Bond

The current Bank of Japan policy meeting is possibly the most important thing going on this week (even more so than Bernanke's comments perhaps). If, as is distinctly possible, they don’t do anything to reinforce the immediacy of the Kuroda QQE package, we could be looking at bond markets reacting in a most "unfavorable manner".  The effect would be to reinforce the latest round of 'fear-on' bond selling – certainly over the short-term, and the damaged sentiment could impact stocks also. In fact, there is probably not much the BoJ can say at this meeting – it’s got to give the policy (of massive QE) time to work. That leaves markets highly vulnerable to a sense of disappointment tomorrow. 'Back in the bond market, over the last few days the search for yield does seem capped. There have been some stumbles in new issues... That all tells me the bond market is nervous.'

Chaos Theory turns 50 years old this year, celebrating half a century of flapping butterfly wings in Brazil creating tornadoes in Texas.  That most famous example is especially appropriate, since it was a meteorologist named Edward Lorenz who first outlined why seemingly consistent and knowable systems can still go wildly wrong.  As it turns out, as ConvergEx's Nick Colas reminds us, small errors in measurement or observation at the start of a time series can significantly change how things look at the end.  In the current low volatility, one-variable central bank driven global equity markets, Chaos Theory may seem a quaint relic of past crises.  However, its central lesson – that complex interrelated systems create unexpected outcomes from seemingly benign inputs – is still relevant.  Students of economics like to think of their discipline as scientific, just like physics or other hard sciences.  They would do well to embrace the intellectual honesty neatly encapsulated by the central lessons of Chaos Theory. The problem is that current market price action - that slow steady grind higher - indicates marginal buyers don’t fret very much about the future.  No matter how little we really know about it.

Up until today, the narrative was one trying to explain how a soaring dollar was bullish for stocks. Until moments ago, when Bill Dudley spoke and managed to send not only the dollar lower, but the Dow Jones to a new high of 15,400 with the following soundbites.

• DUDLEY: FED MAY NEED TO RETHINK BALANCE SHEET PATH, COMPOSITION
• DUDLEY SAYS FISCAL DRAG TO U.S. ECONOMY IS `SIGNIFICANT'
• DUDLEY: FED MAY AVOID SELLING MBS IN EARLY STAGE OF EXIT
• DUDLEY: IMPORTANT TO SEE HOW WELL ECONOMY WEATHERS FISCAL DRAG
• DUDLEY SAYS HE CAN'T BE SURE IF NEXT QE MOVE WILL BE UP OR DOWN

And the punchline:

• DUDLEY SEES RISK INVESTORS COULD OVER-REACT TO 'NORMALIZATION'

Translated: the Fed will never do anything that could send stocks lower - like end QE - ever again, but for those confused here is a simpler translation: Moar.

The gold and bond markets have been "saying" that QE is ending for the past few months. The equity and junk markets have largely ignored the signs. June is setting up as an interesting month.

We are now used to the daily dispensation of deep twitsight by Pimco's head. Today's installment does not disappoint: in under 140 characters, the bond kind breaks down the now thoroughly dis-proven Efficient Market Hypothesis for the "new normal" in which both alpha and beta are purely functions of virtual central bank printers. However, his view on what happens when said virtual ink runs out (or rather if) is well-known by all at this point. The only question is when.

Gross:Alpha is gr8ly a function of beta &the levered structurs that domin8 credit mkts. No beta? Skinnier alpha ahed 4 unsuspecting investrs

— PIMCO (@PIMCO) May 21, 2013

• IMF Tells Central Europe to Spend More (WSJ)
• Tornadoes Blast Oklahoma (WSJ)
• Frenetic search for survivors as 91 feared dead in tornado-hit Oklahoma (Reuters)
• JPMorgan investors on edge over vote on Dimon; what if they win? (Reuters)
• Wealthy bank depositors to suffer losses in EU law (Reuters)
• Yen Slips as Amari Backtracks (BBG)
• Japan Ready for More Yen Weakness Despite Recent Comments (WSJ)
• IRS officials back on Capitol Hill hot seat over targeting (Reuters)
• Li Keqiang pledges China boost to India trade (FT)
• Europe's Recession Sparks Grass-Roots Political Push (WSJ)
• Obama and Xi to meet in effort to calm growing US-China rivalry (FT)
• Berlin plans to streamline EU but avoid wholesale treaty change (FT)
• France must reform or face punitive measures - EU's Oettinger (Reuters)

