"We all hear nonsense in the course of our lives. Sometimes we talk it. Over the past 48 hours I have heard that this apparently unforeseeable re-pricing of global markets is down to Greece, down to Ebola, and/or down to the fact that the street is not offering much liquidity. However, I think the re-pricing was foreseeable and has – so far – barely anything to do with these first two items. At some point I’m sure the market will accept that the re-pricing is much more about reassessing global growth and deflation expectations and collapsing policymaker credibility. And as for the liquidity argument – which HAS been a factor, in my view – how can this be a surprise? After all, as I see it, one of the cornerstones of regulation over the past five or six years has been to ensure that banks are unable to provide liquidity when clients really need it en masse."
When it comes to levitating the stock market, and allowing America's worthless politicians to keep on doing nothing in hopes the Fed can fix everything by simply printing money, the Fed's Chairmanwoman has no problem with getting to work. However when it comes to the latest deadly Pandemic to cross the Atlantic and hit US shores, the Fed has a dire message: America, you are on your own.
- FED'S PLOSSER: MONETARY POLICY CANNOT DO MUCH ABOUT ECONOMIC THREAT FROM EBOLA
You mean, the Fed can't print antibodies? And why is the Fed expected to do "much" or anything for that matter about the economic threat from Ebola - isn't there a president and a Congress to actually deal with America's problems... instead of just making them worse that is?
Here is why the center will hold.
It appears the "Fed is ending QE because the economy is recovering" narrative is failing (as the world wakes up to the fact that The Fed is being forced to exit due to having broken the markets). In the September FOMC meeting, Yellen put the final nail in the QE coffin by confirming the money-printing would end in October. This is what has happened since then...
We know low interest rates and QE hasn`t worked, or they wouldn`t have to be re-initiated in the form of additional QE Programs, and we wouldn`t still be having this entire conversation 7 years after ZIRP began.
"...much like when the Germans bombed Pearl Harbor, nothing is over yet. The Fed has not undone its extraordinary loose monetary policy and is just now stopping its direct QE purchases... Paul [Krugman] will continue to be mostly wrong, mostly dishonest about it, incredibly rude, and in a crass class by himself."
Nearly two decades of central bank financial repression have created huge distortions and imbalances in the world economy. Now they are coming home to roost as the impossibility of ZIRP forever dawns on even our mad money printers. Having created yet another round of ebullient financial bubbles, they are now getting palpably nervous.
With oil prices crashing, as various OPEC members (cough Saudi Arabia cough) turn the screws on each other, we thought (after showing the US domestic pain) the following chart from The Economist would provide more context for which nations are feeling the most (and least) pain...
"I am calm. But I am angry, too. It doesn’t have to be this way... this consensus-by-fiat style of policy leadership where we are always only one counter-factual reveal – the sick nurse or the sick economy – away from a breakdown in market or governmental confidence. I am angry that we have been consistently misjudged and underestimated, treated as children to be “educated” rather than as citizens to be trusted. I am angry that our most important political institutions have sacrificed their most important asset – not their credibility, but their authenticity – on the altar of political expediency, all in a misconceived notion of what it means to lead. And yet here we are. On the precipice of that breakdown in confidence. A cold wind of change is starting to blow. Can you feel it?"
The fact that the US economy is nowhere near strong enough to offset the deflation it would import and is already importing through USD strength vs EUR and JPY in particular, has now become a key market theme. Crucially, markets are now collectively having to consider what Bob Janjuah thinks is the reality – that annual trend global growth is converging down at around 2.5%, well short of the pre-crisis levels of over 4%. Janjuah believes "we will see UST 10yr yields closer to 1.5% before they get anywhere near 3.5%, with 10yr Bund yields at 50bp; and a weekly close on the S&P 500 below 1905 was and remains his key pivot point - targeting 1770 as the next stop."
Equity markets live and die on several well-established conventions, according to ConvergEx's Nick Colas, noting that these are the rules that investors use as the bedrock of their fundamental analysis. The volatility of the last few weeks shows that some of these paradigms are now under attack. Chief among the question marks: “Do central banks always have the power to tip the balance between growth and recession?” Another rising concern: “Can stocks constantly shrug off recessionary signals from commodity and fixed income markets?” Lastly, “How many exogenous, if largely unpredictable, global events can equities ignore before their collective weight halts a bull market?” Bottom line: the debate on these topics isn’t over for October or the balance of the year.
While Greek leaders are proclaiming victory, intending to exit the bailout plan early and fund themselves in the public marketplace - just as they did in April (despite record poverty, unemployment, and suicides); it appears investors are a little less sanguine about the prospect. Greek bond yields have topped 7% for the first time since March and any gains from the 5Y bonds sold to hedge funds in April have now gone (and Greek stocks are at 13-month lows). The driver of recent weakness appears to be fears over whether Draghi's OMT will ever be real enough to monetize Greek debt and a re-rating based on more standalone risk if Greece were to exit the bailout program early.
With this in mind we hope the Swiss people display their fierce independence and reject the advice of the "experts," many of whom got us into this mess, in favour of the policies that have kept them peaceful and prosperous for centuries ...
“Hyperinflation and hyper-deflation are just two different forms of the same phenomenon: credit collapse. Arguing which of the two forms will dominate is futile: it blurs the focus of inquiry and frustrates efforts to avoid disaster.”
While today's market dump was certainly dramatic, it was a function of the scant liquidity in the market (as we warned would be the case first thing) and outsized moves following last week's mauling, not the result of any fundamental (or not so fundamental) news. That could change tomorrow, and change for the worse, because as Barclays reminds us, tomorrow is when the European Court of Justice (ECJ) is scheduled to hear testimony on the ECB’s non-existent Outright Monetary Transactions program (OMT). Recall that the OMT is the imaginary (again: non-existent) byproduct of Draghi's "whatever it takes" speech: a byproduct that was supposed to exist purely in the imaginary realm (as it was merely a verbal bluff, one which was never meant to be actually activated), and never actually take practical shape (hence, why the OMT's legal term sheet still does not exist, over two years later). Sadly for Draghi, and the entire Deus Ex theater that managed to send European peripheral bonds from record wides yields to record low, tomorrow it will attain some much dreaded shape.