Despite the president's tongue-in-cheek warning to Wall Street that this time it's different, and it that "it should be concerned", that same Wall Street continues to roundly mock his attempts to talk it lower on the third day of America's "shutdown", knowing very well that if things ever turn bad, Mr. Chairman, aka the S&P chief risk officer, will get to work, and rescue everyone from that pesky thing known as losses. Whether the offsetting optimism was driven by made up China non-manufacturing PMI rising from 53.9 to 55.4, the highest in six months, or just as made up non-core European PMI data which also beat expectations despite Germany Services PMI continuing to telegraph a weakness, dropping from 54.4 to 53.7, is unknown and once again not important. So while futures are modestly lower if only until such time as the daily 3:58pm VIX slam takes place just before market close, do not expect any major moves in stocks until either the GOP finally folds and lets Obama have his way, or bundles all shutdown legislation into the debt ceiling negotiation, and careens the US right into the debt ceiling deadline on October 17 without any legislation in place.
- U.S. Government Shut Down With No Quick Resolution Seen (BBG)
- 12 House Republicans now say they’d back a ‘clean’ CR (WaPo)
- Republicans’ 2014 Senate Edge Muddied by Shutdown Message (BBG)
- Obama Shortens Asia Trip Due to Government Shutdown (WSJ)
- Fed Said to Review Commodities at Goldman, Morgan Stanley (BBG)
- Foreign Firms Tap U.S. Gas Bonanza (WSJ)
- Behind Standoff, a Broken Process in Need of a Broker (WSJ)
- Japan Awaits Abe’s Third Arrow as Companies Urged to Invest (BBG)
- Microsoft investors push for chairman Gates to step down (Reuters)
Following the Fed’s surprise decision not to ‘taper’ its asset purchases this month, market participants feel misled. That’s hardly a surprise to UBS' Amit Kara who has long argued that central banks have limited ability to guide markets, given that their policies must adjust to hard-to-predict outcomes. Policy pre-commitment is an oxymoron, and central bankers who pledge ‘forward guidance’ do so at considerable risk to their credibility. In an inherently uncertain world, central bankers must adjust current policies to achieve those outcomes. That makes it impossible to pre-commit to a given policy, given that flexibility is required to respond to unforeseeable circumstances.
Two weeks ago we first pointed out that as a result of the quiet creep in high grade leverage to fresh record high levels, the resurgence in PIK Toggle debt for LBOs and otherwise, means that the credit bubble is now worse than ever and that the next credit crisis will make 2007 seem like one big joke. Recall that nearly 80% of PIK issuers made a PIK election during the last downturn, "paying" by incurring even more debt and in the process resulting in huge impairments to those yield chasing "investors" who knew they were going to lose money but had no choice - after all, the "career risk." Subsequently, we quantified the explosion in covenant-lite loans - another indicator of a peak credit bubble market - as nearly double when compared to the last credit bubble of 2007 (whose aftermath the Fed, with a $3 trillion larger balance sheet, is still struggling to contain).
Fingers of Instability
Following yesterday's modest bounce in equities punctuated by the traditional last minute spike, sentiment has reverted lower once again, driven by the uncertainty surrounding debt ceiling talks in the US, where lawmakers have until next Tuesday to agree to a spending bill, or much of the government will shut down. The Senate will vote on a spending bill later today, which will then be sent back to the House putting republicans in a quandary (Politico explains the complications surrounding the GOP's "Plan C"). It was reported that US House leaders are considering postponing action on a bill to extend the US government's borrowing power, with the leadership discussing a change of strategy to complete action on the stopgap spending bill before debating the debt-limit debate. In FX, GBP strengthened across the board this morning after BoE’s Carney said he does not see a case for more quantitative easing.
When markets break, nobody cares: after all central banks are there to protect everyone and remove all risk. But... what happens when a central bank fail? Just relesed by the BOE: "News Release – Statement from the Bank of England. The Bank has been experiencing some technical IT problems today. There is no impact on critical payment and settlement services. Alternative procedures are in place where necessary. The Bank is acting to resolve these problems as soon as possible."
Is the Syrian electronic army finally getting amibitious and how long until FedLine/FedWire are in danger?
As Wall Street, CNBC, and feckless politicians tout American energy independence from the miracle of shale oil, reality is already rearing its ugly head. Production grew by 24% over the first six months of 2012. Production has grown by only 7% over the first six months of 2013. That is a dramatic slowdown. The fact is that these wells deplete at an extremely rapid rate. Oil companies will always seek out the easiest to access oil first. They have already accessed the easy stuff. This explains the dramatic slowdown. Peak Bakken oil production will be below 1 million barrels per day. The last time we checked, we consumed 18 million barrels per day. We wonder when that energy independence will be achieved?
- Fed likely to reduce bond buying, pass policy milestone (Reuters)
- Fall in Home Loans Pushing Fed Away From Taper in Mortgage Bonds (BBG)
- Russia says U.N. report on Syria attack preconceived, political (Reuters)
- China House Price Surge Raises Prospect of Steps to Cool Market (FT)
- Cyprus Plans to Complete End of All Capital Controls... some time in 2014 (FT)
- GOP Reworks Budget Terms (WSJ)
- U.S. Navy was warned that Washington shooter 'heard voices' (Reuters)
- Berlusconi Impeachment Vote Looms (WSJ)
- Ageing could weaken central banks, spur rate volatility (Reuters)
The day when the Fed will begin the unwind of its latest QE program (for the fourth time) has finally arrived (as has the day when an impeachment committee will vote whether to ban Berlusconi from public office, but understandably that is getting far less press). In a few short hours the answer to all those questions of whether and how much of the taper was priced in, will be revealed. But while the Taper discussions will dominate the airwaves, as they have for the past five months, there actually were some news in the world that had nothing to do with the US Politburo in charge of capital markets and the US economy, located in the Marriner Eccles building. Here is a brief summary.
The most important event of the "coming" week was unexpected, and did not even take place during the week, but the weekend. So with Summers unexpectedly, and uncharacteristically out, here is what else is in store.
US Fed's exit plan poses a critical dilemma and underscores important contradictions. The calendar says Europe should be talking about exits too--as aid packages for Spanish banks, and Ireland and Portugal are to wind down in the coming year--yet more rather than less assistance may be neeed.
Even if one correctly predicts what the FOMC does next week, getting the direction right for dollar is a different matter. The markets are anticipatory in nature and the effect often takes place before the cause.
"The Bank of England now has the ability to take the froth out of future housing market booms, without having to resort to interest rate increases," is the way the UK's realtor association explains their demand that the BoE limit national house price growth to 5% a year. While they would benefit from short-term gains, it seems the Royal Institution of Chartered Surveyors (RICS) sees the dangers of another unsustainable housing boom outweigh them. As The FT reports, RICS adds, "this cap would send a clear and simple statement to the public and the banking sector, managing expectations as to how much future house prices are going to rise. We believe firmly anchored house price expectations would limit excessive risk taking and, as a result, limit an unsustainable rise in debt." Or will it merely lead to further financial engineering and leverage?
For the right answer, we look to the past....