Archive - Aug 2015

Since we now see the China rate cut exuberance fading fast, we thought it worth reminding 'investors' what is really driving the overnight ramp. It's not the economy, it's The BoJ stupid...

If yesterday's liquidity was bad enough to precipitate the biggest wholesale market flash crash, including the historic, first-ever "limit down" triggers for all major index futures, then be very careful what you do today because as of this moment E-mini liquidity is even worse than it was yesterday, not to mention at any other point in the past month, at this time of the day.

"... others took us to task a great deal more disconcertingly, calling upon us to close our business; to take up another vocation; to stop making “calls” and as one “pundit” rather comically suggested we should go have sexual relations with our self."

Goldman's 3 key reasons for China's "surprise" rate cut: i) Activity growth weakened meaningfully after a brief rebound in 2Q; ii) Outflows re-emerged and drained liquidity; iii) Equity market has been falling very rapidly. The conclusion: "These cuts are positive moves which are much needed to support the economy and market. But they are unlikely to be sufficient by themselves."

The dual policy rate cut is a desperate attempt to i) free up liquidity, and ii) shore up confidence in the stock market. We suspect the effects may be short lived on both accounts because after all, aggressive easing only fuels further depreciation necessitating further liquidity-sapping FX interventions in a vicious loop, and loose monetary policy likely won’t be much comfort to China’s 90 million retail investors who now, more than ever before, are virtually guaranteed to sell any rip they can get in a desperate attempt to claw back their life savings which they naively poured into stocks back in April and May.

• China’s Central Bank Cuts Interest Rates (WSJ)
• Chinese Stocks Crash Again to Extend Biggest Plunge Since 1996 (BBG)
• China cuts rates, reserve ratio to aid economy as stocks sink (Reuters)
• Wall St. suffers worst day in four years, S&P confirms correction (Reuters)
• Europe's Stocks Head for Best Day Since 2011 (BBG)
• Market turmoil clouds Fed rate outlook (FT)
• For All Its Heft, China’s Economy Is a Black Box (WSJ)

The PBOC cut itself was not surprising, considering the PBOC now has to juggle and micromanage every aspect of the economy, from its sliding currency, to the bursting stock bubble, to record capital outflow, to soaring real interest rates, to the slowing economy. In fact, bulls around the globe will welcome the latest central bank bailout. Which also happens to be the worst aspect of today's intervention, because one can once again toss all the talk that China would finally stop intervening in asset pricing, with today's decision merely perpetuating the market's reliance on central banks. As a reference, this was the second time China cut both RRR and interest rates in 2 months: the last time it did so was during the depths of the financial crisis.

• CHINA PBOC CUTS INTEREST RATES
• CHINA PBOC CUTS REQUIRED DEPOSIT RESERVE RATIO
• CHINA PBOC CUTS 1Y DEPOSIT RATE BY 25 BPS
• CHINA PBOC CUTS 1Y LENDING RATE BY 25 BPS
• CHINA PBOC CUTS BANKS DEPOSIT RESERVE RATIO BY 50 BPS

To make people eat their seed corn, we need to add the essential element: a perverse incentive. There’s only one way to make everyone play a perverse game: force. Let’s look at monetary policy in this light.

My only conclusion is that the sensational bearish setups are firmly in place and, once the bounce is complete, you will be witness to a fury of plunging price quotes that will, in the end, prove that Monday, August 24th, was simply a shot across the bow.

Brazil's flagging economy, which is mired in stagflation and remains a slave both to China and to what looks like intractable political turmoil, has destroyed nearly 550,000 jobs YTD. As Barclays notes, " [the July] print is compatible with 140,939 job eliminations, pretty close to the historical low of -154,355 in June."

There’s an ill will blowing across the country. The economy is tanking. The people are directionless, and politics provides no answer. And like former regimes, the militarized police have stepped up to provide a façade of law and order manifested by an overt violence against the citizenry. Americans must break free of the apathy-inducing turpor of politics, entertainment spectacles and manufactured news. Only once we are free of the chains that bind us—or to be more exact, the chains that “blind” us—can we become actively aware of the injustices taking place around us and demand freedom of our oppressors.

The Carnage continues in China (and across AsiaPac) as Japan propagandizes and China throws more kitchen sinks at the market to stop the malicious sellers...

As asset bubbles are in the way of the Fed’s policy, a decline in stock prices removes the equity market bubble and enables the Fed to print more money and start the process up again. On the other hand, the stock market decline could indicate that the players in the market have comprehended that the stock market is an artificially inflated bubble that has no real basis. Once the psychology is destroyed, flight sets in.