It is quite clear that Bernanke achieved his goal of inflating asset prices by expanding the Federal Reserve's balance sheet by 371.64% since the end of the financial crisis. However, was he as successful in fulfilling his other objectives? The following charts perform the same cost/benefit analysis on real economic health... Did the Fed's monetary intervention programs keep the economy from sliding into a much deeper recession? Probably. Have the programs been effective in achieving Bernanke's stated goals? Not really.
Following the overnight ramp in various JPY crosses (dragging equity futures higher, and the Nikkei up 0.8%) it is as if the market is desperate to put all of last week's geopolitical events in the rearview mirror, and while yesterday there were no economic events of note, today's CPI and existing home prints should provide at least some distraction from the relentless barrage of one-line updates on Ukraine and Gaza. Still, that is precisely where the biggest risk remains, with an emphasis on the possibility of more Russian sanctions, this time by Europe.
The death toll among Palestinians from the Israeli offensive in the Gaza Strip reached over 500 on Monday, Gaza health officials said, as the two sides counted their dead following the bloodiest day of fighting so far in the two-week campaign. CBS reports the officials said some 3,150 Palestinians had been wounded. The IDF just announced 7 Israeli soldiers were killed today, raising the Israeli death toll to 25 (including 2 civilians). A glance at the stunning images below beggars belief that world equity markets (and Israel's) are shrugging at this escalating violence. We assume they 'believe' in the power of John Kerry.
"Retirement Off" It appears the 'proof' that markets were Teflon and could shrug off the worst spate of geopolitical concerns in years... is wrong. US equity markets have given up all the gains from Friday's knee-jerk massive short-squeeze fest... as Treasury yields have tumbled lower all day long...
In the absence of any major economic events, it will be another day tracking geopolitical headlines out of Ukraine (lots of accusations, propaganda and fingerpointing on both sides, zero actual evidence and facts - expect more European sanctions to be announced today to match last week's latest US-led round ) and Israel (where the death toll has now risen over 500, almost entirely on the Gaza side), and then promptly spinning any bad news as great news. For now, however, futures are modestly lower from the Friday close pushed down by the AUDJPY which has rebased around 95.00. We expect the momentum ignition correlation algos will promptly take of that as soon as the US market opens, a market which has now been described as bubbly by the BIS, the Fed and the IMF.
A dispassionate look at the issues and events shaping the investment climate in the week ahead.
We show that equity markets are stretched (e.g., more than 80% of the S&P rally since last year is due to re-rating), but we also find that the fixed income market has become quite rich (we have been overweight European peripherals for more than a year on valuation grounds, we show that this argument no longer holds), and the same is true of the credit market. Second because capital has been flowing rapidly into risky assets, we document that argument and here too find evidence that the market might be ahead of itself. We read the market reaction last week to the Portuguese news as a sign that the market is indeed too complacent and could correct rapidly.
Thanks to the capable carry-induced ramp in AUDJPY (and a helpful OPEX pile-on for VIX), US equity markets are surging this morning (Russell 2000 above yesterday's highs?!) on the heels of the biggest short squeeze in over a month... SSDD...
"Fixed" - well almost. US equity markets have retraced all the losses suffered post-Israel-escalation (why worry?) but remain (for now) below the levels reached before the MH17 crash headlines hit... Of course, AUDJPY is in in charge along with VIX (as it is Friday after all)...
Despite an initial attempt to rally after the terrible news out of Ukraine hit, stocks were unable to mount any serious BTFD as uncertainty spread. Despite Bullard's best efforts, bond yields crashed lower (over 7bps today) with 10Y at 2.45% near the lowest close in 13 months. Gold prices jumped over $20 (even as the USD Index flatlined - though JPY strengthened notably as risk-off set in). VIX exploded 3.7 vols (its biggest swing - 45% - since Aug 2011). Equity markets cratered into the close as Israel ground invasion news (A White House Lockdown) added to the concerns leaving all US markets red post-payrolls and red post-Yellen. The S&P 500 dropped 1.18% - its biggest drop in 3 months. The Russell 2000 is now down 2.5% year-to-date.
Remember when Ukraine was fixed and you could BTFATH as no geopolitical concerns could ever harm US equity markets... well that just changed... News that a Malaysian Airlines passeneger jet carrying 280 passengers was shot down in Ukraine has sparked major derisking across stocks and slammed bonds to the low yields of the day. Gold and Silver are jumping and the USD is fading.
Ironically, Carl Icahn - poster-child of the leveraged financial engineering that has overtaken US equity markets on the back of Central Bank largesse - told CNBC that he was "very nervous" about US equity markets. Refelecting on Yellen's apparent cluelessness of the consequences of her actions, and fearful of the build of derivative positions, Icahn says he's "worried" because if Yellen does not understand the end-game then "there's no argument - you have to worry about the excesssive printing of money!" So in 12 hours, we have been told: some sectors are stretched (Yellen), there is a bubble but we don't want to pop it (Fisher), when the Fed ends QE, there'll be abear market (Druckenmiller), and now Icahn is "worried about markets." Cue, Cramer explaining how none of these buffoons know anything about stocks...
Since Janet Yellen started speaking yesterday, the USD has jumped most in 10 weeks to 1-month highs, Treasury yields have risen 5bps at the short-end but are unchanged at the long-end, Gold and silver are down 1%, oil up 1%, and copper -1.4%. In stock land, The Dow and Trannies are leading, S&P is unch, and Russell 2000 is not happy (-1.3%). VIX tested down to a 10-handle once again (but closed at 11.1). Credit markets remained far less excited than stocks today. Biotechs are down over 4.5% since Yellen started speaking and Social Media -1.2%. The Russell 2000 closes -0.8% for 2014.
What does Yellen know? Nothing apparently (if she says 'sell') US equity markets, juiced by China's GDP data (but missing China's retail sales and home price slump) and helped by Portugal 'reassurances' that have yet to materialize, are soaring this morning... VIX is back at a 10-handle as Dow hits record highs, the S&P nears record highs and even small-cap, social media, momo, tech fantasy stocks are ripping... you can't keep a good market down... It seems "fight the Fed" is the new "Don't fight the Fed"