Non-ideologically laden overview of the key issues shaping the investment climate in the week ahead.
As Chinese Credit Plummets US Stocks Soar On Hopes Of More PBOC Easing; But Is Conventional Wisdom Again Wrong?Submitted by Tyler Durden on 08/13/2014 22:19 -0400
Conventional wisdom, now so habituated to getting all the cheap credit it can get, did not anticipate such a dramatic collapse in Chinese credit last month, is eagerly expecting a proportional response from the PBOC, one which would potentially involve significant easing, which is precisely what US equities priced in today when they closed near the highs of the day, even as there was not a single piece of good macroeconomic news overnight. Pretty cut and dry right? Well not really. Recall that as we reported in the last week of July something odd was revealed: namely that China quietly unveiled and implemented its Pledge Supplementary Lending line, or as it is increasingly better known: China's QE.
Steve Forbes has had enough of the Federal Reserve and its "sinning" policies to undermine the dollar. In this brief interview with Birch Gold Group, the publisher and CEO of Forbes, Inc. exposes the damage that the central bank has created, "Bernanke was a disaster...has totally mucked up the credit markets." Blasting Janet Yellen "who needs to go to re-education camp," Forbes explains why he believes so strongly in the gold standard, and the one single scenario under which he would ever sell his gold.
Who best to summarize what Yellen just said (aside from Bernanke of course, however he will demand at least $250,000/hour for his profound insight), than the bank which actually runs the NY Fed: Goldman Sachs. So without further ado, here is Goldman's Jan Hatzius on what Yellen really said. "BOTTOM LINE: The Q&A of Yellen's semi-annual monetary policy testimony contained a few bits of interesting information, including a slightly hawkish shift in her description of when FOMC participants think the first rate hike may occur."
This is a big deal. On the heels of our pointing out the surge in Treasury fails (following extensive detailing of the market's massive collateral shortage at the hands of the unmerciful Fed's buying programs), various 'strategists' wrote thinly-veiled attempts to calm market concerns that the repo market (the glue that holds risk assets together) was FUBAR. Even the Fed itself sent missives opining that their cunning Reverse-Repo facility would solve the problems and everyone should go back to the important business of BTFATHing... They are wrong - all of them - as yet again the Fed shows its ignorance of how the world works (just as it did in 2007/8 with the same shadow markets). As JPMorgan warns (not some tin-foil-hat-wearing blogger with an ax to grind) "the Fed’s reverse repo facility does little to alleviate the UST scarcity induced by the Federal Reserves’ QE programs coupled with a declining government deficit." The end result, they note, is "higher susceptibility of the repo market to collateral shortages" and thus dramatically higher financial fragility - the opposite of what the Fed 'hopes' for.
Having already warned that looming political uncertainty is not at all priced-in to US equities, Goldman's Alec Phillips points out that legislation was introduced earlier this week (July 7) in the US House that would attempt to revamp the FOMC's monetary policy process. The bill would require the FOMC to justify to Congress each policy decision relative to a Taylor rule specified in the legislation. While Goldman, do not expect the bill to get very far, but the issue does appear to be a growing focus for some lawmakers and we expect further action on it in the near term.
The boom is unsustainable. Investment and consumption are higher than they would have been in the absence of monetary intervention. As asset bubbles inflate, yields increase, but so do inflation expectations. To dampen inflation expectations, the Fed withdraws stimulus. As soon as asset prices start to fall, yields on heavily leveraged assets are negative. As asset prices decline, increasingly more investors are underwater. Loan defaults rise as mortgage payments adjust up with rising interest rates. When asset bubbles pop, the boom becomes the bust.
Many believe the most significant battle of our era is between the forces of Decentralization vs. Centralization. Niall Furguson takes that battle and looks at it from a historical perspective, describing it as Networks vs. Hierarchies, and warns we "need networks, for no political hierarchy, no matter how powerful, can plan all the clever things that networks spontaneously generate. But if the hierarchy comes to control the networks so much as to compromise their benign self-organizing capacities, then innovation is bound to wane."
It feels like it was only yesterday when we wrote about the plight of what was once supposed to be the ultramodern east-coast competitor to the glitzy kitsch of Las Vegas: Atlantic City's Revel casino which back in February 2013 "filed for bankruptcy ten months after opening." Well, a short 16 months later it is time for an update because Revel, which was supposed to have a viable balance sheet upon emergence from its first Chapter 11 filing, just filed for bankruptcy for a second, and most likely final time: the dreaded "Chapter 22." And not only did the company admit its business model is not viable not due to its overlevered balance sheet, but because of the sad state of the economy and the AC gambling market, it also warned it may shut down permanently if it can't find a buyer in bankruptcy court.
If you had fallen asleep at your desk recently due to the absolute lack of anything noteworthy happening, this past week should have woken you up. A massive upset in the Virginia primary dethroned House Majority Leader Eric Cantor which sent moderate Republicans scurrying to shore up their voting bases. Al-Queda backed forces, ISIS, have advanced through Iraq and are not closing in on Baghdad which has sent oil prices rocketing higher this past week. Lastly, the mainstream media was completely baffled by the "sea of red" on their monitors which caused one anchor to quip: "Wow...stocks really can go down."
US Banks enjoyed more or less steadily climbing, or rather soaring, deposits by Russian institutions and individuals, having tripled in just two years to $21.6 billion by February, according to the US Treasury... and then March hit... boomerang
You can smell this one coming a mile away... the ECB is now energetically trying to revive the a market for asset-backed commercial paper (ABCP) - the very kind of “toxic-waste” that allegedly nearly took down the financial system during the panic of September 2008. The ECB would have you believe that getting more “liquidity” into the bank loan market for such things as credit card advances, auto paper and small business loans will somehow cause Europe’s debt-besotted businesses and consumers to start borrowing again - thereby reversing the mild (and constructive) trend toward debt reduction that has caused euro area bank loans to decline by about 3% over the past year. What they are really up to, however, is money-printing and snookering the German sound money camp.
Dispassionate discussion of the investment climate.
“I am often asked why I do not support a more rapid deceleration of our purchases, given my agnosticism about their effectiveness and my concern that they might well be leading to froth in certain segments of the financial markets. The answer is an admission of reality: We juiced the trading and risk markets so extensively that they became somewhat addicted to our accommodation of their needs… you can’t go from Wild Turkey to cold turkey overnight."
Fits the pattern of gratuitous bank enrichment perfectly. But this time, the beneficiaries of the Fed are foreign banks.