Archive - Jun 13, 2013 - Story

The rabbit hole just got deeper. A whole lot deeper.

Establishment politicians from both major political parties are rushing to defend the NSA and condemn whistleblower Edward Snowden.  They are attempting to portray Edward Snowden as a "traitor" and the spooks over at the NSA that are snooping on all of us as "heroes".  In fact, many of the exact same politicians that once railed against government spying during the Bush years are now staunchly defending it now that Obama is in the White House. But it isn't just Democrats that are acting shamefully.  Large numbers of Republican politicians that love to give speeches about "freedom" and "liberty" are attempting to eviscerate the Fourth Amendment to the U.S. Constitution.  The government is not supposed to invade our privacy and investigate us unless there is probable cause to do so. Apparently many of our politicians misunderstood when they read the novel 1984 by George Orwell.  It wasn't supposed to be an instruction manual.

Based on Credit-Suisse's Panic-Euphoria model of risk appetite, US bond markets are on the verge of the short-term capitulative "Panic" mode. Each time we have reached this level of 'selling' in the last 6 years, Treasury yields have compressed significantly. At the same time, equity risk appetite remains bearish and US credit risk appetite has resumed its decline (but relative to Treasuries they are significantly over-sold). Not a pretty picture...

Gluskin Sheff's David Rosenberg has ten nagging concerns...

Earlier this month, in an article for “Project Syndicate” famous American economist Nouriel Roubini joined the chorus of those who declare that the multi-year run up in the gold price was just an almighty bubble, that that bubble has now popped and that it will continue to deflate. Gold is now in a bear market, a multi-year bear market, and Roubini gives six reasons (he himself helpfully counts them down for us) for why gold is a bad investment. His arguments for a continued bear market in gold range from the indisputably accurate to the questionable and contradictory to the simply false and outright bizarre. But what is most worrying, and most disturbing, is Roubini’s pathetic attempt to label gold bugs political extremists. It is evident from Roubini’s essay that he not only considers the gold bugs to be wrong and foolish, they also annoy him profoundly. They anger him. Why? – Because he thinks they also have a “political agenda”. Gold bugs are destructive. They are misguided and even dangerous people.

We are trying to remember when the last time the BOJ minutes were important for global risk assets, and are drawing a blank. That's how messed up the financial markets have become. That said, here are the highlights from the BOJ's May minutes which appear to have spooked the Nikkei some 10 minutes ahead of the open.

• HIGHER VOLATILITY MAY ACCELERATE JGB SELLING - Remember the "VaR shock?" 
• L-T RATE RISES DUE TO WEAK YEN, HIGHER OVERSEAS RATES - And higher overseas rates due to weak yen, also known as a Circular iteration
• FEW MEMBERS: BOJ SHOULD WATCH FED POLICY EFFECT ON JAPAN YIELDS - We have several non-lemmings
• ONE MEMBER:MUST KEEP FISCAL DISCIPLINE TO ENSURE BOND STABILITY - And a dissenter

And perhaps that quotes that spooked the market:

• ONE MEMBER: TIMELINE SEEMED TO BE INCREASING BOND VOLATILITY - i.e., the longer it goes on, the more we lose control
• FEW MEMBERS: BOJ SHOULD WATCH FED POLICY EFFECT ON JAPAN YIELDS - Get to work, Mr. Chairman

Nikkei down 200 in minutes.

With most market participants (what's left of them) traditionally narrowly focused on one specific asset class, be it stocks, bonds, rates, or commodities, they sees a few trees but miss the whole forest - a perspective which has to include all cross asset perspectives, which in our day and age is quite complicated, to say the least, due to the prevailing and oftentimes irreconcilable cognitive biases among such traders (all of which tend to interpret Bernanke's market signaling in their different way). So courtesy of Citi's Stephen Antczak, here is a comprehensive summary how every single asset class is viewing the market right now.

For the past five years of suppressed crisis, central states around the world have chosen to create an artificial sense of abundance by printing or borrowing trillions of dollars of fiat money and flooding their economies with this false abundance. This false abundance has led to a continuation of bad decision-making, as it has nurtured a magical-thinking faith that the era of abundance can be conjured up with monetary tricks. This is the essential feature of cargo cults, the magical-thinking belief in the return of abundance without having to chart a new path of authentic reforms. Creating the monetary illusion of abundance is not the same as authentic abundance. Fostering illusions of prosperity only further cripples our ability to make the necessary difficult decisions.

