"The world has changed," explains the 27-year old daughter of David Stevens - CEO of the Mortgage Bankers Association. Despite her father's constant 30-year pitch of the merits of homeownership - and knowing full well that rates are low, rents are high, and owning a home 'builds wealth' - Sara Stevens is not buying. After watching "cousins and other family members go through pretty tough situations in 2008 and 2009," her skepticism is broad-based as Bloomberg reports, t’s more than the weight of student loans, an iffy job market and tight credit -- even those who can buy are hesitant. As Bloomberg so eloquently concludes, when even the cheerleader-in-chief for housing can’t get a rah-rah out of his daughter, you know this time is different.
A look at key events and data in the week ahead.
This is a big deal. On the heels of our pointing out the surge in Treasury fails (following extensive detailing of the market's massive collateral shortage at the hands of the unmerciful Fed's buying programs), various 'strategists' wrote thinly-veiled attempts to calm market concerns that the repo market (the glue that holds risk assets together) was FUBAR. Even the Fed itself sent missives opining that their cunning Reverse-Repo facility would solve the problems and everyone should go back to the important business of BTFATHing... They are wrong - all of them - as yet again the Fed shows its ignorance of how the world works (just as it did in 2007/8 with the same shadow markets). As JPMorgan warns (not some tin-foil-hat-wearing blogger with an ax to grind) "the Fed’s reverse repo facility does little to alleviate the UST scarcity induced by the Federal Reserves’ QE programs coupled with a declining government deficit." The end result, they note, is "higher susceptibility of the repo market to collateral shortages" and thus dramatically higher financial fragility - the opposite of what the Fed 'hopes' for.
With EURUSD hardly budging, constantly disappointing economic data (from periphery to the core now), and central bank transmission mechanisms that are entirely clogged and useless for anything but stuffing the pockets of bloated bank balance-sheets with domestic sovereign debt, it is no wonder Germany's Bundesbank has said 'enough'. "If we pursued our own monetary policy... it would look different," explained Bundesbank chief Jens Weidmann. As Reuters reports, Weidmann noted that many savers in Germany were irritated by low interest rates and property prices were overvalued in some big city areas in Germany; implicitly threatening the ECB's chatter-box that "this phase of low interest rates, this phase of expansive monetary policy, should not last longer than is absolutely necessary."
This is it! The holy grail of forecasting, Jeffrey Kleintop has discovered it. You'll never have to worry about actual earnings reports, a massive bubble in junk debt, the sluggishness of the economy, new record levels in sentiment measures and margin debt, record low mutual fund cash reserves, the pace of money supply growth, or anything else again. Just watch the yield curve! Unfortunately, as we showed here in the US, this advice could turn out to be extremely dangerous for one's financial health - and has been across many nations throughout time. People remain desperate for excuses as to why the latest bit of asset boom insanity will never end
Having already warned that looming political uncertainty is not at all priced-in to US equities, Goldman's Alec Phillips points out that legislation was introduced earlier this week (July 7) in the US House that would attempt to revamp the FOMC's monetary policy process. The bill would require the FOMC to justify to Congress each policy decision relative to a Taylor rule specified in the legislation. While Goldman, do not expect the bill to get very far, but the issue does appear to be a growing focus for some lawmakers and we expect further action on it in the near term.
Brent Johnson, of Santiago Capital, provides a brief but broad overview of the state of the state in the world's precious metals markets (and monetary policy implications). Often accused of "waiting for armageddon", Johnson is quick to note that he would love to be wrong... "If I thought it possible to carry out the next 40 years the same as the last - by sticking to the status quo - I'd do it." But it's not... and no matter how many "say it isn't so" you hear from the mainstream, it is inevitable (when not if). Simply put, he warns, if you do have to have capital markets exposure - make sure you have insurance - you need it now more than ever.
The US is tapering, with the Fed knowing any further monetization of private sector bonds will lead to a crash in the already illiquid bond market; Japan is stuck with its massive QE, jawboning every day a rumor that first appeared in November of 2013 (and which sent the USDJPY 500 pips higher and has so far been nothing but a lie) that it may do more, but has unleashed such a firestorm of imported inflation, plunging real wages and collapsing exports that there is nothing Abe or Kuroda can do to boost the Nikkei "wealth effect" or halt what now appears an almost certain 2014 recession. Europe, too, saw a rumor emerge in November 2013 that it would also launch QE, however it won't: instead the ECB just went NIRP and is threatening to do ABS purchases, which just like the OMT pipedream will never happen simply because there aren't enough unencumbered assets to monetize (most of which are already have liens with local banks) while an outright QE would require redrafting Article 123. So what is a world starved for "outside money" to do? Why make up another rumor, this time focusing on the last possible source of QE: China.
Is there any doubt that we are living in a bubble economy? At this moment in the United States we are simultaneously experiencing a stock market bubble, a government debt bubble, a corporate bond bubble, a bubble in San Francisco real estate, a farmland bubble, a derivatives bubble and a student loan debt bubble. And of course similar things could be said about most of the rest of the planet as well. And when these current financial bubbles in America burst, the pain is going to be absolutely enormous.
"Following the release yesterday afternoon of the latest minutes from the FOMC which make it very clear that the Fed’s propensity to tighten monetary policy in the near future is near zero. We may have thought that the market was over-bought and due for a correction, but we are going back to being “pleasantly” long rather than market neutral for the Fed’s wind is at our back." - Dennis Gartman
Gold has meaning to China in the same way that gold has meaning (or should have meaning) to Western investors. Not as an inherent store of value or some timeless monetary standard... but as a symbol of failed confidence in Western central bank control over market outcomes. To both investors and China, gold is an insurance policy against Western central bankers losing control of their massive monetary policy experiment. The difference is that China has the power to do something about it.
A nervous peace prevails in the financial markets as central banks sit on their throne, fingers at the ready on the liquidity switch. As UBS' Bhanu Baweja notes, most volatility buyers have been 'rolled' into their graves. As they have explicitly targeted risk premia in addition to rates, a lot more hangs on the monarchs of monetary policy today than it has in previous cycles. While growth and inflation are both low, they are not necessarily uncertain; and although every crisis is different, certain patterns tend to repeat and certain events have reliably driven volatility higher.
Having continued to taper, expressed no fear of inflation, and been nothing but confident that Q1 was nothing-but-weather at the press conference, the FOMC Minutes shows:
*SOME FED OFFICIALS SAW INVESTORS AS TOO COMPLACENT ON RISKS
*FED SAW INSUFFICIENT INVESTOR UNCERTAINTY ON ECONOMY, RATES
*FOMC SEES QE ENDING WITH $15 BLN CUT IN OCT. IF OUTLOOK HOLDS
Strange not a mention of the surge in Treasury fails but this appears as close to a "sell" as the Fed will give...
Pre-FOMC Minutes: S&P Futs 1964, Gold $1323.50, 10Y 2.59%, Oil $102.22, JPY 101.75
Stocks at record highs... Unemployment rates at multi-year lows... magical job creation 'impressive'... President Obama has a lot to proclaim "mission accomplished" over - except its all fallacious (as Wal-Mart's CEO recently explained). Of course, this will all be solved if everyone was paid 'fairly' at least $15/hour despite the greatest irony of Obama's inequality fight is that "his policies are squeezing the middle class and causing the Fed – with the President’s encouragement – to engage in the radical monetary policy, which is exacerbating inequality. This simple truth cannot be repeated often enough."
The record bank lending binge “not evidence of an economic recovery.” Instead, they’re fretting about the greatest credit bubble in history.