At this point it has gotten painfully tedious, and the one phrase to describe trading is - Same Pattern Different Day. With equity futures closing decidedly weak on earnings reality after US market close, the slowly, steady overnight ramp seen every single day for the past month has returned as always, this time on yet another largely expected German confidence indicator beat (following the just as irrationally exuberant ZEW some time ago, and yesterday's far better than expected PMI), this time the IFO Business Climate, which printed at 104.2, on expectations of 103 and up from 102.4. This was driven by both the current assessment rising from 107.1 to 108 and the Expectations rising from 97.9 to 100.5. Naturally, all confidence indicators will be skewed in a way to prevent the market from doubting for a second that Germany may actually succumb to the same recession that has gripped all other European countries (which Germany is an inch away from after its negative Q4 GDP). In other words: there is hope. As for reality, UK Q4 GDP came in at -0.3% on expectations of a far lower drop to -0.1%, and down from the olympics-boosted 0.9% in Q3. The UK certainly can't wait for Mark Carney to come and show them how cable devaluation is really done, cause this time it will be different, if only it wasn't different for everyone else.
The market gets smoked for 1/4 Trillion in a single name, and we're trading at the highs. Go figure.
We have noted the odd cyclicality in macro data (and its leading effect on the market) and it seems Goldman Sachs has also noticed that something is different this time. For 15 years, the seasonal patterns in Goldman's macro index have been mild to totally negligible; but since 2009, something changed. As the chart below indicates, it really is different this time as the macro cycle has become extremely short and consistent (drop in H1, rise in H2) - and is evident not just top-down but bottom-up in payrolls and ISM for instance. Goldman expounds pages of statistical jiggery-pokery to show what we suspected - that this is not weather or seasonality effects, and is not just US (UK and Europe see same pattern of six month cycles); but appears driven by central-bank policy actions (which have been more concentrated in Q4/Q1). 2013 is playing out exactly as the last three years has - with a downdraft that is set to continue for the next few months - though they note that stability in oil prices this time (and recent expansion of easing efforts - Fed and BoJ) may shift the pattern. For now, it appears the macro cycle is becoming shorter and warrants concern as they are unable to find anything but 'reality' as a driver of this odd cyclical pattern as the real economy fades rapidly after each and every infusion of promises from the Central Banks.
Starting tomorrow and every Friday for the next few years, the ECB will report the number of banks and the amount of funds they will repay of the 3-year repo operations conducted in late 2011 and early 2012. For those who do not have the luxury of following these developments closely, I have put together a 10 point cheat sheet.
The present is a time when things are in great confusion. We are creating money from nothing and yet enjoying the fruits of their labors. The economies in Europe and in Japan and America are worsening and yet yields for their sovereign debt are barely off all-time lows. The stock markets of the world, following the 2008/2009 financial crisis, are back at new highs. All of this has taken place because the world’s central banks, acting in concert, have pumped enough small pieces of paper into the fire to keep it burning long into the night and so all of the markets on the planet have been stoked with fuel. When the fundamentals of the markets are out of line with their performance then history teaches us that at some point rational behavior will cause a correction. It was just five years ago when the world learned a rather harsh lesson. It was a lesson that cost Americans 36% of their wealth.
Since Alan Greenspan became the Fed chairman in 1987, there has been a policy consensus on the primary role and effectiveness of monetary policy in cushioning an economic downturn and kicking it back to growth. Fiscal policy, due to the political difficulties in making meaningful changes, was relegated to a minor role in economic management. Staving off crisis and reviving growth still dominate today's conversation. The prima facie evidence is that the experiment has failed. The dominant voice in policy discussions is advocating more of the same. When a medicine isn't working, it could be the wrong one or the dosage isn't sufficient. The world is trying the latter. But, if the medicine is really wrong, more and more of the same will kill the patient one day. The global economy was a debt bubble, functioning on China over-borrowing and investing and the West over-borrowing and consuming. The dynamic came to an end when the debt crises exposed debt levels in the West as too high. The last source of debt growth, the U.S. government, is coming to an end, too, as politics forces it to reduce the deficit. Trying to bring back yesterday through monetary growth will eventually bring inflation, not growth.
I am sorry to tell you that whatever door that had been opened is now closed. America has turned the corner from the self-sufficiency of an individual to a new ideology for this country which is that incomes and life-styles should be equalized by taxes in the name of patriotism and for the greater good. The Socialism of much of Europe has arrived at our shores and spread from sea to shining sea and the safety net of decades past for our less fortunate citizens has been raised to a harmonization of social/governmental benefits regardless of hours worked or income earned. Stock markets rise, Treasury yields decrease, other bonds compress because there is no place off-world to invest money and it must be put somewhere. We are living in a fantasy world of the voters’ making and, I predict with some certainty, that we will all suffer the consequences of our decisions. The problem is extremely serious, answers are frustrating and aggravating and great care must now be exercised because this cliff is exceedingly steep.
China Narrowly Averts Credit Bubble Pop With Latest Government Bailout Of First Domestic Bond DefaultSubmitted by Tyler Durden on 01/23/2013 09:58 -0500
A Chinese solar firm which nearly produced the country's first domestic bond default will complete an interest payment on schedule after a local government intervened on its behalf. Investors say the latest instance of a government riding to the rescue of a troubled Chinese firm has led to moral hazard and inefficient credit allocation. In previous near-defaults, local governments had stepped in directly to arrange bailout funding. But as in past cases, the deal flouts legal notions of debt seniority by allowing one group of creditors - bondholders - to get paid in full, even as a pre-existing default remains un-cured. Analysts say the market does not effectively price in risk because investors assume the government will never allow a default.
