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The Great Unwinding?
- Ben Bernanke
- Borrowing Costs
- Carry Trade
- Central Banks
- David Rosenberg
- Dennis Gartman
- Dow Jones Industrial Average
- Equity Markets
- ETC
- European Central Bank
- Federal Reserve
- fixed
- Germany
- Gluskin Sheff
- Nomura
- Price Action
- Quantitative Easing
- Recession
- recovery
- Rosenberg
- Stimulus Spending
- Trichet
- Unemployment
- Yen
Submitted by Leo Kolivakis, publisher of Pension Pulse.
Dan Burrows of Daily Finance writes So much for the Dow's 2009 high. Good news on jobs is bad news for stocks:
It was silly season on Wall Street Friday. November's unemployment figure -- still a dismal 10% and subject to revision -- came in stunningly better than expected and the markets immediately soared to fresh 2009 highs. The Dow Jones Industrial Average ($INDU) alone shot up as much as 150 points in early trading.
And
then, at about 11 a.m. Eastern, everybody decided to sell. "I don't
know what happened," says David Wyss, chief economist at Standard &
Poor's. "Some of it was probably just profit taking, but anybody who
believes in rational markets hasn't looked at them very long."
On a Teeter-TotterThe
Dow spiked, plunged and eventually finished with a wee gain. Welcome to
the wacky world of equities, where good news is bad news and bad news
is good news. It seems traders -- as fidgety as chipmunks but with
shorter attention spans -- suddenly and collectively realized that an
improving jobs picture could make their cheap-dollar-fueled bubbles
blow up much sooner than expected.Here's how: Stocks, gold and oil have all ballooned on the so-called reflation trade.
That's where central banks and governments around the globe keep
interests rates low (in the U.S.'s case, essentially at zero), while
simultaneously flooding the world economy with stimulus spending. All
that cheap liquidity has to flow somewhere, and it's been pouring into
pretty much any asset class you can think of.Magnifying this effect is that the weak dollar has become the vehicle of choice for the international carry trade.
That's where traders borrow cheap currency (until recently, the yen for
16 years) to purchase higher-yielding assets such as stocks, bonds,
oil, gold and commodities in general. Profit is made by pocketing the
difference. As the dollar rises, borrowers of greenbacks find
themselves in a short squeeze, which forces them to sell those higher-yielding assets in order to buy outright the dollars they've borrowed.Dollar's Surprise Move
So
if the economy is stabilizing faster than forecast -- as today's jobs
report at first seemed to suggest -- the chipmunks figured the Fed will
have to raise rates sooner than they expected. Why is that bad? Stocks
and bonds drop on rate hikes even in the best of times. But in this
case, it would hurt even more because a rising dollar will make all the
assets it has reflated -- equities, debt, gold, oil, etc. -- fall even
harder.Which is exactly what the chipmunks did to these asset classes Friday. The dollar jumped and
everything predicated on it being weak fell. Who saw that coming?
Apparently no one. As Dennis Gartman, author of the well-regarded
investment newsletter bearing his name, said Friday, punters who played
the jobs report got what's coming to them."Anyone,
anywhere who chooses to make material 'bets' in the world of
trading/investing predicated upon the outcome of [the unemployment]
report deserves the sound thrashing that he or she shall likely
receive," Gartman told clients, noting that these reports are
"notorious for revisions of 30% to 60%...in either direction!"If
there is some weirdly good news about Friday's market action, it's that
at least the dollar/securities correlation remained intact, unlike the
previous spooky session. On Thursday, small cap stocks, financials and
oil fell even as the dollar sunk, too, notes Keith McCullough, CEO of ResearchEdge, a New Haven, Conn., strategy and research firm.
Rates Staying Put"Dollar
down equals stocks and commodities down?" McCullough wrote Friday.
"Yes, this is new," the former hedge fund manager says. "It's called
unwinding the reflation trade," says McCullough -- a situation that does not bode well for our bubbles.Also adding to Friday's market mishegoss
was that even though the employment report was a pleasant surprise when
benchmarked against economists' and market expectations, "the overall
labor market backdrop remains extremely fragile," wrote David
Rosenberg, chief economist and strategist and Canada's Gluskin Sheff.
In other words, at least some of the chipmunks took the time to
actually digest the data -- and they didn't like what they ate.But
getting back to the idea that the Fed might hike rates anytime soon?
Well, that's just goofy. "The Fed will need to see sustainable
unemployment trends before they'll raise rates," says S&P's Wyss.
"And then if the fragile recovery started to fall apart, they would
just drop them again."The bottom line for retail
investors is that one day in the market (or in Friday's case, 90
minutes) does not make a trend. Every day is but a single data point --
and some points are noisier than others.