Another event-free day in which the only major economic data point was the release of UK CPI, which joined the rest of the world in telegraphing price deflation, despite bubbles in the real estate and stock markets, printing 2.0% Y/Y on expectations of a 2.3% increase, the lowest since November 2009 and giving Mark Carney carte blanche to print as soon as he arrives on deck. In an amusing twist of European deja-vuness, last night Japan's economy minister who made waves over the weekend when he said that the Yen has dropped low enough to where people's lives may be getting complicated (i.e., inflation), refuted everything he said as having been lost in translation, and the result was a prompt move higher in the USDJPY, quickly filling the entire Sunday night gap. That said, and as has been made very clear in recent years, data is irrelevant, and the only thing that matters, at least so far in 2013, is whether it is Tuesday: the day that has seen 18 out of 18 consecutive rises in the DJIA so far in 2013, and whether there is a POMO scheduled. We are happy to answer yes to both, so sit back, and wait for the no-volume levitation to wash over ever. The US docket is empty except for Dudley and Bullard speaking, but more importantly, the fate of Jamie Dimon may be determined today when the vote on the Chairman/CEO title is due, while Tim Cook will testify in D.C. on the company's tax strategy and overseas profits.

If you develop your beliefs about gold and silver by sourcing mainstream media news, everything you believe about gold and silver will always be wrong.

The pattern is obvious. The dollar is going up. The question is why. In one word, the answer is arbitrage.

Moments ago, GETCO's rampathon algos did not like what they heard coming out of the mouth of the Fed's biggest permadove, Charles Evans. That thing was math, and it was as follows:

IF FED CONTINUES TO BUY ASSETS AT CURRENT PACE THROUGH YEAR END,BALANCE SHEET WOULD BE 'VERY LARGE' $4 TRILLION - FED'S EVANS

Supposedly this was news to someone although it wasn't news to our readers who knew since September that not only will the Fed's balance sheet hit "a very large" $4 trillion by 2014, it would hit a "very larger" $5 trillion by 2015, when the Fed may realistically start abandoning QE.

The last few years have been dominated by one theme and every trade has been a derivative bet on that theme. The idea that by inflating another asset bubble, a wealth effect will ripple through the market to the real economy, encourage animal spirits and spark a renaissance (in something, we are not sure what). Well, so far no good. The real economy, as discussed at length, is not recovering; but the question of just who is benefiting from the wealth effect is unclear. As the following charts across the 100 largest G4 pension plans show, the asset managers have missed the trickle-down. Despite bad (and worsening) under-funding and a Fed repressing 'safe' assets to the point of ultimate risk, G4 pension funds have refused to partake of any mythical 'great rotation', remain avid bond buyers, are as drastically under-funded as ever, and finally, have maintained the same 'cash on the sidelines' for 14 years now...

UPDATE: Gas Prices reach all-time high in Oklahoma City

With the bond vigilantes still suppressed by the heavy boot of central bank intervention, the role of 'governor' of monetary (and fiscal implicitly) largesse has been left to the energy markets around the world. As we noted here, the Brent Vigilantes have indeed capped economic gains in the past few years (and perhaps more worryingly for investors, as we detailed here, have capped P/E expansion hopes). Sure enough, with a one-month lead, crude oil prices are leading retail gas prices higher (now near three-month highs) which point to a rally-ending, economy-sapping $3.80 price within the next few weeks (unless oil prices are rapidly suppressed too).

If Japan’s bond market implodes, then global Central Bank efforts to hold the system together will have proven a failure.

While we are told day after day that not only is Europe 'fixed' but that Cyprus was not a template, it seems the bankers in the peripheral nations are a little less confident (never mind their record amount of reach-around-based domestic bond buying). European "leaders need to moderate their language," warned one bank CEO, and as the FT reports, another feared a "Cyprus virus," adding that "you can't keep playing with fire." The comments come in the wake of the depositor haircuts in Cyprus as a rush of clients wanted to move cash from deposit accounts to vaults: "most clients in Portugal don't trust deposit guarantees... they choose vaults instead." Fixed indeed... and why would these bankers worry about the 'precedent' if it were not a 'template' for future bail-ins?

It’s painfully clear for all to see that the majestic United States is now firmly caught in the rapacious stranglehold of financial elites which have completely captured it in a grotesque gamed monetary process.  Our country’s once idealistic and industrious free market economy has been hijacked and is undeniably being fraudulently and overtly financialized by the craven clutches and maniacal machinations of a contemptible self-seeking banking class. They have become nothing more than avaricious parasites disgustingly feeding from the grand trough of our treasured human ingenuity and self-respecting industry.