While some are focused on the demise of the dollar, the fact is that it has been appreciating and this is causing some confusion. See if this helps clarify what is happening.
Regulators from the U.S. and the UK are in a “war room” today conducting financial war games to see if they can cope with fall-out when the next big bank collapses. "We are going to make sure that we can handle an institution that previously would have been regarded as too big to fail. We're confident that we now have choices that did not exist in the past," Osborne said at the International Monetary Fund's annual meeting.
If central banks have learned anything since 2008, it's that waiting around for the panic to deepen is not a winning strategy. Put yourself in their shoes. Isn't this what you would do, given the dearth of alternatives and the very real risks of implosion? Anyone in their position with the tools at hand would not have any other real option other than to buy stocks in whatever quantity is needed to reverse the selling and blow the shorts out of the water. If $1 trillion doesn't do the job, make it $3 trillion, or $5 trillion. At this point, it doesn't really matter, does it?
Today US activity will be very light given the Columbus Day holiday. As DB summarizes, we have a relatively quiet day for data watchers today but the calendar will pick up tomorrow and beyond with a big focus on inflation numbers amongst other things. Indeed tomorrow will see the release of Germany’s ZEW survey alongside CPI prints from the UK, France and Spain. Wednesday’s data highlights will include the US retail sales for September, the Fed’s Beige Book, CPI readings from China and Germany, US PPI, and the NY Fed Empire State survey. Draghi will speak twice on Wednesday which could also be a source for headlines. On Thursday, we will get Industrial Production stats and the Philly Fed Survey from the US on top of the usual weekly jobless claims. European CPI will also be released on Wednesday. We have the first reading of October’s UofM Consumer Sentiment on Friday along with US building permits/housing starts. Yellen’s speech at the Boston Fed Conference on Friday (entitled “Inequality of Economic Opportunity”) will also be closely followed.
By now it is clear to everyone that the force-feeding of free-money into financial markets by The Fed et al. has led to a scale of financial repression never before witnessed as bond yields for even the riskiest of risky names collapse to record lows and cheap-financed share buybacks raise leverage to record highs and support an ever more fragile equity wealth creation machine. As Blackrock (and many others) have recently proclaimed, the corporate bond market is "broken" and the risk posed by investors trying to dump bonds is"percolating right under" the noses of regulators; so it is with grave concern we suggest the following two charts - showing the massive out-sized holdings of PIMCO's funds in the high-yield and emerging market debt markets leave a bond marketplace in fear that forced sales via redemptions are the straw that breaks the 'central bank omnipotence' narrative's back...
Hearing of IMF interventions generally conjures up images of developing nations (and the occasional Eurozone peripheral economy of late) facing some kind of financial difficulty. But it was actually Great Britain, the cradle of the industrialized world, which in 1976 became one of the first countries ever to be "bailed out" by the IMF in the modern sense of the term.
We have been discussing the widespread belief in "the narrative of central bank omnipotence" for a number of months (here and here most recently) as we noted "there are no more skeptics. To update Milton Friedman’s famous quote, we are all Bernankians now." So when Saxobank's CIO and Chief Economist Steen Jakobsen warns that "the mood has changed," and feedback from conference calls and speaking engagements tells him, there is a growing belief that the 'narrative of the central banks' is failing, we sit up and listen.
The difference between 2007 and today is back then these were largely sub-prime loans and overvalued real estate mortgages, vs, today's entire global bond market bubbles from Spain and Greece to the United States.
The last note briefly addressed the benefits associated with the reverse repurchase facility (RRF). Indeed liabilities have increasingly moved from bank balance sheets to the Fed, freeing lending capacity. One must recall reserves are not fungible outside of the banking system (but can act as collateral for margin). With flow decreasing, the opportunity for small relative volume bids spread over a large quantity of transactions (most instances per unit time) decreased with market prices in many asset markets. Is more downside coming?
It's sad to say with such finality, but a universal fact of existence is that most of the people you meet in this life are fundamentally and functionally ignorant. Entire nations have fallen throughout history because of this terrible weakness... By extension, such ignorance is not just an inherent disease but also an easily exploitable disease. The disease of ignorance leaves us vulnerable to many other plagues, including literal plagues like the Ebola virus. When we take the establishment at its word concerning the threat of Ebola outbreak, we make ourselves vulnerable. When people assume that the worst could never happen to them, history shows us that it inevitably does.
The job market is tightening, and by any normal measure interest rates should be following suit and rising as well regardless of whether the US Dollar also strengthens.
“If I had a world of my own, everything would be nonsense. Nothing would be what it is, because everything would be what it isn't. And contrary wise, what is, it wouldn't be. And what it wouldn't be, it would. You see?” - Lewis Carroll, Alice's Adventures in Wonderland
This week has seen some market volatility (see VIX Chart) reminiscent of the functioning market from days of old. The markets are spooked, bad news is overtaking good news and bearish views are becoming vogue. We are seeing a titanic battle taking place between the various bull and bear camps and they are starting to unleash some serious firepower.
- It wasn't Obama this time: Pakistani teen, Indian activist win Nobel Peace Prize (Reuters)
- Surging VIX Shakes Bulls as S&P 500 Charts Go Haywire (BBG)
- Global shares hit six-month low as growth worries mount (Reuters)
- Police, protesters clash in St. Louis ahead of weekend of rallies (Reuters)
- We're Sitting on 10 Billion Barrels of Oil! OK, Two (BBG)
- Spain seeks answers as seven more enter Ebola isolation (Reuters)
- Iran will sell its oil to Asia in November at the biggest discount (BBG)
- Redefining honeypot: U.S. DEA 'most interested' in U.S. investors in Canadian marijuana firms (Reuters)
- UKIP Wins First Commons District With Conservative Defector (BBG)
- Fake Ebola Patients Help Hospitals Prepare for Next Case (BBG)