Capital Markets

French Nobel-Prize Winning Economist Slams "Big State" Socialism: "Not Enough Money To Pay For It"

One would think: i) French + ii) economist + iii) Nobel prize winner = the French version of Paul Krugman, which immediately means someone who exists in a permament state of eternal hubris and confused shock at the endless stupidity of all those others who (have a functioning frontal cortext and thus) fail to recognize his brilliance (hence, are capable of rational thought), whose only explanation for the failure of all his promoted policies is that not enough, never enough of them was attempted, and that, like a good socialist, the only thing better than a massive government apparatus is an infinite government apparatus, coupled with 10 Princeton economists sitting in a circle, chanting and micromanaging the world, the economy and the capital markets.

One would be wrong.

What The Fed Does Next

In 2008, various liquidity facilities, designed by the Fed, unclogged broken capital markets and helped avert economic and financial disaster. The Fed’s (subsequent) QE and ZIRP policies have enabled fiscal stalemate, turbo-charged wealth inequality, and arguably led to financial asset bubbles. For these reasons, we believe they have become counter-productive. New tactics, should they be needed, would therefore be welcomed. The Fed claims it will turn to “macro-prudential” polices, but as Kevin Warch told The IMF, "macro-prudential policies are vital, but we have no idea what they are." We have a theory for what the Fed does next... and holders of capital (who have been so richly rewarded) will be badly hurt.

The Collapse Of "Well-Established" Stock Market Conventions

Equity markets live and die on several well-established conventions, according to ConvergEx's Nick Colas, noting that these are the rules that investors use as the bedrock of their fundamental analysis. The volatility of the last few weeks shows that some of these paradigms are now under attack. Chief among the question marks: “Do central banks always have the power to tip the balance between growth and recession?” Another rising concern: “Can stocks constantly shrug off recessionary signals from commodity and fixed income markets?” Lastly, “How many exogenous, if largely unpredictable, global events can equities ignore before their collective weight halts a bull market?” Bottom line: the debate on these topics isn’t over for October or the balance of the year.

The "Crazy Ivan" Playbook: How To Time A Near-Term Market Bottom

Just when you think the selloff couldn’t get any scarier, it did. The last hour of trading took over 1% out of the S&P 500 in rapid fashion, reportedly on fears of an Ebola check at a major U.S. airport. Today we offer up a “Top 10” list of specific markets and indicators to watch for signs of a near term market bottom. They include the CBOE VIX Index (key levels at 26 and 32), the action in small cap stocks and crude oil, and the dollar. Less quantifiable issues – but important nonetheless – are headlines related to Ebola (probably getting worse before better), 10-year Treasury bond yields (2.0% and 1.5% possible here), and European policymakers addressing a host of difficult monetary and fiscal policy issues. Bottom line: this is unlikely to be a dramatic “V-bottom” low given the range of issues of concern to investors.  Look for the majority of our “Top 10” to stop going down before calling a bottom.

Futures Euphoria Deflated By Latest Batch Of Ugly European News: Germany Can't Exclude "Technical Recession"

So far the overnight session has been a mirror image of Monday's, when futures languished at the lows only to ramp higher as soon as Europe started BTFD. Today, on the other hand, we had a rather amusing surge in the AUDJPY as several central banks were getting "liquidity rebates" from the CME to push the global carry-fueled risk complex higher, only to see their efforts crash and burn as Europe's key economic events hit. First, it was the Eurozone Industrial Production, which confirmed that the triple dip is well and here, when it printed -1.8%, below the expected -1.6%, and far below last month's 1.0%. This comes in the month when German IP plunged most since 2009, confirming that this time it's different, and it is Germany that is leading Europe's collapse into the Keynesian abyss not the periphery. And speaking of Germany, at the same time Europe's former growth dynamo released an October ZEW survey of -3.6%, the 10th consecutive decline and well below the 0.0% expected: first negative print since late 2012!

