10 Year Treasury
The biggest fear the market currently has is not the ongoing crisis in the Emerging Markets, not the suddenly slowing economy, not even China's credit bubble popping: it is that Bernanke's successor may have suddenly reverted to the "Old Normal" - a regime in which the Fed is not there to provide the training wheels should the S&P suffer a 5%, 10% or 20% (or more) drop. Whether such fears are warranted will be tested as soon as there is indeed a bear market plunge in stocks - the first in nearly three years (incidentally the topic of the Fed's lack of vacalty was covered in a recent Reuters article). So, assuming that indeed the most dramatic change in market dynamics in the past five years has taken place, how does one trade this new world which is so unfamiliar to so many of today's "younger" (and forgotten by many of the older) traders? And, more importantly, how does one look for the signs of a bottom: an Old Normal bottom that is. Courtesy of Convergex' Nicholas Colas, here is a reminder of what to look forward to, for those who are so inclined, to time the next market inflection point.
Forget the last two day's decline. The consensus opinion for 2014 is pretty uniform: stocks will go up modestly, bond will decline in similar fashion. Job growth will grind higher, as will inflation. The Fed will taper its bond-buying program, slowly. And so it may all come to pass... But ConvergEx's Nick Colas ponders what could go wrong, or at least different. Top of his list: fixed income volatility, in conjunction with stock market valuations that are, at best, average. Colas reflects ominously on 1914, where if you read the papers of the day you would have seen much of the same "Yeah, we got this" tone that prevails today. As the great market sage Yogi Berra once opined, “It’s tough to make predictions, especially about the future.” Either way, a cautious outlook is the better part of valor so early in the year.
Curious which were the best and worst performing asset classes for the month of October? Deutsche Bank explains.
This artificial prosperity plan for Wall Street has the added benefit of allowing the captured politicians in Washington D.C. to continue their $1 trillion per year deficit spending with no consequences for their squandering of future generations’ wealth. Bernanke and Yellen will never taper, because they can’t. The Fed balance sheet will continue to grow by at least $1 trillion per year until they crash the financial system again. Except this time, there will be no money printing solution. We are all trapped like rats in this monetary experiment being conducted by evil mad scientists. No one will get out alive. Welcome to the new normal. Now eat your cheese.
The macro picture for the world is dangerous. And high quality companies will not be spared the carnage if a market onslaught begins (which is looking increasingly likely).
If you are an equity bull let’s hope you don’t get what you wish for.
There is one problem with the Fed's plan that bond yields will progress ever higher in calm, cool and collected fashion from here to 3%, 4%, 5% and onward: it assumes that those who don't sell today, will patiently await turn to sell (with much bigger) losses tomorrow. Of course, what happens instead is that everyone will try to sell today, to avoid any losses tomorrow. What results, are spikes such as the one seen on the chart below, which just took the 10 Year yield to a fresh 2 year high of 2.8269% and rising. But perhaps most important, there are now just under 70 bps until the 3.50% "disorderly rotation" threshold beyond which bad things start happening.
How is the Federal Reserve going to stem the deflationary tide with equity markets at their highs?
So maybe we should take Bernanke at face value.
"If you believe that [Bernanke] means what he says," explains Gloom, Boom, and Doom's Marc Faber to a spell-bound Trish Regan on Bloomberg TV, "then you believe in Father Christmas." Simply out, Faber adds, "we are going to see QE99," and while he notes that equities, bonds, and gold are "very oversold," he would "rather buy bonds and gold than equities." From his views on Laszlo Birinyi to inflation, the 'taper', US housing, and China, Faber calmly warns that "the S&P could drop 20-30% from the recent highs - easily."
"The only thing that I know is that I want to own some physical gold because I don't want all of my assets in financial assets."
"I am not a prophet, I don't know exactly where the price will be on a month by month basis, but I want to have some wealth, some of my assets in physical gold. I can see a lot of problems coming into the world including expropriation through taxation or through regulation or even through revolution and social strife."
The mere mention that tapering was even possible, combined with the Chairman's fairly sunny disposition (perhaps caused by the realization that the real mess will likely be his successor's problem to clean up) was enough to convince the market that the post-QE world was at hand. This conclusion is wrong. Although many haven't yet realized it, the financial markets are stuck in a "Waiting for Godot" era in which the change in policy that all are straining to see, will never in fact arrive. Most fail to grasp the degree to which the "recovery" will stall without the $85 billion per month that the Fed is currently pumping into the economy. Of course, when the Fed is forced to make this concession, it should be obvious to a critical mass that the recovery is a sham.
The global liquidation wave started with Bernanke's statement yesterday, which was interpreted far more hawkishly than any of his previous public appearances, even though the Fed had been warning for months about the taper. Still, markets were shocked, shocked. Then it moved to Japan, where for the first time in months, the USDJPY and the Nikkei diverged, and despite the strong dollar, the Nikkei slumped 1.74%. Then, China was swept under, following the weakest HSBC flash manufacturing PMI print even as the PBOC continued to not help a liquidity-starved banking sector, leading to the overnight repo rate briefly touching on an unprecedented 25%, and locking up the entire interbank market, sending the Shanghai Composite down nearly 3% as China is on its way to going red for the year. Then, India got hit, with the rupee plunging to a record low against the dollar and the bond market briefly being halted limit down. Then moving to Europe, market after market opened and promptly slid deep into the red, despite a services and mfg PMI which both beat expectations modestly (48.6 vs 47.5 exp., 48.9 vs 48.1 exp) while German manufacturing weakened. This didn't matter to either stocks or bond markets, as peripheral bond yields promptly soared as the unwind of the carry trade is facing complacent bond fund managers in the face. And of course, the selling has now shifted to the US-premarket session where equity futures have seen better days. In short: a bloodbath.
what does it mean?
Is the low implied volatility a harbinger of good things to come, or just one final act in luring the sheep to the yield chasing slaughter...