While the full court press propaganda express in Japan's media that 'Abenomics' is working may be flagging a little in the face of the recent 20% collapse in equity prices, there appears no limit to how low they will stoop. It is not the first time you girls have been used to promote the benefits of buying Japanese bonds (as we discussed here), but, as The Telegraph reports, a four-member band of 16-year-old Japanese girls will be raising (and lowering we suppose) the length of their skirts based on the Nikkei 255. The band - Machikado Keiki Japan, which roughly translates as "street corner economic conditions", debut single - Abeno Mix (seriously!) - has karaoke references to quantitative easing and construction bonds.

What comes after George Bush and George Bush Jr.? Must be George Bush the Third, only this time armed with a Nobel peace prize. Seriously, are they that stupid to think they can rerun the entire Iraq invasion scenario without changing anything? And is the US public really that dumb to let it slide? And how many Syrian citizens and US soldiers have to die in what is the most glaring instance in the past decade of a wag the dog-type distraction from on onslaught of domestic administration scandals?

“We appreciate the President’s finding that the Assad regime has used chemical weapons on several occasions. We also agree with the President that this fact must affect U.S. policy toward Syria. The President’s red line has been crossed. U.S. credibility is on the line. Now is not the time to merely take the next incremental step. Now is the time for more decisive actions.... We cannot afford to delay any longer. Assad is on the offensive with every weapon in his arsenal and with the complete support of his foreign allies. We must take more decisive actions now to turn the tide of the conflict in Syria.”

The "red-line" has been crossed. The New York Times is reporting that:

U.S. CONCLUDES SYRIA USED CHEMICAL WEAPONS AGAINST REBELS: NYT, and
NYT SAYS EUROPEAN OFFICIALS REACH SAME CONCLUSION ON SYRIA
MCCAIN SAYS U.S. TO PROVIDE WEAPONS TO SYRIAN REBELS

And alongside that finding, as part of (or justification for?) the arming of the Syrian rebels, the WSJ reports that the US Military is calling for a limited no-fly zone inside Syria. The seriousness of this escalation must be put in the context of a desperately-needed distraction for the current administration - which makes the decisions being made even more concerning in their potential for extremes.

In an almost perfect mirror-image of last week the dump in stocks into Thursday was caught and ramped back to new highs. Today is the best day for the S&P 500 futures market since the first day of the year. Volume was well below average which is exemplified by the fact that the VWAP (or market balance point for the day) closed down 4 points despite ES up over 20. The bounce was already on a roll before Hilsenrath sparked some last minute momentum surges above yesterday's highs.

The last time Hilsenrath tried to be relevant, back on May 22, he essentially said to ignore anyone who tried to time the Taper (but don't call it a Taper) when he said: "when the Fed shuts off bond buying, it won’t be abrupt and it won’t be predictable." So just to make sure market expectations of tapering are actually very predictable, if at least on the short end, moments ago Hilsenrath once again hit the tape with the following: "Fed Likely to Push Back on Market Expectations of Rate Increase: Federal Reserve officials have been trying to convince investors for weeks not to overreact when the central bank starts pulling back on its $85 billion-per-month bond-buying program. An adjustment in the program won’t mean that it will end all at once, officials say, and even more importantly it won’t mean that the Fed is anywhere near raising short-term interest rates. Investors aren’t listening." So here comes the Hilsenrally to save the day by making investors listen, even if not so much for the benefit of stocks this time, as for bonds, which little by little are starting to lose it.

With the JPY trading through 93 at one point overnight, Nikkei September futures traded through our stop of 12,700. Although futures are now trading back above our stop, testament to the enormous volatility in the market there, on the basis of the Tokyo close, we were stopped out with a potential loss of 6.16 percent. Japanese markets continue to roll back gains and unwind inflation expectations, moves that we now think are excessive given the firm commitment to ease. But with the June BOJ meeting now past, it is somewhat less clear what will shift sentiment in the near term.