Over two weeks ago we first described what at that point was merely the hint of trouble at Australian mega-miner Fortescue which is slowly but surely losing the fight with insolvency courtesy of plunging iron ore prices, whereby it was once again proven that bonds always have a better grasp of the situation than equities. Sure enough the cash crunch which we predicted was imminent at Fortescue, has since hit the company over the past several days, as the firm is currently in dire liquidity straits, desperate to renegotiate covenants and get waivers that allow it to continue operations even as creditors get the short stick (in exchange for some serious money upfront). It is unknown whether it will succeed, although judging by its halt from trading until next week by which point it hopes to restructure its debt, things are certainly not rosy for the megalevered iron-ore company. In retrospect, FMG AU is lucky to be alive as is, having had a comparable near-death experience back in 2007/2008: should its bondholders end up owning the equity, so be it. However, another far more troubling and certainly underpriced covenant renegotiation has struck, this time impacting Chinese conglomerate Sany Heavy Industry, a company which is the Chinese equivalent of US Caterpillar and Japanese Komatsu, which is owned by Liang Wengen who is mainland China's richest man with a $10 billion net worth, and which is so big and diversified that under no circumstances should it be forced to request covenant waivers, especially not under a soft-landing scenario for China. And yet this is precisely what it did.
From Egan-Jones, which downgraded the US for the first time ever last July, two weeks ahead of S&P: "Up, up, and away - the FED's QE3 will stoke the stock market and commodity prices, but in our opinion will hurt the US economy and, by extension, credit quality. Issuing additional currency and depressing interest rates via the purchasing of MBS does little to raise the real GDP of the US, but does reduce the value of the dollar (because of the increase in money supply), and in turn increase the cost of commodities (see the recent rise in the prices of energy, gold, and other commodities). The increased cost of commodities will pressure profitability of businesses, and increase the costs of consumers thereby reducing consumer purchasing power. Hence, in our opinion QE3 will be detrimental to credit quality for the US."
Against what seemed logical (given the assumption that Bernanke would save his limited ammo for a weaker market/economic environment), Bernanke launched an open ended mortgage backed securities bond buying program for $40 billion a month "until employment begins to show recovery." That key statement is what this entire program hinges on. The focus of the Fed has now shifted away from a concern on inflation to an all out war on employment and ultimately the economy. However, will buying mortgage backed bonds promote real employment, and ultimately economic, growth. Furthermore, will this program continue to support the nascent housing recovery? Clearly, the Fed's actions, and statement, signify that the economy is substantially weaker than previously thought. While Bernanke's latest program of bond buying was done under the guise of providing an additional support to the "recovery," the question now is becoming whether he has any ammo left to offset the next recession when it comes.
Color us stunned. While the world and their pet cat Roger are not worrying about inflation because Bernanke says CPI/PPI are still well-anchored and everything else is "transitory"; it turns out the market has a 'different' opinion. We have discussed inflation expectations before (whether 5Y5Y forward views or 10Y inflation swap breakevens) as a trigger for Fed action (or inaction) but this time, the market front-ran Bernanke's Bazooka and in the last two days of QEternity has exploded higher with 5Y forward expectations now near 6 year highs. CPI remains below 2% but there is a clear lag between the rise in market-implied inflation and it showing up in the unicorn-laden CPI prints - what this means is that given the hubris of the Fed yesterday, market expectations of inflation are inferring CPI could rise to over 5% within the next 3 to 6 months. It will surely be difficult for Ben to keep-on-buying ('Finding Nemo'-like) in the face of that kind of 'transitory' rise in real data - though for now, real money remains bid as risk comes off a little (even as the long-bond yield blows 26bps higher this week) - oh and CPI and PPI jump their most in 3 years.
The YouTube video depicting Mohammed is nothing more than the straw that broke the camel’s back. This kind of violent uprising against American power and interests in the region has been a long time in the making. It is not just the continuation of drone strikes which often kill civilians in Pakistan, Yemen, Somalia and Afghanistan, either. Nor is it the American invasions and occupations of Iraq and Afghanistan. Nor is it the United States and the West’s support for various deeply unpopular regimes such as the monarchies in Bahrain and Saudi Arabia (and formerly Iran). Nor is it that America has long favoured Israel over the Arab states, condemning, invading and fomenting revolution in Muslim nations for the pursuit of nuclear weapons while turning a blind eye to Israel’s nuclear weapons and its continued expansion into the West Bank.
Valuations; stocks are cheap; money-on-the-sidelines; everyone's bearish; trend is your friend. We've all heard them and we've all played them but the following charts from Morgan Stanley will at least provide some nuance of sense for those stunned into silence by a market seeing its nominal price surging amid Bernanke blowing bubbles. The headline is - with real rates this low (and staying low for a few more years yet) current P/E multiples are extremely high and even on a long-run empirical basis, hope remains excessive at 22xShiller P/E versus an average 16x. Remember, a long-term investment is a short-term trade gone bad. But it seems for now that you buy because you'll always be able to sell it back higher to the next smarter dumber greater fool.
