Ben Bernanke

The venerable UBS floorman asks (and answers) an interesting question. With the re-institution of the payroll tax and higher level rates and with spending lowered by sequestration, will the Treasury need to offer fewer bonds? And if so, will the Fed remain steadfast in its purchasing 'size' (good for bond bulls since secondary demand will increase) or reduce its 'size' to meet the lower monetization needs of the Treasury (bad for equity bulls since flow is all that matters.) Thoughts below...

Since it is Tuesday, and since the bubble formerly known as the "stock market" is once again completely disconnected from reality, fundamentals, math, logic, gravity and everything else, and watching its relentless climb higher on nothing but central bank liquidity tsunami and attempts to hit any remaining upside ES stops is about as exciting as watching Bernanke print electronic money, here is a small diversion courtesy of @911Buff:

• NEW JERSEY: PHOTO - GARBAGE TRUCK DRIVER SNEEZED, LOST CONTROL AND SLAMMED INTO HOME.

And the result...

Since the mid-November lows, the S&P 500 has gained a remarkable 268 points on the back of faith, hope, and Bernanke/Kuroda charity. But perhaps what is more mind-numbing is that this efficient market has given us more than 50% of those gains on Tuesdays. With 17 up-days in a row, Tuesday is the Monday dip-buyers dream. Since 1/18, absent Tuesdays, the S&P 500 has gone nowhere. Maybe Bob Geldof needs to write a new song for the US investor "I do like Tuesdays", or at least a slightly revised cover version of the Bangles' "Manic Tuesday".

Federal Reserve Chairman Bernanke is a Reverse Robin Hood, robbing from the lower 95% and giving to the financier class. It's worth understanding the mechanisms of this wealth transfer: in essence, the Fed extends low-cost credit (i.e. "free money") to the financier class which then uses this free money to buy rentier assets, that is, assets that generate economic rents for the owners, who add no value and create no wealth. This is of course the neofeudal model. Goebbels would approve of the Fed's masterful propaganda campaign: rob the bottom 95% to benefit the financier class, all the while piously proclaiming that its policies were aimed at increasing employment for the bottom 95%. In terms of propagandistic chutzpah, it doesn't get any better than this. Congratulations, Bernanke, Yellen, et al.

Gross: Dow hits 15,000 & PIMCO’s internal Corp & Hi Yield Index hits all-time yield lows. Thanks Chairman #Bernanke! Got any more?

— PIMCO (@PIMCO) May 7, 2013

It is one thing for Bank of America's chief credit strategist Hans Mikkelsen to be wrong on his long-term strategic call about a "Great Rotation" out of bonds and into stocks year... after year... after year (somewhat ironic that the credit guy gets the equity call right, and is dead wrong on the credit side). After all, it has gotten to the point where the buyside bets how long it takes until the latest vintage of said "great" call blows up in his face. These are, after all, "strategic" call, and as everyone knows, when the sellside says one thing strategically, it is time to do the other. However, not even the most jaded and cynical of market observers had any clue just how spectacular Mikkelsen's "tactical" call implosion would be.  Apparently, neither did he. And judging by his language, his clients - if there are any left of course - most certainly did not either.  "We wrote last Friday that this week would be crunch time for our challenged tactical (short term) short stance on the market, expressed by buying protection on the CDX.IG. We got crushed. Thus we remove our tactical view and cover the short."

Gluskin Sheff's David Rosenberg exclaims we are currently are witnessing the Potemkin rally (the phrase Potemkin villages was originally used to describe a fake village, built only to impress). The term, however, is now used, typically in politics and economics, to describe any construction (literal or figurative) built solely to deceive others into thinking that some situation is better than it really is. Ben Bernanke, recently proclaimed “The Hero” by Atlantic Magazine, is the “Wizard of Potemkin.” Since 2009 Bernanke has engage in massive monetary experiments. These experiments lead to future dislocations. There is no doubt that the Fed wants inflation. The problem is they may get more than they ask for. We are currently witnessing the slowest economic recovery of any post-WWII period. However, It is important to challenge your thought process. Read material that challenges your views. Here are David's rules...

Following last week's macro fireworks, the coming week will be an absolute snoozer with virtually nothing on the calendar until Thursday's Initial claims, which is the key event of the week, as well as much Fed president jawboning again, including both good and bad cops talking QE4EVA either up or down. And with earnings season basically over, at least coffee consumption will be higher than average.

