Capital Markets

The Central Bank policies of the last five years have damaged the capital markets to the point that the single most important item is no longer developments in the real world, but how Central banks will respond to said developments.

• Ukraine Shifts to Defense Against Russian Incursion (WSJ)
• U.S. forces carry out operation against al-Shabaab in Somalia (Reuters)
• Bond Markets Tilt Toward Frankfurt as Draghi Negates Fed (BBG)
• Another "unexpectedly" - Swiss Economy Unexpectedly Stalls as Euro Area Takes Toll (BBG)
• Japan's 'Abenomics' feared in trouble as challenges build (Reuters)
• Germany Imposes Nationwide Ban on Uber's Cab-Hailing Service (WSJ)
• Japan's 'forward guidance', the GPIF, has "already begun a highly anticipated portfolio reshuffle" (WSJ)
• Detroit Brings Bankruptcy Plan to Court With Billionaires (BBG)
• Burger King has maneuvered to cut U.S. tax bill for years (Reuters)

• Off balance sheet vehicles?  Check
• Conflicted bank "research" recommending muppets buy stock while soliciting banking fees from same stock?  Check
• Hoping to sell debt on to muppets?  Check
• Chinese corruption? Check
• State bailout of failed bank? Check

We believe Fed’s actions would be more appropriately described as permitted cancerous beliefs to spread throughout the financial system, thereby killing Democratic Capitalism which is the basis of the capital markets. Today we’re going to explain what the “final outcome” for this process will be. The short version is what happens to a cancer patient who allows the disease to spread unchecked (death).

The popular view concerning the Fed is that it is apolitical. Anyone who considers the timing of the Fed’s actions knows this is false. However, for the vast majority of Americans, including financial professionals, the Fed is thought to be an apolitical entity focusing exclusively on economic and financial matters.

Dispassionate overview of the week ahead, with thoughts about September.

It is clearly not in the interests of the long-standing members of the EU to escalate a 'sanctions and financial conflict' with Russia. This is why politicians are walking on eggshells, paying lip-service to America and the scared Eastern fringe members of NATO while hoping this goes no further. So long as this is the case it is clear that NATO members are powerless to stop Russia from wresting control of all or parts of Ukraine from the government in Kiev. Putin knows this; unfortunately it is not clear to us that the American government does. All in all it seems likely that after a period of slow-burn as Putin dictates the pace of developments, the political situation in Ukraine will deteriorate with some unhelpful nudges from Russia.

In a historic first, three days ago, South Africa's Rand Merchant Bank, a division of FirstRand Bank Limited, announced it would issue the FirstRand Gold Bond, or a bond denominated in South African Krugerrand gold coins. In other words, for the first time "holding" gold will pay a dividend (or in this case, interest). Sound odd? Maybe because it is.

With USDJPY algos, and thus the S&P, reacting as if stung like bees by every fabricated headline emerging out of Ukraine (only to reverse the move promptly after once the market realizes the biggest war in Ukraine continues to be one of disinformation), there appears to be far more confusion about how the Ukraine conflict will play out than what the Fed will do (recall that everyone is certain today Yellen will release even more dovishness). So to help out with the confusion here are three scenarios and trades from JPM, on how the Ukraine conflict may play out, if only in capital markets.

• Ukraine accuses Russia of invasion after aid convoy crosses border (Reuters)
• Hunt for Foley’s Killer Spans Old Policing and Tech Tools (BBG)
• U.S. Probe Examines GM Lawyers (WSJ)
• Argentina accuses U.S. Judge Griesa of "imperialist" attitude (Reuters)
• Violence-weary Missouri town sees second night of calm (Reuters)
• Geneva Banks Break 200-Year Silence to Unveil Earnings (BBG)
• Richest Jailed Putin Foe Says Ukraine Fears Sparked Prosecution (BBG)
• Disclosure of Failed Attempt to Rescue James Foley Is Criticized (WSJ)
• Execution of U.S. journalist reveals the changing business of war coverage (Reuters)

With the impasse over the latest Argentina default going nowhere fast, late last night president Kirchner stunned its creditors when she announced what amounts to a cramdown plan for holdouts, in which all bonds would be stripped of their existing indentures and converted to local law bonds. Or, as some would call it, a "scorched earth" transaction that burns all bridges, and goodwill, with the international creditor community and likely leaves Argentina unable to access global capital markets for the foreseeable future.

The algos and chart traders are making another run at 2000 on the S&P 500, attempting to convince the wary investor one more time that buying on the dips is a no brainer. And in that proposition they are, ironically, correct.  To buy this utterly manipulated market at these nosebleed valuation levels is about as brainless of an undertaking as is imaginable.

Nobody really believes the official narrative that the "recovery" is powering the remarkable strength of U.S. stocks, bonds and real estate. The real Main Street economy is quite obviously struggling, outside the energy and Federal government sectors, and so many see the Federal Reserve's free money for financiers (a.k.a. quantitative easing) bond and mortgage-buying programs as the real reason bond yields have declined and stocks have soared. This leads us to wonder if capital inflows into the U.S. aren't a largely overlooked driver of rising U.S. markets.

I was left slack-jawed as I listened to an interview on financial media between the host and guest. I have always enjoyed as well as respected the host even though many times I may totally disagree. However, as for the guest being interviewed, not only did I disagree: I lost quite a bit of respect for. During the interview the questions were posed as to why people (investors et al) harbor these feelings of angst as to whether or not they should get in, get out, etc,, etc. The guest then went on to use data points, math, trend references, and any other metric available within a snake oil sales bag as to prove his point: Where people not believing in this market rally along with those who’ve not participated are, (and I quote) “Idiots.” I have only one answer to that statement: What you’ve just demonstrated is exactly why people with more than half a brain aren’t buying your message: You are insulting their/our intelligence.

Non-ideologically laden overview of the key issues shaping the investment climate in the week ahead.