"Risk on, risk off" might be the most essential hallmark of the current market, but just focusing on the day-to-day whims of capital markets ignores longer term changes to investor risk preferences. Nic Colas, of ConvergEx looks at the topic from the vantage point of gender-specific investment choices. For example, more women are participating in deferred compensation (DC) plans, and the data from millions of 401(k) accounts tells a useful story. Their retirement accounts still lag those of their male counterparts in total value and they remain a bit more risk-averse. But for the first time in at least a decade they are more likely than men to contribute to a retirement account and are contributing a greater percentage of their earnings. You’ll never see pink or blue dots on the “Efficient Frontier” of academic models, to be sure. However, both empirical data and psychological studies do point to subtle – but notable – differences in how men and women consider the classic risk-reward tradeoff inherent in the challenge of investing. Nick suggests it may make sense to reconsider the notion that continued money flows into bonds and other safe haven investments are really "Risk off" market behavior. At least a piece of it may well be "Risk shifting," driven by the demographic and psychological factors as assets controlled by women are clearly increasing. "Risk off" may well be "risk shift."
Update: Gold and Silver are extending losses now.
Asian markets have been open for an hour or two now and markets have done nothing but extend the late-day derisking from the last hour of the US day-session. S&P 500 e-mini futures (ES) are down around 8pts from the close, Treasury yields are 5-7bps off their intraday highs now (3-4bps lower than where they closed), JPY is strengthening (carry-off - even though Noda is scheduled to speak), AUD is weakening (carry-off - almost back to post Aussie jobs print levels), and Copper & Oil are tumbling (WTI back under $83). Gold and Silver are falling off quicker now (having suffered during the day session and stabilized a little) as it seems markets are playing catch up to their signals (still around unch from 5/28 closing levels while WTI is down almost 9% and Copper -3.5% from those swing equity highs). Broadly speaking risk assets are increasing in correlation and ES is getting dragged lower.
A week ago, Zero Hedge first presented the now viral presentation by Raoul Pal titled "The End Game." We dubbed the presentation scary because it was: in very frank terms it laid out the reality of the current absolutely unsustainable situation while pulling no punches. Yet some may have misread the underlying narrative: Pal did not predict armageddon. Far from it: he forecast the end of the current broken economic, monetary, and fiat system... which following its collapse will be replaced with something different, something stable. Which, incidentally, is why the presentation was called a big "reset", not the big "end." But what does that mean, and how does one protect from such an event? Luckily, we have another presentation to share with readers, this time from Eidesis Capital, given at the Grant's April 11 conference, which picks up where Pal left off. Because if the Big Reset told us what is coming, Eidesis tells us how to get from there to the other side...
It's been a while since we had a close encounter with Hitler and specifically his trading prowess. Today we learn just how truly powerless the German is when faced with the terrible trio of Geithner's "strong dollar policy", a CFTC barrage of margin calls, and the fine print of various precious metal ETFs. And of course FX sellside "recommendations" by the TBTFs.
In today’s world, there are many who want government to regulate and control everything. The most bizarre instance, though — more bizarre even than banning the sale of large-sized sugary drinks — is surely central banking. Why? Well, central banking was created to replace something that was already working well. Banking panics and bank runs happen, and they have always happened as long as there has been banking. But the old system that the Fed displaced wasn’t really malfunctioning — unlike what the defenders of central banking today would have us believe. Does central banking retard the economy by providing liquidity insurance and a backstop to bad companies that would not otherwise be saved under a free market “bailout” (like that of 1907)? And is it this effect — that we call zombification — that is the force that has prevented Japan from fully recovering from its housing bubble, and that is keeping the West depressed from 2008? Will we only return to growth once the bad assets and bad companies have been liquidated? That conclusion, we think, is becoming inescapable.
While not quite Biderman-rant-worthy, Stratfor's more-attractive-than-Charles Kristen Cooper provides a brief and clear explanation, in this clip, of why the creation of a European banking union, which seems to be the cure-du-jour, will do little to help the eurozone's ongoing crisis in the short-term. The degree of political integration required in order to agree on such a solution will take years to conclude in her opinion with the various constituencies all with different levels of urgency and time-horizon. The sad truth is that while focusing on yet another grand plan will make the leaders of Europe appear as though they are doing 'something' (to themselves and others), a banking union in and of itself does little to solve the raging unemployment and more specifically the distrust of Spanish banks. The idea of a banking union is not new (where Berlin would share liabilities for deposits held by Spanish banks, for example, and in return would enable an integrate supervisor of the financial sector - some sovereignty give-ups), but as Kristen concludes: "How long can the eurozone's political elite focus on long-term solutions concerned with sovereign debt and banking bailouts before a genuine social crisis emerges."
The game continues. Talk up the economy, talk down printing and pray. If the market heads into the Fed meeting at current levels it runs the risk of being disappointed. If this is combined with continued economic weakness then the real set up happens between the June meeting and the August one. It is in that interim period that the market could throw another one of its hissy fits and beg for more liquidity. Money supply growth is extremely sluggish right now all over the world. The velocity never happened and the global economy is rolling over. The Fed is already behind the curve and so when they are forced to act the infusion will have to be huge just to stem the momentum. Mike Krieger suggests people go back and look at different asset classes from the prior two lows in China’s M2 year-over-year growth rate. The first one occurred in late 2004. The M2 growth rate then accelerated until around mid 2006. In that time period gold prices went up around 65% and the S&P 500 went up 20%. In the second period of acceleration from late 2008 to late 2009 gold was up 65% and the S&P500 was up 15%. We are at one of these inflection points and considering the DOW/Gold ratio is still holding gains from its countertrend rally from last August of almost 40%, this is probably one of the best entry points to buy gold and short the Dow of any time in the last decade.
