It’s not entirely clear what will happen in the near term, but the financial markets are already pushed to extremes by central-bank induced speculation. With speculators massively short the now steeply-depressed euro and yen, with equity margin debt still near record levels in a market valued at more than double its pre-bubble norms on historically reliable measures, and with several major European banks running at gross leverage ratios comparable to those of Bear Stearns and Lehman before the 2008 crisis, we're seeing an abundance of what we call "leveraged mismatches" - a preponderance one-way bets, using borrowed money, that permeates the entire financial system. With market internals and credit spreads behaving badly, while Treasury yields, oil and industrial commodity prices slide in a manner consistent with abrupt weakening in global economic activity, we can hardly bear to watch...
Market Wrap: Futures Lower After BOJ Disappoints, ECB's Nowotny Warns "Not To Get Overexcited"; China SoarsSubmitted by Tyler Durden on 01/21/2015 06:55 -0500
Three days after Chinese stocks suffered their biggest plunge in 7 years, the bubble euphoria is back and laying ruin to the banks' best laid plans that this selloff will finally be the start of an RRR-cut, after China's habitual gamblers promptly forget the market crash that happened just 48 hours ago and once again went all-in, sending the Shanghai Composite soaring most since October 9, 2009. It wasn't just China that appears confused: so is the BOJ whose minutes disappointed markets which had been expecting at least a little additional monetary goosing from the Japanese central bank involving at least a cut of the rate on overnight excess reserves, sending both the USDJPY and US equity futures lower. Finally, in the easter egg department, with the much-anticipated ECB announcement just 24 hours away, none other than the ECB's Ewald Nowotny threw a glass of cold water in the faces of algos everywhere when he said that tomorrow's meeting will be interesting but one "shouldn’t get overexcited about it."
The surreal nature of this world as we enter 2015 feels like being trapped in a Fellini movie. The .1% party like it’s 1999, central bankers not only don’t take away the punch bowl – they spike it with 200% grain alcohol, the purveyors of propaganda in the mainstream media encourage the party to reach Caligula orgy levels, the captured political class and their government apparatchiks propagate manipulated and massaged economic data to convince the masses their standard of living isn’t really deteriorating, and the entire façade is supposedly validated by all-time highs in the stock market. It’s nothing but mass delusion perpetuated by the issuance of prodigious amounts of debt by central bankers around the globe. But now, the year of consequences may have finally arrived.
The fate of countries like Japan is really in the hands of central bankers. However, central planners are not able to manipulate markets infinitely. At a certain point, something has to give. That is when the markets will give up and disbelief will replace trust. In such a bust scenario, people flee down the Golden Pyramid of asset classes to their safe haven, being gold.
Underneath the Propaganda, the Economy Is In BAD SHAPE …
"The nation was leery of a national bank with seemingly endless power to manipulate the money supply and the Second National Bank of the United States was attacked by both the expansionists and the sound money opponents. It was during this period that future President Andrew Jackson shaped his anti-Bank views in Tennessee while his future hard-money arm in the Senate, Thomas Hart Benton (Old Bullion), shaped his views in Missouri, two of the hardest-hit states. The debate over central banking, and the concern over deflation and inflation, continue two hundred years later."
Following last week's holiday-shortened week, which was supposed to be quiet and peaceful and was anything but thanks to OPEC's shocking announcement and a historic plunge in crude prices, we have yet another busy week of macroeconomic reports to look forward to.
Day after day, well-dressed talking heads are paraded on business media and proclaim how cheap Japan is, how Abenomics will work (he promise... if it doesn't we'll have to question everything we believe in), how GDP is backward-looking (so ignore it... and every other economic indicator), and how being long Japanese stocks (of course, hedged back to dollars because you don't want to take the currency risk that Abe is creating) is a "no brainer." The problem with that strategy is... in 2014, the JPY-hedged Japanese stock market investor in the US has not had a daily close in the green year-to-date and is down over 5% for the year... but it gets worse.
Kuroda has fired the shot that looks likely to trigger the next phase of the crazy monetary experiment we’ve all been living in for the last five years. Unfortunately, the next phase is where things start to get nasty. Just because equity markets cheered the latest sugar rush he guaranteed them should not make smart investors lower their guard — quite the opposite, in fact. Colonel Kuroda has gone up-country into the Heart of Darkness, and all we can do is await the Apocalypse now.
Even Japan is playing dirty little tricks...
For the moment capital markets appear to be adapting to deflation piece-meal. The fall in the gold price is equally detached from economic reality. While it is superficially easy to link a strong dollar to a weak gold price, this line of argument ignores the inevitable systemic and currency risks that arise from an economic slump. The apparent mispricing of gold, equities, bonds and even currencies indicate they are all are ripe for a simultaneous correction, driven by what the economic establishment terms deflation, but more correctly is termed a slump.
We've written a lot about Japan lately as what happens today under the no longer rising sun is going to have such repercussions worldwide that it would be foolish not to pay attention. Moreover, there’s something about what Bank of Japan Governor Haruhiko Kuroda said this morning that both perfectly and painfully illustrates to what depths, economically as well as morally, the country has sunk.
We’ve been keeping the long lost idea of our long lost society alive by squeezing our own children wherever we can, and telling them that if they only work hard enough, they can be whoever they want to be. But they can’t, that notion is also long lost. When you keep home prices artificially high, homeowners don’t suffer as much, even if they bought at insanely high prices, but the suffering is switched to potential buyers, who remain just that, potential, while they live in their mom’s basements for years. A surefire way to kill a society while everyone’s eagerly awaiting the growth that is just around the corner and will forever remain there. Take it from your kids. Take it from somewhere else in the world. And that’s where we’re now passing a barrier: there’s no-one to take it from anymore.
The problem with what we call the Exit Rule for Bubbles - "you only get out if you panic before everyone else does" – is that you also have to decide whether to look like an idiot before the crash or an idiot after it.