The government shutdown has removed key algo-dependent headline-making economic data from our daily lives such as incomes, spending and retail sales. However, we have anecdotal signals from trade industry data (pace of dining out has stalled and anyone but the hghest earners are seeing consumer comfort plunge) and from-the-horse's mouth we have CEO comments. Here is what is on the US retailers' mind...
Fingers of Instability
Back in April, in a desperate scramble to raise liquidity courtesy of a hail mary Goldman syndicated term loan, we penned "Confused By What Is Going On At JCP? Here's The Pro Forma Cap Table And The Cliff Notes", where in addition to the obvious - that this is merely buying a few months for the melting icecube company which with every passing day is closer to a Chapter 11 (or 7) bankruptcy filing - we also laid out that what Goldman was doing was merely positioning itself to be at the top of the company's capital structure with a super secured and overcollateralized credit facility, through what is effectively a pre-petition DIP... As it turns out we only had to wait for five months before the same Goldman that raised the company's emergency liquidity term loan turned around and launched a vicious attack on the same company that paid it millions in dollars in underwriting fees. Specifically, what Goldman just did is write a report (perhaps one of the best bearish cross-asset investment theses we have seen to come out of the firm in a long time) in which it laid out, in a lucid and compelling manner, why JCP is doomed. The report is titled appropriately enough: "Initiate on JCP with Underperform: Looking for cash in the name"... and not finding it.
Much attention has fallen on the Fed's recent announcement that a new fixed-rate, full-allotment overnight reverse repo facility is in the works (so much so that both shadow banking experts Singh and Stella have opined on the issue). It appears that despite the Fed's "best efforts" at communication, not enough clarity has been shed on the topic. So here is Bill Dudley's explanation.
As expected, here come the first two doves "explaining" the reasons behind Bernanke's taper surprise last week:
- DUDLEY SAYS FED MUST ACT ‘FORCEFULLY’ TO PUSH AGAINST HEADWINDS
- DUDLEY: MAY TAKE CONSIDERABLE TIME TO REACH 6.5% JOBLESS LEVEL
- DUDLEY SAYS ECONOMY STILL NEEDS `VERY ACCOMMODATIVE' POLICY
And Lockhart adds to the chorus:
- LOCKHART SAYS FED FOCUS SHOULD BE FASTER U.S. ECONOMIC GROWTH
- LOCKHART HAS BACKED FED'S ASSET PURCHASE PROGRAM
- LOCKHART SEES `SOME SLOWING' IN U.S. PAYROLL GROWTH
Translation: much more "high-quality collateral" to be extracted from the system.
"There is nothing safe anymore, because the money-printing distorts all asset prices," is the uncomfortable response Marc Faber gives to Thai TV during this interview when asked for investment ideas. Faber explains how we got here "massive money-printing and ZIRP creates a huge pool of liquidity that does not flow evenly," as it washes from Nasdaq stocks to real estate to emerging markets and so on. Each time, "the bubble inflates and then is deflated as the capital (liquidity) floods out." The Fed, based on the doubling of interest rates since they began QE3 "has lost control of the bond market," Faber warns; adding that while he expects some "cosmetic tapering," the Fed members and other neo-Keynesian clowns will react to a "weakening US and global economy," and we will be a $150 billion QE by the end of next year, as the world is held hostage to US monetary policy.
With Septeper an epic disappointment, some terms being casually thrown now include Octaper and Dectaper. But while the first is quite improbable, despite Bullard's attempt at a trial balloon floated on BBG TV moments ago, the prevailing consensus has now shifted to December. Which incidentally is when Bank of America, which was the only big/TBTF bank to correctly forecast a Snotaper announcement, has marked its calendar in expecting the first $10 billion reduction in the monthly $85 billion flow injection by the Fed. To wit: "In line with our out-of-consensus call, the Fed surprised most market participants and did not taper at their September meeting. Moreover, the FOMC statement, updated projections, and tone of Chairman Bernanke’s press conference all were dovish, as we had anticipated. Thus, our base case remains for a December taper. We now expect a modest-sized reduction of $10 bn, split evenly between MBS and Treasuries, followed by a gradual, data-dependent wind-down of purchases likely to end in October 2014. We also now expect the first rate hike in late 2015 at the earliest (previously we had looked for the first hike that summer), putting the target funds rate at 50 bp at the end of 2015 and 1.50% at the end of 2016."