Whether it was the deterioration in Consumer Credit, downgrade rumors for US financials, Greek bank restructuring/run chatter, or a final realization that near-term QE is off at these levels of equity prices (as signaled by Bernanke and Gold this morning), the equity short-squeeze stumbled hard in the last hour of the day to end unch. Utilities managed to outperform handily as all the high beta sectors dumped into the close as Tech and Financials closed red for the day. Treasury yields and the USD were signalling considerably more equity weakness than we got though the dive caught stocks up but Gold remained the biggest loser of the day (-2% on the week against the 0.7% loss in the USD). Silver remains positive for the week - though matched gold's weakness on the day as Copper and Oil whipsawed up and down on rumor and then lack of follow-through. Equities pulled back closer to the underperforming investment grade (and less so high yield) credit market at the close. Treasury yields ended marginally lower (with the long-bond underperforming) and 7s and 10s -2bps)leaving 5Y flat still up 9bps on the week (and outperforming). Risk markets in general slid as Bernanke's speech was delivered and the Q&A proceeded but stocks went almost totally dead with financials and the S&P 500 e-mini clinging to VWAP as volumes died - until that last hour plunge. MS and BofA took the brunt of the selling pressure (ending down 3-4%) - though they are still well of the lows from a few days ago. VIX cracked back above 22% as we dropped in the end but closed down 0.5vols at 21.7% (and the term structure of vol has steepened up to 5mth highs) but implied correlation rose back over the somewhat critical 70 threshold and equities remain notably rich to broad risk assets in general still and today's huge jump in average trade size is somewhat concerning.
That the just released consumer credit update for April missed expectations of a $11 billion increase is not much of a surprise. As noted earlier, the US consumer has once again resumed deleveraging: April merely saw this trend continue with revolving credit declining by $3.4 billion, offset by the now traditional increase in student and subprime government motors car loans, which increased by $10 billion. In other words, following a modest increase in revolving consumer credit in March, we have another downtick, and a YTD revolving credit number which is now negative. Obviously the government-funded student loan bubble still has a ways to go. No: all of this was expected. What was very surprising is that as noted in the earlier breakdown of the Z1, the entire consumer credit series was revised, with the cumulative impact resulting in a major divergence from the original data series. Why did the Fed feel compelled to revise consumer credit lower? Simple: as debt goes down, net worth goes up, assuming assets stay flat. Which in the Fed's bizarro world they did! Sure enough, if one compares the pre-revision Household Net Worth data (which can still be found at the St. Louis Fed but probably not for long) with that just released Z.1, one notices something quite, for lack of a better word, magical. Ignoring the March 31 datapoint which does not exist for the pre-revision data set, at December 31, household net worth magically grew from $58.5 trillion in the original data set to $60.0 trillion in the revised one!
Following the success of the "Dummies Guide To Europe's Problems" and the "Global Economic Collapse For Dummies", we present "Systemic Risk For Dummies". With global systemic risk at March 2009 highs and nearing November 2011 all-time peak levels, perhaps it is worth considering just what it is that all this TBTF-saving money-printing has achieved?
Spain has not even asked Germany Europe for a formal bailout (well they did, but promptly recanted), not has Germany even granted one, and already the fiesty Iberians are protesting against Germany... if only on twitter. As can be seen below the #stopmerkel hashtags has taken Spain by storm. While we wholeheartedly support this expression of independence, we are a little confused just what Spain is protesting: a German bailout of insolvent Spanish banks? We expect once the initial "twitter revolt" subsides, and Spanish citizens realize they would rather have EURs than 95% devalued pesetas, or even Spiderman towels, in their insolvent banks, they will promptly revert to #merkelgive.
The next few weeks consist of some crucial events - perhaps most notably the EU summit of 28-29 June - which create scope for governments to offer fundamental responses to the Euro crisis. Goldman Sachs, like us, expects to be disappointed and are not optimistic that resolution will be achieved in the near-term. Until the Franco-German axis at the heart of the Euro area can agree the terms at which sovereignty is foregone in return for a sharing of the debt overhang (and greater fiscal integration), other countries (potentially including larger more globally contagious nations like Spain and Italy) will be kept in a state that Goldman describes as 'suspended animation' via temporary support measures that contain - but do not resolve - their problems. This bodes ill for their real economic performance. This also fits with our ongoing cyclical travel along Einhorn's circle of death chart for Europe.
Last quarter, upon the release of the Q4 2011 Z.1 (Flow of Funds) report, we penned "The US Deleveraging Is Now Over", because, well, it was: all the categories tracked by the Fed's Credit Market Debt Outstanding series posted a sequential increase over Q3.. As it turns out, the entire "releveraging" was merely a one time artifact of consumers relying more than ever on credit to purchase items in the holiday season. Because as the just released update from the Fed indicates, deleveraging is back with a vengeance. In Q1 the Household sector saw its total debt decline by $81 billion, or the most since Q1 of 2011, to $12.85 trillion. That this happened even as overall net worth supposedly soared by $2.8 trillion as noted in the previous article is truly disturbing, and confirms what everyone knows: not only is nothing fixed in the US economy, but the deleveraging wave continues on its merry way.
Curious why the Fed chairman has officially long given up on focusing on housing (and of course generating jobs, or worrying about inflation) as the main source of US household "tangible" net worth creation, and is mostly focusing on the Russell 2000 as per his own words? Wonder no more: as the chart below shows, as of Q1 2012, over two-thirds of household assets, or 68.8% to be specific, was financial assets, or $52.5 trillion: assets who value is dependent primarily on the S&P 500.