Archive - Sep 2012 - Story

Update: Looks like quite a few people have shared their thoughts in the past 30 minutes. Compare before and after.

On Friday, the San Francisco Fed, best known for such cutting edge research as "Why Is Unemployment Duration So Long?" (turns out it was Bernanke's fault), "US Household Deleveraging" which concluded incorrectly that "Going forward, it seems probable that many U.S. households will reduce their debt" (turns out completely wrong as consumer debt is now at a new all time record), and "This Time It Really Is Different" (turns out it wasn't), asked a simple question on its FacePlant page: "What effect do you think QE3 will have on the U.S. economy?" The people have now responded in a fashion that leaves little to the imagination. Actually, one thing is left to the imagination, namely whether the name of the one person responding that the $85 billion in monthly flow in perpetuity associated with QE3 is "not big enough" begins with Paul and ends with Krugman. Aside from that, in typical SF Fed fashion, no surprises at all.

Back in 2010, everyone's favorite truthsayer in Europe - MEP Nigel Farage - opined on who exactly was Herman Van Rompuy - the new EU President. Claiming HvR's charisma approached that of a damp rag, we noted at the time that this was indeed slanderous to all the hard-working damp-rags out there. Well, given the EU's need for cash - by any route possible - it seems they have chosen to start building a mountain of fines. As AP reports, the EU parliament fined Nigel EUR2980 for his self-expression.

Does everyone who call @euhvr a "damp rag" get a $4,000 fine?

— zerohedge (@zerohedge) September 17, 2012

Given Germany's EUR 190bn ESM contribution, we assume that Nigel has 63 million more insults before Europe is fixed.

Every European stock index closed red today - that is something we have not seen in a few weeks. The drops were not dramatic - and in fact IBEX rallied from open to close after an ugly start to the day. Spanish and Portuguese bond markets sold off notably (in the front- and back-ends of the curve) and given its place as fulcrum security we suspect the slight underperformance in European credit markets relative to stocks indicates the Draghi-induced reflex buying is starting to fade. Swiss 2Y was stable; European VIX rose modestly; and EURUSD which saw some violent swings into the US day-session open is ending its day fractionally lower. All-in-all, given recent strength and momentum, sovereigns have definitely stalled and equities will need a catalyst now (Spanish bailout?).

The European 'Union' continues to be the most amusingly misdefined oxymoron in existence. Today's Exhibit A confirming just that: Spiegel's interview with Bavarian finance minister Markus Söder which can be summarized in the following 4 words: Everyone Wants Our Money.

The reach for yield must be carefully balanced against the inane ignorance of 'if it sounds too good to be true, then it is!' and it appears that there are plenty of sucker-draining entrepreneurial asset managers out there willing to create whatever the market will bear. To wit, the WSJ reports on the growing size of the Master Limited Partnership (MLP) market; for years a haven for 'safer' income with upside potential this asset-class has been seized upon as "private-equity firms, eager to offload assets, are turning mountains of sand, gas stations and coal mines into a special type of security that offers investors annual yields as high as 19% for years to come." Seven of the last ten MLP IPOs have offered yields above 10% (sound reasonable?) and with the sector's market cap having risen from $65bn in 2005 to over $350bn now it seems like the thundering herd is willing to sell it to the blundering herd. Critically though, as WSJ notes, these new MLPs carry much more risk than their predecessors - as the promise of such high returns may be too good to be true. Indeed - though we assume that the Fed will be buying MLPs too by the time these go pear-shaped.

The unleashing of QE3--unlimited money-printing in support of the financial Status Quo-- is proof the Fed has failed, failed, failed. If anything the Fed has done in the past four years had actually had a positive consequence in the real economy, Bernanke would have identifed that policy and expanded it in a measured response. Instead he went all-in, emptying the Fed's toolbox in one big dump: unlimited money-printing, unlimited propping of the mortgage market, unlimited support of low Treasury rates and three more years of zero-interest rate policy (ZIRP). Here is the translation of the Fed Chairman's public comments: whatever. Did you see any of his testimony? It was painfully obvious that either 1) he was sky-high on Ibogaine or 2) he was just going through the motions, duly enunciating PR "cover" that he finds tiresome to repeat and impossible to say with any sincerity or conviction. His body language and delivery said: "You think I believe this canned shuck and jive? Get real, chumps."

We warned that the shine was coming off Draghi's rally late last week but since mid-morning on Friday, Spain's 10Y spread has risen a very notable 36bps and the 10Y yield has just broken back above 6% for the first time in over two weeks. However, the seemingly impregnable short-dated market has started to crack. Spain's 2Y has also broken back above 3% - up over 50bps in the last 3 days! It seems the reality of the cash position, as we described in detail last night, is perhaps starting to outweigh the unlimited-but-capped open-ended-but-conditional support that the ECB supposedly has.

Having trouble keeping track of how many countries have now officially rebelled against Pax Americana in the past week? Here is your handy one-stop resource to keep you abreast of all the latest in the embassy storming fad.

