No reason to sell. No reason to buy. That about sums it up. Unfortunately, that is about as optimistic a scenario as we can come up with, supported by equally optimistic growth expectations. In reality, the market has no support. We can only hope that it will not crash at the first sign of trouble. There are always good reasons to own a home, a place to raise a family. However, home ownership via extremely leveraged financing carries enormous and unprecedented risk. We think many potential buyers recognize the risk and are correctly staying out of the market. The new normal in real estate terms is unlikely to be what the market is hoping for.
Judging by the excitement this morning across the mainstream media, one could be forgiven for assuming WTI was trading back at $100 and everything was fixed again. However, we have seen these 'dead-cat-bounces' numerous times in the past few months and there is one way to know if professionals are buying the stability-is-here-to-stay meme or not... the credit market for energy names remains practically bidless...
Things in risk land started off badly this morning, with the worst start to a year ever was set to worsen when European equities came under early selling pressure following news of German unemployment falling to record low, offset by a record high Italian jobless rate, with declining oil prices still the predominant theme as Brent crude briefly touched its lowest level since May 2009, this consequently saw the German 10yr yield print a fresh record low in a continuation of the move seen yesterday. However, after breaking USD 50.00 Brent prices have seen an aggressive bounce which has seen European equities move into positive territory with the energy names helping lift the sector which is now outperforming its peers. As a result fixed income futures have pared a large majority of the move higher at the EU open. But the punchline came several hours ago courtesy of Eurostat, when it was revealed that December was the first deflationary month for the Eurozone since the depths of the financial crisis more than five years ago, when prices dropped by -0.2% below the -0.1% expectation, and sharply lower than the 0.3% increase in November, driven by a collapse in Energy prices.
It has been a busy few days for Germany. In the space of a week, they have warned Greece "there will be no blackmail," adding that a Greek exit from the euro was "manageable," only to hours later deny (clarify) these comments. This was then followed up with beggars-are-choosers Syriza demanding any ECB QE must buy Greek bonds (or else) - which Germany has flatly ruled out - only to see today that Syriza is practically guaranteed to win a "decisive victory" at the forthcoming snap election. So it with a wry smile that we note Bild reports tonight that the German government is preparing for a possible Greek exit, warning of financial system collapse, bank runs, and huge costs for the rest of the EU.
If you want to know where the global experiment in massive money printing is heading - just take a look at the monetary madhouse in Europe. And that particular phrase has full resonance once again as it becomes more apparent by the hour that Europe and the Euro were not fixed at all. Indeed, beneath the surface of Draghi’s “whatever it takes” time out, the crisis has been metastasizing into ever more virulent deformations.
Same slide, different day, as the crude crash continues, with both WTI and Brent tumbling to multi-year highs, below $49 and $52 respectively. This happened despite the news overnight that China is accelerating 300 infrastructure projects valued at 7 trillion yuan ($1.1 trillion) this year, suggesting that China will focus more on fiscal policy than monetary easing, which in turn led to much confusion in the SHCOMP, which fluctuated up and down for the day several times before finally closing unchanged. There was no confusion about the stops slamming USDJPY, and its Nikkei225 derivative which tumbled 3%, sending Japanese Treasury yields to fresh record lows. Record low yields were also seen in Germany, Austria, Belgium, Netherlands, Finland, France (and many other places), which in turn forced the US 10 Year to finally dip back under 2.00%. In fact, taken together, the average 10Y bond yield of the U.S., Japan and Germany has dropped below 1% for the first time ever, according to Citi.
“Don’t look back - something might be gaining on you,” Satchel Paige famously warned. For connoisseurs of civilizational collapse, 2014 was merely annoying, a continued pile-up of over-investments in complexity with mounting diminishing returns, metastasizing fragility, and no satisfying resolution. So we enter 2015 with greater tensions than ever before and therefore the likelihood that the inevitable breakdown will release more destructive energy and be that much harder to recover from.
Einstein advised “We cannot solve our problems with the same level of thinking that created them”. Yet that’s mostly what I see happening today on many levels.
Issuing lies and pursuing willful blindness is not leadership: it's failure on a grand scale.
Anyone who put on a long Shanghai Composite, short Brent trade on January 1, 2014, congratulations: you can now retire. However, since nobody did and instead the groupthink herd of beta-levered momentum chasers known as hedge funds were mostly long the S&P and short Treasurys, it explains why most of them generated negative returns in 2014. Here is how all the other main asset classes did in 2014, denominated both in local currency and in the soaring USD.
The new year is not even a week old and already the volatility fireworks are off, as well as the continued commodity derisking. But while for now US stocks continue to be an island oasis in a turbulent global sea where GDP forecasts decline every single day, the same can not be said about either the Euro, which after crashing overnight to a 9 year low, and rebounding briefly, has continued to decline and is now once again flirting with a key support level, this time 1.19, last reached during the May 2010 first Greek bailout. The catalyst, as usual, Greece which may or may not be leaving the Eurozone shortly, as well as ongoing bets on ECB QE following this morning's regional German inflation data which declined once more and now hints at outright deflation in Europe's strongest nation.
We thought yesterday's absurd story of former hedge fund manager James Crombie, founder of Paron Capital Management, who was arrested after found squatting in a million dollar Maryland house, would be as strange as it gets for hedge fund stories this weekend. We were wrong: moments ago the WSJ reported that Thomas Gilbert, founder of the $200 million Wainscott hedge fund, whose success Gilbert said previously had come from investing in biotech funds, was found dead with a single bullet to the head in his Manhattan apartment this afternoon, allegedly shot by none other than his 30-year-old son.
The investment climate is being shaped by four forces:
1. De-synchronized business cycle with the US ahead of the pack
2. The prospects of sovereign bond purchases by the ECB, amid political uncertainty sparked by Geece's snap election
3. The continued drop in energy prices is a stimuluative writ large but poses challenges for oil producers and the leveraged eco-system that has been built on the premise of high oil prices forever.
And they are picking up shares in all kind of (precious metal) miners...
Today, concerned that Tsipras' ascent to power will mean precisely that, namely more "blackmail" by Greece of Germany and the Eurozone, as a Grexit opens the way for a collapse of the monetary union and a return to the DEM which would cost Germany far more than continuing the annual charade of keeping Greece in the Euro, Spiegel is out with another piece saying "Bundesregierung hält Ausscheiden Griechenlands aus dem Euro für verkraftbar", or loosely translated, the Federal Government considers Greece's exit from the euro manageable. Why is this coming out today? Because moments ago, Tsipras made it quite clear just what he will demand once he gets the power: "Germany had most of nominal value of debt written off in 1953, same should be done for Greece in 2015", adding that Greece wants writedown on nominal value of Greek debt. And so the gloves come off, and the real bluffing begins.