Equity Markets

Once again, US equity markets are algorithmically surging as Treasury bonds are aggressively bid. It didn't end well yesterday, and we suspect won't today either...

While this week has been, and continues to be, devoid of macro updates, yesterday's flurry of mostly disappointing earnings releases both before and after the open, including some of the biggest DJIA companies as well as the current and previously biggest and most important companies in the world, AAPL and MSFT, both of which came crashing down following earnings and forecasts that were well short of market expectations, came as a jolt to a market that was artificially priced by central bank liquidity and HFT momo algos beyond perfection. Add to that yesterday's downward revision to historical industrial production which confirmed the US economy is a step away from recession, as well as last night's Crude API inventory build which is once again pressuring WTI lower and on the verge of a 49 handle, and perhaps the biggest question is why are futures not much lower.

During the Vietnam War, surveying the shelled wreckage of Ben Tre, an American officer famously remarked, “It became necessary to destroy the town to save it.” His comment came to epitomize the sort of self-defeating “victory” that undoes what it aims to achieve. Last week, China destroyed its stock market in order to save it. Faced with a crash in share prices from a bubble of its own making, the Chinese government intervened ruthlessly, and recklessly, to turn those prices around. Its heavy-handed approach seemed to work, for the moment, but only by severely damaging far more important goals and ambitions.

Due to significant retail participation and the fact that the equity mania in China has served as a distraction for a nation coping with decelerating economic growth and a bursting property bubble, some (and we were among the first) began to suggest that the broader economy and indeed, social stability, may be at risk in China if stocks continued to fall. The extent to which this suggestion represented a real concern (as opposed to the ravings of a tin foil hat fringe blog) was underscored by the extraordinary measures China adopted in a desperate attempt to stop the bleeding and, later by several sellside strategists who began to warn about possible spillovers into the real economy. Now, with Beijing still struggling to restore the stock bubble, the first signs of knock-on effects are beginning to emerge.

Would you rather have one “Share” of the S&P 500 at $2,124, or 41 barrels of crude oil, or 1.86 ounces of gold? Yes, they are all worth the same amount at the moment, but the price relationship between the three has shifted over the decades.

"Free" markets for all, but the real joke is that this comes from the Beijing Review

An "esoteric point" about China's GDP data has suddenly become a very big deal as the world looks to China for economic leadership amid a global deflationary supply glut, lackluster demand, and depressed trade.

After weeks of overnight turbulence following every twist and turn in the Greek drama, this morning has seen a scarcity of mostly gap up (or NYSE-breakding "down") moves, and S&P500 futures are unchanged as of this moment however the Nasdaq is looking set for another record high at the open after last night's better than expected GOOG results which sent the stop higher by 11% of over $40 billion in market cap. We expect this not to last very long as the traditional no volume, USDJPY-levitation driven buying of ES will surely resume once US algos wake up and launch the self-trading spoof programs. More importantly: a red close on Friday is not exactly permitted by the central planners.

Mario Draghi should remain "largely on message" in Thursday's ECB presser, with the deal struck in Brussels last weekend having spared him the inconvenience of convening a tense discussion about imminent Grexit. Expect the ECB to reiterate the central bank's commitment to implement PSPP in full and the market will no doubt be looking for any color the ECB cares to add about the event risks surrounding the implementation of a third Greek program and the recent turmoil in Chinese equity markets.

And so the 2015 season of the Greek drama is coming to a close following last night's vote in Greek parliament to vote the country into even more austerity than was the case before Syriza was voted into power with promises of removing all austerity, even with Europe - which formally admits Greece is unsustainable in its current debt configuration - now terminally split on how to proceed, with Germany's finmin still calling for a "temporary Grexit", the IMF demanding massive debt haircuts, while the rest of Europe (and not so happy if one is Finnish or Dutch) just happy to kick the can for the third time.

The stock market is just too important to leave to the vagaries of an actual market now. Too much depends on good-looking numbers now. It must be guided and controlled, or else the stilts on which our global financial system balances become shakier and more visible. The market must be rendered increasingly meaningless simply because it's too meaningful to our current economic system.

With Small Business Optimism cratering to 15 month lows and CFO's skepticism at 2 year lows, it is no surprise that 'average joe' is also feeling a little less confident (despite the exuberance in equity markets). Gallup's U.S. Economic Confidence Index registered at -11 this week, which marked an eight-month low for the index. While current conditions are weak, more worryingly, the economic outlook has tumbled to its lowest since October with 56% of Americans saying "the economy is getting worse."

In his Pulitzer-Prize-winning book, Lords of Finance, the economist Liaquat Ahamad tells the story of how four central bankers, driven by staunch adherence to the gold standard, “broke the world” and triggered the Great Depression. Today’s central bankers largely share a new conventional wisdom – about the benefits of loose monetary policy. Are monetary policymakers poised to break the world again?

The problem with these policy extremes is that they are so painfully visibly acts of central-planning desperation. If things are as positive as we're told, then why are central planners forced to impose such absurdly extreme policies to keep the status quo from imploding? If these policies worked, why are interest rates still pegged to zero after six years of "growth" and the inflation of monumental asset bubbles? If these policies don't work (and they obviously don't, otherwise the authorities could have normalized interest rates and ceased quantitative easing, stock purchases, plunge protection schemes, etc. many years ago) and central planners keep doing more of what has failed, then the only possible conclusions are...