"After several weeks, Gold is setting up for a sell, US Treasuries are set to resume their bear trend, and the USD is set to resume its bull trend. Get ready..." is the ominous warning BofAML's Macneil Curry sets forth in his technical treatise this weekend. Despite the plethora reasons for rates to go lower for longer (and treacherous market conditions expected ahead) and the various fundamental and technical drivers of recent precious metals strength, Curry says it's time.
"The government bond markets right now present one of the most one sided trades I've ever seen in my professional life."
This week’s news certainly WASN’T BORING. Big events and small add up to unfolding CHAOS around the WORLD. This week’s subjects: American Empire on FIRE!, Out on a LIMB: Credit Unions facing INSOLVECY, Is rising indebtedness a sign of economic strength?, Bond YIELDS continue to collapse as the race for yield INTENSIFIES, George Orwell in Action, Showdown looming at the OK corral!, Simply UNBELIEVABLE SOVEREIGN credit market action, PHANTOM GDP, Rare INDEED, Must watch video interview with Charles Nenner,European BANKING SYSTEM INSOLVECY
The recent decline in US yields appears to have run its course and given Citi's outlook for a better employment dynamic in the US, they expect yields to trend higher at this point. Citi's FX Technicals group remain of the bias that the normalization of labor markets (and the economy) will lead to a normalization in monetary policy and as a result significantly higher yields in the long run. Might the shock be that the Fed could be grudgingly tightening by late 2014/early 2015 (an equal time line to the 1994-2004 gap would suggest end November 2014) just as it was grudgingly easing by late 2007 despite being quite hawkish earlier that year? However, given the "treacherous market conditions" we suspect Citi's hoped-for normalization won't go quite as smoothly as The Fed hopes.
Because we are living in the Golden Age of Central Bankers, and that wreaks havoc on the fundamental nature of market expectations data....
- the VIX is not a reliable measure of market complacency.
- the wisdom of crowds is nonexistent.
- fundamental risk/reward calculations for directional exposure to any security are problematic on anything other than a VERY long time horizon.
- I’d rather be reactive and right in my portfolio than proactive and wrong.
The Golden Age of the Central Banker is a time for survivors, not heroes. And that’s the real moral of this story.
In his recent note “Treacherous Market Conditions,” Scotiabank's Guy Haselmann attempted to outline the precarious position the FOMC has put itself in. The Fed’s depleted ammunition applies greater pressure on its attempts to ensure a strong recovery; yet, as Haselmann hinted, the Fed is in a race against time, because risks to financial stability aggregate with each passing day, while economic benefits approach zero. Despite differences as to the extent and degree of financial risks, FOMC members have (finally) become aware that they have arisen. Draghi seems to share concerns about bubble conditions... and now the BIS fears that a "persistently aggressive monetary policy risks exacerbating collateral damage."
Committees, investigations, concerns... but no actions. The SEC's Mary White spoke about market micro-structure this morning but mereley asked a lot of questions - as opposed to answered any. Two things she did mention of note: increased transpraceny for dark pools and internalizers; and forcing more high-frequency traders (and prop shops) to register as broker-dealers (and thus come under closer regulatory scrutiny). However, by the time any of this becomes 'law', we suspect the lobbyists will have created loopholes the size of Draghi's ego for HFTs to walk through. As WSJ reports, the SEC's enforcement division is investigating whether some high-speed traders are using order types - commands exchanges provide that determine how traders' buy and sell orders will be handled - in ways that can give them an advantage over less-savvy investors. We apologize for not seeing this 'investigation' as a positive but we've been here before with every other regulator... vested interests remain strong.
The governments and central banks of the world are engaged in a futile effort to stimulate economic recovery through an expansion of fiat money credit. They will fail due to their ignorance or purposeful blindness to Say’s Law that tells us that money is the agent for exchanging goods that must already exist. New fiat money cannot conjure goods out of thin air, the way central banks conjure money out of thin air. This violation of Say’s Law is reflected in loan losses, which cannot be prevented by any array of regulation or higher capital requirements. In fact rather than stimulate the economy to greater output, bank credit expansion causes capital destruction and a lower standard of living in the future than would have been the case otherwise.
"... the Fed is overpromising and over-reaching on what it can actually deliver. It has always been quite a leap of faith to believe that ever-rising asset prices would create a wealth effect adequate enough to boost consumption, so as to make progress on the Fed’s dual mandates without causing adverse financial markets conditions.... After the 2008 crisis, policymakers have tried to end this mindset by becoming more proactive in trying to prevent financial crises. Though well-intentioned, this new approach has arguably led to Fed policy itself becoming a source of systemic risk... Markets are likely headed for a difficult period as the FOMC tries to gradually wean investors off of its liquidity addiction. It is too late for the FOMC to do much other than to try to limit the damage.... The bottom line could simply be that QE means ‘risk-on’, while ending QE means ‘risk-off’."
As the chart below shows, there’s much the Fed doesn’t understand, while at the same time showing that QE may have little purpose beyond providing a massive gift to wealthy traders and investors. With regard the question of where a dollar of QE goes, the answer is “not far.” Outside of pushing up asset prices and encouraging an occasional luxury purchase, it doesn’t seem to escape the financial sector. Liquidity that might otherwise be offered by private institutions is instead provided by the Fed, and – as Phil Collins might put it – that’s all.