What Denmark has just done is "back-door QE", because as some forget, there are two ways to push the price of an asset higher (thus pushing its yield lower in the case of a bond): increase demand, which is what conventional QE does when central banks buy bonds, or reduce supply. Which is what Denmark just did by completely cutting off all Treasury issuance "until further notice". As a result, paradoxically, increasingly more speculators are betting that the "Trade of 2015" could be doing precisely the opposite of what the Danish central bank is hoping will happen: i.e., shorting the EURDKK (or going long the DKKEUR) in hopes that when the Danish peg finally does break, it too will result in long Swiss France-type profits.
What happens if one expands the Eurozone NIRP universe to include the debt of other countries including Japan, Denmark, Sweden, Switzerland and so on? Conveniently, JPM has done the analysis and finds that a mindblowing $3.6 trillion of government debt traded with a negative yield as recently as last week. This represents 16% of the JPM Global Government Bond Index, or in other words nearly a fifth of all global government debt is now trading with a negative yield, meaning investors pay sovereigns, using other people's money of course, for the privilege of buying their issuance!
With NIRP raging in the Eurozone and over €1.5 trillion in European government bonds trading with negative yields, many were wondering when any of this perverted bond generosity will spill over to other debtors, not just Europe's insolvent governments (who can only print negative interest debt because of the ECB's backstop that it will buy any piece of garbage for sale in the doomed monetary union). In fact just earlier today we, rhetorically, asked a logical - in as much as nothing is logical in the new normal - question: "Who will offer the first negative rate mortgage." Little did we know that just minutes after our tweet, we would learn that at least one place is already paying homeowners to take out a mortgage. That's right - the negative rate mortgage is now a reality.
The Fed has been supporting the market since the late 1980s. But there is an important difference between the actions of the Fed under Yellen versus Greenspan and Bernanke. In 2008, the Fed allowed Bear Stearns and Lehman Brothers to fail. Given the massive wipeout that followed, this decision is now viewed as a dangerous mistake. Having learned their lesson, the Fed is now rushing in to support the market in response to even routine 20% drops. In this way, the Fed is acting like a value investor who demands a small margin of safety before investing.... Since 2010, however, the Fed has changed tactics. The Fed is now reacting far more quickly. Small market selloffs are followed by immediate responses. By quickly riding to the rescue, the Fed is effectively front-running value investors.
Q4 Annualized GDP Misses, Tumbles To 2.6% From 5.0%; Surging Personal Consumption Pulled Forward From 2015Submitted by Tyler Durden on 01/30/2015 08:44 -0500
Following last quarter's upward revised 5.0% GDP, driven higher mostly as a result of even more mandatory Obamacare taxation, Q4 GDP had nowhere else to go but down, the only question was how much. Wall Street estimated 3.0%. Moments ago we got the first estimate for Q4 GDP and it was a miss, printing at 2.6%, and nearly 50% below the Q3 annualized number. This also means that the final 2014 GDP is 2.4%, higher than the 2.2% in 2013 as well as the 2.3% in 2012.
While the US daytime trading session has lately become a desperate attempt to expand multiples on the declining earnings of the S&P500, thanks to recurring BOJ intervention in the USDJPY, to keep the S&P above the 100 SMA at all costs including generous central banker verbal intervention then it is during the US overnight session when global deflationary reality reasserts itself with a vengeance, and sure enough at last check, the 10 Year has rallied with 10Y yield hitting 1.71% before this morning’s 4Q GDP release, as well as following the latest deflation number of -0.6% out of Europe (worse than the -0.5% expected) which was the biggest price decline on the continent since 2009. "Treasuries remained well bid overnight due to month-end index adjustments. Some talk of a reallocation from equities to bonds trade going through in both Asia and continuing in Europe," ED&F Man head of rates and credit trading Tom di Galoma wrote in a note to explain the latest Great Unrotation, if only until the Virtu HFT algos get the full blessing of the Fed to ramp the USDJPY, and thus the stock market.
