"We believe the US will be in recession before the end of 2016 and then things will be really interesting. How will the public receive news of more QE, NIRP, forward guidance, cash bans and capital control in a time when faith in central bank omnipotence disappears?"
At the height of the financial crisis, the unprecedented decline in swap rates below Treasury yields was seen as an anomaly. The phenomenon is now widespread, as Bloomberg notes, what Fabozzi's bible of swap-pricing calls a "perversion" is now the rule all the way from 30Y to 2Y maturities. As one analyst notes, historical interpretations of this have been destroyed and if the flip to negative spreads persists, it would signal that its roots are in a combination of regulators’ efforts to head off another financial crisis, China selling pressure (and its impact on repo markets) and "broken" wholesale money-markets.
There is growing turmoil in buybacks that threatens the very fabric of the stock bubble. That was always the primary transmission of the foundation of its current manifestation, corporate debt, into asset prices; especially the huge run following QE3 and QE4. The problem once momentum fades is that investor attention turns toward valuations that were repeatedly ignored before. As long as everything is moving upward and any fundamental downside is completely contained (in perception) as “transitory” then valuations are easily set aside as one form of rationalization. The effect of reversing momentum is for a more honest measurement; particularly by force of change in economic sentiment which is almost always concurrent.
Faith in the QE world is waning everywhere and with very good reason. If the "wholesale money" eurodollar takeover was instead responsible for the serial asset bubbles of the past two decades, then it would make far more sense to extrapolate stock trends from that starting point rather than the irrelevant and overstated federal funds monkeying. In this context, the panic in 2008 makes perfect sense as it was a total failure of the eurodollar/wholesale system which not only reversed in total the prior bubble levels it crushed the global economy with it.
Should the Fed decide to raise interest rates, it will be the first Fed hike since June 29th 2006. In the 110 months that have since past, global central banks have cut interest rates 697 times, central banks have bought $15 trillion of financial assets, zero interest rates policies have been adopted in the US, Europe & Japan. And, following the Great Financial Crisis of 2008, both stocks and corporate bonds have soared to all-time highs thanks in great part to this extraordinary monetary regime. A rate hike with a stroke ends this era.
It goes until the “big one” shows up “out of nowhere” because everyone studiously ignores these events as if they can’t possibly be what they so obviously are: continued warnings. It is impossible to say what the final turn will be, as you can’t predict the level of “necessary” liquidations going too far because liquidity supply is totally hidden and derivative. The fact that one central bank after another continues to fall victim to the same connecting degeneration is cause for still deeper pause and reassessment, but that isn’t any fun for the bull bubble and the “easy money” mindset. In any case, when the yen functions as the last resort bid of safety, you can pretty well assess just how messed up everything got – and start to make some determination about just how close to the precipice.
The downturn in China is “our” downturn. All the recent happy talk, due to unsuitable extrapolation and nothing more, has melted away yet again. In short, the same trend dating back almost four years now is quite expectedly unaltered by whatever any central bank does or does not do. “Stimulus” is just noise against all that, at best; at worst it actively contributes to the instability of the decline.
Chinese Devaluation Extends To 3rd Day - Yuan Hits 4 Year Low, Japan Escalates Currency Race-To-The-Bottom RhetoricSubmitted by Tyler Durden on 08/12/2015 23:23 -0400
The "one-off" adjustment has now reached its 3rd day as The PBOC has now devalued the Yuan fix by 4.65% back to July 2011 lows.
PBOC tries to reassure: *CHINA PBOC SAYS YUAN REMAINS STRONG CURRENCY IN LONG-TERM
"The question for 2015 is whether Fed actions are going to take away the liquidity punch bowl, and create a problem for the next rally's ability to achieve escape velocity... We saw this principle of diminished liquidity back in 1998-2000, and again in 2007-08..."
It wasn’t until the Americans were free to issue unlimited amounts of ‘dollars’ that these claims lost their soundness in a rambunctious belief in the never-ending global supremacy of US manufacturing. Now the damage is done. The gross misallocations that have plagued the world economy for well over four decades cannot be corrected without a cataclysmic event that will dramatically change living standards as the US realign their manufacturing and service sectors. But it cannot continue indefinitely either. Something will have to give.
The minimum wage is not what is commonly referred, as is being proven again as parts of the US experiment directly with this boundary. In New York, fast food workers have been given a $15 per hour minimum wage which is being celebrated by the same fast food workers who will bear the brunt of the experimentation. Some of them will be happy with the results, but there will be clear losers – the full wrath of redistribution is usually unseen which is why it persists.
Just as Japan thought they could go back to pre-Plaza Accord growth rates by holding on to the old ways in the 1990s, the Chinese will expect the growth miracle to return in 2016 with the “right” policies. It will not. It is all a mirage though. Just as in Japan, the Chinese will not allow the market process to do its magic to get the economy back on a stable footing. Draconian measures to stop the recent stock market rout are a clear testimony of that. In other words, the Chinese economy will resemble that of Japan, and it will do so very soon, if it is not already there. China is heading straight into a zero growth environment, and will be mired there for years to come.
With almost everything turning lower this week under “dollar” pressure, it is imperative to keep in mind the apex asset class. In 2007, it was the ABX indices and various mortgage related structures that signified the how far along everything was; in this cycle it is clearly corporate credit. The disarray starts in the riskiest pieces and then moves inward and eventually, if left unchecked, eroding too much underneath with which to support what was once believed perfectly safe. Once there is no place to hide, the turn really begins.
The action in gold in 2013 was a warning about the “dollar”, a warning that went completely unheeded yet has been largely fulfilled. Again, 2013 provides a guide as to why gold prices may be declining in sharp moves, especially right at the open or in weaker trading hours, and it has very little to do with interest rates apart from fixed income suggesting the same factors about the “dollar.” Whether it is growing unease about the global economic picture or the “sudden” recurrence of financial irregularity almost wherever you wish to gaze, the “dollar” is once more wreaking havoc. This isn’t controversial at all, but somehow economists can miss that gold is global and universal collateral and when the eurodollar system is stressed it becomes activated in that manner.