• Lesson From Buffett: Doubt Yourself (WSJ)
• Gold Bulls Split With Buffett as Traders Say Sell (BBG)
• Apple Misses IPhone Customers as Global Carriers Balk (BBG)
• Russia extends Cypriot loan by 2 years, cuts interest: troika document (Reuters)
• Tax Rewrite in Play in Capitol (WSJ)
• No early warning for U.S. on Israeli strikes in Syria (Reuters)
• Germany riveted at start of neo-Nazi murder trial (Reuters)
• JPMorgan Investors Urged to Split Chairman Role, Oust Directors (BBG)
• Leniency for Offshore Cheats (WSJ)
• Brussels steps up efforts over tax avoidance (FT)
• Ambulance chasing: Mesothelioma Doctors, Lawyers Join Hunt for Valuable Asbestos Cases (WSJ)
• Web Sales-Tax Bill Set to Face Bumps (WSJ)
• Colleges Cut Prices by Providing More Financial Aid (WSJ)

With equity valuations no longer levitating but in a different, 4th dimension altogether, and credit spreads compressing dramatically (and unreasonably)... It is in situations like these, when the crash comes, that the proverbial run for liquidity forces central banks to coordinate liquidity injections. However, something tells me that this time, the trick won’t work. Over almost a century, we have witnessed the slow and progressive destruction of the best global mechanism available to cooperate in the creation and allocation of resources. This process began with the loss of the ability to address flow imbalances (i.e. savings, trade). After the World Wars, it became clear that we had also lost the ability to address stock imbalances, and by 1971 we ensured that any price flexibility left to reset the system in the face of an adjustment would be wiped out too. From this moment, adjustments can only make way through a growing series of global systemic risk events with increasingly relevant consequences. Swaps, as a tool, will no longer be able to face the upcoming challenges. When this fact finally sets in, governments will be forced to resort directly to basic asset confiscation.

If you thought that Baupost's Seth Klarman would be the next to join twitter, #timestamp his minute-holding trades, ignore the money-losing ones, trumpet his winners, always make money, scream at all those who don't agree with his "strategy", and otherwise become what is known these days as a (momentum) investor, we have some bad news: it's not happening. Here's why.

For those following Bitcoin, this interview with Gavin Andresen, the 46-year-old lead software developer for the Bitcoin project in today’s Wall Street Journal should be of interest. The chief scientist for the digital currency talks about its appeal - and pitfalls - in a world of fiat money. Politicians and their appointees are entirely cut out of Bitcoin’s monetary loop, Andresen explains, adding that "Bitcoin or a similar technology could threaten the power of not just central banks, but banks, period." It is perhaps the coder's parting words that are most insightful, "I tell people it’s still an experiment and only invest time or money you could afford to lose. If only investors could as easily follow that advice with fiat currencies."

A look at the price action in the foreign exchange market and the technical forces in the week ahead.  

"We believe that the global central bankers, led by the Fed as “thought leader,” have no idea how much pain the world’s economy may endure when they begin the still-undetermined and never-before attempted process of ending this gigantic experimental policy. If they follow the paths of the worst central banks in history, they will adopt the “tiger by the tail” approach (keep printing even as inflation accelerates) and ultimately destroy the value of money and savings while uprooting the basic stability of their societies....  At some stage, central banks inevitably realize, regardless of whether they admit the catastrophic nature of their own failings, that the cessation of money-printing will cause an instant depression. Even though at that point the cessation of money-printing may be the only action capable of saving society, that becomes a secondary consideration compared to the desire to avoid immediate pain and blame."

With macro data becoming worse and worse (more and more bullish for Fed free money) and stocks off to the races (despite earnings that are abysmal), we thought a litle reminder of just what is driving this un-reality in nominal price moves. As the following chart, inspired by UBS, shows, each time the S&P 500 shows any sign of weakness, US money grows dramatically (money defined as the sum of M2 and foreign custody repo-able holdings at the Fed). Simply put, this is the reaction function of the Bernanke Put and explains why any weakness in Europe causes problems for the US - as the foreign banks repatriate and impact this 'growth' support. Correlation is not causation, but it is a strong hint.