Archive - Feb 6, 2012 - Story

When all else fails, pretend it's all good. Like what Australia did, following the just released announcement by the RBA that it is keeping the cash rate unchanged at 4.25% on expectations of a 25 bps rate cut. Which begs the question: is China re-exporting the lagging US inflation it imported over 2011? So it appears to Glenn Stevens, who just said that "Commodity prices declined for some months to be noticeably off their peaks, but over the past couple of months have risen somewhat and remain at quite high levels." Or maybe they are not pretending and inflation is still alive and very much real? It also means that Chinese inflation continues to be far higher than what is represented, but we probably will just take the PBoC's word for that. Or not, and wonder: did the RBA just catch the PBOC lying about its subdued inflation? And if that is the case, does anyone really wonder why that very elusive RRR-cut is coming with the same certainty as the Greek creditor deal? Either way, the AUDJPY spikes by 80 pips on the news, however briefly, and if the traditional linkage between the AUDJPY and the market is preserved, it should have a favorable impact on risk as it means at least one hotbed of inflation remains. On the other hand, it also means that Chinese easing is a long way off... and in a market defined solely by hopes for central bank intervention this is not good. And amusingly, just as we write this, Bloomberg release a note that the PBOC is draining funds: "China’s money market rates rose after PBOC resumed fund drain via a repo operation, showing it remained cautious toward policy easing." Translation: "Hopes for a near-term RRR cut could be dashed, Credit Agricole CIB strategist Frances Cheung writes in note to clients." Oops. Furthermore, the PBOC did 26 billion yuan in repos, meaning it is set to conduct a net liquidity withdrawal for this week according to Credit Agricole. Withrawing liquidity when the market expects RRR cuts? Fughetaboutit. (and reread the Grice piece on why only idiots define inflation by the CPI or the PCE).

The mainstream view uniting the entire political spectrum is that all our financial problems can be fixed by what amounts to top-down, centralized policy tweaks and regulation: for example, tweaking policies to "tax the rich," limit the size of "too big to fail" financial institutions, regulate credit default swaps, lower the cost of healthcare (a.k.a. sickcare), limit the abuses of student loans to pay for online diploma mills, and on and on and on. But what if the rot is already beyond the reach of more top-down policy tweaks? Consider the recent healthcare legislation: thousands of pages of obtuse regulations that require a veritable army of regulators staffing a sprawling fiefdom with the net result of uncertain savings based on a board somewhere in the labyrinth establishing "best practices" that will magically cut costs in a system that expands by 9% a year, each and every year, a system so bloated with fraud, embezzlement and waste that the total sum squandered is incalculable, but estimated at around 40%, minimum....The painful truth is that we are far beyond the point where policy/legalist regulatory tweaks will actually fix what's wrong with America. The rot isn't just financial or political; those are real enough, but they are mere reflections of a profound social, cultural, yes, spiritual rot. This is the great illusion: that our financial and political crises can be resolved with top-down, centralized financial reforms of one ideological flavor or another. It is abundantly clear that our crises extend far beyond a lack of regulation or policy tweaks. We cling to this illusion because it is easy and comforting; the problems can all be solved without any work or sacrifice on our part.

Beware what you ask for.

We are not even half way into the quarter, and the negative preannouncements for financials have already begun:

• MACQUARIE SAYS `SUBSTANTIALLY LOWER LEVELS' OF CLIENT ACTIVITY - BLOOMBERG

Why is this the case? Just read the previous post on market volume hitting decade lows. And while there are just under 2 more months left in the quarter, absent some seismic volatility explosion in the next month (ahem, Greece) we fail to see how bank revenues will grow at all sequentially, let alone QoQ. Furthermore, with the curve once again flattening, and mortgage rates dropping to all time lows to the point where Net Interest Margin benefits for banks have disappeared (read more on the impact on the liquidity trap from this morning's Bill Gross note), key M&A activity being halted by regulators on either side of the pond, and Facebook about to suck up all IPO unencumbered capital for months, we fail to see how banks hope to generate any incremental pick up in their top line. Furthermore, SG&A slash and burn  (which the BLS fervently refuses to acknowledge ever happened) will only make top line growth far slower if a true rebound for the financial sector ever materializes. Bottom line: the dash for trash in the financial sector is coming to an abrupt close.

The adjustment to the population over the last decade was the second largest on record. However, the devil is in the details, as the population of 55 and older didn't really increase — they were always there but just not counted. The real concern is with the 16-24 age group. The longer that age group remains unemployed, the higher the probability that they will become long-term unemployable due to degradation of job skills. As we have seen in the recent reports, this age group has a much higher unemployment rate than any other category, and that doesn't bode well for economic strength in future as this group moves into lower wage-paying positions. Recent manufacturing reports show that one of the problems they face is finding "skilled" labor to fill available positions. The shift away from a production and manufacturing base over the last 30 years in the U.S. is now starting to take its toll. The problem, in trying to bring manufacturing back to the U.S., is not just education and skill training but also competitive advantages that the U.S. will have a difficult time overcoming in terms of underlying production and labor costs. Countries like China and Korea have no regulatory, environmental and minimum wage requirements to meet. Those are all additional costs that the U.S. must build into production costs, which limits our competitive potential. Outsourcing is going to be a long-term problem that will be very difficult to reverse.

