Russ Certo's Macro Thoughts On Today's Global Coordinated Crude "Rate Cut" And Other "Market Schizophrenia"

Tyler Durden's picture

From Russ Certo At Gleacher & Company

Good afternoon.  Quick synopsis of macro-thoughts.  I’m not used to writing market comments or market updates anymore given the all things government and policy impacts on markets.  It seems too often that it was as simple as the Treasury is selling the Fed is buying.  And that was it.  Simple. 

The markets have been weighing degrees of stimulus for years now, Tarps, Talfs, QE2s, stabilization funds, foreign exchange gimmicks.  Today is another sort of stimulus.  To some degree, we have seen a first today, unprecedented coordination to lower a commodity price, and possibly for political reasons.  The IEA, a Paris based research arm of 28 industrialized countries, held an emergency press conference to announce its members would release 60 million barrels onto the market.

It is only the third time IEA tapped reserves, the first was during 1991 Gulf War, then again when Hurricane Katrina wiped out some production in the Gulf of Mexico.  The U.S. topped the operation off by releasing an additional 30mm barrels from the Strategic Petroleum Reserve.

There is a surreal irony in the fact that policy coordinations used to be in the form of global FX interventions.  Years ago, for the youngsters, there used to be a term that would resonate in the FX markets.  The term was “dirty float” and it was used commonly on FX desks as globally coordinated FX interventions.  When I started in the business in early 90s it was common to have central banks globally coordinate to buy US dollars.  The dollar was under attack and was trading at all time lows of 78 dollars to yen.  This was Rob Rubinesque fare as a voice of calm on the pulpit to defend the dollar. 

In bond markets, central banks used to often coordinate rate cuts and rate hikes.  Again, in the early 90s the Fed was finishing a decade plus long string of rate cuts that culminated in a 1% Fed Funds rate.  Often, central banks would cut rates in tandem.  U.S., Bundesbank (before ECB), France, Netherlands etc.  We have seen our fair share of unconventional policies and coordinated policies in recent years and now we see globally coordinated strategic oil releases. 

There was considerable discussion on trading floors, blogs, maybe even the streets, that this is a political function, releasing oil for strategic political reasons.  Elections and economies.  Oil used to be and can be viewed as a representation of inflation.  Not only higher transportation gas costs but the commodity is in many products globally and its input can drive the marginal cost of a product. 

But at a level oil becomes a tax, and elasticity of demand function whereby consumers have less discretionary cash flow as a result of higher fuel and energy costs choking off consumption.  Some accuse the executive office of now having figured out as James Carville once said, “It’s the economy, stupid.”  Maybe not Libya, which is another political concept anyway. 

There even has been some linkages made to Fed Chairman Bernanke who increasingly has been exposing the sensitivities or LIMITATIONS of conducting monetary in a fiscal world.  A world of debt limit debates, global business confidence impacts, refusal to invest corporate monies on sidelines confidence impacts, stimulus package impacts.  Heck, the Chairman gave a speech on June 14th called “Fiscal Sustainability”.  An odd topic for MONETARY wonk. 

Today’s events in oil should be considered the equivalent of a global coordinated rate cut.  I view oil in long run as an inflationary headwind but I view elevated prices at the moment as more of a consumption tax and price shock.   Today’s events may merely be temporary (as China is likely luring to buy EVERY available barrel)  but I think they will serve a psychological and pocket purpose of lubricating conditions. 

J-curve, an economics text book concept of the first reaction being the opposite of intermediate term or longer term reaction.  I feel risk asset and equity responses today as J-curve.  Why?

In the globalization of markets and the evolution of markets, asset performance has become correlated.  Some times, often during downturns, assets tend to become more correlated but I think no one can deny the fact that there is a delta correlation in most asset classes often.  The pursuit of alpha lends to creative hedging strategies.  CDX index sell mortgage, HY sell NASDAQ, Hedge tips buy selling oil.  Get hit on Pepsi sell Coke, HIT OIL: SELL EQUITIES.  J-curve. 