Say you are a socialist, and you have intervened heavily in the economy. Suddenly, things don’t work as you thought they would. Somehow, economic laws seem to refuse to bend to your will. However, you cannot really believe that since according to your convictions, wealth is a byproduct of government plans and decrees. So the solution to the unintended consequences of the initial intervention is to intervene further, in an attempt to refine the plan, so to speak. So you try again. And again. And again. Chances are, your name is Nicolas Maduro. In summary, the thread by which Venezuelan socialism hangs may soon snap.
It appears markets are on the verge of learning just how damaging the unintended consequences will be from multiple years of extreme central bank promises now that the Fed has run out of the ammunition to keep the utopian market façade alive. The structure of the ECB QE and the Greek situation make the backdrop considerably more troubling and difficult.
"People say, 'Sell government bonds and lend money to widget manufacturers.’ It doesn’t really work like that." Hayes says, adding that "Low yields don’t necessarily mean more lending to the real economy; time and confidence are key elements and last 6 years have shown QE can’t control those." In short: it hasn't even started and QE is already a complete failure. Good job central-planners.
The bottom line is that unfortunately for the BTFDers, with the Fed no longer giving explicit buy signals with the "considerable time" language struck, and with an implicit economic upgrade suggesting a rate hike is still on the table, it is becoming increasingly more difficult to frontrun the Fed's "wealth creation" intentions.
Suppose you could print up counterfeit dollars, euros or yen that were identical to the real things. Fun, you think? Here's how it plays out.
Another Ex-Central Planner Speaks Up: Currency War Policy "Risks Major Downward Shock To Asset Prices"Submitted by Tyler Durden on 01/28/2015 19:20 -0500
Merv "The Swerv" King - former governor of The Bank of England - has joined the ranks of those ex-central-planners-who-feel-the-need-to-protect-their-legacy-by-rewriting-history-and-admitting-the-entire-thing-is-crazy. Speaking in Tokyo overnight, King said he’s concerned that financial markets believe real interest rates will remain very low for a very long time which has created "a significant disequilibrium in the world economy," adding that he does "not believe and expect a market economy to thrive on real interest rates that are close to zero." Warning that many nations realize "they have pushed monetary policy as far as it can go," King added that with the additional risk of currency wars, "markets will discover that they have been pushing asset prices to an excessively high level and there will be a major downward shock to asset prices."
It’s terrifying how fast the whole Swiss yield curve sank under the waterline of zero. Now even the 15-year bond has negative interest. The franc has reached the end.
Market Wrap: Futures Tumble On Spike Of "Strong Dollar" Earnings Disappointments And Profit WarningsSubmitted by Tyler Durden on 01/27/2015 07:25 -0500
Following yesterday's earnings disappointments, most notably from Microsoft which is down 7% this morning following the usual after-the-fact downgrades from JPM, Citi and Nomura, futures were already on a the back foot heading into this morning - no doubt impacted by the deja vu ridiculous move in the EURCHF noted earlier - when the latest batch of earnings just hit, of which Dow component Procter and Gamble stood out and which missed the top and bottom line. But the punchline, and in direct refutation of what Jack Lew said previously about a strong dollar being good for the US economy, was this:"The outlook for the year will remain challenging. Foreign exchange will reduce fiscal 2015 sales by 5% and net earnings by 12%, or at least $1.4 billion after tax." In other words, P&G will "offset" the surge in the USD with more layoffs. So when Jack Lew said "good" he really meant "bad."
While central banks’ grip on the economy seems to be waning, notes Citi's Matt King, additional liquidity still seems as potent as ever when it comes to propping up global markets. The question in our minds revolves around whether central banks remain willing to keep pumping when the economic benefits are so questionable. Equally, though, valuations are already so elevated that we doubt they can afford to stop. One way or another, this feels like a recipe for increased volatility.