While the EURUSD's recovery post Europe's close seemed to modestly support stocks, the USD is still up from Friday's close as ES (the e-mini S&P 500 futures contract) closes marginally in the green against the direction of FX carry, Treasuries, commodities broadly, and credit. The volumeless (and gravitationally unchallenged) push from post-Europe dip lows this afternoon were generally ignored by VIX, investment grade, and high-yield credit markets, after the morning was a relatively significant amount of selling pressure in HYG (the increasingly significant high-yield bond ETF) to pre-NFP levels only be bough all the way back and some more into the close. Average trade size and deltas had a decidedly negative feel on every algo-driven push higher from VWAP to unchanged but the divergence between Brent and WTI dragged the Energy sector over 1% higher (as every other sector lost ground with Financials and Materials underperforming. Treasuries rallied well from the Europe close and closed just off low yields of the day as commodities all ended lower from Friday's close with Copper and WTI underperforming and Silver just edging Gold as they hovered around USD's beta for the day. VIX dropped modestly after the cash close but ended higher on the day with a notably low volatility of vol from mid-morning onwards (and the late-day vol compression seemed index-driven as implied correlation also fell commensurately). A quiet day in European sovereign and financials along with the disastrously low volume day in ES and on the NYSE really don't feel like signs of broad participation as Greek events slowly but surely unfold along the path of known resistance.

We are struggling for superlatives (or whatever the antonym for superlatives is). Today's NYSE volume is as low as we could find on Bloomberg data. It is the lowest non-holiday trading day volume in over a decade. This is 26% below last year's post-Superbowl trading day volume. ES, the e-mini S&P 500 future contract, which has tended to be the most liquid and heavily traded instrument reflective of the equity markets, traded around 1.19mm contracts versus a 50-day average of 1.83mm (down 35%) and also we were struggling to find a non-holiday trading day with lower volumes (lower even than on the Thanksgiving Friday of last year's volume). Using our trusty Birinyi ruler and extrapolating the trend since the March 2009 crisis lows, we see No-Volume-Day (NV-Day) as being celebrated on the NYSE in September 2015 (we assume valuations are being adjusted on financials and exchanges as we speak).

It has only been a week since we discussed the San Francisco Fed's research group admitted that water was wet Fed policy will be unable to impact unemployment since the cyclical changes are more structural leading to jobless recoveries as fat is removed from the system. The powerless Fed now has another well-researched problem. As Daniel Wilson of the FRBSF sheepishly admits (having spent several thousands in taxpayer cash to fund the latest Fed 'white paper') with regard to the impact of fiscal stimulus: It is an inconvenient reality that this literature provides an enormous range of multiplier estimates, ranging from –1 to +3. Critically he notes that the benefits of fiscal stimulus vary with the business cycle and are strongest during recessions. So, given that the US is decoupling and that we are not in a recession, we assume the multiplier effect of the Fed's much-desired fiscal stimulus requests will be at the lower end of the range - either negative or inconsequential?

In other words, for the Fed to get its desired fiscal stimulus from the government they had better engineer, using only the monetary policies up their sleeves, a recession.

Zero Hedge has not been focusing much on the topic of our broken equity markets recently because if by now, following over three years of coverage, someone is not aware just how fragmented, manipulated and largely broken the market truly is, they never will. Yet every now and then it worth reminding readers who may have stumbled on this blog recently, just how bad things are in graphic format. Our friends at Nanex, who are by far the best forensic analysts of everything that is busted with the US stock market, have completed a masterpiece analysis showing the churning (packet traffic) in the various fragmented US market venues, from the NYSE to the Nasdaq to BATS and so forth, on a daily basis beginning in January 2007 and continuing through today. While the "rise of the HFT machine" over the past 5 years, following the adoption of Reg NMS, will hardly be a surprise to most, what is stunning is the first animated confirmation of the market terminally breaking on August 5, 2011, the day the US was downgraded, an observation that first was made right here on Zero Hedge. Which begs the question: what really happened in the stock market on August 5, 2011 when the US was downgraded to AA+, when everything literally broke, who is intervening constantly in the stock market, and why are they doing so via various HFT intermediary mechanisms?

The last week has offered an amusing display of the difference between the cheerleading corporate mainstream media, lying Wall Street shills and the critical thinking analysts. What passes for journalism at CNBC and the rest of the mainstream print and TV media is beyond laughable. Their America is all about feelings. Are we confident? Are we bullish? Are we optimistic about the future? America has turned into a giant confidence game. The governing elite spend their time spinning stories about recovery and manipulating public opinion so people will feel good and spend money. Facts are inconvenient to their storyline. The truth is for suckers. They know what is best for us and will tell us what to do and when to do it....  The drones at this government propaganda agency relentlessly massage the data until they achieve a happy ending. They use a birth/death model to create jobs out of thin air, later adjusting those phantom jobs away in a press release on a Friday night. They create new categories of Americans to pretend they aren’t really unemployed. They use more models to make adjustments for seasonality. Then they make massive one-time adjustments for the Census. Essentially, you can conclude that anything the BLS reports on a monthly basis is a wild ass guess, massaged to present the most optimistic view of the world. The government preferred unemployment rate of 8.3% is a terrible joke and the MSM dutifully spouts this drivel to a zombie-like public. If the governing elite were to report the truth, the public would realize we are in the midst of a 2nd Great Depression.

