Bank of America

"On the current trajectory, we doubt the market can stay stable beyond a few quarters, especially if some SOE and/or LGFV bonds indeed default."
- Bank of America

As always happens after shocking events like yesterday which "nobody could have possibly predicted", watching the Penguin gallery reel in its humiliation is absolutely worth the price of admission.

This trade has become blood-soaked.

Back in February, we noted that NIRP had officially arrived in the US as JP Morgan announced it was preparing to charge some large institutional customers for deposits. This represented a kind of de facto (if not yet de jure) NIRP. Now, a combination of pinched margins and new regulations has led some of the largest financial institutions in the US to penalize corporate and institutional deposits on the way to instituting what amounts to a stealth version of negative interest rates.

The US has seen that movie before, it's not a happy ending. Oh, and enjoy that AAA credit rating while it lasts.

"The only way to get velocity to pick up in a benign way is to write off the debt by a meaningful amount. That would have helped in the 2008 global financial crisis if more losses had been imposed on creditors.  But that obviously did not happen in 2008 as the policymakers demonstrated that they did not believe in capitalism. Otherwise, the only other way velocity picks up is by an unhealthy hyperinflationary surge reflecting a loss of confidence in central banks, an outcome that becomes more plausible the more extreme the resort to quantitative easing."

One year ago we reported that companies were using secured bank debt to repurchase stock: a stunning, foolhardy development. It so unbelievable we promptly forgot this bizarre tangent into "use of loan funds"... Until today when we found that it was, indeed, all a lie and that the banks themselves had become complicit in perpetuating not only the worst possible capital misallocation, but being an accessory to the US stagnation, soon to be replaced with full-blown recession.

Aside from Chinese monetary data, it was a relatively quiet session in which traders were focusing on every move in the suddenly tumbling USD, and parsing every phrase by central bankers around the globe, as well as the previously noted piece by Fed mouthpiece Jon Hilsenrath which effectively ended the debate whether there will be rate hikes in 2015. Adding to the overnight froth were ECB speakers first Ewald Nowotny and then Spain's Restoy, who said that euro-area core inflation "clearly" below goal, remarks which were immediately assumed to signal increasing pressure to boost stimulus, and which promptly translated into even more weakness in EUR and equity strength, pushing US futures up about 15 points from yesterday's close.

News That Matters

If we, and Bloomberg, are correct, and if the CFD unwind has only just started impacting the true supply/demand dynamics, and thus price, of copper, then we are only 30% of the way through the unwind of China's copper "carry trade" and thus the 'over-capacity' concerns are massively under-appreciated.

While yesterday's JPM results missed from the top to the bottom, coupled with a surprising and aggressive deleveraging of the bank's balance sheet which has shrunk by over $150 billion in 2015 mostly on the back of a decline in deposits, Bank of America reported numbers which were largely the opposite when it printed a modest beat on both the top line with $20.9 billion in revenues (adjusted sales of $20.6Bn vs Exp. $20.5Bn), down $500 million from a year ago, and the bottom line: generating $0.35 in adjusted earnings in the quarter, 2 cents better than the $0.33 consensus estimate.

When China was closed for one week at the end of September, something which helped catalyze the biggest weekly surge in US stocks in years, out of sight meant out of mind, and many (mostly algos) were hoping that China's problems would miraculously just go away. Alas after yesterday's latest trade data disappointment, it was once again China which confirmed that nothing is getting better with its economy in fact quite the contrary, and one quick look at the chart of wholesale, or factory-gate deflation, below shows that China is rapidly collapsing to a level last seen in 2009 because Chinese PPI plunged by 5.9% Y/Y, its 43rd consecutive drop - a swoon which is almost as bad as Caterpillar retail sales data.

Some things you CAN see coming, in life and certainly in finance. Quite a few things, actually. Once you understand we’re on a long term downward path, also both in life and in finance, and you’re not exclusively looking at short term gains, it all sort of falls into place. Of course, the entire global economy has been hanging together with strands of duct tape for decades now, but hey, it looks good as long as you don’t take a peek behind the facade, right?

Welcome to Reflexivity 101.

The cyclical fallout from the Great Financial Crisis and the secular deflationary “D’s” of excess Debt, tech Disruption, aging Demographics have been the major catalysts for deflation.