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It seems the words of Plosser and Williams are more powerful than the rumors of Hilsenrath for now. While the jury is still out for whether the 'Tepper Top' is in, today's equity sell-off (admittedly a mere 0.5%) appears to have stunned a few people back into the reality that stocks actually fall. Trannies were worst performers but broadly speaking this was the worst drop in 2 weeks (only 2nd down day in May) and it appears equity markets are beginning to play catch-down to the reality other risk asset classes have been warning about for a week or two. Homebuilders were the worst performers (as the data this morning was just horrible - US and Europe) and while Tech held us up for a little while, APPL's retest of its 50DMA saw sellers come back (and GOOG also lost ground from the open). Away from stocks, Treasuries closed -6bps (their best day in 5 weeks); credit continued to widen (weaken); VIX shifted higher still; shorts actually 'won' on the day (most-shorted -1% vs RUT -0.5%); and despite an early dip, the USD ended the day up another 0.25% (with AUD weakness the most obvious pain for carry traders).

Perhaps instead of "America, The Brave", a more appropriate description of what the USA has become would be (judging by the following chart) "America, The Dependent".

Last week it was Fed's WSJ lapdog hinting at a tapering. Now it is up to the Fed's own John Williams to provide an even stronger hint at what may be coming as soon as this summer. From Bloomberg:

• WILLIAMS SAYS FED MAY REDUCE QE IN SUMMER, HALT BY YEAR END

However, promptly following this is the following headline which we can only hope has a typo in it:

• WILLIAMS: UNEMPLOYMENT WON'T FALL BELOW 6.5% UNTIL MID-2105 (er, sic?)

And just to confuse everyone, as the Fed enjoys doing, here is the conclusion:

• WILLIAMS SAYS SLOWING QE WOULDN'T MEAN TIGHTENING IN POLICY

Bottom line: nothing will change.

What almost everybody calls capitalism is actually fascism, a system where both consumer and capital goods are privately owned, but they are strictly regulated and controlled. This is a huge distinction.

This morning we were treated, once again, to confirmation that Europe is still in the middle of a deepening crisis. No, this was not a reflection of the terrible data, it was Mr. Hollande's insistence that "the crisis is behind us." Luckily we have a foil for this idiocy. Bernard Connolly, author of 'The Rotten Heart of Europe' explains to CNBC's Rick Santelli, "the point is that the union has produced this disaster; and the people who put the disaster in place hail it as a success. are they crazy? If they are, that's pretty disturbing! If they're not crazy, then the question of why they have done it is more disturbing." In a few brief minutes, uninterrupted by an anchor desperate for silver linings, Connolly explains to Santelli when asked of the future, that nothing will change in the short-term, "the potential ways of getting out of the mess are simply unthinkable," to both beggar and chooser, adding that "you have a cycle of deflation, depression, default, more banking crisis, more sovereign debt crisis, and social and political crisis." Simply put, Connolly concludes on social unrest, "I don't see any way of avoiding it."

It is only logical that when one of the smarter people in finance warns that he "sees bubbles everywhere" that he should be roundly ignored by those who have no choice but to dance. Because Bernanke and company are still playing the music with the volume on Max, and if not for POMO there is always FOMO. However, if there is any doubt why this "rally is the most hated ever", here are some insights from the Bond King from an interview with Bloomberg TV earlier today: "We see bubbles everywhere, and that is not to be dramatic and not to suggest they will pop immediately. I just suggested in the bond market with a bubble in treasuries and bubble in narrow credit spreads and high-yield prices, that perhaps there is a significant distortion there. Having said that, it suggests that as long as the FED and Bank of Japan and other Central Banks keep writing checks and do not withdraw, then the bubble can be supported as in blowing bubbles. They are blowing bubbles. When that stops there will be repercussions. It doesn't mean something like 2008 but the potential end of the bull markets everywhere. Not just in the bond market but in the stock market as well and a developing one in the house market as well."

