Archive - Sep 2014

When is the U.S. banking system going to crash? We can sum it up in three words. Watch the derivatives. It used to be only four, but now there are five "too big to fail" banks in the United States that each have more than 40 trillion dollars in exposure to derivatives.

Despite her platitudes to the unemployed (here) and the poor (here), it is clear Janet Yellen's Federal Reserve policies are aimed squarely at only one segment of the US population - the wealthy. The reason is simple... with an economy built on the back of conspicuous consumption, it's only the top quintiles of the population's income earners that spend-spend-spend to keep the dream alive. What's good for the 'wealthy' is good for America, right?

Aside from Russian threats, weaker-than-expected Durable Goods, and #Bendgate, here are nine other reasons for today's sell-off...

“Money amplifies our tendency to overreact, to swing from exuberance when things are going well to deep depression when they go wrong.”

With President Obama having bombed 7 mostly-Muslim nations in his reign as Nobel-Peace-Prize-Winner-in-Chief, we thought Pew Research's study on where the world's Muslims are would be useful context...

Just last week, we explained why Blackrock - the largest asset manager in the world - is gravely concerned about the 'broken' corporate bond market. Simply put, thanks to The Fed's continued presence in the Treasury market has left the corporate bond market a liquidity-starved ticking time-bomb if faith in the stability of defaults ever falters (with firm balance sheets at record high leverage) and "selling" begins. As the following chart from Deutsche Bank highlights, the current level of liquid assets as a proportion of total HY assets is about as low as it has been tracking data back around 25 years. In other words, the massive (and likely levered) positions The Fed has forced the world to take on by its repression face a dramatic liquidity risk cost if they are ever to 'realize' any gains from the Fed's handouts (by actually selling). That's what every bond manager 'knows'...

There is no doubt that fracking stopped the long-term decline in U.S. oil output. Since the all-time low output in 2006, daily oil production has increased by 30%. Natural gas production has soared even higher, but seems to have leveled off. Ignoring the environmental impacts of fracking, just the economics alone show that shale oil and gas are not the miracle that will save us from the perils of peak cheap oil. Fracking extraction of oil is extremely expensive. If oil prices were to fall to $80 per barrel, there would be no profits for frackers. They would stop drilling wells. So don’t plan on ever paying less than $3 per gallon for gasoline ever again. Don’t believe in miracles.

The composition of the force carrying out airstrikes in Syria highlights the logistical complexity of this kind of operation. Most of the U.S. aircraft taking part in the operations over northern Iraq and Syria are based in and around the Persian Gulf, meaning they are operating far from their origins. Bahrain, Jordan, Saudi Arabia, the United Arab Emirates and Qatar reportedly participated in the initial operations in Syria, adding further complexity and coordination issues.

For investors, Fed stimulus has trumped all other factors.  It has lowered risk premia and inflated asset prices.  The gig is soon up, but investors have yet to adequately adjust. Unfortunately, they will attempt to do so with significantly compromised market liquidity.  The path to normalization is made even more challenging, because Japan and Europe are in recession, and China is slowing.

At the heart of the problem is the fact that the Federal Reserve’s manipulation of the money supply prevents interest rates from telling the truth: How much are people really choosing to save out of income, and therefore how much of the society’s resources — land, labor, capital — are really available to support sustainable investment activities in the longer run? What is the real cost of borrowing, independent of Fed distortions of interest rates, so businessmen could make realistic and fair estimates about which investment projects might be truly profitable, without the unnecessary risk of being drawn into unsustainable bubble ventures? All that government produces from its interventions, regulations, and manipulations is false signals and bad information.

Three are four developments in the fixed income markets that represent a clear and present danger for stocks.

The most polarizing man in Barack Obama's administration — besides the president himself — is calling it quits. President Obama will make a "personnel announcement" at 1630ET...

I did it in 2012 when eveyone ridiculed (to be read as lost money opposing) the call. It happened again in 2014 - Two major product releases in a row! Sooner or later those damn "Muppets" will catch on, no?

US equities suffered their biggest drop in 2 months today, with the S&P 500 closing a glaring 30-point divergence with high-yield credit markets which also sold off dramatically. The S&P 500 broke (and closed) below its 50DMA (as did the Nasdaq, Dow Industrials, and Transports). Russell 2000 dropped to beyond 4-month lows (-4.4% in 2014). Early USD strength gave way as stocks started to leak lower and closed unchanged (+0.5% on the week) led by JPY and EUR strength. Treasury yields plunged 4-6bps on the day (led by the long-end) with 10Y testing the critical 2.50% handle once again. VIX broke above 16, its 4th biggest rise of the year. Gold rose as stocks lost ground but silver, oil and copper slipped lower. HY Credit spreads closed at 8 month wides. Investors also piled into safe-haven short-squeeze 'camera-on-a-stick'. Stocks closed not "off the lows."