Once again: The FOMC minutes had nothing to do with overnight's events, especially since both Ben Bernanke and Bill Dudley made it very clear previously that for any tapering to occur (and which is supposedly bullish according to David Tepper, who may finally be done selling to momentum chasers) if ever, the economy would have to be be stronger (which is of course a paradox because it is the Fed's QE that is making the economy weaker). If anything, the minutes reminded us that there is a mutiny in the FOMC with finally someone having the guts to say on the record that Bernanke is blowing a bubble - something never seen before on the official FOMC record. And after all, the Nikkei opened way up, not down. It was only after the realization of what soaring bond yields mean for, wait for it, stocks (despite central planner promises that it is soaring bond yields that are a good thing - turns out, they aren't) that the sell-off really started. That, and of course copper, and the end of the Chinese Copper Financing Deals arrangement that has been China's illicit cross-asset rehypothecation scheme for years (more shortly). So in a nutshell, here is what has transpired so far, courtesy of Bloomberg.
What is 410 words and is released precisely 180 seconds after the FOMC's minutes? Why Jon Hilsenrath's FOMC minute-parsing piece of course. Which we can only assume means Jon was on the "preapproved" list for early distribution and pre-analysis, because not even we can analyze and type that fast. We are confident he did not breach the embargo. Because that would not look good for the Fed already being investigated by the Inspector General for last month's humilating breach.
Well that escalated quickly... the S&P is now 30 points off its earlier highs and it seems (for once) that it is stocks and none of the other risk-assets that are taking the brunt of the disappointment. And no, it wasn't the mention of a June taper that spooked markets: as the Fed itself said that will be a function of the economy, and as everyone knows there bad news and good news are both goods news. What spooked the market is that finally someone on the FOMC is not only acknowledging asset bubbles, but putting it in writing: "a few participants expressed concern that conditions in certain U.S. financial markets were becoming too buoyant.... One participant cautioned that the emergence of financial imbalances could prove difficult for regulators to identify and address, and that it would be appropriate to adjust monetary policy to help guard against risks to financial stability." Now this is a problem because unlike the economy where QE may or may not trickle down to the unemployment rate (it won't as QE is causing it but fear not - more QE is just around the corner to fix a problem caused by QE) asset bubbles only get bigger and bigger and bigger, until QE has to be not only tapered, not only stopped, but actually unwound. And with some finally on the record, the blame will be cast squarely at those who ignored the first warnings.
FOMC Minutes: This Is What It Sounds Like When Doves Cry, And When Others Start To See An Asset BubbleSubmitted by Tyler Durden on 05/22/2013 14:02 -0400
It appears (as we noted here) that the size of the balance sheet, difficulty of the exit, frothiness of markets, and not-totally-dismal labor headlines have even the doves a little more hawkish about the possibility of an exit at some point - though obviously the minutes are clear that the 'flow' can increase (as well as decrease) based on the data.
- FOMC MINUTES: MANY SAID MORE PROGRESS NEEDED BEFORE SLOWING QE
- FED'S BROAD PRINCIPLES ON EXIT `STILL VALID,' FOMC MINUTES SHOW
- SOME ON FOMC WILLING TO SLOW ASSET PURCHASES AS EARLY AS JUNE
- SOME SAID "CONDITIONS IN CERTAIN FINANCIAL MARKETS WERE BECOMING TOO BUOYANT"
Two things seem clear: 1) the Fed is explicitly forcing the market to hope for bad data to maintain gains as the gap between market and reality is now too large for a soft-landing; and 2) the Fed has explicitly admitted that it is the 'flow' not the 'stock' that matters - as we have been vociferous about for years. But what is worst, is that now that some at the FOMC are openly seeing asset bubbles, Bernanke is facing a mutiny on his hands!
With part two of today's Fed-a-palooza due out shortly in the form of the May 1 FOMC meeting minutes, here is an informative recap of the current roster of assorted birds at the FOMC via Bank of America. Of course, since every decision always begins and ends with Ben, and soon his replacement Janet, all of below is largely meaningless.
News That Matters - Today's news in brief
Update: Bubbles Bernanke slams any hopes for tapering goodbye, as long predicted: PREMATURE TIGHTENING RISKS SLOWING OR ENDING RECOVERY
Bernanke's quarterly hearing with the Joint Economic Committee this morning will be today's must-see event (with FOMC minutes a close second). It seems the equity market has no fears but many in the high-yield market are anxious for the words 'frothy', 'taper', 'bubble', 'clueless', and 'I plead da fif'. While Bernanke's words will be the most important, these hearings typically include their fair share of ironic ignorant 'humor' from the politicians who sit in awe of the most powerful man in the world and his CTRL+P prowess.