What is it that makes Keynesians so insanely self destructive? Is it their mindless blind faith in the power of government? Their unfortunate ignorance of the mechanics of monetary stimulus? Their pompous self-righteousness derived from years of intellectual idiocy? Actually, I suspect all of these factors play a role. Needless to say, many of them truly believe that the strategy of fiat injection is viable, even though years of application have proven absolutely fruitless. Anyone with any sense would begin to question what kind of madness it takes to pursue or champion the mindset of the private Federal Reserve bank… Quantitative easing has shown itself to be impotent in the improvement of America’s economic situation. Despite four years of free reign in central banking, employment remains dismal in the U.S., the housing market continues its freefall, and, our national debt swirls like a vortex at the heart of the Bermuda Triangle. Despite this abject failure of Keynesian theory, the Federal Reserve is attempting once again to convince you, the happy-go-lucky American citizen, that somehow, this time around, everything will be “different”.
The US is no longer the cleanest dirty shirt, or least syphilitic hooker in the whorehouse as we so responsibly noted previously. Year-to-date, the US Dow Jones Industrials 30 and Europe's EuroStoxx 50 - the two major blue-chip indices of the beleaguered regions - are now equally awesome at +11.35%. Of course, Gold and Silver are outperforming both of these (and the long-bond is unchanged) but nevertheless, even with EURUSD now up over 200 pips on the year, 2Y Spain yields are unchanged and 10Y Spain yields up 70bps. Context is king here, especially when we just keep anchoring to the latest 5 minute trend.
The market may no longer reflect any actual events or newsflow as it quietly levitates on what is a now certain avalanche of fiat dilution and wheelbarrow blue light specials, and it may thus be forgiven to ignore the dramatic developments abroad, but that does not mean you should. As country after country storms and burns down US embassies in futile searches for foodstamps and to express other pent up forms of soaring dissatisfaction with Pax Americana, follow the latest developments live courtesy of this Al Jazeera webcast with constant updates from around the world.
"Everything will collapse" is the consequence Gloom, Boom, & Doom's Marc Faber sees from the Fed's latest 'stimulus' (and the fallacy and misconception of how money-printing can help employment). In a wondrously clarifying interview on Bloomberg TV this morning, Faber explained why he was 'happy', since "the asset values of his holdings will go up" but as a responsible citizen he is worried because "the monetary policies of the US will destroy the world." It truly is class warfare under a veil of 'its good for you' as he notes: "the fallacy of monetary policy in the U.S. is to believe this money will go to the man on the street. It won't. It goes to the Mayfair economy of the well-to-do people and boosts asset prices of Warhols." Congratulations, Mr. Bernanke.
Did we say Arab Fall? We meant global fall. From the Star Tribune: "Thousands of Kashmiri Muslims protested Friday against an anti-Islam film, burning U.S. flags and calling President Barack Obama a "terrorist," while the top government cleric here reportedly demanded Americans leave the volatile Indian-controlled region immediately. In the southern Indian city of Chennai, protesters threw stones at the U.S. Consulate, shattering some windows and burning Obama in effigy. Police quickly cleared the area, arresting more than 100 protesters. U.S. Embassy officials in Delhi did not immediately comment." And elsewhere: "In Bangladesh, about 5,000 hardline Muslims marched in Dhaka's streets after Friday prayers, burning U.S. and Israeli flags and calling for the death of the filmmaker. Police prevented them from marching toward the U.S. Embassy several miles away." And elsewhere: "In Indonesia, the world's most populous Muslim nation, about 200 protesters chanted slogans and held up signs in a largely peaceful protest outside the heavily guarded U.S. Embassy in Jakarta. American diplomatic outposts increased security worldwide this week after clips of the film went viral online and sparked violent protests in the Middle East. About 20 protesters outside the U.S. Embassy in Kuala Lumpur, Malaysia, shouted "Allahu akbar!" and handed reporters a letter addressed to the U.S. ambassador expressing their anger over the movie and calling for greater respect for religions."
As the Eurogroup meets today and tomorrow, a funny thing is happening to Spanish bonds; they are selling off. Today is the worst day for the no sacrasanct 2Y Spanish bond yields in over 5 weeks and 10Y yields are not pretty at all. The 'sync' between risk-on around the world as Bernanke's bubble was re-blown yesterday seems to have drawn all that fast money flooding back to the S&P 500 leaving the forelorn Spaniards to ponder whether a bailout wouldn't be so bad. Just for one second, consider this - why did Bernanke go full retard yesterday? Data didn't exactly scream 'panic' mode. Perhaps he knows something about this weekend in Europe and wanted to get out in front of it? Certainly, the shift in Spanish bonds is idiosyncratic and extreme given all the 'Draghi-support' it has. For now though, it seems fast money is playing high-beta US equities, not high-beta European debt - but for how long?