It never gets old... if this sell-off was triggered by a realization that the consumer is truly depressed (retail sales) and the Fed is almost done, then the face-ripping rally (notably on weak volume) of the last 24+ hours is the ugly truth that the 'market' is always and everyday a function of central-bank bullshit. Since Bullard's "QE4" comment (strengthened by random headlines on Yellen's "economic confidence" and ECB Coeure's "QE any minute" comment), the Dow is up 400 points, S&P up 70, and Trannies up 3.5%. Small Caps are now up 3.5% on the week and 30Y Treasury yields only -2.5bps on the week.
Several days ago we were confused why, out of the blue, a €1 billion loan BWIC appeared that was dumping German non-performing loans. After all, the whole point of the European "recovery" fable to date has been to deflect all the attention from the "pristine" German banks, up to an including world-record derivatives juggernaut Deutsche Bank, and to focus on Greece and other insolvent peripheral European nation. Earlier today, German Handelsblatt provided an answer, when it reported that "four German banks are on the brink", i.e., four banks of which three are known, HSH Nordbank, IKB and MunchenerHyp, will likely fail the ECB's stress test whose results are due to be announced next Friday.
"I see deflation flirting with America." Retail sales equals consumer spending equals velocity of money. And unless the money supply is rising, hardly likely in the taper, less spending is deflation by definition. Forget about PMI and all that kind of data, it’s much simpler than that. Central banks can do all kinds of stuff, but they can’t make us spend our money on things we don’t want or need. Let alone make us borrow to do so. And if we don’t, deflation is an inevitable fact. That doesn’t mean prices for some items won’t go up, but that’s not what counts. It’s about how fast we either spend the money we have – if we have any left – or how much we borrow. And if time is money, then borrowed money is borrowed time. So we really shouldn’t.
This should fix it and calm the panic:
*OBAMA SAID TO APPOINT RON KLAIN AS EBOLA CZAR, CNN TWEETS
Forget medical experience, what the USA needs to combat the worst Ebola pandemic ever is "an American lawyer and political operative best known for serving as Chief of Staff to two Vice Presidents - Al Gore (1995–1999) and Joseph Biden (2009–2011)" Gotta wonder how Tom Frieden feels about this...
The recovery from the lows after Bullard spoke yesterday is another reminder how addicted markets still are to liquidity. Indeed in today's pdf we reprint and update a table from our 2014 Outlook showing the various phases of the Fed's balance sheet expansion and pausing over the last 5-6 years and its impact on equities and credit. We have found that the relationship broadly works best with markets pricing in the Fed balance sheet move just under 3 months in advance. We've also included our oft-used chart of the Fed balance sheet vs the S&P 500 to help demonstrate this. So end July / early August 2014 was always the time that this relationship suggested markets should enter a new more difficult phase.
Following last month's exuberant catch-up to the Conference Board confidence, UMich confidence surged to cycle highs (helped by Ebola panic and the worst stock maket turmoil in years). At 86.4, handily beating the 84.0 expectations - this is the highest confidence since July 2007. This is the biggest beat of expectations since April 2013 as current conditions were flat but the outlook for the future (hope) surged to 78.4 - highest in 2 years.
It appears Bunga-Bunga boy still has something to offer the international elite. After a lengthy meeting with Germany's Angela Merkel (at a hotel in Milan) where Putin warned of "big transit risks" in delivery of Europe's gas as Ukraine is "starting to siphon off our gas from the export pipeline," and threatening to respond by "reducing flows by the amount stolen;" Putin decided the place to be was 78-year-old Berlusconi's house at 3am. Finally, it is worth noting that Ukraine's President Poroshenko was scheduled to meet with Frau Merkel this morning - we assume to plead his case for why gas transit should flow through his nation (and beg for some more support).
The ECB may not release its minutes to the public (opting instead to keep these secret for 30 years) at least for now, but earlier today a transcript of its internal deliberations was made public by the NYT, which revealed how the ECB governing council once again snubbed its responsibilities, and in January 2013 bailed out a failing Cyprus bank, Cyprus Popular Bank, just months ahead of the now infamous Cypriot "bail-in" i.e., deposit confiscation. The story in a nutshell: following much internal wrangling and posturing by the "northern" states, notably the usual suspects such as Wiedmann and Knot, the Cypriot bank, which the ECB continued to bail out even though it should not have as the bank had obtained an ECB lifeline based on fake financials and glaringly impossible assumptions, the bank ultimately failed. Who was left holding the bag? Why Cyprus' depositors of course.
We suspect the market will be disappointed by this morning's headlines from China. Chinese rate markets are implying a RRR cut is coming soon (as swap rates drop below deposit rates - previously signaled 2 RRR cuts) but the PBOC announced this morning a muich more focused injection of cash to 20 of the nations' largest banks. RRR cuts, are (theoretically) considerably more broadly stimulative to lending than a $32.8 billion cash injection to banks - which are struggling to lend as demand for loans (given high costs of debt for the firms that need the money the most) is weak. One can only imagine the holes in bank balance sheets that exist if the PBOC is forced to do this. Simply put, no matter how much hope there is, as we noted previously, the PBOC will not be providing broad stimulus.
With no mention of the current turmoil in markets - or suggestion of QE99 - Janet Yellen's speech this morning on "Inequality and Opportunity" in America explains how the poor can get rich. After admitting that widening inequality resumed in the recovery (and "greatly concerns" her), as the stock market rebounded (driven by Fed's free money) and cost-conscious share buying-back companies defer wage growth as the healing of the labor market has been slow; she turns her attention to how the poor can beat the vicious cycle. Rather stunningly, she notes the 4 sources of income opportunity in America: The first two are widely recognized as important sources of opportunity: resources available for children and affordable higher education (so more student debt and servitude). The second two may come as more of a surprise: business ownership and inheritances. As she concludes, "this is how individuals and their families can improve their economic circumstances."
September was another month in which US single-family housing starts stagnated, and in fact declined when it comes to permits, only to see a strong rebound in both permits and starts when it comes to multi-family, aka rental housing.
Just wehn you thought it was safe to shower again, NOAA issues their US seasonal drought outlook and crushes dreams of wetter winter helping Californians. Hopes for heavy rain from El Nino will not be enough to change the drought situation for 60% of Californians, as MotherJones reports, NOAA forecasters warn, "While we're predicting at least a 2 in 3 chance that winter precipitation will be near or above normal throughout the state, with such widespread, extreme deficits, recovery will be slow."
For those curious why the Russell 2000 has completely ignored this week's broader market rout and is in fact higher now than last Friday, the answer comes from a recent technical note from Bank of America which says that as of the first week of the month, the "Russell net short positioning largest since 2008 after fifth consecutive week of selling."
While one of the big Ebola updates overnight, in addition to Obama being open to appointing an Ebola czar - because clearly the CDC is unable to handle the epidemic, best to have one on top of it all -is that some schools in Ohio and Texas are closed today after students’ potential exposure to a nurse with Ebola furthered fears of the disease spreading, this is nothing compared to the just released revelation that a health care worker who may have handled a specimen from the Liberian man who died from Ebola in Dallas is on a cruise ship in the Caribbean.