A look back at the headlines and market movements of the last month provides some useful color for why markets are weak and why now... As Scotiabank's Guy Haselmann warned early last month, there is a threshold point during the Fed’s attempt to normalize policy where the tide reverses and investors join in a sell-off in a race to avoid being left behind. This is why it's called the greater fool theory.
High Frequency Trading (HFT) covers such a broad swathe of 'trading' and financial markets that Mark Cuban (yes, that Mark Cuban), who has been among the leading anti-HFT graft voices in the public realm, decided to put finger-to-keyboard to create an "idiots guide to HFT" as a starting point for broad discussion. With screens full of desperate "stocks aren't rigged" HFT defenders seemingly most confused about what HFT is and does, perhaps instead of 'idiots' a better term would be "practitioners."
UPDATE: Abenomics double #fail - Japanese Base Labor Earnings dropped YoY for the 21st straight month...
Another night, another disaster for Abe. Japan's all-important Tankan Business conditions forecast dropped to a one-year low and missed by the most since Lehman (but apart from that Abenomics is "nailing it"). China's "official" Manufacturing PMI beat expectations modestly and printed at a stimulus-busting 50.3 (expanding) as imports and new export orders jumped rather cough-notably-cough given external conditions and all other economic data. Rather remarkably, the New Order sub index of the Steel Industry PMI report showed a huge surge from 32.4 to 46.1 as New Export orders tumbled - this is the biggest jump in new Steel orders in.. well as far back as we have data...Then HSBC's PMI hit. Printing at 48.0 - worse than the flash print at 48.1 and still firmly in contraction territory leaving China once again in Schrodinger baffle 'em with bullshit economic growth mode.
With Chinese authorities increasingly looking like they are sticking to their reform promises, fighting moral hazard and allowing defaults to occur (in a completely 'contained' way, of course); the continued crackdown on graft and government corruption has hit a new high (or low). As Reuters reports, Chinese authorities have seized assets worth at least 90 billion yuan ($14.5 billion) from family members and associates of retired domestic security tsar Zhou Yongkang, who is at the center of China's biggest corruption scandal in more than six decades. 71-year-old Zhou has been under house arrest since first being investigated late last year but the size and scale of the corruption is unprecedented including 300 apartments, 60 vehicles, bonds, stocks, and gold - "it's the ugliest in the history of the New China."
The start of Q2 2014. US economy to strength. Japan's to weaken. Euro-area is barly growing, while the UK continues apace.
For some inane reason, about a year ago, there was a brief - and painfully boring - academic tussle between one group of clueless economists and another group of clueless economists, debating whether Too Big To Fail banks enjoy an implicit or explicit taxpayer subsidy, courtesy of their systematic importance (because apparently the fact that these banks only exist because they are too big in the first place must have been lost on both sets of clueless economists). Naturally, it goes without saying that the Fed, which as even Fisher now admits, has over the past five years, worked solely for the benefit of its banker owners and a few good billionaires, has done everything in its power to subsidize banks as much as possible, which is why this debate was so ridiculous it merited precisely zero electronic ink from anyone who is not a clueless economist. Today, the debate, for what it's worth, is finally over, when yet another set of clueless economists, those of the NY Fed itself, say clearly and on the record, that TBTF banks indeed do get a subsidy. To wit: " in fact, the very largest (top-five) nonbank firms also enjoy a funding advantage, but for very large banks it’s significantly larger, suggesting there’s a TBTF funding advantage that’s unique to mega-banks."
It’s evident that the economy isn’t growing strongly because of conditions that central bankers themselves created, by encouraging excessive borrowing and disregarding moral hazard. In other words, the problem isn’t so much that the Fed can’t deliver another debt-fueled boom, but that it shouldn’t be trying to cure a credit bust with more borrowing in the first place. Sadly, though, this idea falls in the same category as the notion that the Fed’s balance sheet isn’t the right tool for job creation. It’s too damning a thought to be accepted by central bankers who’ve shackled themselves to a philosophy of ceaseless intervention. It’s also too basic for economists who prefer abstract theories and mathematical models over reality-based thinking.