Now,
I have to give you my read on Friday's stock market action. The
surprise figure on the jobs report caused a big gap up at the opening
and traders sold the news. The gap was filled by mid-day and stocks
edged up by the close.
I have to give you my read on Friday's stock market action. The
surprise figure on the jobs report caused a big gap up at the opening
and traders sold the news. The gap was filled by mid-day and stocks
edged up by the close.
There is nothing sinister about this
price action. Anyone with minimum trading experience has seen it a
million times. Stocks gap up, traders sell the news, gap is filled and
we move forward and grind higher. People love conspiracy theories but
they should first learn to read the tape and understand market dynamics. The rally of a lifetime still has legs to run.
Having
said this, we are witnessing the unwinding of the global reflation
trade. On Thursday, Bloomberg reported that European Central Bank
President Jean-Claude Trichet is withdrawing stimulus measures faster
than economists anticipated, clearing obstacles to higher interest rates next year:
The ECB’s decision
yesterday to end long-term emergency loans and tighten the terms of its
final 12-month tender will give greater traction to any rate increases
in 2010 should policy makers deem them necessary.
“The ECB chose a
quicker exit path,” said Laurent Bilke, a former ECB economist now at
Nomura International Plc in London. “It’s very difficult not to think
it’s the beginning of a tightening process.”
The move
to tie the rate on the 12-month loans to the ECB’s key rate rather than
setting a fixed rate of 1 percent means any increase in the benchmark
will also affect banks’ funding costs. While Trichet said the move
doesn’t signal the ECB intends to raise rates, some officials are
concerned that leaving borrowing costs at a record low for too long
will fuel asset bubbles and faster inflation.Trichet
spoke as Federal Reserve Chairman Ben S. Bernanke promised a “smooth”
withdrawal of stimulus in the U.S. as the world’s two biggest economies
pull out of recession.
Yesterday’s announcements “put
the ECB in a position where it can choose to raise rates if it wants to
further down the line,” said David Page, an economist at Investec
Securities in London. “We’re penciling in a rate rise in the second
half of next year.”
Economic Recovery
The
risk for the ECB is that any indication it could raise rates sooner
than the Fed may fuel further gains in the euro and undermine the
region’s economic recovery.
Further gain in the euro will definitely undermine Euroland's recovery. The article went on to quote an ECB council member:
ECB
council member Axel Weber said yesterday it’s a “balancing act” for
central banks to withdraw stimulus measures without threatening their
economic recoveries.
“We’ve made it clear that we’ll
gradually withdraw unconventional measures in the future,” Weber, who
is also head of Germany’s Bundesbank, told ARD television. “But that
doesn’t mean that we won’t use the necessary caution. There’s no need
to send a signal on interest rates at the moment.”
The
pace of withdrawing non-standard operations is a balancing act for
all central banks that engaged in quantitative easing. If they proceed too quickly and too aggressively, they risk creating another global recession.
What does the removal of global liquidity mean in terms of global macro moves? Bloomberg reports that BNP Paribas sees the US dollar rallying in 2010 as the Fed cuts liquidity:
The
dollar’s decline is in its final stages, heralding a rally in the next
two years, as the Federal Reserve scales back stimulus measures, BNP
Paribas SA said.
“The Fed has sent signals that it will stop
expanding its balance sheet from March onwards,” a team led by
Hans-Guenter Redeker, London-based global head of currency strategy,
wrote in a report dated today. “Hence, dollar liquidity growth will
start to shrink starting in March.”
“Markets tend to be
forward looking and extreme dollar short positioning indicates to us
that the dollar turnaround could come earlier,” they wrote.
The
greenback's rally is not just based on covering of extreme short
positions. Going forward, the USD will rally because the relative
fundamentals will favor US growth over other regions. I agree with
Stéfane Marion, chief economist and strategist at National Bank
Financial and one of the few who correctly foresaw US payroll surprise,
the next few employment reports will surprise to the upside as
companies redeploy their cash flows and start hiring again to position
themselves for the recovery. This will lend further support to the US
dollar.
Importantly, the drop in the
US dollar allowed financial conditions to loosen as the US economy was
trying to recover from a terrible recession. With interests rates at
zero, the greenback's slide acted as an important buffer to further
deterioration in economic conditions. Now that the economy is
recovering, the greenback will reflect improving fundamentals.
So
what does the global unwinding mean for other asset classes? Again,
that all depends on how bold and how fast monetary authorities unwind
all that stimulus they provided the financial system with.
