fixed

Perhaps there is a reason why Morgan Stanley is 'giving up' on its fixed income business. It seems, yet again Morgan Stanley has hired an ex-Goldman Sachs criminal   opportunistic trader. Glenn Hadden, the very head of interest rate trading at Morgan Stanley, has been found guilty of engaging in trading that violated CME rules in Treasury futures on December 19th 2008 - while was employed by Goldman Sachs. While Goldman faces a $875,000 slap on the wrist, Hadden, somewhat remarkably will face a mere $80,000 fine and the wonderfully timed (given the summer doldrums) 10-day suspension from trading. Doing God's work wherever they trade... that'll teach him! And now, back to Glenn manipulating buying and selling the 10 Year.

Everything was going so well in the overnight session, following some mixed Japanese data (stronger than expected production, inline inflation, weaker household spending) which kept the USDJPY 101 tractor beam engaged, and the market stable, until just before 2 am Eastern, when Tokyo professor Takatoshi Ito, formerly a deputy at the finance ministry to the BOJ's Kuroda, said overvaluation of the yen versus the dollar has been corrected, which led to a very unpleasant moment of gravity for the currency pair which somehow drives risk around the world based on what several millions Japanese housewives do in unison. The result was a slide to just 30 pips away from the key 100 support level, below which all hell breaks loose, Abenomics starts being unwound, hedge funds - short the yen and long the Nikkei - have no choice but to unwind once profitable positions, the wealth effect craters, and streams are generally crossed.

Anytime a free market guy rails against central planning and socialism, there is always someone who stands up and says “what about Sweden?” Ah, Sweden... a socialist’s paradise... a place where taxes are among the highest in the world, few people are wealthy, and the government is involved in people’s lives from cradle to grave. And in all of these government surveys on ‘happiness’, places like Sweden, Norway, and Denmark consistently rank among the happiest countries in the world. Well… the veneer is cracking. The riots we first noted here continue and these foru charts may offer some of in the incendiary material for why. As we noted recently, the benefits that have kept Europe relatively 'social-unrest-free' so far are starting to run dry. People in North America who are rapidly being dragged into a welfare state should pay very close attention... because this is the future that awaits.

First, the important news: in a few hours the Fed will inject between $1.25-$1.75 billion into the stock market. More importantly, it is a Tuesday, which means that in order to not disturb a very technical pattern that will have held for 20 out of 20 Tuesdays in a row, the Dow Jones will close higher. Judging by the futures, this has been telegraphed far and wide: it is a Ben Bernanke risk-managed market, and everyone is a momentum monkey in it. In less relevant news, the underlying catalyst for the overnight rip higher in risk was the surge in the USDJPY, which left the gate at precisely Japan open time, and after languishing at the round number 101 support for several days, did not look back facilitated by what rumors said was a direct BOJ intervention via a Price Keeping Operation in which banks bought ETFs directly. This was catalyzed by the usual barrage of BOJ and FinMin individuals engaging in post-crash damage control and chattering from the usual script.

Peak collateral is just a notion - one we have discussed in detail many times (most recently here). The notion that at the time we want yield and growth we are running out of collateral which is supposed to underpin the high yielding assets and loans. Such a shortage would cause the ponzi-like growth that is necessary to sustain a bubble, to stall and then implode. We think our lords and rulers know this and have decided that it must not be allowed. And this – the need for collateral – is the reason for the endless QE. If this is even close to the mark, then recent murmurings about the Fed tailing off its bond buying will prove to be hollow. The Fed will quickly find it cannot exit QE without precipitating precisely the disorderly collapse, to which it was supposed to be  the solution.

Once upon a time in the good old U.S. of A, way back in the 19^th century, there were gigantic companies that were known as trusts. We had trusts for Steel, we had trusts for oil, we had trusts for railroads, and we had trusts for just about everything except trust itself.

It has just been released that the UK came within 6 hours of seeing itself deprived of its eggs and bacon as gas supplies across the entire country depleted to danger levels on March 22nd.

A week later and everyone is a bit more nervous, with the speculation that US sovereign debt purchases by the Federal Reserve will wind down and with the Bank of Japan completely cornered. In anticipation to the debate on the Fed’s bond purchase tapering, on April 28th (see here) we wrote why the Federal Reserve cannot exit Quantitative Easing: Any tightening must be preceded by a change in policy that addresses fiscal deficits. It has absolutely nothing to do with unemployment or activity levels. Furthermore, it will require international coordination. This is also not possible. In light of this, we are now beginning to see research that incorporates the problem of future higher inflation to the valuation of different asset classes. Why is this relevant? The gap between current valuations in the capital markets (both debt and credit) and the weak activity data releases could mistakenly be interpreted as a reflection of the collective expectation of an imminent recovery. The question therefore is: Can inflation bring a recovery? Can inflation positively affect valuations? The answer, as explained below, is that the inflationary policies carried out globally today, if successful will have a considerably negative impact on economic growth.