For what it's worth, here is Goldman's Jan Hatzius with a Q&A on the Fed's announcement, which now sees the first tapering to start in December, QE to conclude (three months after their prior forecast), and expects the first rate hike to take place in 2016: 8 years after the start of the financial crisis: "We now expect the QE tapering process to start at the December 2013 FOMC meeting and to conclude in September 2014, three months later than before. Our baseline is that the first step will consist of a $10bn cut in Treasury purchases. These steps remain data dependent in all respects--timing, size, and composition. A change in the explicit forward guidance for the federal funds rate is also likely, probably at the same time as the first tapering step. Our baseline is an indication that the 6.5% unemployment threshold is conditional on a forecast of a near-term return of inflation to 2%, and that a lower threshold would apply otherwise. But there are also other options, such as an outright inflation floor or an outright reduction in the unemployment threshold. Our forecast for the first hike in the funds rate remains early 2016. The reasons are the large output gap, persistent below-target inflation, and some weight on "optimal control" considerations."
BOTTOM LINE: The FOMC unexpectedly decided not to taper the rate of its asset purchases at today's meeting, preferring to wait for further confirmation of improvement in the outlook. There was no change to the forward guidance on the federal funds rate. The Summary of Economic Projections showed a decline in the central tendency expectation for the year-end 2015 fed funds rate, and the 2016 rate suggested a cautious pace of rate hikes once they begin.
The July statement from the FOMC presented the following snapshot of the economy, "Information received since the Federal Open Market Committee met in June suggests that economic activity expanded at a modest pace during the first half of the year. Labor market conditions have shown further improvement in recent months..." but as Stone McCarthy notes, tomorrow's FOMC post-meeting statement could well be less upbeat in tone, with hints of a slowing in the pace of improvements in the labor market, housing, consumer and business spending, and inflation remaining well below the 2% goal. A look at the housing and spending data certainly raises eyebrows but it is clear that the Fed remains cornered by deficits, sentiment, technicals, and international ire.
For the second month in a row, the Empire Fed has fallen and missed expectations. At 6.29 (vs 9.1 exp), this is the lowest since May as the average workweek (down from 4.81 to 1.08) and number of employees (down from 10.84 to 7.53) subindices fall notably. In general the index was not worse because of the effect of the six-months-outlook views (which soared 3pts to 40.6 - its highest since early 2012) when, as usual, current conditions deteriorate but offset by hopium that eventually things will get better, but even there employment (number of employees outlook down from 8.43 to 4.30) was seen as weaker.
The following 100-second clip from Nanex represents 4 years of daily trading in the US equity "markets". Each line is a day in the life of quote spam and the y-axis is the volume of quotes... from around 1000/second in 1999, we now see 2 million quotes per second... progress?
With bonds and stocks rallying (and the USD dropping) notably in the last few days, one could be forgiven for believing the Taper is off but Goldman's baseline forecast remains for a $10bn reduction in asset purchases - probably all in Treasuries - and $15bn is possible (though recently mixed labor data may choke that a little) and a strengthening of forward-guidance. As they note, the current redction in uncertainty (or rise in complacency some might say) has the potential to offset the tightening in financial conditions, barring another major outbreak of DC strife in the run up to the debt ceiling in late October/early November. However, what is most notable is Goldman's expectation that the Fed will start walking-back its unemployment-rate threshold as it has been clearly shown not to be a good catch-all indicator of broad economic and labor market performance. So it's data-dependent - but the data is unreliable at best and false at worst.
Back in May, with the release of the quarterly TBAC presentation, we penned "Desperately Seeking $11.2 Trillion In Collateral, Or How "Modern Money" Really Works" in which we described in detail Wall Street's lament that as a result of upcoming changes and regulations of the shadow market, that there may be a dramatic shortage in collateral over the next several years, which in addition to other factors, may hit over $10 trillion. Well, we can scratch the collateral concerns off.
- G20 TASK FORCE SAYS NEW SHADOW BANKING RULES EXPECTED TO BE IN PLACE BY 2015
- WON'T IMPLEMENT GLOBAL MINIMUM 'HAIRCUT' ON REPOS, SECURITIES LENDING UNTIL MARKET CONDITIONS RIGHT
Said otherwise, Wall Street looked at the shadow banking abyss, and promptly ran away when the abyss looked back.
The current external environment and consequence of past policies are limiting options for EM nations (most specifically Indonesia and India). Citi believes the best they can do now is to smooth the (inevitable) macro adjustment (weaker FX, higher risk premiums, slower growth) through improved policy credibility (to curb volatility and overshooting) and find offsets to portfolio flows to ease the pressure. The 4 choices of various rocks and hard places do not hold much hope for anything but further FX devaluation. As Citi's Matt King points out, what goes up (in terms of Emerging Market central bank FX reserves) risks coming back down with a thud... and in case you were wondering why India, Turkey, and Indonesia were the most-hammered...