Surging nominal imports and a miss for exports just about sums up perfectly just how the reality of Abenomics is crushing the real economy as the market goes from strength to strength on the hope that recovery is just around the corner. For the 28th month in a row Japan trade deficit has dropped YoY and its 12-month average is now at its worst ever. Energy costs are driving up imports (and adjusted for the devaluation in the JPY, the data is simply horrendous. Of course, there are green shoots - CPI is not deflating as fast as it was... and 'some' inflation expectations are rising (though as we noted here that is simply due to the tax expectations). Contrary to expectations held by some in the bond market, the BOJ did not comment on the sharp fluctuation in JGB yields since April as a result of monetary relaxation - on the basis, we assume, that if they don't mention it, it never happened. The result post a nothing-burger of 'more uncertainty' from the BoJ, the Nikkei keeps screaming higher, JPY rallied then fell back, and JGBs are sliding higher in yield.
As virtual fantasy worlds go, Blizzard Entertainment’s Diablo 3 is particularly foreboding. Within this fairly straightforward gaming framework, virtual “gold” is used as currency for purchasing weapons and repairing battle damage. Over time, virtual gold can be used to purchase ever-more resources for confronting ever-more dangerous foes. But in the last few months, various outposts in that world have borne more in common with real world places like Harare, Zimbabwe in 2007 or Berlin in 1923 than with Dante’s Inferno. A culmination of a series of unanticipated circumstances has over the last few weeks produced a new and unforeseen dimension of hellishness within Diablo 3: hyperinflation. Considering the level of planning that goes into designing and maintaining virtual gaming environments, if a small, straightforward economy generating detailed, timely economic data for its managers can careen so completely aslant in a matter of months, should anyone be surprised when the performance of central banks consistently breeds results which are either ineffective or destabilizing? The Austrian School has long warned of the arrogance and naïveté intrinsic to applying rigid, quantitative measures to the deductive study of human actions and the events of the last week provide a stark reminder of the power and inescapability of the laws of economics.
Up until today, the narrative was one trying to explain how a soaring dollar was bullish for stocks. Until moments ago, when Bill Dudley spoke and managed to send not only the dollar lower, but the Dow Jones to a new high of 15,400 with the following soundbites.
- DUDLEY: FED MAY NEED TO RETHINK BALANCE SHEET PATH, COMPOSITION
- DUDLEY SAYS FISCAL DRAG TO U.S. ECONOMY IS `SIGNIFICANT'
- DUDLEY: FED MAY AVOID SELLING MBS IN EARLY STAGE OF EXIT
- DUDLEY: IMPORTANT TO SEE HOW WELL ECONOMY WEATHERS FISCAL DRAG
- DUDLEY SAYS HE CAN'T BE SURE IF NEXT QE MOVE WILL BE UP OR DOWN
And the punchline:
- DUDLEY SEES RISK INVESTORS COULD OVER-REACT TO 'NORMALIZATION'
Translated: the Fed will never do anything that could send stocks lower - like end QE - ever again, but for those confused here is a simpler translation: Moar.
If this plan fails to bring about economic growth in Japan, or worse still fails to bring about growth and unleashes inflation, then it’s GAME OVER for Central Bankers. Their one great claim “we’re not doing enough QE” will have been proven to be total bunk.
Preview of tomorrow's Bernanke testimony and FOMC minutes.
Another event-free day in which the only major economic data point was the release of UK CPI, which joined the rest of the world in telegraphing price deflation, despite bubbles in the real estate and stock markets, printing 2.0% Y/Y on expectations of a 2.3% increase, the lowest since November 2009 and giving Mark Carney carte blanche to print as soon as he arrives on deck. In an amusing twist of European deja-vuness, last night Japan's economy minister who made waves over the weekend when he said that the Yen has dropped low enough to where people's lives may be getting complicated (i.e., inflation), refuted everything he said as having been lost in translation, and the result was a prompt move higher in the USDJPY, quickly filling the entire Sunday night gap. That said, and as has been made very clear in recent years, data is irrelevant, and the only thing that matters, at least so far in 2013, is whether it is Tuesday: the day that has seen 18 out of 18 consecutive rises in the DJIA so far in 2013, and whether there is a POMO scheduled. We are happy to answer yes to both, so sit back, and wait for the no-volume levitation to wash over ever. The US docket is empty except for Dudley and Bullard speaking, but more importantly, the fate of Jamie Dimon may be determined today when the vote on the Chairman/CEO title is due, while Tim Cook will testify in D.C. on the company's tax strategy and overseas profits.
It’s painfully clear for all to see that the majestic United States is now firmly caught in the rapacious stranglehold of financial elites which have completely captured it in a grotesque gamed monetary process. Our country’s once idealistic and industrious free market economy has been hijacked and is undeniably being fraudulently and overtly financialized by the craven clutches and maniacal machinations of a contemptible self-seeking banking class. They have become nothing more than avaricious parasites disgustingly feeding from the grand trough of our treasured human ingenuity and self-respecting industry.
In the absence of major data releases, the focal point of the week for markets becomes the release of the minutes of the May FOMC meeting. The most notable change in the statement was the inclusion of the new language: “the Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.” In the May meeting minutes, the market will be looking for any clarification of the motivation behind this change as well as any evidence that the committee members may be becoming less comfortable with the unemployment rate threshold or more specific about tapering timelines and dates.