Hugh Hendry Capitulates: "Can't Look At Himself In The Mirror" As He Throws In The Towel, Turns BullishSubmitted by Tyler Durden on 11/22/2013 12:55 -0500
"I cannot look at myself in the mirror; everything I have believed in I have had to reject. This environment only makes sense through the prism of trends."
- Hugh Hendry
For anyone who still suggests, incorrectly, that Larry Summers was the "wrong" choice for Fed Chairman just because he would promptly end QE the second he was elected as the erroneous popular meme goes, we have one soundbite from his recent Bloomberg TV interview refuting all such speculation: "if you had to say, should we have used this tool or should we not have, I think the answer is overwhelming that we should have." He had some other amusing logical fallacies (including discussing whether the market is in a bubble) all of which are transcribed below, but the best one is the following: "I think it does bear emphasis that the people who were most appalled by it are the people who have been predicting hyperinflation around the corner for four years now and they have been wrong at every turn." And let's not forget that "subprime is contained" - until it isn't. Then again, the last time we checked, the history on the biggest monetary experiment in history - one in which both the Fed and the BOJ are now openly monetizing 70% of gross bond issuance - has certainly not been written. Finally, in the off chance Summers is indeed correct, what history will instead say, is why instead of monetizing all the debt from day 1 of the Fed's inception in 1913, and thus pushing the stock market into scientific notation territory, did the Fed leave so many trillions of "wealth effect" on the table?
There comes a time in every bubble's life when participants who have a stake in its continuation have to employ ever more tortured logic to justify sticking with it. We have come across an especially amusing example of this recently. “Good news!” blares a headline at CNBC “Bubble concern is at a 5-year high”. Ironically, since at least 1999 if not earlier, the source of this headline has been referred to as 'bubble-vision' by cynical observers (or alternatively as 'hee-haw'). It definitely cannot hurt to be aware of market psychology and sentiment. However, the argument that a surge in searches for the term 'bubble' on Google can be interpreted as an 'all clear' for a bubble's continuation seems to have things exactly the wrong way around. The misguided behavior of financial market participants that can be observed during bubbles is merely mirroring the clusters of entrepreneurial error monetary pumping brings about.
- Wonder why: JPMorgan plans to keep pay roughly flat from last year (Reuters) - maybe this: Charles Schwab Warns "We Are In A Manipulated Market"
- Democrats overturn filibuster rule, increasing Obama’s power (FT)
- Day JFK Died We Traded Through Tears as NYSE Shut (BBG)
- When even dictators snub Obama - Afghanistan rejects U.S. call for quick security deal (Reuters)
- Obama Plunges in Investor Poll as Stocks Make New Highs (BBG)
- Iran, six powers struggle to overcome snags in nuclear talks (Reuters)
- Derision for China’s ‘rejuvenation index’ (FT)
- Bottom is in: Paulson Said to Inform Clients He Won’t Add More to Gold (BBG)
- German business sentiment rebounds strongly (WSJ)
- WTO on verge of global trade pact (FT)
There were two events of note in the overnight session: first was the return of the Japanese jawboning, because now that the Nikkei has upward momentum - nearly hitting 15600 in early trading only to close unchanged - and the Yen has downward momentum, the Abe, Kuroda, Amari trio will do everything to talk Mrs. Watanabe to accelerate the momentum. In this case BoJ Governor Kuroda said he does not think JPY is at abnormally low levels and consumer inflation likely to hit 2% by fiscal year to March 2016. Kuroda also said he does not think JPY is excessively weak or in a bubble now and JPY has corrected from excessive strength after Lehman. This also means look forward to the daily bevy of Japanese speaker headlines in overnight trading to push the USDJPY and EURJPY higher on an ad hoc basis. The other notable event was the German IFO Business climate which jumped from 107.4 to 109.3, beating expectations of 107.7 and in the process pushing the EUR notably higher, and particularly the EURJPY which moved from 136.30 to nearly 137 or a fresh four year high. At this point European exporters must be tearing their hair out, as must the ECB whose every effort to talk the Euro lower has been met with relentless export-crushing buying.
Late in the life of every financial bubble, when things have gotten so out of hand that the old ways of judging value or ethics or whatever can no longer be honestly applied, a new idea emerges that, if true, would let the bubble keep inflating forever. During the tech bubble of the late 1990s it was the “infinite Internet.” During the housing bubble the rationalization for the soaring value of inert lumps of wood and Formica was a model of circular logic: Home prices would keep going up because “home prices always go up.” Now the current bubble – call it the Money Bubble or the sovereign debt bubble or the fiat currency bubble, they all fit – has finally reached the point where no one operating within a historical or commonsensical framework can accept its validity, and so for it to continue a new lens is needed. And right on schedule, here it comes: Governments with printing presses can create as much currency as they want and use it to hold down interest rates for as long as they want. So financial crises are now voluntary. The illusion of government omnipotence is no crazier than the infinite Internet or home prices always going up, but it is crazy.
