Market Conditions

• Only time will define Bernanke's crisis-era legacy at Fed (Reuters)
• Record Cash Leaves Emerging Market ETFs (BBG)
• Investors Look Toward Safer Options as Ground Shifts (WSJ)
• Fed Policy Makers Rally Behind Tapering QE as Yellen Era Begins (BBG)
• Rating agencies criticise China’s bailout of failed $500m trust (FT)
• Russia to await new Ukraine government before fully implementing rescue (Reuters)
• U.S. readies financial sanctions against Ukraine: congressional aides (Reuters)
• Companies resist president’s call for minimum wage rise (FT)
• Secret Swiss Funds at Risk as Italy’s Saccomanni Visits Bern (BBG)
• Top Democrat puts Obama trade deals in doubt (FT)
• Erdogan to Give Rate Increase Time Before Trying Other Plans (BBG)

From Citi: From the viewpoint of domestic US economic conditions the Statement is completely anodyne. From the point of view of EM, the Fed has just said "hasta la vista, baby"

As we begin 2014, it is important to recognize the levels of INSANITY currently existent in the world  enabling us to understand the apocryphal nature of the times we live in and prepare ourselves to meet the challenges it represents.  The world is leveraged to an extent that has never before seen in history! Debt now masquerades as NOMINAL growth and REAL growth has ceased.  Headline economic reports are now nothing more than POLITICALLY CORRECT HOAXES to FOOL the public at large and mask the betrayal of the public by the leaders who hold the reins of power.  ECONOMIC Stagnation emerged after the 2008 Global financial crisis and in real terms has NEVER ENDED!
 

The Status Quo views real estate bubbles as a "good thing": as home prices rise, the homeowner's collateral (equity) rises, creating both a psychological "wealth effect" (now that we're richer, we can afford to borrow and blow more money) and a temporary (and thus phantom) increase in collateral that will support more household debt. What few seem to realize (or discuss) is how rising home prices push rents higher.This is an entirely pernicious effect, as renters aren't getting any more "home" for the higher rent--they're paying more money for the same shelter. Central Planning pushing housing prices higher is not win-win--it is lose-lose-lose.

• Citigroup 165K
• Barclays 175K
• UBS 185K
• HSBC 191K
• Goldman Sachs 200K
• JP Morgan 215K
• Bank of America 220K
• Deutsche Bank 250K

Following the missed expectations of the Manufacturing PMIs in China, it appears 'reform' is having the exact slow-growth-inducing credit-creation-dampening effects many had worried about (but dismissed because - well the Fed has out back right?). HSBC's China Services PMI slumped by its most in 8 months to its lowest level since August 2011 (the 2nd worst level since the data began). New business expansion in particular dropped to its lowest level in 6 months and while labor market conditions improved marginally, HSBC - desperate to cling to some silver lining - noted the Composite PMI remains above 50 (phew) - adding "we expect the steady expansion of manufacturing sectors to lend support to service sector growth..." or not. Markets are disappointed...

A look at the technical condition of the fx market, interest rate differentials, central bank developments and the data due out in the week ahead.  

Well, it took three years, but finally the Goldman Sachs-based head of the New York Fed, Bill Dudley, admitted what we all knew. From a speech just given by NY Fed's Bill Dudley at the 2014 AEA meeting in Philadelphia:

"We don't understand fully how large-scale asset purchase programs work to ease financial market conditions"

Or, in other words, "we still don't know how QE works." It just does (thank you Kevin Henry). And this coming from the people who want their word to become equivalent to gospel in a time when QE is being phased out and replaced with forward guidance. Luckily, at least the Fed knows all about how "forward guidance" works.

The recent strength of the euro and sterling seemed to evaporate, while the yen and dollar-bloc currencies recovered.  Is this a major trend change or was it simply reflecting some position adjustment in a thin market? 

Worried about being priced out of the housing market once again? Concerned that longer-term fixed rates will rise? It seems the general public, guided by the always full of fiduciary duty - mortgage broker - has reverted to old habits and is charging back into Adjustable-Rate Mortgages. As The LA Times reports, ARMs, which all but vanished during the housing bust, are back - accounting for 11.2% of homes purchased in November (double that of the year before)! While not the Option Arms of yesteryear, it would appear people, pushing for lower monthly payments, remain completely oblivious to the word "adjustable" when they shift their risk to the shorter-end. Though, as the 'experts' continue to tell us, rising rates won't affect housing negatively - not at all...

Over the past two weeks, Trust Preferred (or TruPS) CDOs have gained prominent attention as a result of being the first, and so far only, security that the recently implemented and largely watered-down, Volcker Rule has frowned upon, and leading various regional banks, such as Zions, to liquidate the offending asset while booking substantial losses. But... what are TruPS CDOs, and just how big (or small) of an issue is a potential wholesale liquidation in the market? Courtesy of the Philly Fed we now have the extended answer.

Dolllar weakess is largely concentrated against euro and sterling and those handful of currencies that move in their orbits.  The US dollar is firm against the dollar-bloc and yen and many emerging market currencies.  

Global monetary conditions remain easy and despite the Fed's decision to taper, peak monetary accommodation is not here yet.  

• the risk of runs and asset fire sales in repurchase (repo) markets;
• excessive credit risk-taking and weaker underwriting standards;
• exposure to duration risk in the event of a sudden, unanticipated rise in interest rates;
• exposure to shocks from greater risk-taking when volatility is low;
• the risk of impaired trading liquidity;
• spillovers to and from emerging markets;
• operational risk from automated trading systems, including high-frequency trading; and
• unresolved risks associated with uncertainty about the U.S. fiscal outlook.

"Step right up and try your luck...spin the wheel and watch where she lands...everybody's a winner" - sometimes if you listen hard enough you can almost hear the Carney coaxing unwary investors to step up and try their luck in a game that has been rigged against them. During the last two decades, we have been amazed to watch as individuals strolled through the doors of the Wall Street casino to try their luck by betting "against the house" for a dream of riches. Just as with anyone who has ever gone to Vegas - you will win sometimes but the "house" wins most of the time. However, there are always the "professional gamblers" that can do better than the average most of the time. Why? Because they understand "risk" in its various forms...