Archive - May 2013 - Story

JPY is clinging sheepishly to the 101 level versus the USD almost as if there is an 'agreement'. It has been testing this level for a week now with many viewing the 100 line in the sand as a pass/fail mark for Abenomics. Tonight's heavy data flow is mixed. While we noted yesterday the inconsistencies in Abenomics, there are two interesting anecdotes this evening worth paying attention to. First, Household spending missed expectations by the largest amount in 18 months (not a good sign for real growth coming back); and second, in a brief moment on CNBC this afternoon, the CEO of Japan's mega corp Sony admitted that while, "the preconception is that a weaker Yen is good overall. Unfortunately for us, versus the USD, it goes the other way." Futures markets signal a green open (just like last night) for the equity markets and a slight red open for JGBs.

The periodic Munk debate spectacle out of Canada is memorable for bringing together very flamboyant personalities, discussing very germane topics. The one that has just started has a topic of whether the rich should be taxed. More. Surely an issue that has seen its share of discussion in the US in the past year, so we hardly expect to learn anything new. What is most amusing, however, is that the debate tonight pits none other than Paul Krugman (and former Greek socialist leader and economic destructor extraordinaire George Papandreou, whose family incidentally was found with tax-evading Swiss accounts so brownie points for extra hypocricy) defending more tax hikes, and pitting Newt Gingrich and Arthur Laffer on the "don't tax me bro" side. The result should be quite a memorable catfight.

First a big caveat: the following comes from CNN, the world's farce leader, so take it with a quarry of salt. That said, CNN's household access is pervasive and when it comes to setting the social mood based on a news report, be it completely fabricated or not, the news organization is second to none. Which may be precisely why it is CNN that is reporting that in Syria - a place just itching for the proverbial match to be struck on a mountain of geopolitical gunpowder involving all the key actors: from the US, to Russia, Europe, China, and of course Israel, said match may have just been lit. To wit: "Syrian state-run television reported Thursday that forces loyal to President Bashar al-Assad killed three Westerners, including an American woman and a British national, who they claim were fighting with the rebels and were found with weapons and maps of government military facilities."

Does it really make any sense at all that Bernanke would leave gold to trade in an open and transparent market? Hardly. Consider. The Fed has conjured multiple trillions of digital dollars out thin air in the last five years. These efforts have propped up the Treasury market, the domestic TBTF banks, the foreign TBTF banks, the ECB, the BOE, every European sovereign bond market, the RMBS market, the CMBS market, the equity market, the housing market and the entire industrial and soft commodity complexes, to name a few. Since the price of gold we see on our Bloomberg screens is set via derivatives and overwhelmingly settled in USD, the ability for central banks and bullion banks to manipulate the price of gold is way too easy. All the bullion banks have to do is coordinate (as in LIBOR), sell in size and punish anyone in their way. Take losses? No problem, more fiat can be conjured post-haste. So long as no one is taking physical delivery, the band(k) plays on. (Actually, physical demand delivery IS becoming a major new problem for the banks but this is a topic for a different note.) A quickly rising gold price upsets this fiat-engineered, centrally planned, non-market based recovery. Gold left to its’ own devices would signal the unwinding the rehypothecated world of shadow banking where latent monetary inflation goes to summer (think of it as the monetary Hamptons where only the Wall Street elite get to play). Most importantly, it would signal a huge lack of faith in the US dollar. A currency backed by nothing more than faith in central banking.

While the acceptance ratio at Harvard, the lowest of any university, is 5.9%, Goldman Sachs has just topped it for 'exclusivity'. As Gary Cohn explains in this brief Bloomberg clip, the firm hired 350 summer 'intern' analysts in its investment-banking division from a pool of more than 17,000 applicants - an acceptance ratio of 2%. It seems the firm has no problem attracting 'talent' but it remains in second place for most 'difficult' job to attain... behind flight attendant at Delta Airlines.

US Treasury yields have risen sharply in the last four weeks with 10yr yields higher by about 50bps. Direct causation is hard to find. While the economic data has improved in places, the prices have moved much more than the facts. For just about every good piece of data, there was an equal piece of bad news. Then of course, there is Ben Bernanke who made the slightest hint to the possibility that a tapering of purchases could begin "in the next few meetings" if the economics warranted. But trying to position a trade based on the impact of the Fed quickly becomes a reflexive exercise going no place because the Treasury market finds a way to reflect macroeconomics despite them. The history of the Fed shows that economics always trumps their effects. This isn't to say that at any given moment, the Fed may have interest rates at a different level than they otherwise would be, but it isn't useful to use this as a reason to buy or sell because a change in their buying could just as easily mean that the economy will be weaker and thus rates would fall as that they would cause rates to rise. What this recent yield back-up boils down to is that the market is expecting that there is self-sustaining, above trend, GDP growth coming. It isn't often that prices become this divorced from fundamentals. Expecting self-sustaining above trend growth is hoping, not the result of a careful analysis. We continue to think that no matter how forceful this back-up has been, or where it ultimately peaks, we will see new low yields in the Treasury market before this cycle is over. Here are 7 short-term and 3 long-term reasons why we think they won't stay up here for long...

US consumer confidence is soaring. That's great - there is a problem: the two year drop real US wages has never been lower.

