The cardinal rule of investing – and life, frankly – is, according to ConvergEx's Nick Colas, "When the facts change, you have to change your point of view." The Fed’s decision to maintain its current pace of bond buying at yesterday’s FOMC meeting is one of those fact-changing events. Markets were primed for a reduction, and along with a host of other flashing yellow lights that was enough to make plenty of market watchers cautious. Yes, the Fed will eventually cut the QE tow rope if/when labor markets improve, but for now, Colas notes, they seem content to keep toting the barge and lifting the bale. That leaves markets free to head to the bar, hopefully avoiding incarceration along the way. Remember 1999 though, he warns, when markets ripped through Q4 because so many investors had bided their time waiting for the dot-com bubble to collapse earlier in the year? Cue the music, because this is beginning to look like the same market setup.
The "market is in a state of shock" after the Fed's decision to postpone taper, noted Credit Agricole's David Keeble adding that "Fed credibility and its communication strategy are in tatters." This, as others have noted, will make it many times more difficult to manipulate yields lower in the future as the "Fed is moving to a new way of looking at asset purchases." As we explained in detail 15 months ago, Keeble notes the Fed appears to have clearly signaled that the degree of accomodation is not linked to size of the Fed balance sheet, but that the flow of Fed buying is "very important."
So, it's the flow, not the stock; and that means, as we noted here, that unless The Fed is actively engaged in monetization at every given moment, the impact from easing diminishes progressively; ultimately approaching zero and subsequently becoming negative.
- Expectations for Fed to begin to taper asset purchases by USD 10-15bln
- Ranges for pace of Treasury purchases: high USD 45bln, low USD 25bln
- Ranges for pace of MBS purchases: high USD 45bln, low USD 30bln
- Some see FOMC lowering unemployment threshold from current 6.5%
- Summary of Economic Projections and Press Conference from Fed Chairman Bernanke follow the announcement
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.
Why Treasuries will likely rally and the dollar sell-off in response to the FOMC.
Over the past year, India has unleashed the most unprecedented series of gold "capital controls" ever seen in a modern nation, shy of confiscation (and even that may be imminent). Today, India added yet another more measure to its list of prohibitions that seek to minimize the size of the gold market available to citizens, yet which will only result in even more interest and demand in the yellow metal. As Reuters reports, India increased its import duty on gold jewellery from 10 percent to 15 percent, setting it higher than the duty on raw gold in a move to protect the domestic jewellery industry. Why is the government doing this? Simple: "To protect the interests of small artisans, the customs duty on articles of jewellery ... is being increased," the ministry said.
A decisive tipping point in the evolution of American capitalism and democracy - the triumph of crony capitalism - took place on October 3, 2008. That was the day of the forced march approval on Capitol Hill of the $700 billion TARP (Troubled Asset Relief Program) bill to bail out Wall Street. This spasm of financial market intervention, including multi-trillion-dollar support lines provided to the big banks and financial companies by the Federal Reserve, was but the latest brick in the foundation of a fundamentally anti-capitalist régime known as “Too Big to Fail” (TBTF). It had been under construction for many decades, but now there was no turning back. The Wall Street bailouts of 2008 shattered what little remained of the old-time fiscal rules. There was no longer any pretense that the free market should determine winners and losers and that tapping the public treasury requires proof of compelling societal benefit.
Deep Thoughts From Jamie Dimon's Daughter On Fi-Nance, "What The Hell Is A Bond", And Who Should Get TaxedSubmitted by Tyler Durden on 09/16/2013 21:28 -0400
One would think Laura Dimon, the daughter of one James Dimon, would be on familiar terms with such concepts as bonds, capital structure and finance (especially the more arcane substrata thereof). After all the father of the graduate from the Columbia School of Journalism (author of such previous pieces as "The Last Office Taboo for Women: Doing Your Business at Work" which examines "the lengths women go to avoid getting caught in the stall") is none other than the CEO of the largest bank in the US, best-known for such "one-time items" as constantly recurring legal charges associated with financial innovation gone horribly wrong (today's rumor of a $750MM settlement over the bank's London-based prop trading group being a case in point). As it turns out, one may be mistaken...
"A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money ."