Bill Gross, who manages the world’s largest bond fund, has indicated that the 30+ year old super cycle bull market in bonds has ended. This is very bad news for the markets.

A 'second Economic Miracle' and other psychedelic feats, but inconvenient data gets in the way.

Presented with no comment...

Confirming what we explained recently, Morgan Stanley explains that among its equity long-short fund activity, the short activity (the net of shorts added and shorts covered) reached a minus-2 z-score indicating massive covering over the past 20 days. The last 3 times this occurred were April 2010 (S&P then fell 13% in 8 days), July 2011 (S&P then fell 19% in 23 days), and Oct 2011 (S&P then fell 10.5% in 20 days). Across sectors, Consumer Discretionary has been the most covered over the past week and month. Due to heavy covering, Discretionary short activity fell below a minus-3 z?score as of yesterday (now the highest long/short ratio of all sectors). It is worth keeping in mind, MS add, that historically speaking, the sector with the highest long/short ratio has often gone on to underperform over the following 6?12 months. This covering has driven median net leverage up to 64% (its 97th percentile of post crisis levels). Money-on-the-sidelines!! not so much... Massive short-covering rally - yes...

We have long discussed the problem that the Japanese government faces if interest rates in the troubled nation rise (cost of debt financing will swamp revenues in a vicious circle); but now it seems there is another - just as vicious - problem (that the BoJ is set to discuss according to Nikkei). The inability of the BoJ to 'control' Japanese interest rates (JGB rates spiking unprecedentedly day after day) has put the banking system in a lot of trouble. As we explained recently the banks appeared to initially 'hedge' their huge JGB positions but now appear to recognize that first out wins and are reducing exposure overall (YTD -3.7% according to local data). The reason - simple - as the IMF explains via the BoJ - according to BOJ estimates (footnote 4), a 100bp (parallel) rise in market yields would lead to mark-to-market (MTM) losses of 20% of Tier-1 capital for regional banks and 10% for the major banks. He who sells first wins...

We're not going to have another Watergate in our lifetime. I'm sure.--Bob Woodward History does not repeat itself, but it does rhyme.--Mark Twain

We are sure every effort has been undertaken to ensure Mr. Erdogan's visit (Iran Gold or not) was a success but just in case there was any confusion if the administration has learned anything as a result of the scandals in the past week, the following tweet from CBS' White House correspondent Mark Knoller should add insight on just how much more transparent the administration is and how seriously it takes the freedom of the press...

Questioners pre-chosen and I'm not one of them. Again.

— Mark Knoller (@markknoller) May 16, 2013

While there are a plethora of Wall Street analysts calling for much higher levels for the S&P 500; most of these calls are based simply on the belief that the current trajectory must continue indefinitely.  While you certainly cannot "fight the Fed" the underlying fundamentals and economics that support the markets long term are not present for the party.  What is very important to understand, and can be clearly seen in the chart below, is that despite repeated calls for "ever rising" stock markets in the past eventually left investors devastated.  Markets do not, and cannot, continue indefinitely in one direction. Unfortunately, for most individuals, by the time they realize what is happening it will likely be far too late to act. Could the catalyst be 'language' changes from the FOMC as they see bubbles and froth in high-yield credit and margined stocks?

The US is moving to broaden its 'blockade' efforts of Iran to the movement of pure gold into the Islamic Republic. The US-led embargo of Iranian crude succeeded in slowing the flow of petrodollars into the nation but as Foreign Affairs committee chairman Edward Cohen remarked, there is "no question that there is gold going from Turkey to Iran." While the official line from US elite such as Bernanke remains that 'gold is not money' it appears that increasingly other nations would disagree, as Cohen admitted, "in large measure what we're seeing is private Iranian citizens buying gold as a protection against the falling value of Iran's currency." It would seem somewhat self-evident that the US is admitting, by attempting to embargo this gold flow, that outside the US, the Dollar is becoming increasingly irrelevant (see China's gold demand); and that for many countries the petrodollar no longer exists, having been replaced by 'Petrogold'.