Archive - Jun 2013 - Story

With Bernanke now making it extremely clear that housing is all we have, the following may raise a few eyebrows. Accommodate, accommodate, accommodate, accommodate... that was and is the mantra. It did not matter whether it was the S&L fiasco, 9/11, the sub-prime bubble or the Lehman collapse, the Fed's policy is to accommodate. All good things must come to an end. Look at that chart. We are about to go off the page. With QE-to-infinity, Bernanke is spent. Each new iteration of accommodation is bringing in less results.

Following Part 1's exposure to the faux-prosperity of the post-2009 'recovery' and the precariousness of the Bernanke bubble, Part 2 of the series explained the dismal internals of the jobs numbers the utterly politicized calculation of the “unemployment rate” that disguises the jobless nature of the rebound (as breadwinner jobs languish). In Part 3, David Stockman (from his new book "The Great Deformation") starts an explanation of the why. As he notes, the Fed’s post-crisis money-printing polices gifted Wall Street speculators, as intended, but they also delivered an utterly botched recovery on Main Street. The reason the Main Street economy refused to follow the Keynesian script, however, could not be found in the texts of the master or any of the vicar’s uncles. The Keynesian catechism has no conception that balance sheets matter, yet Main Street America is flat broke, and that is the primary thing which matters.

A suddenly seemingly hawkish Ben Bernanke may be giving the impression he is preparing to taper because he feels confident enough about the recovery (just don't ask him about sudden dramatic rises in yields: that "puzzles" him). Yet as those who have been reading Zero Hedge for the past three years know, this jobs "recovery" is purely quantitative (not to mention seasonally adjusted): the quality of jobs regained is, in a word, abysmal, with the bulk of new job creation benefiting part-time and minimum-wage jobs. If anything, this loss of saving power, is the backdrop not for a recovery, but for a depression far more acute than the current "sugar-high" one when the Fed finally pulls the training wheels off, and when the US consumer realizes that all purchasing power is gone, all gone, and in exchange the only valuable and competitive job skills gained have been, well, absolutely none.

One of the enduring analogies of the Federal Reserve's quantitative easing (QE) program is that the stock market is now addicted to this constant injection of free money. The aptness of this analogy has never been more apparent than now, as the market plummets on the mere rumor that the Fed will cut back its monthly injection of financial smack. (The analogy typically refers to crack cocaine, due to the state of delusional euphoria QE induces in the stock market. But the zombified state of the heroin addict is arguably the more accurate analogy of the U.S. stock market.)But like all highs based on addictive substances, the stock market high cannot be sustained without an increase in the drug. But there is a diminishing-return dynamic to ever higher doses of QE smack--the higher doses are no longer generating the same highs. The addict (the stock market) has become desensitized to the QE free money injections, and higher doses no longer generate the desired state of bullish euphoria. The more Ben talks about eventually decreasing the injection of financial smack, the more panicky the addict becomes.

The Brazilian protests, which swept through the country with the raging bear market (and the pulled mega-IPO) over the past week, and which had the goal of reducing a recent bus-fare increase among other assorted protest goals, appear to have succeeded. At least when it comes to the fare increase. As for the other protester demands, listed below, it may take a little longer.

If you thought the US was the king of shale, we are sorry to burst your bubble... it no longer wears the crown. China has more proven oil reserves than the US. As the following chart shows - from the EIA's 730-page report, which assesses the shale formations of 41 countries - the global race for shale development has started. As Casey Research's energy report discusses, countries that are not now known for their oil and gas production are showing much shale oil and gas promise.

Almost exactly 8 years after Greenspan's now infamous "conundrum" comments about the unprecedented persistence of low, long-term interest rates, Bernanke is now "puzzled" at the dramatic rise in interest rates following his recent Taper remarks. Have no fear though, just as Greenspan noted, "I'm reasonably certain we would not automatically assume that it would mean what it meant in the past, " Bernanke said today that the "sharp rise in rates", was not about the Taper but "due to other factors, including optimism about the economy." Perhaps more importantly, today for the first time someone, not Hilsenrath of course, had the guts to ask Bernanke the hardest question: is the Fed's "Stock not Flow" worldview broken, and was it wrong all along? Of course, the implications of the Fed being wrong on this most critical aspect of monetary theory opens up a hornet's next of Pandora's boxes: just what else is the Fed wrong about, and how much will Bernanke be "puzzled" when one by one all of his flawed theories are revealed to be nothing but religious dogma.

The economic and asset bubble in Japan burst in 1990, at roughly the same time as its demographic structure reached a tipping point. As UBS' George Magnus notes, the working age population began to fall, marking the start of a relentless rise in both the total and old age dependency ratios; and, he adds, a comparable phenomenon occurred in the US and Europe between 2005-2010. On current trends, Magnus warns, China will replicate at least the demographic part of this phenomenon between now and 2016, against a backdrop of rising concern about the structural nature of the slowdown in economic growth, along with rising credit intensity, indebtedness, and misallocation of resources.

Who though that a term we coined over a month ago would suddenly get so much airplay: why, it was none other than billionaire hedge fund investor David Tepper who said days later (and just in time to top tick the market) not to fear the taper, that it is a bullish sign. Looks like it wasn't. But at least Tepper sold everything he had to sell by now so someone is happy. As for what happens next, nobody still has any idea, although the first, and so far best, post-mortem of Bernanke's predicament comes from SocGen, whose opionion is simple enough: FOMC on track for September tapering.

One word can describe performance across all asset classes today: clobbered. Stocks tumble, Commodities slide and Bonds crash, with the 5 year suffering the biggest intraday percentage jump in yields... ever! And why? Because Bernanke confirmed what everyone thought they knew, namely that the Fed will start tapering (how else can the Fed match the reduction in gross Treasury issuance at auction without taking over the private market entirely) eventually. Or at least that's what the market read between the Chairman's lines. In reality, Bernanke himself is more dazed and confused than anyone out there and just like Europe, is making it up one day at a time.

It seems the Fed head is confident that we are on our way back (despite cutting forecasts) - well he should be given his efforts - but as the following chart shows, arguing that downside risks have diminished seems not to fit too well with macro reality...

Things are escalating quickly... with US Treasuries beginning to look a lot like JGBs: the 5Y soared +18bps to the highest since August 2011, the 10Y +13.5bps touches 2.32% widest since March 2012, 30Y +8bps, and credit markets are getting monkey-hammered. There is no joy in Newport Beachville.

With markets now showing their true colors (pricing in the inevitable beginning of a taper), the next hour or so of double-speak and talking out of both sides of his mouth may well be the most important in the career of Ben Bernanke.

• *BERNANKE: FOMC MAY `MODERATE' PACE OF PURCHASES LATER IN 2013
• *BERNANKE SAYS FED MAY END PURCHASES AROUND MID-YEAR 2014
• *BERNANKE SAYS FED WILL EASE QE PACE IF ECONOMY IMPROVES
• *BERNANKE SAYS PURCHASE REDUCTION REPRESENTS FOMC CONSENSUS

Perhaps the biggest red flag in today's FOMC release is the quarterly economic projections which improved from March with the Fed expecting better GDP and employment, offset by lower core and PCE inflation from 2013 all the way to 2015: whether this is sufficient for Bernanke to determine a need to taper the monthly $85 billion flow will be explained during the 2:30 pm press conference.

UPDATE: Of course, it wouldn't be the US equity market if it didn't instantaneously rip higher and revrt to VWAP after the high volume drop...

Stocks - sold; Bonds - sold; Gold - sold; USD - bought.