Last week, Citi's Tobias Levkovich raised numerous concerns about the state of exuberance and "disconcerting disconnects" that is our new normal market currently. In the week since, Citi's proprietary Panic/Euphoria model is sending a clear warning of substantial complacency - its most "euphoric" since 2008. This is worrisome, he notes, since there is an 80% probability of a market decline in the next 12 months based on the current reading.
Last week, Bank of America warned that "it's getting frothy, man" based on the sheer surge of fund flows into equities. Here is the same firm with some other observations on what can simply be described as a "frothy", "overbought", "overmargined" market with "not enough bears."
Normally Treasury Bills are not something discussed around the dinner table or hotly debated on the business news channels. As UBS notes, the fact that the Tbill market has become the focus of attention is an ominous sign, and indicates that the stalemate over the debt ceiling could have profound effects. While TED-Spreads, and financial CDS were the key indicators in 2008, now we must watch money fund flows, and Tbill forwards. In a sense, the Tbill market is the proverbial canary in a coal mine for the US financial system. The canary is not yet back in good health.
- Government has too much debt to issue more debt
- Government nationalizes private pension funds making their debt holdings an "asset" and commingles with other public assets
- New confiscated assets net out sovereign debt liability, lowering the debt/GDP ratio
- Debt/GDP drops below threshold, government can issue more sovereign debt
The 10Y Treasury yield has jumped nearly 130bp from its low point in early May. Given the tight ranges and low volatility of yields during the most of QE era, this kind of move in just over 3 months seemed stunning to some investors. Consequently, the question that has come up often recently is: what has been driving Treasury yields? As UBS' Boris Rjavinski notes, several years ago a rate strategist would give you a straightforward and predictable answer: inflationary expectations, economic growth projections, and current and future monetary policy. But now, as Rjavinksi notes, central banks and politics in the driver seat. Volatility will remain elevated as we await key messages from the Fed in September, and U.S. political calendar will start to heat up as we approach the “drop-dead” dates to fund the government and extent the dent ceiling.
As is well-known by now, one of the main reasons why the Fed's hands are tied when it comes to the future of QE, is the dramatic drop in the US budget deficit which cuts down on the amount of monetizable gross issuance (read Treasurys) and for which a big reason is that the GSEs have shifted from net uses of government cash to net sources. So in what may be the best news for Bernanke, and/or his successor, we learn that according to a report written by the Federal Housing Finance Agency (FHFA) inspector general and reviewed by Reuters, "Fannie Mae and Freddie Mac are masking billions of dollars losses because of the level of delinquent home loans they carry."
Deutsche: "Either The Central Banks Lose Credibility Soon Or The Markets Have Overstretched Themselves"Submitted by Tyler Durden on 08/19/2013 09:46 -0400
Some unpleasant observations from Deutsche Bank below for fans of either central planning and/or risk assets, as having one's cake and eating it too is no longer an option, and one or the other is finally set to snap. To wit: "Yield curves are very steep suggesting a challenge to central bank guidance credibility is at a tipping point. Either the data really are strong and the central banks lose credibility soon or the markets have overstretched themselves, allowing for a partial recovery in lower rates." A "tweeted out" Bill Gross is praying to the Newport gods it's the latter.
Succinctly summarizing the positive and negative news, data, and market events of the week...
Those seeking the definitive, one-stop fund flow heatmap covering the key paper asset classes over the past 10 years, are advised to bookmark this page.
It is well-known that as part of the S&P500's ascent to new records, investor margin debt has also surged to all time highs, surpassing for the past three months previous records set during both prior, the dot com and the housing, stock market bubbles. And as more attention has shifted to the topic of speculator leverage once more, inquiries into the correlation between bets upon bets and stock performance are popping up once more, in this case in a study by Deutsche Bank titled "Red Flag! - The curious case of NYSE margin debt." Of particular note here is a historical comparison of margin-debt warnings that have recurred throughout history but especially just before major stock bubble crashes, such as in the period 1999/2000, 2007/2008 and of course today, which have time and again been ignored. Here is what was said then, what is being said now, and what is ignored always.
With the Federal Reserve's bond-buying, liquidity-injecting, market-inflating, volatility-suppressing, confidence-inspiring, economic-supporting, media-headline-generating, program currently in full swing; one would assume that the daily pushes to new market highs are driven by massive inflows of cash into the equity markets. Well, that assumption is only partially correct.
There has been much discussion about fund flows into domestic mutual funds in the past few weeks for one simple reason: there have been inflows into domestic mutual funds (as tracked by ICI). For some reason, pundits correlate this inflow with the move higher in stocks. What remains unsaid is why there was little to no discussion of fund flows into domestic stock funds for about 90% of the time in the past three years. The reason is just as simple: there were no inflows, as can be seen on the chart below. There were, however, other "exogenous" events during this time: such as QE2, LTRO 1 + 2, Draghi's whatever it takes language and Operation Twist of course, and then QE3 which will likely continue indefinitely and be replace by QE4 the second it is fully "tapered." So what is relevant: inflows (or, gasp, outflows) or whatever central banks do? You decide.
With revenues fading, profit margins collapsing, and only financial institutions' entire lack of transparency providing any lift in EPS, the 'great rotation' continues to provide enough cognitive dissonance to sink a boat for the asset-gatherers. The trouble, as we showed previously, is this 'rotation' is dominated by US retail investors (more specifically non-US domiciled and non-retail investors are rotating away from US equities). The US retail investor has shifted in a great-rotationary manner by the greatest amount since Feb 2000 - just as the last great bubble burst. US equities are the 3rd most over-crowded speculative long asset in the world after Crude Oil and the Brazilian Real. It seems the Fed is getting just what it wants but, just as Kyle Bass warned, "investors should be really careful doing what the central bankers want them to do."
The world can only build so much storage to store extra supply; at some point demand has to eat up this extra supply.
Since the US monetary system is (mostly) a closed loop, it has become impossible to rely on the US stock market for anything besides "analyzing" how many hot potatoes the excess reserve-funded Primary Dealers are juggling with each other. However, there may be one place that remains untouched by the Fed's intervention: foreign opinion of the US, which manifests itself in capital fund flows, the same fund flows that the TIC data reports every month with a 2-month delay. Because if foreign capital flows remain the only remaining objective indicator of US economic health, then the US has some very serious problems on its hands...