However, the reality of higher inflation won’t show up in China’s inflation data (which clocks in at an absurdly low 3%). However, you can see clear signs of this in China’s civil unrest: you don’t get wage and labor strikes for nothing.
When the Taper Talk sign is on, beware. The sign is now brightly lit.
There are increasing signs of deflationary risks in the developed world, suggesting bonds are set for a comeback.
As we recently noted, thanks to the overwhelming dominance of the BoJ, the Japanese government bond market is "for all intent and purpose" dead. As the chart below shows, that is the lesson that Europe has learned also. Since the Greek bailout, bond trading volumes (and thus liquidity) has collapsed to practically zero. Of course, this is ignored by the mainstream media, instead focusing on the 'low' yields of that nation's debt as indicative of 'recovery' around the corner and a market that knows better. Instead it is simply a measure of the domestic banks meager pricing at the margin of a bond market that reflects nothing but a shell of its former self. The pattern is similar (though not so terrible) for Spanish and Italian debt as the entire European bond market devolves into OMT-driven farce.
The following Top Ten Market Themes, represent the broad list of macro themes from Goldman Sachs' economic outlook that they think will dominate markets in 2014.
- Showtime for the US/DM Recovery
- Forward guidance harder in an above-trend world
- Earn the DM equity risk premium, hedge the risk
- Good carry, bad carry
- The race to the exit kicks off
- Decision time for the ‘high-flyers’
- Still not your older brother’s EM...
- ...but EM differentiation to continue
- Commodity downside risks grow
- Stable China may be good enough
They summarize their positive growth expectations: if and when the period of stability will give way to bigger directional moves largely depends on how re-accelerating growth forces the hands of central banks to move ahead of everybody else. And, in practice, that boils down to the question of whether the Fed will be able to prevent the short end from selling off; i.e. it's all about the Fed.
That the Fed has a problem is increasingly well known - despite the blather from the mainstream media that QE monetization can continue ad infinitum. Their problem, of course, is running out of government-provided liabilities to monetize (as deficits shrink and their ownership of the entire Treasury complex surges). They face other problems (as we have noted before) but the admission that they are boxed in would have major ramifications in the market's faith. So, how does the Fed, faced with the knowledge that they have created asset bubbles, broken the bond market, and are boxed in by their own excess still meet the market's undying desire to keep the flow going? Bill Dudley just, perhaps inadvertently, dropped a hint of the next 'market/scapegoat' for monetization - Student loans.
Economics is all about making rational decisions given some set of likes and dislikes. It doesn’t presume to tell you what you should like or dislike, and it assumes that you do in fact know what you like or dislike. Or at least that’s what economic theory used to proclaim. Today economic theory is used as the intellectual foundation for a political stratagem that goes something like this: you do not know what you truly like, and in particular you do not know your economic self-interest, but luckily for you we are here to fix that. This is the common strand between QE and Obamacare. The former says that you are wrong to prefer safety to risk in your investments, and so we will fix that misconception of yours by making it extremely painful for you not to take greater investment risks than you would otherwise prefer. The latter says that you are wrong to prefer no health insurance or a certain type of health insurance to another type of health insurance, and so we will make it illegal for you to do anything but purchase a policy that we are certain you would prefer if only you were thinking more clearly about all this.
It took Hilsenrath just under a minute to pump out his 1057 (excluding the title) word thesis on the FOMC minutes. As usual, this is indicative of a comfortable embargo cushion which one can be assured was unbreached, as anything else would be very illegal. "Federal Reserve officials had a wide-ranging discussion about the outlook for monetary policy at their Oct. 29-30 policy meeting. The bottom line was that they stuck to the view that they might begin winding down their $85 billion-per-month bond-buying program in the “coming months” but are looking for ways to reinforce their plans to keep short-term interest rates low for a long-time after the program ends. They struggled to build a consensus on how they would respond to a variety of different scenarios. One example: What to do if the economy didn’t improve as expected and the costs of continuing bond-buying outweighed the benefits? Another example: How to convince the public that even after bond buying ends, short-term interest rates will remain low."
The big trouble in massive China that we discussed here is weighing heavily on the liquidity in the debt-fueled nation. As The FT reports, several banks have had to delay or dramatically reduce Chinese bond issues as the impact of a tight onshore credit market begins to be felt. "China is much more funding dependent than in the past," warns one analyst, as issuers are dealing with a string of problems stemming from the drying up of interbank market liquidity and fierce competition from wealth management and trust products for investors’ funds. "Government and policy banks have suffered the most. Now pressure is coming to corporates," one trader pointed out, adding, ominously, "it's going to end pretty ugly unless PBOC changes its attitude to liquidity;" which, of course, is exactly the situation the 3rd Plenum outline is looking to change.