However, the best argument why the type of Quantitative Easing imposed by Ben Bernanke, and the associated "necessary and sufficient" condition to exit this greatest of all monetary experiments, or eventually allow Ben and Kuroda to taper QE, i.e., the "great rotation" from government bonds into stocks (because otherwise both the Fed and the BOJ will be stuck monetizing and monetizing and monetizing until one day, soon, they own all government bonds), will never work in Japan is a simple one. And quite visual...

What is going to happen when the greatest economic bubble in the history of the world pops?  The mainstream media never talks about that.  They are much too busy covering the latest dogfights in Washington and what Justin Bieber has been up to.  And most Americans seem to think that if the Dow keeps setting new all-time highs that everything must be okay.  Sadly, that is not the case at all. Right now, the U.S. economy is exhibiting all of the classic symptoms of a bubble economy. What we are witnessing right now is the calm before the storm.  Let us hope that it lasts for as long as possible so that we can have more time to prepare. Unfortunately, this bubble of false hope will not last forever.  At some point it will end, and then the pain will begin.

What may come as a surprise to most, is that as of this week's H.4.1 update, the amount of ten-year equivalents held by the Fed increased to $1.583 trillion from $1.576 trillion in the prior week, which reduces the amount available to the private sector to $3.637 trillion from $3.668 trillion in the prior week. And also, thanks to maturities, and purchase by the Fed from the secondary market, there were $5.219 trillion ten-year equivalents outstanding, down from $5.244 trillion in the prior week. What this means simply is that as of this moment, the Fed has, in its possession, a record 30.32% of all outstanding ten year equivalents, or said in plain English: duration-adjusted government bonds. It also means that the amount of bonds left in the hands of the private sector has dropped to a record low 69.68% from 69.95% in the prior week. Finally, the above means that with every passing week, the Fed's creeping takeover of the US bond market absorbs just under 0.3% of all TSY bonds outstanding: a pace which means the Fed will own 45% of all in 2014, 60% in 2015, 75% in 2016 and 90% or so by the end of 2017 (and ifthe US budget deficit is indeed contracting, these targets will be hit far sooner). By the end of 2018 there would be no privately held US treasury paper.

Today is one on those rare days in which everyone stops pretending fundamentals matter, and admits every market uptick is purely a function of what side of the bed Bernanke wakes up on, how loudly Kuroda sneezes, or how much coffee Mark Carney has had before lunch, but more importantly: that all "risk" is in the hands of a few good central-planners. Following last night's uneventful Bank of Japan meeting, in which Kuroda announced no changes to the "full speed ahead" policy of inflation or bust(ed bank sector following soaring JGB yields) and which pushed the Nikkei225 to surge above the DJIA closing at 15,627, today it is Bernanke's turn not once but twice, when he first takes the chair in the Joint Economic Committee's "Economic Outlook" hearing at 10 am, followed by the May 1 minutes release at 2pm (which may or may not have been previously leaked like last month). As a reminder, Politico reported last night that Ben Bernanke had previously met in secret with Darrell Issa and other lawmakers "to discuss the central bank’s efforts to stimulate the economy and how it could exit this strategy in the future, according to people who attended the meeting."  And since we know how important transparency is to Bernanke and the Congress, "Participants in the meeting declined to disclose specifically what Bernanke told lawmakers beyond saying there was discussion about the Fed’s bond buying programs and other issues." But as long as Mr. Issa, the wealthiest man in the House, has his advance marching orders, all is well.

Surging nominal imports and a miss for exports just about sums up perfectly just how the reality of Abenomics is crushing the real economy as the market goes from strength to strength on the hope that recovery is just around the corner. For the 28th month in a row Japan trade deficit has dropped YoY and its 12-month average is now at its worst ever. Energy costs are driving up imports (and adjusted for the devaluation in the JPY, the data is simply horrendous. Of course, there are green shoots - CPI is not deflating as fast as it was... and 'some' inflation expectations are rising (though as we noted here that is simply due to the tax expectations). Contrary to expectations held by some in the bond market, the BOJ did not comment on the sharp fluctuation in JGB yields since April as a result of monetary relaxation - on the basis, we assume, that if they don't mention it, it never happened. The result post a nothing-burger of 'more uncertainty' from the BoJ, the Nikkei keeps screaming higher, JPY rallied then fell back, and JGBs are sliding higher in yield.

Last Thursday at a hearing held by the Senate Armed Services Committee, we found out what many of us already knew.  That the “war on terror” is never going to end.  Indeed, it was never supposed to end.  This never-ending “war” on a fantastical enemy provides the American oligarch class with too much money and too much power to ever make it worthwhile for the establishment to shut down. "Nobody really even knows with whom the US is at war, or where. Everyone just knows that it is vital that it continue in unlimited form indefinitely." 1984 really was an instruction manual for the people in power.

We thought most readers would be rather surprised to learn what the result of a simple Bloomberg query comparing S&P EBITDA per share (BBG mnemonic TRAIL_12M_EBITDA_PER_SHARE) to the S&P looks like. For one: not only is corporate LTM EBITDA per share not at all time highs (it is well off the record levels seen in 2008), but it is at levels last seen in January 2007. But perhaps most surprising is what happens when on juxtaposes the S&P500's EBITDA level relative to the actual S&P. The stunning result is charted below: