chase every opportunity imitate those who make their money by collecting 2 and 20 not by generating alpha. For all these, the following charts are for you.

Goldman Sachs, like most of the mainstream economists believes today's FOMC statement will likely be "broadly neutral" with no indication of sooner rate rises than expected (despite what we have noted as the timing not being better), some modest upgrades to the economic outlook (to keep the "everything's good and you don't need us anymore" meme alive), and continued taper at the same pace (with maybe some acknowledgemnet of the transitory pop in inflation). UBS, on the other side, suggests there is a chance of some FOMC surprises with Janet Yellen pulling a semi-Carney as Citi's Steven Englander has previously noted "the Fed needs more volatility in order to maintain its illusion of omnipotence."

Despite the White House seeming reluctance to see airstrikes as an imminent option (as AP reports, in part because there are few clear targets that U.S. could hit, officials said), Arabiya TV - citing Iraq's Foreign Minister Zarabi, has asked for help (seemingly triggered by ISIS attacks on the Baiji refinery):

*IRAQ ASKED U.S. FOR AIRSTRIKES AGAINST MILITANTS: ARABIYA
*IRAQ ASKED US TO GO AHEAD W/ AIR STRIKES AGAINST JIHADISTS: AFP

This has now been confirmed by the BBC reporting that Gen. Martin Dempsey confirms the request. So 275 boots on the ground are not boots on the ground and now the US will reluctantly but pin-pointedly accurately bomb the bad guys (and some good guys) in Iraq... how has that ended in the past?

We discussed earlier that China does not have the capacity to feed itself as it simply doesn’t have enough fertile land in production to support its population’s growing food demand. Theoretically this is fixable. With a bit of time, patience, and technology, barren soil can be rehabilitated In other words, China doesn’t have enough enough productive land capacity to support its population. But the far greater issue is China’s massive freshwater deficiency.

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