- Ben Bernanke, Deflation: Making Sure "It" Doesn't Happen Here, November 21, 2002
Equity markets have to explaining to do, regardless of where you think they are heading. As ConvesrgEx's Nick Colas notes, if bullish, riddle me this: are stocks just going to hop-skip-jump over Fed tapering, U.S. budget battles, a new Federal Reserve Chair, Syria, Greek bailout 3.0, German Elections, and other near term speedbumps? Last time we checked "hope" still isn’t a strategy. And for the bears: Colas asks, how has that been working out for you over the last week of boa constrictor-like squeezes higher? Not so good. In the following note, Colas takes an out-of-the-box approach to explaining the recent rally by looking at some new academic work on the subject of stress. As it turns out, stress is only harmful if you believe it is. Maybe markets have 'learned' that lesson and view all these potential stomach-churning headlines as annoyances, rather than existential crises-in-waiting.
- Obama Holds Fire on Syria, Waits on Russia Plan (WSJ)
- China Shadow Banking Returns as Growth Rebound Adds Risk (Reuters)
- Not one but two: Greece May Need Two More Aid Packages Says ECB’s Coene (WSJ)
- BoJ insider warns of need for wage rises (FT) ... as we have been warning since November, and as has not been happening
- California city backs plan to seize negative equity mortgages (Reuters)
- Home Depot Is Accused of Shaking Down Suspected Shoplifters (BBG)
- Most-Connected Man at Deutsche Bank Favors Lightest Touch (BBG)
- Norway Pledges to Limit Oil Spending (BBG)
- China Shadow Banking Returns as Growth Rebound Adds Risk (BBG)
- Gundlach Says Fed Is Mistaken in How It's Ending Easing (BBG)
Despite earlier comments from Obama on Tuesday night, who called for a pause in authorizing military strikes on Syria, which led to another drop in crude prices overnight, the drop has since reversed and both WTI and Brent Crude contracts are trading in the green. Whether this is the result of a note by Goldman analysts who noted that the Brent crude sell-off was overdone and that they see no improvement regarding the conflict in Libya which is constraining oil production, or because Russia is once again throwing hurdles in the international process to force Syrian disarmament, is unknown. The lack of any key catalysts and no USDJPY levitation, led to most global markets unchanged, and futures currently trading sideways. What is not trading sideways is Apple which is down over 2% to just over $480 as all hopes of a China Mobile deal fall apart, coupled with pervasive critical panning of the new iPhones which, aside for the commodity version, is just the old iPhone with an extension that allows the NSA's new fingerprint database to be filled in record time.
According to the latest whip count on Syria attack proposal in the House, 237 reps oppose a such a strike and 169 are undecided with just 27 are for. While this number guarantees that no vote will ever come to pass, and humiliate Obama, who if anything will revoke the punt to Congress from September 1 and unilaterally engage in strikes to appease assorted Saudi/Qatari interests, all that would take for the 27 Yay votes to become 28, would be for Obama to return the Nobel Peace Prize. According to The Hill, a Republican lawmaker said he'll vote to authorize military action against Syria if President Obama returns his Nobel Peace Prize. The line between reality and an alternative Onionesque universe is thin, but this is not a joke.
Emerging markets’ currencies are crashing, and their central banks are busy tightening policy, trying to stabilize their countries’ financial markets. Who is to blame for this state of affairs? The cause of this state of affairs, in one word, is austerity. Weak demand in Europe is the real reason why emerging markets’ current accounts deteriorated (and, with the exception of China, swung into deficit). Thus, if anything, emerging-market leaders should have complained about European austerity, not about US quantitative easing. Fed Chairman Ben Bernanke’s talk of “tapering” quantitative easing might have triggered the current bout of instability; but emerging markets’ underlying vulnerability was made in Europe.
Bond yields snapped lower, equity prices surged higher, gold and silver prices ripped higher, and the USD snapped dramatically lower (as JPY surged) on the worse-than-expected payrolls print (and terrible downward revision). The sad reflection of bad-news-is-good-news reaction of US capital markets to this 'most important number in the world' is summed up perfectly by CNBC's Rick Santelli as he exclaims how sad this reaction is and asks "what are we a banana republic?" Well, yes, Rick, it appears we are...