Carry Trade

The only discernible difference we see from the Wall Street version of a casino it’s now so prominently become, and the one we find on some island or strip is this: At the least, when we have a great winning bet placed on Red or Black... The odds that someone from the house bank coming down to floor and yelling 'Fire' as the wheel is about to stop right on my stop is far, far less than a Central Banker coming out touting 'Well maybe we should or shouldn’t do...' the moment the true free hand of market is about to expose itself. At least at a true casino – they do have some level of integrity.

Globally the US Dollar carry trade is believed to be north of $3 trillion (larger than the economy of France). What happens when it begins to unwind?

European shares fall, reversing earlier gains, with the banks and tech sectors underperforming and basic resources, oil & gas outperforming. Companies including ArcelorMittal, Allianz, Swiss Re, Richemont released results. The Spanish and Italian markets are the worst-performing larger bourses, the U.K. the best. The euro is stronger against the dollar. Japanese 10yr bond yields rise; German yields increase. Furthermore, the pullback in the USD-index from overnight highs has also provided the commodity complex with some upside and thus has seen basic materials and energy name outperform to the benefit of the FTSE 100. Elsewhere, Allianz’s (+4.9%) impressive pre-market report has helped halt the move to the downside for the DAX which trades with modest gains of 0.3%. Fixed income markets continue to hold fire (albeit in marginal negative territory) with volumes exceedingly thin ahead of key risk events. And with that, all eyes move to today's Nonfarm payroll expected to print at 235K, after last month's 248K. Something to keep in mind: the average seasonal adjustment to the October data is almost exactly 1 million, so yet again the fate of the US and global economy, will be determined by an Arima X 13 "fudge factor."

Shit just got real. The Bank of Japan said it will buy 100% of new bond issuance.

The US Dollar is moving up RAPIDLY. Will this blow up the financial system as it did in 2008? We’ll soon find out.

The problem with what we call the Exit Rule for Bubbles - "you only get out if you panic before everyone else does" – is that you also have to decide whether to look like an idiot before the crash or an idiot after it.

The global economy is like a jetliner that needs all of its engines operational to take off and steer clear of clouds and storms. Unfortunately, as Nouriel Roubini tells The Guardian, only one of its four engines is functioning properly: the Anglosphere (the United States and its close cousin, the United Kingdom). As Roubini continues, the question is whether and for how long the global economy can remain aloft on a single engine. Weakness in the rest of the world implies a stronger dollar, which will invariably weaken US growth. The deeper the slowdown in other countries and the higher the dollar rises, the less the US will be able to decouple from the funk everywhere else, even if domestic demand seems robust. But it's not just the rest of the world that is decoupling from US growth... as the following uncomfortable chart shows, so is a crucial pillar of monetary policy transmission, consumer wealth perception, and economic stability - the US housing market itself.

What today's JPY-carry-trade-enabling Bank of Japan exuberance means to the 'average joe'...

We're being hit with a double-whammy: Wages are under deflationary pressure, and almost everything else is exposed to inflationary pressure.  No wonder we feel poorer: most of are poorer.

I challenge the central banker, manager, trader, and investors to manufacture and financially engineer a safer and better alternative to the USD.

Last Wednesday the markets plunged on a vague recognition that the central bank promoted recovery story might not be on the level. But that tremor didn’t last long. Right on cue the next day, one of the very dimmest Fed heads - James Dullard of St Louis - mumbled incoherently about a possible QE extension, causing the robo-traders to erupt with buy orders. And its no different anywhere else in the central bank besotted financial markets around the world. Everywhere state action, not business enterprise, is believed to be the source of wealth creation - at least the stock market’s paper wealth version and even if for just a few more hours or days. The job of the monetary politburo is apparently to sift noise out of the in-coming data noise - even when it is a feedback loop from the Fed’s own manipulation and interventions.

Back in June 2011, Zero Hedge first posted: "Exclusive: The Fed's $600 Billion Stealth Bailout Of Foreign Banks Continues At The Expense Of The Domestic Economy, Or Explaining Where All The QE2 Money Went" Of course, the conformist, counter-contrarian punditry promptly said this was a non-issue and was purely due to some completely irrelevant micro-arbing of a few basis points in FDIC penalty surcharges, which as we explained extensively over the past 3 years, has nothing at all to do with the actual motive of hoarding Fed reserves by offshore (or onshore) banks, and which has everything to do with accumulating billions in "dry powder" reserves to use for risk-purchasing purposes. Fast, or rather slow, forward to today when none other than the WSJ's Jon Hilsenrath debunks yet another "conspiracy theory" and reveals it as "unconspiracy fact" with "Fed Rate Policies Aid Foreign Banks: Lenders Pocket a Spread by Borrowing Cheaply, Parking Funds at Central Bank"

Self-evidently, all the major economies are saturated with debt. Accordingly, central bank balance sheet expansion has lost its Keynesian magic entirely. Now the great sea of freshly minted liquidity simply fuels the carry trades as gamblers everywhere load up with any asset that generates a yield or short-run capital gain, and fund these bloated positions with cheap options and repo style finance. But here’s the obvious thing. Central banks can’t normalize interest rates - that is, allow the money markets to rise off the zero-bound - without triggering a violent unwind of the carry trades on which today’s massive asset inflation is built. On the other hand, they can no longer stimulate GDP growth, either, because the credit expansion channel to the main street economy of households and business is blocked by the reality of peak debt. Yes, the era of Keynesian money printing is over and done. But don’t wait for the small lady at the Fed to sing, either.

The ECB again cut the interest rates it controls, deeper into negative territory. It says it’s trying to nudge prices higher, but it’s actually feeding the cancer of falling interest.

The Fed, by raising its rates and relinquishing its downward pressure on the US dollar, is about to kill off most of the emerging markets. That’s a whole lot of misery in one pen stroke. That’s a whole lot of millions of people who will see their dreams of better lives shattered, just as they were beginning to think they had a chance. It’s how the game is played. The weak must be sacrificed so the strong be stronger.