In a recent comment, Reflation Trade or Recovery Trade?, Stéfane Marion and Pierre Lapointe of the National Bank Financial
write that the "period between the end of recession and the first rate
hike is a very profitable sweet spot" but they add that they "cannot
exclude the possibility of short-term turbulence in equity markets"
because the Fed will start removing liquidity.
On a sectoral basis, Mr. Lapointe recently shared his growth buys in 2010 with the FP Trading Desk:
For
investors looking to take some risks in equities next year, the best
bet is to keep it in North America, a new note from National Bank
suggests.
"On a global basis, the sectors that are expected to
show the best earnings growth in 2010 will not be the same as in 2009
... consensus expects the strongest earnings improvements to be posted
by the energy, materials, consumer discretionary and IT sectors,"
Pierre Lapointe, analyst with National Bank Financial Group, said in a
note to clients.
And the best place for this is North America, with the U.S. having a 40% weighting and Canada 34% in these sectors.
Mr. Lapointe also expressed doubts about gold, which has been breaking price records on an almost daily basis in recent weeks.
"Since
we think U.S. employment could start growing again soon and rates could
start rising sooner than the market expects, we believe the U.S. dollar
could gain support at the expense of bullion," he said.
I happen to agree that energy and IT will outperform in 2010 but my long-term portfolio remains almost exclusively weighted in Chinese solar stocks as this is the area where I see a long-term secular bull market developing.
[Warning:
Solar stocks are not for the feint of heart as the sector is heavily
manipulated by big hedge funds. I can tell you from personal experience
that I endured swings of 40% or more in my portfolio but continued
buying the dips and added to my long-term positions at very attractive
levels.]
There are a few other sectors that show great promise.
I continue to believe that in the investment environment we're heading
in, you have to pick your spots, stay nimble and always remember that small is beautiful. Also, be very weary of those sharks on Wall Street spewing their nonsense, feeding off your insecurities.
»
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Asset bubbles destined to come crashing down do not an economy make.
"but the recovery story is not just perception, it is happening at a faster than anticipated pace, albeit from depressed levels."
So, I ask you for the second time today, give me the evidence of the recovery story. I listed all of the problems in my post above and your reply was that it was just a liquidity trade. Your writings are highly disingenuous.
Leo, Leo, Leo,.. how the f... do you see a recovery around the corner?
We never solved any problems i.e too much debt every where,.. we rescued a few thousand broke bankers, and bought som time,.WITH MORE DEBT,.. and throwing more debt at a problem of too much debt,..does not solve shit,..
The U.S is the front of the train and will be at the bottom of the wreck once the world goes over the cliff.
It´s not a dooms day prediction,..(just for wall street)poor people (like me) will do what we have always been good at,..survive on very little,.. and you will learn to be happy with much less once your portfolio implodes to real p/e values.
You seem so smart, yet don´t see a mathematical impossibility right in front of you.
Who the f... pays you salery anyhow?
Average job-threatened-bankbailouttaxpayin-Joe
Doesn't matter what the real facts are.
The only thing that matters is what the institutional buyers believe.
Right now, they believe the recovery story:
Airlines:
Staffing Firms:
Motels:
Trucking and Rails:
Technology:
Big Deal ... one day 75 -> 76, nothing has started or changed, just trading after big report ... it always happens Payrolls, GDP's, Fed Meetings ... check it out.
Every time you think you are going to forget, just remember this-
..... there is no recovery,
there is only central stimulus ........
and hold your breath for at least another 18 months.
"Now that the economy is recovering, the greenback will reflect improving fundamentals."
Mr. Kolivakis, what metrics are you looking at that would convince you that there has been a material improvement in the fundamentals? Barge and rail traffic is still down y/o/y, the November retail reports are down y/o/y, consumer credit is still contracting, banks are hoarding their excess reserves (thank you FR and FRBNY), numerous states and cities are teetering on bankruptcy, the ISM data are weakening now that the Obama stimulus is fading and the reappointment of the Chairman has become a public policy issue. What signs of material improvement do you see in our economy?
" ...my long-term portfolio remains almost exclusively weighted in Chinese solar stocks... "
Wow, and you write a blog about pensions? Is that irony not lost on anyone else?
Yeah, come back to me in a year or five years and tell me how stupid I was to invest in these Chinese solar stocks. Also, you do not need a "material improvement" in the economy to change exchange rate dynamics. As long as currency traders think the US will grow faster than Euroland or Japan in the coming year, they will buy the greenback. PERIOD.
Interesting but you are staking your position on the idea that these guys know how the United States will perform. Isn't that somewhat like buying the stock market when it is rising and selling when it is falling? Pardon my simplistic view but what I guess I mean is are these currency traders somewhat akin in volatility to day traders of stocks?
