Market Conditions

Despite the intense pain they are suffering in the low price Crudedome, both the Russian and Saudi governments profess for public consumption that they are committed to their volume and market share policies. This observer believes the two countries cannot long withstand the pain they have brought upon themselves - and this article only scratches the surface of the negative impact of low crude prices on their economies. They have, in effect, turned no pain no gain into intense pain no gain and set in motion the possibility neither will exit the low price Crudedome under its own power.

The 2007-2008 financial crash was not a black swan. That is a collective lie propagated by policy makers so they don’t cry themselves to sleep at night. Many different people predicted and profited from the 2008 crisis. It was about the fear of failing banks and crashing markets... but the true horror was the impending collapse of the entire fiat money system that never came to be. That was the true black swan. 

Central banks are fearful and unwilling to normalize but artificially high valuations across asset classes cannot be sustained indefinitely absent fundamental global growth. Central banks are in a prison of their own design and we are trapped with them. The next great crash will occur when we collectively realize that the institutions that we trusted to remove risk are actually the source of it. The truth is that global central banks cannot remove extraordinary monetary accommodation without risking a complete collapse of the system, but the longer they wait the more they risk their own credibility, and the worse that inevitable collapse will be. In the Prisoner’s Dilemma, global central banks have set up the greatest volatility trade in history.

The Federal Reserve is quickly becoming trapped by its own "data-dependent" analysis. Despite ongoing commentary of improving labor markets and economic growth, their own indicators are suggesting something very different. As we have stated previously, while the Federal Reserve may hike interest rates simply to "save face," there is indeed little real support for them doing so. Tightening monetary policy further will simply accelerate the time frame to the onset of the next recession. Of course, the Fed knows this which is why they recently floated the idea of "negative interest rates" out into the markets. In other words, they already likely realize they are screwed.

Philly Fed general business activity somehow managed to rise very modestly in October from -6.0 to -4.5 but missed expectations. This the second monthly decline in a row - not seen since 2013. We say "somehow" as the underlying components were a total and utter disaster. New Orders collapsed from +9.4 to -10.6, Unfilled orders crashed to -11.7, Employment plunged from 10.2 to -1.7, and workweek evaporated from +7.0 to -7.3. Even "hope" collapsed with future expectations dropping from 44.0 to 36.7 with CapEx expectations cliff diving.

The yawning gap between job cuts (surging most since 2009) and initial jobless claims (hovering near 42 year lows) continues to grow as initial jobless claims collapse 7k this week to 255k - the lowest since 1973. Bear in mind, Goldman's explanation that jobless claims are useless in this part of the business cycle..."this does not signal a booming labor market."

"While it is human nature to think and expect along linear lines, our World just doesn’t work that way. Instead, everything moves in cycles, some short and shallow, while other cycles are long and deep. What we are experiencing today is the likely turning point in a very long cycle of borrowing, borrowing and then borrowing some more."

While yesterday's JPM results missed from the top to the bottom, coupled with a surprising and aggressive deleveraging of the bank's balance sheet which has shrunk by over $150 billion in 2015 mostly on the back of a decline in deposits, Bank of America reported numbers which were largely the opposite when it printed a modest beat on both the top line with $20.9 billion in revenues (adjusted sales of $20.6Bn vs Exp. $20.5Bn), down $500 million from a year ago, and the bottom line: generating $0.35 in adjusted earnings in the quarter, 2 cents better than the $0.33 consensus estimate.

One of the primary arguments by the more "bullish" media is that the current setup is much like that of 2011 following the "debt ceiling" debate and global economic slowdown caused by the Tsunami in Japan. While there are certainly some similarities, such as the weakness being spread from China and a market selloff, there are some marked differences.

• Playboy to Drop Nudity as Internet Fills Demand (NYT)
• Stock futures fall on weak China trade data (Reuters)
• Any Hall is down 20% YTD (WSJ)
• Global Stocks Slide With Metals After Chinese Imports Tumble (BBG)
• Clinton's tack to the left to be on display in Democratic debate (Reuters)
• Switzerland Said to Impose 5% Leverage Ratio on Big Banks (BBG)
• AB InBev, SABMiller brew up $100 billion deal (Reuters)

As we pointed out previously, the growing convergence between BLS-reported initial jobless claims (at 42 year lows) and reported job cuts (highest since 2009) suggests someone is lying. It appears we have found the cuplrit as Goldman Sachs confirms that changes in gross labor market flows (e.g. gross hires and quits), as well as changes in the unemployment insurance benefit take up rate, affect the relationship between jobless claims and employment growth over the cycle. For this reason, today’s low level of jobless claims should probably not be taken as a sign of a booming labor market.

WSJ’s Fed whisperer is always good for a bit of Eccles propaganda and so, for whatever it's worth to you, we present the following Hilsy interpretation of the just-released minutes from the “most important” Fed meeting in recent history.

Given the tumble and stock save since September's infamous "chickening out" FOMC Meeting, investors hope today's minutes will provide some color on just how close Janet and her merry men were to pulling the trigger:

• *FED OFFICIALS SAID `PRUDENT' TO WAIT FOR CLARITY ON OUTLOOK
• *FOMC MINUTES: MOST PARTICIPANTS SEE LIFTOFF CONDITIONS MET THIS YR
• *FOMC MINUTES: ALL BUT ONE MEMBER SAID ECON COND DIDN'T WARRANT HIKE

With all the blame pinned on global turmoil (which has now "calmed" apparently) the S&P 500 has roundtripped to unchanged post-FOMC and given these minutes which suggest this was not a close-call at all. However, this was before the Sept payrolls data.

Pre-FOMC Minutes: S&P Futs 1988.25, 10Y 2.095%, Gold $1145, EUR 1.1285

If you’re a fan of dovish policymakers who are committed to Keynesian insanity, you can always count on Minneapolis Fed chief Narayana Kocherlakota who is out today with the latest hint that NIRP is coming to America.

And now the real shocker: there is over US$100bn in gross financial exposure to Glencore. From BofA: "We estimate the financial system's exposure to Glencore at over US$100bn, and believe a significant majority is unsecured. The group's strong reputation meant that the buildup of these exposures went largely without comment. However, the recent widening in GLEN debt spreads indicates the exposure is now coming into investor focus."