I believe the equity space is getting hit today as a risk correlation.  Risk on: risk off.  Equities are a natural byproduct of hedging oil risk, commodity risk and vice versa.  There is a beta. 

However, lower oil price should be a boon to consumption and a boon to equities.  We may be able to claim Middle East policy but how do you get more stimulus with the timing of a Federal Reserve press conference where Chairman’s opine?  What do you do when you have zero interest rates and at zero you have bumped up against the lower boundary of perceived traditionally explicit policy of rate cuts?  You find other stimulus. 

Ask the tips market.  There was a $7 billion 30 year tips auction today that came 4 bps through the market.  Calculate the $1226 value of a basis point times 4 bps ($4904) per million times market share bid?  Dealers aspire to set shorts to buy supply.  $7 billion bonds means $34 billion street P&L hit for dealers.  26.1% direct bidders which means players bypassed the street.  But why?  Oil was down over $4 at the time and that this TIPS buying may read oil moves as STIMULATIVE.  Equities got it wrong earlier on sophisticated correlation trading.  World of opposites but I think this correlation will be short lived.  Different players expressed different views in tips and other risk assets today. 

So, I view today’s news as a significant positive for equities and, hence, less so for bonds.  Funny that the oil declines COULD be the unintended straw that breaks the bond market’s back.  But to no avail today.  Russ

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So Close's picture

That is fucking amazing.  

Reminiscences of a Stock Operator X.0  Anyone?

Highrev's picture

Nice stick save today in the U.S. that’s creating what’s looking like a medium term bottom.

Or is it?

Check out the slow stochastic rally in the NDX for example. Almost an 11 session rally in the slow stochastic and price is still below where it started. Same thing on the SPX, and in the case of the SPX, the same also on the RSI.

Simply working off oversold? Perhaps.

This dip is very suspect in my opinion. And with what we’re seeing in overnight rates, etc., I should probably say EXTREMELY SUSPECT.


max2205's picture

Lets face it Obamaramma will never get reelected with gas at this level...he through "the boys" need to crush oil and gas until 10/12

AladdinSaneGirl's picture

That is over a year away! However Steven Chu is a genius and must have some idea of what he's doing. In the meantime, my North Sea oil stocks may suffer since producer can't afford to pump oil out of the ground if it falls below $100. Aarghh. 

Concentrated power has always been the enemy of liberty.'s picture

Steve Chu is a stupid piece of shit.  He and Bernanke have the wisdom of a lemming.  Ivory tower group think.

iNull's picture

He is a hands on laser physicist--hardly stupid. He is however an upholder of the status quo and will do as many prop jobs as required to keep the system from collapsing. Which he knows is coming.

Cognitive Dissonance's picture

Wait. I thought you could dig/pump/resurrect anything out of the ground for less than $5 per unit? At least that's what MethMan says.

Speaking of screaming addictions, where has that pestilence gotten too lately?

Crisismode's picture

He's crouching right behind you, Cog, and he's holding an ice axe.


I'd suggest you deftly extract the Glock 26 from your pocket and execute a smooth 180 right about now.

iNull's picture

Which is why we're driling down a mile undersea then another mile below the sea floor. Because oil is so cheap and easy to get. Heck what's the fuss? Trillions of tons of shale with about 1/4 the BTUs of cow shit. We can just convert that. Or let the Russians show us how it's done with abiotic oil. I heard it on Coast 2 Coast and the Jeff Rense shows so it must be true.

jeff montanye's picture

you think?   i thought it was russian arctic floating nuclear stations:

Beam Me Up Scotty's picture

Instead of purchasing 3 Billion in bonds, how about releasing 3 Billion in oil into the market?  New revenue sorce?

zKeyserSoze's picture

u got it. this is what bernanke meant by "doing other things" instead of QE

chrisd's picture

We haven't heard from TrimTabs in a while Tyler

Robslob's picture

Transocean and BP already did that?