The idea that someone or group of someones can call the bottom of our economy is bizarre.
Well it's really simple you dimwit.
How did people know Germany would outgrow everyone else from 1930 to 1939. They knew because they were dumping millions a day into it. How did people know the US economy would grow.
That's simple too. When we auctioned treasuries japan and china would by them. That would drain their dollars. To us. We would then use those dollars to buy imports till they got full of dollars again. Then auction treasuries and drain the dollars back out.
Now when china and japan dump thier treasuries on the market it's going to drain all the dollars out of america and leave us with no money to circulate and an extremely constrictive economy. Which is why the FED is constantly hammering auctions day after day after day. So it can go no you can't sell your treasuries our system is dry, please wait another day.
It's going to end, by force. China can put our market on limit down for a MONTH if it feels like. Japan can put it on limit down for weeks if it feels like it. Shutting down the computers and firewalling them out of their money is going to create the most massive hacker fest this planet has EVER seen.
You like to be right and you like to be strong. Your stupid is strong. Ride it far.
Hmm...so then you agree with me that the economy is hammered and that it is not getting ready to recover as Leo claims?
Well of course I agree with you. I don't know where Leo got this. He's lost his mind. My point was the money's going. Stalling and basic kindness and putting up with obstructions and trouble only lasts so long. This time the rothchild and rockefeller and other fucktards don't get to decide where it goes. When you run a banking system and you know where all the money is to say nobody has any idea or can call a top is childish. You don't think Goldman knows every damn thing the IRS knows? You don't think FED knows everything the banks know?
So you agree that the economy sucks and you've got a momentum strategy. Just beware that the trend is not always your friend. That is especially true if currency traders start buying the greenback.
Leos pitching the liquidity driven musical chairs trade.
Im not saying hes wrong but last one outs a rotten egg trading strategies tend to end badly
Au contraire.. The US Dollar is actually the only undervalued asset at the moment.
Certainly stocks, bonds, RE, and Gold are not.
Wild days ahead.
Most are invested along Rates are Low and dollar is weak theme.. I am moving to the other side of the boat. Higher rates and US Dollar. We could see the USD
around 80-85 and 30 yr rates at 5.5% - 6% in 2010.
That would soak up alot of excess liquidity .
Unless you're talking about paper and ink, the dollar is not an asset. It's no more than a bet that the government is going to defeat its citizens.
virgil... u bin smokin' that stuff and spinning 'Big Pink' too long my friend
The Thursday night threat from Japan that they had had enough and were about to dump $100 Billion of Treasuries was enough to cause Bernanke and Geithner to lose sleep and wake up Friday morning with a new vision for the dollar…Look for a fresh foreign economic crisis to provide cover for the withdraw of stimulus, the downturn in the market and the strengthening of the dollar…Barnanke, Geithner and Obama can not say the soon to come reversal is a result of their doings but as a result of some economic crisis in the Ukraine or some other far off land completely out of their control…listen up for the next sales pitch “ this next bailout for American jobs will fix everything….just trust us…”
Leo- As 70% of GDP is the consumer and the consumer is tapped, deleveraged, credit has shrunk, house prices have not bottomed, so many mortgage holders are underwater and bank are hoarding cash. Where will this North America bull run come from? Artificial liquidity is there, yes, but when revenues fall short... quarter after quarter then water? Consumer discretionary? Are you kidding??
The more that believe the recovery is here, the worse the next drop is going to be.
Who really believes we are out of recession now? They put a few trillion dollars worth of lipstick on a broken pig, paid some people to buy cars and houses they can not afford and... Its all fixed now?
The investment bankers have been "unwinding" the liquidty all along leaving behind another shell of a recovery.
All powerful Fed
Rand rolling over in grave
Gold is real money (bitches)
The Fed does not want higher rates anytime soon. However,
if the market takes the ten year over 4% and the thirty
year over 5%, the mortgage market will be adversely
effected. Whether the Fed is in or out of the market,
the market will eventually win and housing will implode.
It's just a matter of when. Give me about 20 more bps,
and equities will begin to discount the resumption of
the economic slowdown.
Here is my take.
1. The phony employment numbers spiked the market.
2. The sell off came when Zimbabwe Ben got his UN fornicating ass handed to him by Senators Bunning and Sanders.
The three things I'm asking myself right now.
1. What is Ben going to do stop the Fed audit.
2. Because Ben is a vindictive little shit. What is he going to do to get even?
3. Since Algore is diversifying out of Green energy. What is he diversifying into?