Archive - Dec 16, 2015 - Story

Is Janet about to greatly disappoint Larry, Curly, and Moe...?

Summing up the anxiety ahead of today's Fed decision - which talking heads just this morning explained is "priced in" and is a "non-event... been so telegraphed" - market professionals believe "it seems a good time just to go and beat the crap out of a punchbag." As Bloomberg reports, real traders say they "just don't want to do any damage today," as they trade around the events, "I think we're going to see a lot of volatility," and Treasury risk is already spiking to 5-month highs.

The argument that the Fed should do nothing - for it will be harder to correct a rate rise than to do nothing - because there is no bubble anywhere, demonstrates that we have the most serious BUBBLE in history. The FED is between a rock and a hard place. It will be blamed no matter it does. Nobody seems to understand the dynamics of the trend in motion.

With Treasury volatility spiking in "panic" mode but equity volatility in "everything will be fine" mode, there is plenty of room for the algos to go wild around this afternoon's decision. As Nanex shows, the last few years has seen lower and lower liquidity on Fed days as the pattern of liquidity collapse intraday provides just the ammunition for the instant buying-panic in the first 2 minutes after the decision.

The upside is ephemeral, illusory or wishful thinking; the downside is real and lasting.

According to ScGen, the Fed is widely expected to start tightening policy on Wednesday and adds that "after the BoJ and ECB, we see a risk that the market will be wrong-footed for a third time, and that extreme positions built ahead of tightening will be reversed.... In particular, we are short US small cap equities vs large via being short Russell 2000 vs S&P 500.... As the Fed tightens and the market enters into a lower-liquidity environment (and higher-volatility regime), we think the premium on small caps is no longer justified."

But... "priced in"? "Non-Event"?

We have reached the apogee of history’s greatest credit inflation. Now we’re hurtling into a prolonged worldwide deflation. You can already see this deflation in the plunge of oil, iron ore, copper and other commodity prices. We are in uncharted waters after nearly 20 years of madcap money printing by the Fed and other central banks. The world’s central banks are finally out of dry powder. They no longer have the means to inflate the global credit and financial bubble. That’s why today’s FOMC meeting is the most crucial inflection point since 1929.

Despite a brief dead-cat-bounce late November, which Jim Cramer heralded as evidence of stabilization in China, the world's best known freight index has collapsed to new all-time record lows this morning. Amid a persistent glut of ships and ongoing concerns about Chinese steel imports, The Baltic Dry has tumbled to 471 - the lowest level in at least 30 years.

"Of primary interest will be the size of the overnight reverse repo facility that the Fed will put in place to pull short rates higher. We don’t think it will be unlimited, but a size large enough that will keep short rates from falling below the 25bp floor – and the size could be as high as $1tn."

... I found myself seeking refuge in the tiramisu staring back at me, a bit uncomfortable that I was only hearing the wah wahs of Charlie Brown’s adult voices. Until this, during the back and forth of Q&A: (Laughter around the room…) “We don’t remember how to raise interest rates. None of us worked here the last time we did it.”

"The City of Flint has experienced a Manmade disaster," said the city’s mayor Monday evening, as she declared a state of emergency over evidently staggering levels of lead in the city’s tap water. Mayor Karen M. Weaver has requested federal assistance to deal with the fallout from over a year’s worth of tainted water delivered to Flint residents and, allegedly, falsely declared safe by government officials.

Following last night's surprising 2.3mm barrel inventory build, reported by API, DOE reports a massive 4.8mm build against expectations of a 1.5mm barrel draw and way above the highest estimate of a 2.6mm draw. This is the biggest build in 2 months at a seasonally 'weak' time of year (and biggest December build since 1993). Crude ramped overnight to regain the losses from the API dump, but dropped back to lows (under $37) before the DOE data, then crashed below $36. Furthermore, production was up in the lower 48.

Following the collapse in industrial production, it is no surprise that Markit's Manufacturing PMI has plunged to 51.3, its lowest since October 2012. Under the surface it is a disaster with production volume growth the softest since October 2013, and new orders crashed to worst since September 2009. Finally, don't shurg this off, although manufacturing only accounts for around one-tenth of the economy, the Manufacturing PMI exhibits a high correlation of 77% with GDP as industrial activity has an important cyclical impact on other parts of the economy.