Ooops...I meant released it into the ocean...different market.

DonnieD's picture

Wasn't the market down before the oil announcements? And if the government is down to using our finite SPR supply to stimulate the economy, wouldn't that tell you the government is grasping at straws.

Mike2756's picture

It accelerated to the downside after the event, silver closed down sharply in spite of the equity rally. Back to "On any Credit Event laden Sunday"?

Hondo's picture

I think he's smoking crack.......consumers aren't going to be buy more goods because oil prices dropped today......that is the kind of insane thinking that got us in this mess.....this is wall street thinking not the consumer.

NotApplicable's picture

Well, he obviously thinks there is still a market (or has to pretend to in order to keep his job). So he's either smoking crack, or dealing it.

Hedgetard55's picture

Not only that, but much of what he wrote is incomprehensible, terrible sentence structure, as if English was his third language, or he went to public schools and literally can't put sentences together.

jeff montanye's picture

went to public schools?  that's raw.

alien-IQ's picture

I have a theory: Every time SPX hits the 200DMA, it triggers an action alert to the department of random bullshit to release some market moving news...ANY news will do as long as it moves the market up...they'll deal with the truthiness of it later.

that's my theory and I'm sticking to it.

zKeyserSoze's picture

good point, oil mark down used to sell TIPS. scary, i'm short overnite china, emerging mkts...but should pop profits next month. also, jim grant notes a guy wrote to FT " i figured out what QE is, but now i dont know what money is." see jim grant interview at 10 min into 13 min interview   -posted on zerohedge before

There is No Spoon's picture

I don't know why he's saying "I view today’s news as a significant positive for equities" - right now equities are correlated almost perfectly with the euro. Once the Greece news came out, the euro spiked and stocks went with it. Assuming that equities were down because they were being shorted as a hedge to long oil positions is a stretch.

There is No Spoon's picture

not at all - actually long dollar for a trade because I think the euro will win the race to the bottom..

alien-IQ's picture

I agree. This news about the 60 million barrels (less than one days supply as Mike Kreiger pointed out) is utter nonsense and meaningless. To believe this is significant requires the same kind of mind that would conclude that if we give everyone in America one free tank of gas for their car, they will take that savings, get in that car and run out and buy a new home. It's preposterous.

web bot's picture

You've got an academic running the country... along with the bankers.

I just listened to some clowns on cnbc talking about how good things are... kicking the can down the road. These people are so low in their ethics... The problems can't be solved unless there is a reset... and I think it's coming.

zKeyserSoze's picture

ive heard kicking the can down the road 1000 times this week. it means continous bailouts until Armegeddon. like raising the debt "ceiling." it cant be a ceiling if its raised.

zKeyserSoze's picture

ive heard kicking the can down the road 1000 times this week. it means continous bailouts until Armegeddon. like raising the debt "ceiling." it cant be a ceiling if its raised.

Atch Logan's picture

Listen to this guy; he knows what he is talking about.

monmick's picture

"78 dollars to yen"

Wow! I don't remember thoses days! Neither does he, obviously...


jeff montanye's picture

nice catch.  i went right through that as 78 yen to the dollar.

Eagle Keeper's picture

The gov is now going to use SPR as more gov debt except they won't be able to just print more of the stuff. A lame attempt at quieting the masses....

oogs66's picture

I can see that it is a statement that the government will pull out all the tricks to support equities. That is a powerful statement but is this really a good idea?

Energy stocks have been strong. Earnings good. I assume this area, if any, has been providing some high paying jobs. Now you hurt it and worse than just hurting it, add an element of uncertainty. Drilling plans cannot look so good with a government willing to do something like this? Energy self sufficiency and alternative energy just took a kick in the teeth. Hey will need even more subsidies. Beware these unintended consequences

What if high oil prices weren't the reason for the soft patch? If we keep getting weak data that scapegoat goes away.