The MF Global Trustee has just released their preliminary report on the progress in uncovering where the vaporized cash went. Bloomberg notes:

• MF GLOBAL DIDN'T ALWAYS RECORD CASH MOVEMENTS, TRUSTEE SAYS
• TRUSTEE SAYS MF HAD SHORTFALL IN COMMODITIES FUNDS START OCT 26
• MF BROKERAGE TRUSTEE TRACED $105 BLN IN CASH MOVEMENT
• MF COMPUTERS COULDN'T TRACK VOLUME IN FINAL DAYS, TRUSTEE SAYS

Of course, we know that MF Global is the only company to not follow Fiduciary Principles 101 (client cash commingling) but also Accounting 101 (T square, debits, credits, and all that boring and apparently irrelevant in a time of uber-kleptocracy, stuff) leaving us wondering just how much of that unrecorded cash may be found in unrecorded suitcases in unrecorded bank vaults.

Bernanke's recognition of his penalizing savers with low rates as an 'issue for people' sparked an interesting note from the WSJ on how sensible and stoic savers are being herded (unsafely) into risky investments. Bernanke's insistence that "our savers collectively have to hold all the assets of the economy and a strong economy produces much better returns in general" must be juxtaposed with comments from a money manager that "I don't think that's a fair-trade" for money intended to be invested safely. By removing the last shred of hope for a rise in savings rates anytime soon, the Fed is once again creating the potential for major unintended consequences as the 30% drop in interest income for US savers from the 2008 peak forces them to extend duration (TSYs), lower quality (corporate bonds), and/or increase leverage/risk (equities). One only has to look at Treasury yields, Muni yields, investment-grade bond yields, and now high-yield bond yields for how tempted investors (retail and professional 'insurance/pension' assets) have become to take their safest net worth asset (low risk liquidity) and expose it to the business/credit cycle and all its myriad event risks. While reducing the rate of savings might seem sensible for the short-term from the Fed perspective, it leaves a wholly unsustainable recovery (or bubble in who knows which asset class next) and as Nordea notes this week, based on their models, a considerably higher savings rate will be needed going forward (for any sustainability) even as 'saved money' is rotated into risk or spent on quality-of-life maintenance. Perhaps it is time for many to listen to the sensibilities of the WSJ's last (75 year-old) interviewee who notes "At my age, I can't be a risk-taker anymore" as maybe it is time to consider the reality of the recent good US data in relation to coinciding elements such as inventory build-up, plummeting household savings, and lower gas prices when adding to that risky investment.

A few days ago we presented some speculation on what the final deployment of the 50 year old USS Enterprise aircraft carrier in the Arabian Sea may mean from a strategic standpoint, today we get to hear it from the US Navy itself. And just when we thought we had heard it all, we now get confirmation that the farcism that has defined capital markets for the past 3 years is slowly migrating to military planning. "The carrier and its entourage of support ships are in the Atlantic Ocean, somewhere east of Florida, with land completely out of sight. But for the purposes of the drill, they’re cruising near the fictitious Treasure Coast. Maps displayed on the bridge’s monitors show the contours of the Eastern Seaboard, the Gulf of Mexico and a good chunk of the Midwest, but all state borders have been removed and replaced with a handful of countries that come with their own boundaries and political allegiances. Enterprise and its strike group are focused on Garnet and North Garnet, countries that support terrorism on the Treasure Coast. They’re fundamentalist Shahida states — a faux-theocracy — and they want to reunite with Pyrope, one of the nine other made-up countries. On Enterprise, intelligence analysts evaluate the situation, fighter squadrons plan sorties, and the ship’s newspaper, “The Shuttle,” prints an extra section that details the international political situation. It’s a novella set at sea that grows more complex as hours past. “Those pesky Garnetians,” strike group commander Rear Adm. Walter Carter Jr. told sailors after a day packed with maneuvers, launches and landings."

Ok, we get the hint. End the foreplay already and file finally. From Bloomberg: "Greece’s Prime Minister Lucas Papademos requested the country’s Finance Ministry to prepare a document on the implications of a Greek default, Panos Beglitis, spokesman for the socialist Pasok Party said. The Prime Minister yesterday told the leaders of the three political parties supporting his interim government that he asked the Ministry “to record accurately and realistically all the consequences of the country’s exit from the euro zone,” Beglitis said today in an interview with Radio 9, according to a transcript of his comments e-mailed from the Athens-based offices of Pasok." And yes, the market initially rallied just after Lehman filed. It didn't last long, because guess what, it was priced in... incorrectly.