Carry Trade

So there you have it: a riskless "profit" handout for foreign banks, subsidized by the most famous US "public" institution - the Federal Reserves - amounting to approximately $11 billion in just one year.

The problem with all of this is that it’s now becoming apparent to everyone. The amount of mal-investment along with just how intertwined all the subsequent carry trades and more is becoming frightfully obvious and can no longer be hidden from view. The real problem now facing the Fed. which I believe they themselves did not fully comprehend was the extent in which all of this was: so blatantly obvious. Again: to anyone who truly wanted to look. Without the Fed’s interventionism – there is (and was) no market. And now with the raising of rates; no one will be able to miss or avoid that fact any longer. No matter how hard they try.

Seven years of zero rates, massive monetary inflation and incessant market backstopping have desensitized and anesthetized. Rational thought ultimately succumbed to "perpetual money machine" quackery. And now all of this greatly increases vulnerability to destabilizing market dislocations, as senses are restored and nerves awakened. "A lot of this looks like late 2007 or early 2008," warns one manager, but today, market mispricing is systemic and global – virtually all securities classes at home and abroad.

After Tuesday’s dividend massacre, it’s plain as day that Kinder Morgan wasn’t the greatest thing since slice bread after all. That is, a “growth” business paying rich dividends out of rock solid profit margins and flourishing cash flow. In fact, it was just a momo stock on a borrowing spree.

"2015 was like commuting by rollercoaster. There were heart-stopping drops, there were nearly vertical ascents, and when it was all over you got off just about where you started and it cost you money."

At the moment, the strength of the USD correlates very strongly to equities. When King Dollar is torpedoed like it was yesterday, stocks plummet. So does this mean that a rate hike next week will be tremendously bullish for stocks?

Overnight market action has largely been a continuation of Tuesday's key themes with European stocks falling as a selloff in mining companies extended to a 7th day, even as metals prices rose and crude oil rallied modestly from a six-year low after yesterday's API crude inventory draw. U.S. equity futures have rebounded from modest declines, as emerging-market shares extended their losing streak to a 6th day while Asian stocks dropped to 2 month lows.

The US Federal Reserve (Fed) and European Central Bank (ECB) have created a very dangerous situation. And it is one that few if any investors are assessing.

...and what will the implications be?

"... the next 12-18 months will be divided into three periods corresponding to the three distinct regimes of market dynamics. They can be summarized by the following modes of the curve: short-term tactical bear flatteners on the back of a Fed liftoff story, followed by volatile bear steepeners of the “taper-tantrum” type around mid-year, and a bull-flattening finale as structural factors deem rate hikes to be a policy mistake."

There’s an old adage among veteran stock traders that goes something like his, “If I told you the news before it were made public – it’s still a 50/50 bet you would guess the market’s reaction correctly.” That was when the markets had some resemblance of normalcy. Today, normalcy has been replaced with sheer lunacy as to the speculation and interpretations for where these markets go from here.

Futures are modestly higher in early trading having tracked the USDJPY once again almost tick for tick, with the carry trade of choice rising to 123 shortly after Mario Draghi's latest speech pushed the dollar strong initially only to see most gains promptly evaporate against both the Yen and the Euro. European shares are likewise little changed, after gaining earlier, while Asian stocks rise; oil also advanced in early trading only to drop to its lowest overnight level moments ago, a few dimes over $40, with aluminum and copper both posting modest increases.

There is no way Fed policy can be win-win-win for all participants.

According to Bank of America, the smart money is taking advantage of this latest rebound in stocks to sell to who else: the traditionally biggest sucker in the room - retail investors.