Since QEternity was announced, the spread between the 30Y mortgage and 10Y Treasury has collapsed from an already very tight (in anticipation of QE3) level to simply incredible levels. Following our comments on Friday about the relative 'safety' of mortgages over Treasuries, the compression from over 60bps pre-Ben to a mere 22bps now is incredible and just highlights how entirely distorted any signaling from any rate market has become. The point remains that lower absolute mortgage rates (which are notably not as exuberant as this relative risk spread would suggest) have not in the recent past provided notable pick-up in the new home sales (which is where real growth in the economy comes from) and furthermore, the benefits to the consumer of further mortgage rate cuts (based on recent JPMorgan work) is around $5bn per annum for every 25bps improvement in the mortgage rate (a drop in the ocean for a consumer who spends $11 trillion per year).

First Afghanistan a few hours ago, and now...

• PROTESTORS TRY TO STORM U.S. CONSULATE IN LAHORE: EXPRESS TV

So: Egypt, Libya, Tunisia, Morocco, Sudan, Lebanon, India, Balgadesh, Indonesia, Afghanistan and now Pakistan. Anyone left out?

When you have central planners printing inverse-wealth (because money printing dilution by definition means less wealth for everyone), who needs that cornerstone of old school economics: trade. Certainly not Japan (which has been diluting its futures to prosperity for the past 30 years and somehow failing each and every time) and China, both of which are now starting to feel the consequences of the collapse in political relations as a result of the senseless spat of the Senkaku Islands (recorded in its full visual glory here). As the NYT reports, "major Japanese companies closed factories in China and urged expatriate workers to stay indoors Monday, after angry protests flared over a territorial dispute, which threatened to hurt trade ties between the two biggest Asian economies." What does the idiotic escalation in unprovoked Japanese tensions over a rock in the East China Sea (note: not West Japan Sea) for the bottom line of Japan? In a word: Lots.

Following this morning's dismal Empire manufacturing 'growth' data (which generated zero impact in equity futures thanks to QEternity 'policy' having dampened the market's beta to any and every macro data points) we note Morgan Stanley's findings that while monetary policy can provide a temporary boost to valuations (driving investors quickly into higher beta and into value over growth), in fact over medium-term horizons (i.e. more than a week or two), it is in fact growth that dominates the drivers of equity performance. Since growth in our advanced 'new normal' economy means debt (and realistically has meant more debt for over 30 years), and with even the most exuberant of Fed heads seeing only modest growth over the next few years, perhaps the hubris of the last few days in the equity markets will dissolve into reality sooner than everyone hopes (i.e. before November) as the realization of Koo's impotent Fed comes to pass and the fiscal cliff remains unresolved.

Today's horrible piece of news, which at least on the surface was supposed to send the market soaring, comes courtesy of the Empire Fed Manufacturing Index, which printed at -10.41, the lowest print since April 2009, down from -5.85, and well below expectations of -2.0. The Index print confirmed the biggest 6 month drop since records began. The components painted a dire picture for jobs, with the employment index sliding from 16.47 to 4.26, New Orders tumbling from -5.50 to -14.03, while, wait for it, prices rose, from 16.47 to 19.15. Re-stagflation here we come. Market for now seems confused - since QE is priced into infinity, it is unclear if this latest datapoint confirming a recessionary economy, QE can't be more-er infiniter. Best to not respond to this, or any other macro news at all, which is precisely what the market has done. For those who missed it, not only has Bernanke doomed the global economy to stagflation and imminent food riots, while making the richest 0.001% richer than ever, he has completely broken any linkage between the economy and the market.

Marc Faber, one of the few analysts, to have predicted the current crisis correctly and to have protected his clients in the process, remains very bullish on gold. In another excellent Bloomberg interview, Faber said that “the trend for gold prices will be steady but the trend for the dollar and other currencies will be down. So in other words gold in dollar terms will trend higher.”  “How high it will go, you will have to call Mr Bernanke and at the Fed there are other people who actually make Mr Bernanke look like a hawk and so they are going to print money.” Faber is on record as to the importance of owning physical gold and he again warned about the importance of owning gold but not storing it in the U.S.  “You ought to own some gold but don’t store it in the U.S., the Fed will take it away from you one day,” Faber astutely noted. He said that Bernanke is a money printer and this could lead to massive inflation and the Dow Jones at 20,000, 50,000 or 10 million. Faber cheerily predicted that the “the Federal Reserve’s monetary policy will destroy the world” and “eventually we will have a systemic crisis and everything will collapse.”

Stocks in Europe traded lower throughout the session, as market participants were seen booking profits following last weeks gains after the Fed announce a radical open ended QE program. Equity indices were led lower by the telecommunications, as well as utility related stocks. It is also worth noting that peripheral stock indices underperformed their core-EU counterparts, with some noting fast money and system accounts selling equities and instead turning to fixed income. As a result, Bunds have edged higher, with yields touching on highest level since April. Also, this week’s supply from France and Spain, as well as Germany, lead to modest spread widening. In the FX space, flows were light so far this session, as such both EUR/USD and GBP/USD are seen little changed as we enter the EU session. Going forward, there are no major economic releases scheduled for the second half of the session and volumes are expected to be thin given the Rosh Hashanah holiday.