Martin Feldstein, Harvard University professor alludes to what many in the financial community recognize that risk-taking is out of control.
After several months of quite complacency, investors were woken up Thursday by a sharp sell off driven by concerns over potential rising inflationary pressures, rising credit default risk and weak undertones to the economic data flows. One of the primary threats that has been readily dismissed by most analysts is the impact from rising interest rates...
Fourth time was sadly not the charm...
While today's Case Shiller data was widely disappointing across the board, indicating a significant slowdown in price gains (and on a sequential seasonally adjusted basis, practically a decline), the one market we paid particular attention to was San Francisco. What we found is a red flag for everyone waiting to time the bursting of the latest housing bubble. Because after an unlucky 13 months of posting consecutive 20% Y/Y price gains, the San Francisco bubble appears to have finally burst, posting "just" an 18.2% price increase, the lowest since January of 2013.
Yesterday we mocked China for being desperate enough to push its tumbling housing market (which directly and indirectly accounts for some 80% of Chinese GDP per SocGen estimates) no matter the cost, that at least 20 developers were offering the kinds of mortgages that resulted in the first credit bubble crack up boom and collapse, namely "Zero money down." Little did we know that the US, never one to lag in the financial innovation department had once again one-upped China, by bringing back from the dead the company that according to Housing Wire was "once a poster child for pre-crash subprime lending" - Ditech Mortgage Corp. But best of all, ditech was known as a leader in subprime. The bulk of the mortgages were interest-only, low-documentation subprimes, and ditech was a pioneer in offering 125% loans allowing the borrower to borrow more than the sale price.
Enter the Fed's recently announced Fixed-Rate Reverse Repo facility, which earlier today saw its greatest use to date in history, when a record $95 billion in Treasury paper was repoed out to the street for a 3 day term, at an 0.03% annual rate. Since there were 68 bidders in the operation, the average participant had an extra $1.4 billion in cash lying around to give to the Fed in exchange for holding Treasurys into year end.
JPM's "flows and liquidity' expert Nikolaos Panigirtzoglou, who last week spotted the "most extreme ever excess liquidity" bubble, has just noticed yet another indication that not even corporations believe in further equity upside. Simply said, this means that that for the first time since the Lehman crisis, non-financial corporations within the entire developed, G-4 (US, Europe, Japan and UK) world, have shifted from net buyers of stock to net sellers, as net "equity withdrawal" have just turned positive.
Over the past year there has been some confusion about whether Ben Bernanke has managed to not only completely break the stock market (which, if one harkens back to hallowed antiquity used to discount good or bad news in the future, and "trade" accordingly), but also invert it fully. The chart below from Guggenheim will once and for all put any such confusion to rest. As Guggenheim's Scott Minderd points out "The 52-week correlation between S&P 500 returns and the change in the Citigroup Economic Surprise Index has plunged from 0.45 to -0.13 over the past 12 months. A negative correlation indicates that weak U.S. economic data tends to push equity prices higher, while strong economic data tends to send them lower."
For those curious what Bernanke's market may do today, we flash back to yesterday's AM summary as follows: "Just as it is easy being a weatherman in San Diego ("the weather will be... nice. Back to you"), so the same inductive analysis can be applied to another week of stocks in Bernanke's centrally planned market: "stocks will be... up." Add to this yesterday's revelations in which "JPM Sees "Most Extreme Ever Excess Liquidity" Bubble After $3 Trillion "Created" In First 9 Months Of 2013" and the full picture is clear. So while yesterday's overnight meltup has yet to take place, there is lots of time before the 3:30 pm ramp (although today's modest POMO of $1.25-$1.75 billion may dent the frothiness). Especially once the market recalls that the NOctaper FOMC 2-day meeting starts today.
JPM Sees "Most Extreme Ever Excess Liquidity" Bubble After $3 Trillion "Created" In First 9 Months Of 2013Submitted by Tyler Durden on 10/28/2013 15:04 -0400
In just the first 9 months of 2013, DM countries have injected $1 trillion in liquidity sourced exclusively by central banks; EMs have injected another $2 trillion driven by bank loan demand.
The total global M2 is over $66 trillion, growing at an annualized pace of over 6%.
The amount of excess liquidity, i.e. the infamous "liquidity bubble" in the global fungible system is "the most extreme ever in terms of its magnitude"
And that's really all there is to know: the monetary music is playing and everyone has to dance... just don't ask what happens when the music ends.
Yes, yes, only the Fed matters. Still, there was some event flow overnight which while completely meaningless for the epic liquidity bubble, may have some implications eventually when the music finally stops. In thie regard, perhaps the best summary of the the lunacy coming out of the Marriner Eccles building is the following sentence from Bloomberg: "Bernanke said he was concerned that market interest rates, driven higher by his own suggestion he would scale back QE, would curb growth." One can't make this up.
Almost exactly 8 years after Greenspan's now infamous "conundrum" comments about the unprecedented persistence of low, long-term interest rates, Bernanke is now "puzzled" at the dramatic rise in interest rates following his recent Taper remarks. Have no fear though, just as Greenspan noted, "I'm reasonably certain we would not automatically assume that it would mean what it meant in the past, " Bernanke said today that the "sharp rise in rates", was not about the Taper but "due to other factors, including optimism about the economy." Perhaps more importantly, today for the first time someone, not Hilsenrath of course, had the guts to ask Bernanke the hardest question: is the Fed's "Stock not Flow" worldview broken, and was it wrong all along? Of course, the implications of the Fed being wrong on this most critical aspect of monetary theory opens up a hornet's next of Pandora's boxes: just what else is the Fed wrong about, and how much will Bernanke be "puzzled" when one by one all of his flawed theories are revealed to be nothing but religious dogma.
The aftermath of the largest liquidity injection process in the history of the world, is that politics, and the entire fiscal process, has effectively been rendered obsolete, and politicians are now nothing but figureheads in a central banker world. Perhaps, the general public would be angry if it were to realize that the only entity left making global macro economic decisions is a private organization run by academics, who in turn are merely firgureheads for the world's private banks. That, however, would entail that the co-opted media would actually explain to the broader population just what is going on behind the scenes: a process that would entail the loss of core advertising revenue, which is why expect confusion about just who pulls the strings to linger for years.
Tuesday's Case Shiller update index showed something very troubling: as a whole, the US housing market in its broadest sense, has barely budged in the past four years (chart). And yet, what is unmistakable, and what has given many the impression that there is a "recovery" (despite clear recent signals to the contrary) are media attempts to spark a buying frenzy in several of the key markets that were responsible for the prior housing bubble, such as Florida, California, Nevada and Arizona. And how do we know they are succeeding, if only until the Bernanke liquidity bubble pops again? Courtesy of articles such as this: "25 markets where flipping homes is most profitable." Nuff said.