As Fracking Enters A Bear Market, A Question Emerges: Is The Shale Boom Built On A Sea Of Lies?

"The audience in the ballroom of the Hotel Derek included engineers for shale drillers such as Marathon, Continental and Rice. Pamela Allen, a senior reserves coordinator for Marathon, raised her hand and told Lee that she was worried that using outsized forecasts in public presentations would run afoul of the SEC and “come back to haunt us.” Singhania, the Marathon spokeswoman, said she was unable to comment on Allen’s remarks without seeing a transcript. “If a lot of people get burned -- and I think a lot of people can and will be burned -- by these numbers in the investor presentations, there may be a push by investors to get the SEC to do something about it,” Lee said during the workshop."

E*Trade Busted For Improperly Trading "Billions" Of Penny Stocks Over 4 Years

As American stock markets become CYNK'd with ever shorter horizons and ever greater aspirations of 'getting rich quick', we thought it fascinating that none other than E*Trade - that bastion of once day-trading prowess and now investing-for-retirement Type-E expertise - has been busted by the SEC for failing in their gatekeeper roles and improperly engaged in unregistered sales of microcap stocks on behalf of their customers. Remember, as the baby explains, "making a big investment is as easy as a single-click..." and so it was that E*Trade sold billions of penny stock shares for customers during a four-year period while ignoring red flags.

There Is No Mystery To Today's Selloff

Regarding the two violent selloffs this week: there is no mystery. Recall that Deutsche Bank warned late in the summer this would happen for one simple reason: there are just three more weeks of POMO left after which the Fed's balance sheet flatlines, and with it, the S&P500. The only question is whether those who "sell ahead of everyone else", manage to take the S&P far below "unchanged", as prior QE ends have done, proving once again that it is all about the flow not the stock, and as a result the Fed will once again have to resort to even more QE.

Frontrunning: October 3

  • How you know it is all a lie: Pelosi Presses Obama to Talk Up Stronger U.S. Economy (BBG)
  • Secret Goldman Sachs Tapes Put Pressure on New York Fed (NYT), Uh, no they don't
  • Clashes Break Out at Hong Kong Protest Site (WSJ)
  • N.Y. Fed Lawyer Says AIG Got Billions Without Paperwork (BBG)
  • Ebola’s Disease Detectives Race to Track Others Exposed (BBG)
  • UPS, FedEx Want Retailers to Get Real on Holiday Shipping (WSJ)
  • No more mailman at the door under U.S. Postal Service plan (Reuters)

4 Years Later, Fed Critics Explain Why Central Planning Still Doesn't Work

On Nov. 15, 2010, a letter signed by academics, economists and money managers warned that the Federal Reserve's strategy of buying bonds and other securities to reduce interest rates risked "currency debasement and inflation" and could "distort financial markets." As Bloomberg reports, they also said it wouldn't achieve the Fed's objective of promoting employment. Four years later, many members of the group, which includes Seth Klarman of Baupost Group LLC and billionaire Paul Singer of Elliott Management Corp., explain why they stand by the letter's content...

Equity Futures Fail To Surge Despite Ongoing Bad News Onslaught

A quick anecdote that should quickly confirm just how broken everything is: earlier today MarkIt reported European manufacturing data that was atrocious, with both German and European PMIs tumbling to levels not seen since mid-2013, and with Europe's growth dynamo now in a contraction phase clearly signalling what has been long overdue: a European triple dip recession. So what happens? Moments later Germany sells €4.1 billion in 10 Year paper at a record low yield below 1%.... even as the Bundesbank had to retain a whopping 17.84% of the auction, the highest since June, with only €4.663 Bn in bids for the €5 Bn target, the first miss since May 21. So hurray for the central banks, boo for the economy, and as for that mythical creature, once known as bond vigilantes, our condolences: good luck figuring out what the hell just happened, and good luck recalling what a free market is.