Currency wars have captured the imagination of many. However, the modern history of the foreign exchange market demonstrates that is has always been an arena in which nation-states compete. Typically central banks want the currency's exchange rate to affirm not contradict monetary policy. The synchronized crisis and easier monetary policy makes it appear that nearly ever one wants a weak currency. Yet most officials are on low rungs of the intervention escalation ladder. Moreover, there is no sign of it spilling over to a trade war. Has any one else noticed that Japan's largest trading partner and regional rival China has been quiet, not joining the the chorus of criticism?
Heading into the North American open, equities are trading in minor negative territory, led lower by banks as markets look forward to the first LTRO repayment, as well as lingering concerns that losses from derivatives contracts by Monte Paschi (entered with Nomura) may undermine the lender’s earnings. Monte Paschi shares opened 8% lower and were halted by the exchange to prevent a further slide in share price. As a result, even though EUR/USD is trading higher and peripheral bond yield spread are tighter, Bunds are trading in minor positive territory. Of note, Spain’s Iberian neighbour Portugal opened books for its 2017 bond and books are said to be around EUR 10bln, with guidance at MS+395bps (down from original MS+410bps). EUR/USD has also benefited from the decision by the Portuguese Treasury to tap capital markets only a day after a successful placement by Spain yesterday. Looking elsewhere, even though USD/JPY has bounced off earlier lows, implied vols continue to trade heavy as option decay and re-positioning post the BoJ decision weighs on prices. So much so that R/R has slipped to Sep levels, but still favours bets on further JPY depreciation.
HSBC has quietly moved into acquiring large amounts of silver bullion. The bank has secured another deal to buy silver bars from KGHM which brings their total purchases of silver from KGHM alone in the last 12 months to $876 million or PLN 3.65 billion. KGHM is one of the largest producers of silver in the world and is the second-largest producer of refined silver in the world. They produce silver bars registered under the brand KGHM HG that are attested to by “Good Delivery” certificates issued by the London Bullion Market Association and the Dubai Multi Commodities Centre. Listed metals producer KGHM signed an estimated PLN 1.67 billion deal on 2013 sales of silver to HSBC, KGHM said in a market filing yesterday. The deal puts the total value of deals between KGHM and HSBC in the last 12 months to PLN 3.65 billion or $876 million, the filing read. KGHM is one of the largest companies in Poland and one of the largest mining & metallurgy companies in the world.
With the market basking in glow of good earnings results yesterday, mostly out of IBM, and to a lesser extent GOOG, which missed on the top line but beat on EPS squeezing some recent inbound shorts, S&P500 futures have yet to post a solid move to the upside. Perhaps a big reason for this is the recent recoupling of risk based on not one but two carry signals: the first is the well-known EURUSD pair, while the second is the recent entrant, the USDJPY, and it is the latter that continues to see a cover of the massive short interest accumulated over the recent 1000 pip move higher on what upon ongoing reflection has been a disappointing announcement out of the BOJ. Needless to say, the Nikkei whose recent surge higher was all due to currency weakness has tumbled overnight despite corporate fundamentals, if not economic data, which continues to post substantially subpar prints.
In a move that may cause some consternation in Europe due to its adverse implications for trade paterns in the continent, tomorrow British PM David Cameron will announce that he will propose a referendum on whether or not to stay in the European Union, a move that as the WSJ qualifies it "threatens to inhibit trade and cast a new shadow over the troubled bloc." That may be a slight exageration: the referendum would take place, if at all, before the end of the first half of the next Parliament, roughly by late 2017, after an election. Which means that if Cameron loses the election, it is a non-issue, just as it would be a non-issue of course if the UK public voted to stay: according to a survey of the British public late last week by pollsters YouGov showed 34% indicated they would vote to leave in a referendum, while 40% said they would vote to stay. A week earlier, 42% said they would opt out, compared with 36% preferring to remain. Obviously a volatile topic for the population.
Two fundamental beliefs have driven economic policy around the world in recent years. The first is that the world suffers from a shortage of aggregate demand relative to supply; the second is that monetary and fiscal stimulus will close the gap. Is it possible that the diagnosis is right, but that the remedy is wrong? That would explain why we have made little headway so far in restoring growth to pre-crisis levels. And it would also indicate that we must rethink our remedies. Policymakers initially resorted to government spending and low interest rates to boost demand. As government debt has ballooned and policy interest rates have hit rock bottom, central banks have focused on increasingly innovative policy to boost demand. Yet growth continues to be painfully slow. Why? What if the problem is the assumption that all demand is created equal? Put differently, the bust that follows years of a debt-fueled boom leaves behind an economy that supplies too much of the wrong kind of good relative to the changed demand.
- "My adversary is the world of finance."
- "I don't like indecent, unearned wealth."
- "We do not believe that in this country, freedom is reserved for the lucky, or happiness for the few."
- "We cannot succeed when a shrinking few do very well and a growing many barely make it."
- "People from all backgrounds and political positions are willing to contribute for services and protection of society as a whole - but on the condition that money is being spent effectively and that everyone is paying their part."
- "We find ourselves in a difficult situation... There's a crisis, weak growth, unemployment... my duty is to ensure that by the end of my mandate (the country) is in a better state than it was at the beginning."