April 3rd, 2012
In our busy days, it is all too easy to fall into the trap of hearing (and believing) the latest headline and its associated spin. For some reason, three minute videos can quickly and easily remove these 'spins' without the need for a PhD. In today's 3:06 un-spin, the broken-window-fallacy is addressed as the seen versus unseen impact of the idiocy of a broken-window's (or war, or destroying homes, or...) positive impact on an economy is explained in cartoon style. The sad fact is that this fallacy remains at the core of mainstream policy-making and as the video notes, the government's 'creation' of jobs via public works programs (or any number of stimulus-driven enterprises) it does so at the expense of the tax-payer via higher taxes or inflation and that 'spending' which would have otherwise gone to new fridges or iPads is removed and this does nothing to significantly improve aggregate demand (should there be such an amorphous thing) and in fact (as we recently noted here and here) leaves us more and more dependent on the state for corporate profit margins leaving any organic growth a dim and distant memory.
Having been an onlooker of the recent tiff between Paul Krugman and Steve Keen, I was very eager to see what Mr. Keen had to say in tonight's LSE public lecture on "Banks Versus the Economy." Observing how Keen had quarreled with Krugman and effectively ate his lunch, I thought he would bring a lot to the table. I was wrong. Keen had raised the (very interesting) issue about how neoclassical economists and their models fail to recognize the role of banks in the economy.
While the S&P closed lower for the day, the dramatic save as ES (the S&P 500 e-mini) hit 1399.5 (again) pushed it all the way back to the safety of VWAP and perfectly unchanged from pre-FOMC news. Meanwhile, Gold and Silver lost around 2%, Treasuries snapped 13-15bps higher in yield and the USD ripped 0.6% higher closing pretty much at their extreme levels of the day. AAPL was unphased as the rest of the world appeared to sell any and everything on news of no more Fed liquidity in the short-term as the stock clung to its VWAP ending with new all-time highs once again. VIX, which managed to surge over 16.5% once again - above yesterday's highs - recovered all the way back to practically unchanged by the close (outperforming the small loss in stocks on the day). With Treasury yields and the USD back at one-week highs and stocks just 0.5% off their multi-year highs, it looked for a moment like equities were going to reconnect with credit's much less sanguine perspective - and indeed they covered half the difference at one point - but by the close HY and IG credit remains unchanged from Friday 3/23 while the S&P is up over 2% from then. Volume was average today but concentrated in the sell-off period of the day but we note that average trade size was very near the lowest of the year (suggesting algos using small lots to tickle us up to VWAP for the close) and some larger blocks going thru in the last few minutes as we peered above VWAP - combined with the shrug from credit, significant weakness in the major US financials, and unwinds in every other asset class - make us nervous for unhedged equity longs here - especially with European weakness now a trend and not a one-off.
Folks, QE 3 is not coming. Not without a Crisis first. End of story. The last time the Fed hit “print” with QE 2 put food prices at all time records and kicked off revolutions and riots around the globe. Today, gas is already at $4, food prices aren’t too far off their highs… do you REALLY think the Fed will kick off more QE in this environment… during an election year? At a time when the Fed is becoming a hot topic in the election?
Repeat the following with increasing vigor...
Jan Hatzius was on TV earlier, stating he expects a whisper of Twist extension in today's minutes, as per Hilsenrath. He did not get what he wanted. His take: it is now just deferred to June. To wit: "March FOMC minutes make easing at April meeting unlikely without substantial deterioration in the outlook. However, an announcement of additional asset purchases remains our baseline, with June the most likely timing at this point."
Seasonal adjustments are not forever.
...For those confused why the market is reacting like a stung bee to today's announcement that contrary to Jan Hatzius' expectations, Twist may not be extended (at least not before we get a 20% market correction), here is where all, repeat all, market "growth" has come from in the past three months. Hint: $2 trillion in central bank easy money. Because the ECB is now shooting blanks, the Fed will find it difficult to ease so close to the debt ceiling farce, and the BOJ is irrelevant. And if the spigot is shut off, watch out below.
Equities tumbled but Gold/Silver and Treasuries were the hardest hit as the potential reality of lower chance of more massive LSAPs was evident in the FOMC minutes. As we have argued for weeks now, the Fed is cornered and is unable to enact QE3 without a much more significant drop in markets and implicitly the economy. We assume now that the sell-side will refocus its efforts on telling us all just how bad the economic picture really is...
So much for the Hatzius and Hilsenrath prognostications. Headlines coming in:
- FOMC SAW NO NEED TO EASE ANEW UNLESS GROWTH SLOWS, MINUTES SHOW
- MOST FOMC PARTICIPANTS SAW `LITTLE EVIDENCE OF COST PRESSURES
- FOMC PARTICIPANTS SAID LABOR MARKET CONDITIONS HAD IMPROVED
- MOST FOMC PARTICIPANTS EXPECTED INFLATION RATE AT 2% OR LESS
- MANY FOMC PARTICIPANTS SAW `EASED' STRAINS IN GLOBAL MARKETS
- MOST ON FOMC SAW TEMPORARY IMPACT FROM RISING OIL, GAS PRICES
- FOMC SAID SIGNIFICANT OUTLOOK CHANGE COULD ALTER 2014 RATE PLAN
Apparently $4 gas has an impact.
Back in the start of March, before the vertical ascent part of the parabolic move in Apple stock truly took off, we pointed out that out of nowhere, Dan Loeb, long well-known for being quite persuasive in getting his hedge fund friends to piggyback on his ideas, had made the iPad maker his Top 5th position as of the end of February, despite not owning one share two months prior. Well as of the end of March, per the firm's just released update of its top positions, Apple is no longer in the Top 5, even as it was his 2nd best performer of the month on March 15. Has Loeb, acutely aware of such things as blow off tops and manias, merely trimmed his position, or has he cut his exposure entirely? As a reminder, this wont be the first time Loeb "rented in" and out of the AAPL hedge fund hotel, having done so most recently in Q2 of 2011. And if Third Point is gone, are Loeb's idea dinner buddies out as well?
Six centuries ago, when London and Paris were irrelevant, plague-infested backwaters, and New York City wasn’t even on the map, the greatest city in the world was Nanjing– the capital of the Great Ming. At the time, Nanjing was not only the most populous city on the planet, it was also the pinnacle of civilization. Art, science, technology, and commerce flourished in the Ming Dynasty’s liberalized economy, which constituted a full 31% of global GDP at the time. (By comparison, the US economy is roughly 25% of global GDP today…) Taxes were low, the currency was strong, and overseas trade thrived. For a time, Nanjing truly was the center of the world. Over the next several hundred years, the tide shifted. The Ming Dynasty fell, and power was transferred further west to the Ottoman Empire, and eventually to Europe which had finally emerged from the Dark Ages as the most advanced civilization on Earth... This phenomenon has lasted for several hundred years now… but as history has shown repeatedly, power centers frequently shift. The world is now witnessing yet another transition of power, this time from west to east, as the US-led western hierarchy suffocates within its own debt-laden Keynesian fiat bubble.