To claim that this is the market at work makes no sense anymore. Today central banks, for all intents and purposes, are the market. Our overall impression is that the Fed has given up on the US economy, in the sense that it realizes – and mind you, this may go back quite a while - that without constant and ongoing life-support, the economy is down for the count. And eternal life-support is not an option, even Keynesian economists understand that. Add to this that the "real" economy was never a Fed priority in the first place, but a side-issue, and it becomes easier to understand why Yellen et al choose to do what they do, and when. When the full taper is finalized next month, and without rate rises and a higher dollar, the real US economy would start shining through, and what’s more important - for the Fed, Washington and Wall Street - the big banks would start 'suffering' again.
Having earlier warned that the Ebola epidemic could kill "hundreds of thousands" and is a "priority for US," President Obama's concerns about "slowing economic growth in Africa," are perhaps the most telling statement of the Nobel Peace Prize winners comments this morning. However, as Bloomberg Businessweek's Brendan Greeley explains in this brief clip, US government bureaucracy stymied efforts to develop and test ZMapp - the potential Ebola treatment.
Self-evidently, all the major economies are saturated with debt. Accordingly, central bank balance sheet expansion has lost its Keynesian magic entirely. Now the great sea of freshly minted liquidity simply fuels the carry trades as gamblers everywhere load up with any asset that generates a yield or short-run capital gain, and fund these bloated positions with cheap options and repo style finance. But here’s the obvious thing. Central banks can’t normalize interest rates - that is, allow the money markets to rise off the zero-bound - without triggering a violent unwind of the carry trades on which today’s massive asset inflation is built. On the other hand, they can no longer stimulate GDP growth, either, because the credit expansion channel to the main street economy of households and business is blocked by the reality of peak debt. Yes, the era of Keynesian money printing is over and done. But don’t wait for the small lady at the Fed to sing, either.
When it comes to the robotization of the workforce - especially those who proclaim they earn less than they are worth - we have grown used to the fast-food-worker being upstaged by technology. However, Murata Manufacturing Co. has unleashed the ultimate threat to every financial TV media's anchor... the world’s first cheerleading robots. With ratings plunging, perhaps it's time for managers to consider the dancing pom-pom carrying machines as replacements to say "off the lows."
U.S. companies are taking a margin hit as they continue to cut prices amid intense competition, according to Bloomberg Briefs' Richard Yamarone. In this disinflationary environment, Yamarone notes that consumer-related businesses are raising red flags on the struggling household sector, especially those at the lower end of the income spectrum. Here are 8 CEOs comments to clarify the 'real' situation (as consumer confidence somehow hits 7 year highs)...
The bull case is not the recovery or the economy as it exists, it is the promise of one and the plausibility for that promise. Under that paradigm, the market doesn’t care whether orthodox economists are 'right', only that there is always next year. Other places in the world, however, are running out of “next year.” The greatest risk in investing under these conditions is the Greater Fool problem. Anyone using mainstream economic projections and thus expecting a bull market will be that Fool. That was what transpired in 2008 as the entire industry moved toward overdrive to convince anyone even thinking about mitigation or risk adjustments that it was 'no big deal'. Remember: "The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so." - Federal Reserve Chairman Ben Bernanke, June 9, 2008.
This is just too delightfully ironic to pass by.
In a world in which nobody has any faith in the capital markets because over $10 trillion in central bank liquidity has been injected to prop out a fragile house of risk asset cards the one place one should have faith (because let's face it: monetarism is the only religion that matters in today's world) is that money will be printed for the foreseeable future, certainly metaphorically and also quite literally. Alas, things did not quite work out that way for the company which, well, prints money (but sadly is not a central bank) when earlier this morning the shares of De La Rue, the company responsible for printing Bank of England banknotes, plunged a record 30% after it issued a profit warning.
This week's 35bps rise in high-yield credit spreads (or ~10%) is the worst since at least June of last year and anxiety spread through other asset-classes appropriately as cheap-buyback-funding and liquidity concerns weighed on all equities - most aggressively small caps. The Russell 2000 is down around 4% from FOMC (and for the year) even with today's buying-panic this afternoon trying to rescue yesterday's losses. Much of today's moves were thanks to The Bill Gross Effect - Treasury short-end sold (2Y-5Y +5bps, 30Y unch), corporate bond spreads jumped wider (HY +20bps, IG +4bps), and European bonds (and German stocks) lurched lower. Markets recovered some of the early move but 2Y closed at 2014 yield highs. The USD closed 1% higher for the 11th week in a row to June 2010 highs. WTI crude close +1.5% on the week, gold unchanged, and copper and silver lower. VIX jumped 22% on the week, closing above 14.5.
With over half of all the stocks in the Russell 2000 and Nasdaq already in a bear market, US equity market indices are becoming increasingly driven by a highly concentrated set of stocks that lack any relationship to macro factors. As BofA shows in the charts below, participation in the record-high exuberance in stocks is waning... and waning fast... But, the biggest concern, BofA fears, is a new low for net free credit at -$182 billion - the major risk is if the market drops and triggers margin calls, investors do not have cash and would be forced to sell stocks or get cash from other sources to meet the margin calls. This would exacerbate an equity market sell-off.
"...the rise of Germany’s AfD anti-euro party calls into question the euro bail-out machinery and queries the pitch for any form of QE stimulus that has already been pocketed and spent in advance by the markets. It will force Angela Merkel to take a tougher line on Europe, and further complicates the management of the (already dysfunctional) currency bloc."
First it was the foreign exchange markets, then commodities, followed by fixed income markets. Now it’s the equity markets. Wherever we look, volatility has been creeping higher. To some extent, this is not surprising. At the end of the US Federal Reserve’s first round of quantitative easing, and at the end of QE2, the markets wobbled. So with QE3 now winding to a close (and with the European Central Bank (ECB) still behind the curve), a period of uncertainty and frazzled nerves should probably have been expected.
Well it is Friday...
With the help of a few former Soviet neighbors, Iran is set to revitalize their crude oil exports after the profound effect of past sanctions. Not only has Russia offered to provide goods and services in return for Iranian oil, Azerbaijan and Kazakhstan have proposed reinstating oil swap deals. With limited access to international finance, oil, and insurance markets, U.S. Deputy Secretary of State William Burns said, “Iran may be losing as much as $50 billion to $60 billion overall in potential energy investments [annually].” These sanctions come after prolonged failure of UN nuclear negotiation talks with Iran. Russia, an active member of those talks, often tries to capitalize on its role to proffer access to RosAtom into the Iranian nuclear industry. Originally under the guise of preventing the weaponization of spent Iranian fuel cells, Russia now seeks to offer their services in return for Iranian oil.
If you want to pinpoint the one dynamic pushing the global economy into not just a prolonged recession but a parallel period of massive social instability, look no farther than the social and financial stagnation that results from optimizing the system to benefit the Elites and the entrenched incumbents who protect them from competition and the dispossessed debt-serf classes below. The incestuous embrace of privilege and power by entrenched, socially isolated Elites characterizes failed states and brittle, doomed regimes throughout history.