Both VIX and credit markets decoupled to the downside soon after Europe closed as equities clambered higher amid lower and lower volumes. As we headed into the last hour though both markets snapped higher to catch up to stocks and that mini-capitulation seemed enough for the equity rally to run out of steam. With the JPY strengthening all day, equities ignored the message of the carry traders until the close - when a big sell-side imbalance (and reality) smacked stocks lower to catch down to the all-important VWAP level once again. The USD saw its worst two-days since Oct 2011 giving up 3 weeks of gains. Gold and Silver are up nicely on the week (1.6 to 2%), outperforming today. Equities still managed gains on the day (despite the late-day tumble) and (oddly) Treasuries also ended very marginally in the green. The last few minutes of the day - normally kept open for some levitating algo to save the day - was a cliff-dive as news of FX margin controls on the all-important JPY carry driver smashed all risk-assets lower.

Moments ago the 101 USDJPY tractor beam was broken, sending the pair lower, as a red headline hit the tape saying that...

• JAPAN TO IMPOSE NEW RULES ON FOREX MARGIN TRADING, NIKKEI SAYS

Which incidentally was long overdue: with the BOJ scrambling to contain bond (and stock, if only to the downside) volatility, it was always the FX market that was the primary uber-levered culprit moving both asset classes. As such, it was very surprising that in a world in which all correlated asset classes (just look at the USDJPY-ES relationship) are driven by FX, that currency leverage and margin rules have remained largely untouched by regulators and central bankers whose credibility is suddenly slipping away, alongside the surge in global market volatility in the past week.

Think it's easy printing green? Believe you could do a better job than our illustrious bubble-blower-in-chief? The WSJ has created 'The Federator' in what we assume is a qualifying process for a Federal Reserve career. On an otherwise quiet day in equity and bond markets, the 'Defender-esque' game enables rates to be lowered (through the bearded-one's jetpack) or raised and a helicopter money-drop is added with the goals of maintaining the 2% inflation rate while keeping unemployment low... Fail and you will witness a WSJ headline exclaiming the error of your ways.

Cheap credit is a great boon to the wealthy and a path to debt-serfdom for everyone else. The ever-widening chasm between the wealthy and the "rest of us" has generated any number of explanations for this deeply troubling phenomenon. Credit has rendered even the upper-income middle class family debt-serfs, while credit has greatly increased the opportunities for the wealthy to buy rentier income streams. Credit used to purchase unproductive consumption creates debt-serfdom; credit used to buy rentier assets adds to wealth and income. Unfortunately the average household does not have access to the credit required to buy productive assets; only the wealthy possess that perquisite. And so the rich get richer and everyone else gets poorer.

In the old normal ("when we had an honest Fed," under Volcker), David Stockman explains to CNBC's Rick Santelli, "the market could judge what Congress and the White House was doing and decide where the risk/reward equation was and how to price the bond, the note, the bills," but in the new normal, "today, the market is entirely rigged." Stockman is no fan of deficits and as he notes "is no fan of money-printing," pointing out that "it's not honest," for the Fed to fund these chronically growing deficits and "created an unsustainably dangerous financial system." In thie brief interview, Stockman (of The Great Deformation fame) sums it up perfectly to a just-as-concerned Santelli, when he notes, "the error of central banking has become unversal." We're taxing the futures generations, he concludes, "they're going to thank you for the massive disaster that was handed to them." The honesty will never come...

The New York Times, The Associated Press, The Huffington Post, CNN and now, of course, Fox News: these are the media organizations, superficially from across the political spectrum, which have said they will boycott a meeting with the DOJ's embattled head, Eric Holder, on the topic of the DOJ's (not to mention the NSA's) Nixonian abuse of the first amendment and eavesdropping wherever and whenever it so chooses. The twist: the meeting is, paradoxically, supposed to be "off the record." One wonders: was this the DOJ's idea of being open and transparent - to hold a closed door meeting with the same media that it, allegedly, has been spying on, and thus put the media whose job is to report events - as in keeping the public informed - in a place where it can't do precisely that? It is as if the Marx Brothers are writing the tragicomic script for a sequence of events that inevitably ends with Holder's resignation and Obama's washing his hands of the whole affair.

UBS said to increase investment bankers' salaries by average of 9%

— Bloomberg News (@BloombergNews) May 30, 2013

Tuesday's weak 2 Year bond auction is now a distant memory, and following yesterday's strong 5 Year it was not surprising to see a very strong pick up in demand for the just concluded 7 Year auction. On the surface, the auction was very strong with the high yield printing at 1.496%, stopping through the 1.515% When Issued if still the highest since March 2012. The internals were also very strong, with the Bid to Cover closing at 2.70, in line with last month's 2.71, and above the TTM average of 2.68. More importantly, Direct demands soared with 20.68% of the takedown going to Direct bidders, the second highest ever in this series, and lower only to December's 23.11%. Indirects were no slouch either, with a final allotment of 40.84%, leaving just 38.48% for Dealers, the lowest take down for 2013. So with very strong primary market demand along the belly, it is safe to say all rumors of a blow up in the US bond market are greatly exaggerated. Remember: TSYs still continue to be the primary source of repoable collateral and for the time being at least, everyone still wants them.