What if oil prices drive back up? Another example of central planning not being able to work?

I get the message that they are trying to send but I question how well it will work and how desperate they are

FreedomGuy's picture

I am glad I read this article because I was wondering how a $4 drop in oil drives down gold and silver. I suppose if we released a million bushels of corn into the market it would have the same effect?

The problem I see is that this is highly temporary. The Obama administration is slowly but surely strangling our domestic oil supply (even while funding the Brazilians) and that trend should overwhelm this temporary boost in supply. Plus, someone correct me if I am wrong, but in theory at least the U.S. government will have to replace those 30mil barrels eventually. So they will wade back into the market and drive the price up?

It's a damn stupid shell game full of bullshit smoke and mirrors temporary fixes. They have not fixed or changed anything for the long term. If I had more cash I'd pile up more metals and even energy options.

Lord Welligton's picture

It's a damn stupid shell game full of bullshit smoke and mirrors temporary fixes.

It won't take the price down at the pump.

It will provide more profit for the oil companies.

Bonus time for the Obama Clan again.

buzzsaw99's picture

the bernank is a one trick pony and that trick sucks ass.

Atch Logan's picture

The price of oil by the government is being knocked down because there is no oil, duh!  This guy is saying that if there is no oil, then the equities of oil stocks (which hunt/produce oil) will go up.

What the government is doing is corrupt, phony. Why would anyone doubt that?

sschu's picture

However, lower oil price should be a boon to consumption and a boon to equities.

Oil needs to be significantly below $80/b for months before the effects on the consumer can be felt in the general economy.  At least they realize this fact, but they just might be too late. 

The answer is not release of strat oil reserve or other games, the answer is more supply.  How does forcing the price of oil down correlate with the financing of the deficit?  How/where will Bennie get the FRNs to cover the $1.6T+ we need to borrow over the next 12 months?  These are the questions that need answers. 

They must have some inside info that the economy has taken a sharp downturn, couple this with the Greece/Europe problems and they are trying to avert another 2008 scenario.

Weren't we supposed to be in recovery by now?


Rainman's picture

When all is said and done, it's still about a real estate depression.

Long-John-Silver's picture

When will the Strategic Silver Reserve be released to refill the Comex?

Stoploss's picture

Great afternoon humor Tyler. And all that other globally coordinated jaz too.

AldoHux_IV's picture

Equities/risk assets need to be lower i.e. pain needs to be felt before QE can be greenlighted.  Chairsatan opines the limits of monetary stimulus, but deep down inside realizes that the uncrontrollable debt far exceeds any priority and thus bonds usually trump all other assets-- maybe the centrally planned regime in charge (aka white house) will soon realize that deflation is actually better for the peasantry esp around election time when voters will be looking at their dwindling pockets.  Many forces at work-- all self motivated and all only benefit a small group-- revolution will only bring real change not empty promises and gimmicky price controls.

Village Smithy's picture

This guy doesn't use the facts. This oil release was a stick save after the markets dropped so much over night. The market was way down on the open and heading lower. Then the news came from the IEA and the DOE shortly after 10:00. Equities immediately sold off as oil longs who had been torched overnight horded cash thinking that things were going to get even worse. Smart oil players quickly realized this was a scam, the amount that was realeased was a day's spillage practically. Oil hardly moved. Then the MSM started filling heads with hopium on lower gasoline costs, boom off we went with retailers leading the way. Then that trick started to flag in the afternoon. News that Greece was no longer a democracy and that G Pap was the new dictator and could decree  without his Parliament's consent "Game On" was next to hit the wire. Up up and away from there.

FreedomGuy's picture

I would guess it was down early based on the prediction of what was going to happen today.

Village Smithy's picture

If by "it" you mean the equity market, then I would reply why did those in the know drive the market in the opposite direction of where they wanted it go? If you meant the oil market, then yes insiders were taking advantage. Splendid though how in the morning when the pros were at work they saw through the game and leveled things off. Thanks for the reply.