Lord Overstone said it best. “No warning can save people determined to grow suddenly rich.” Case in point - CYNK Technology Corp, a listed company that as of this morning has a market capitalization in excess of $1 BILLION. According to official filings, the social media development company had one employee, no website, no revenue, no product, and no assets. What has effectively united this company with prudent investors is today’s central banker. Hyper-aggressive monetary policy has side effects. Getting out of this mess is not going to be easy, and it’s going to be messy.
A single entity successfully scooped up the entire ~30,000 haul of Bitcoins that the US government seized from Silk Road. The successful bidder at the government's auction was V.C. Tim Draper (in partnership with Vaurum) who is infamous as the ideator of viral marketing, a marketing method for spreading a software application from customer to customer (making one wonder if the $19 million bid was more publicity stunt that investment). However, Vaurum has launched trading platforms in emerging markets, and we will be partnering with Tim to leverage the pool of ~30,000+ bitcoins as a liquidity source. The price of Bitcoin continues to rise, now at $650 - up from around $570 when the auction began.
Long before 1984 gave us the adjective “Orwellian” to describe the political corruption of language and thought, Thucydides observed how factional struggles for power make words their first victims, "Words had to change their ordinary meaning and to take that which was now given them." Orwell later explained the reason for such degradation of language, "Political speech and writing are largely the defense of the indefensible." The bottom-line is that tyrannical power and its abuses comprise the "indefensible" that must be verbally disguised; which seems to have never been more appropriate than now in the stream of 'disguised' words we are fed every day...
With the Eurozone going to the extreme of negative interest rates and the IMF belatedly revising downwards their expectations of US economic growth, deflation is now the favored buzzword. It is time to untangle myth from reality and put deflation in context.
Risk is no longer priced into anything. Volatility has gone to sleep. Uniformity of thought has taken over the stock market. Complacency has reached a point where even central banks have begun to worry about it: the idea that markets can only go up – once entrenched, which it is – leads to financial instability because no one is prepared when that theory suddenly snaps. But all this bullishness, this complacency is only skin deep. Beneath the layer of the largest stocks, volatility has taken over ruthlessly, the market is in turmoil, people are dumping stocks wholesale, and dreams and hopes are drowning in red ink.
Borrowing heavily from Albert Edwards "Ice Age" analogy of our new normal, PIMCO's Bill Gross, after explaining why he does not have a cell phone, discusses the "frigidly low" levels of "The New Neutral" in this week's letter. Confirming Ben Bernanke's "not in my lifetime" promise for low rates and a lack of normalization, Gross explains that the "the new neutral" real policy rate will be close to 0% as opposed to 2-3% (just as in Japan) leaving an increasingly small incremental rise in rates as potentially responsible for popping the bubble. Gross concludes, "if 'The New Neutral' rates stay low, it supports current prices of financial assets. They would appear to be less bubbly," clearly defending the valuation of bonds knowing that he can't expose stocks as 'bubbly' without exposing his firm to more outflows.
If yesterday's non-record, red-tick close can be attributed to algos applying the wrong ISM seasonal factor to the day, believing it was Wednesday instead of the permabullish Tuesday, today there is no such excuse, which is why we fully expect the unallowed redness with which futures are currently trading to promptly morph into a non-red color especially with the USDJPY doing it best to ramp to 103.000 levels overnight, stopping out all shorts, and push spoos to fresh record highs. It is an algo world after all. It appears that already record low volatility is being pushed even lower in anticipation of numerous imminent data releases, including today's ADP and Services ISM (first, second and final release), tomorrow's ECB announcement and Friday's payrolls number. Which while good for low volume levitation means bank trading revenues continue to deteriorate forcing banks to pitch M&A deals to clients, which in turn result in even more synergies and more layoffs: because in order to preserve the bottom line, crushing real employment further is perfectly acceptable collateral damage.
As the chart below shows, there’s much the Fed doesn’t understand, while at the same time showing that QE may have little purpose beyond providing a massive gift to wealthy traders and investors. With regard the question of where a dollar of QE goes, the answer is “not far.” Outside of pushing up asset prices and encouraging an occasional luxury purchase, it doesn’t seem to escape the financial sector. Liquidity that might otherwise be offered by private institutions is instead provided by the Fed, and – as Phil Collins might put it – that’s all.
While the last 2 weeks have seen numerous Fed heads, most vociferously Bill Dudley, warning of 'complacency' in markets, fearsome of low volatility and worried about low risk spreads. Of course, investors don't care - don't fight the fed unless the fed tells you to sell, appears the mantra-du-jour. Fed communications are not working... and so they have left it to their mouthpiece - WSJ's Jon Hilsenrath - to explain that they are indeed concerned at just how risk-free markets have become..."Federal Reserve officials, looking out at mostly calm financial markets, are starting to wonder whether tranquility itself is something to worry about."
A day after the Federal Reserve warned that "low level of expected volatility implied by some financial market prices might also signal an increase in risk appetite" and this complacency; the Bundesbank has decided to try and jawbone back investors' exuberance across Europe. As Die Welt reports, while stocks and bonds are near record highs across Europe - thanks to the ECB's Mario Draghi's promises, Bundesbank board member Andreas Dombret warned "we see risks - despite the fact that markets are calm," and perhaps incredibly suggested investors "flatten all risks now to avoid the herd behavior."
It would appear the mantra of "don't fight the Fed" is one that only applies when they are saying "buy stocks." As we have been consistently discussing, yesterday's minutes exposed some concerns: "the low level of expected volatility implied by some financial market prices might also signal an increase in risk appetite" and thus complacency and Fed's Fisher open "concern at almost no volatility in markets." So while J-Yell and her buddies see no bubbles... we thought the following chart, which is 'the sum of all volatilities' across FX, equity, and interest rate markets, might help...
- Eric Holder proves he is no US banker puppet by smashing another foreign bank: BNP Falls as U.S. Probe Said to Cost More Than $5 Billion (BBG)
- Fuld Was Top CEO When Fed Last Raised as New Neutral Era Beckons (BBG)
- Tymoshenko loses her magic in Ukraine presidential race (Reuters)
- GOP Sees Primaries Taming the Tea Party (WSJ)
- Heard that one before: Russian troops preparing to leave Ukraine border area (Reuters)
- Vietnam riots land another blow on the global supply chain (FT)
- Heard that one before too: Bank of England minutes show some members closer to voting for rate rise (Reuters)
- BOJ Refrains From Easing With Signs Japan Weathering Tax Rise (BBG)
- Miner Freeport Pressured by Water Costs as Copper Prices Slide (WSJ)
- Talks to end Thai crisis inconclusive, new round called (Reuters)
- Japan Court Blocks Reactor Restarts (WSJ)
“The stock market is filled with people who know the price of everything, but the value of nothing.” – Philip Fisher.
A 51-point personal perspective on some of the challenges facing today’s investor...
Fed's Williams and Fisher are talking this morning in an oddly frank (and concerning) manner...
WILLIAMS SAYS 'SOFT LANDINGS' IN MONETARY POLICY NEVER HAPPEN
WILLIAMS: FED NEEDS TO CONTINUE TO BE WARY OF EXCESSIVE RISK
Williams says our extraordinary policies could have adverse consequences down the road
Fisher must be wary of markets potential to overshoot
So, we have had Tarullo (Feb) and Yellen (May) warning of bubbles in small caps and credit and now Williams and Fisher sounding some alarms... Don't fight the Fed! (unless the Fed says 'sell') It seems the market is heeding the message in the short-term...