A dispassionate look at the main considerations for investors in the week ahead.
A month ago we presented a must read interview by Swiss Finanz und Wirtschaft with respected value investor Howard Marks, in which, when explaining the motives driving rational investing he summarized simply, "in the end, the devil always wins." Today, we are happy to bring our readers the following interview with one of our favorite strategists, GMO's James Montier, in which true to form, Montier packs no punches, and says that the market is now overvalued by 50% to 70%, adding that there is "nothing at all" that has an attractive valuation, and that he sees a "hideous opportunity set."
Yellen’s press conference was panned by some as confusing and ambiguous. The press conference was not as “boring” as some have stated, because the FOMC (represented by Yellen) now appears to be struggling between theory and practice. This marks a significant shift from the majority of members who had almost entirely been relying on models (theory). The one thing that seemed perfectly clear is that the Fed plans to continue to unwind the QE program barring some type of disaster. After that, we will all have to reassess and see how things unfold...“Theory is when you understand everything, but nothing works. Practice is when everything works, but nobody understands why. When theory and practice are untied, nothing works and nobody understands why.”
A dispassionate discussion of the major forces impacting the investment climate in the week ahead.
Today's nonfarm payroll number is set to be a virtual non-event: with consensus expecting an abysmal print, it is almost assured that the real seasonally adjusted number (and keep in mind that the average February seasonal adjustment to the actual number is 1.5 million "jobs" higher) will be a major beat to expectations, which will crash the "harsh weather" narrative but who cares. Alternatively, if the number is truly horrendous, no problem there either: just blame it on the cold February... because after all what are seasonal adjustments for? Either way, whatever the number, the algos will send stocks higher - that much is given in a blow off top bubble market in which any news is an excuse to buy more. So while everyone is focused on the NFP placeholder, the real key event that nobody is paying attention to took place in China, where overnight China’s Shanghai Chaori Solar defaulted on bond interest payments, failing to repay CNY 89.9mln (USD 14.7mln), as had been reported here extensively previously. This marked the first domestic corporate bond default in the country's history - indicating a further shift toward responsibility and focus on moral hazard in China.
Though many may reckon the U.S. government (and its Deep State) are not so much incompetent as merely evil, we suggest incompetence sows the seeds of evil consequences. Why is our government so incompetent? Short answer: because incompetence has been fully institutionalized in every branch, every agency and every nook and cranny of the state.
The word “tantrums” referenced in the title was the paper’s attempt to explain adverse market reactions, e.g., last year’s reaction from ‘taper-talk’. The authors stated that risk premiums can jump quickly, simply because non-bank market participants (read: mutual funds) are motivated by their peer performance rank. The authors had 3 subsequent conclusions: 1) the relative peerperformance race causes momentum in return; 2) return chasing can reverse sharply; and 3) changes in the stance of monetary policy can trigger heavy fund inflows and outflows. These conclusions partially explain (empirically) the herd mentality and momentum in recent years behind tight credit spreads and elevated equity prices. Investors are so fearful of missing the upside and underperforming peers that they frantically scramble to remain ahead of them (i.e., seek risk). However, the conference and paper suggests that there is a threshold point during the Fed’s attempt to normalize policy where the tide reverses and investors join in a selloff in a race to avoid being left behind. This is why I’ve been calling it the greater fool theory. The most surprising part of the conference was Rubin’s keynote speech. Rather than speak about Washington’s messy politics or such, he basically gave a speech that criticized and questioned Fed policy.
The following exchange between then-Kansas Fed president (and current FDIC director) Thomas Hoenig and the Chairsatan, uttered during the historic Sept 16, 2008 FOMC meeting, is of particular importance for four reasons: 1) it appears to be the first instance in the Fed records, where the phrase "too big to fail" is memorialized; 2) it highlights something that has become all too clear by now: in giving to a culture of moral hazard, the Fed is now being openly "played" by the market (read the big banks); 3) it confirms that the Fed has learned zero lessons from the crisis and 4) the thinking behind the "Bernanke (global) Put" is laid out for all to see.