New Normal

Phantom wealth cannot possibly fund unprecedented retirement and healthcare promises. Only real wealth can do that, and central bank liquidity and the asset bubbles it inflates are not real wealth.

Mass graves - transitory. Military coups - noise. ISIS direct calls for American blood - no problem. Siding with another unelected leader without being sure - new normal foreign policy. Arming kurd fighters - sure why not. Saving a few 100 Yazidi in the name of humanitarianism (oh and the oil sshh) - priceless. We hope President Obama has had a restful morning on his vacation at Martha's Vineyard as he speaks on the latest political developments in Iraq (which last week he explained were crucial if the army was ever to fight for the 'nation' ever again). Just a reminder, the call is 'audio only'  - listen hard for the calls of 'fore' in the background.

Ten-year bond yields in six euro-area nations ended at a record low on Friday as geopolitical tensions fueled demand for the safest fixed-income securities (before everything was ruled 'fixed' later in the US day). As the world's central banks policies begin to diverge, it appears US Treasuries are increasingly attractive on a relative basis for the 'reach for yield' herd (especially as high-yield technicals dominate) in this new normal world (even on an FX-risk-adjusted basis).

Considering all central bank money is created out of thin air, without actual collateral (unlike money created by commercial banks) and just has the backing of the (diluted) "full faith and credit" of the issuer, the only real use for such money is to be "embezzled" either legally - by banks where it ends up as reserves and is then used to push risk assets higher and make the merely uber richer uberest rich... or illegally. It is the latter shortcut that numerous employees of the central bank of Albania decided to pursue when the central bank discovered that around 713 million lek, or $6.7 million, in cash had been stolen two weeks ago.

Is this stock market decline the "real deal"? (that is, the start of a serious correction of 10% or more) Or is it just another garden-variety dip in the long-running Bull market? Let’s start by looking for extremes that tend to mark the tops in Bull markets.

Just in case the legacy of Abenomics wasn't clear enough (it should have been after we reported that its legacy is "Japan's Greatest "Misery" In 33 Years"), here is another confirmation that in the New Normal, only bad things happen when you forget to BTFD.

• Second Ebola patient to arrive in U.S. on Tuesday (Reuters)
• Ebola Drug Made From Tobacco Plant Saves U.S. Aid Workers (BBG)
• Egypt plans to dig new Suez Canal costing $4 billion (Reuters)
• Apple Buybacks Pay Most Ever as CEOs Spend $211 Billion (BBG)
• DeMark Says Sell China Stocks Now After World’s Best Gain (BBG)
• Investors Stung by Losses After Exiting Struggling Property Fund in China (WSJ)
• B.A. in BTFD: MIT May Consider Granting Degrees in Less Than Four Years (BBG)
• Too late, money's already been spent: GPIF Needs Overhaul Before Asset Changes, Shiozaki Says (BBG)
• Oh look, another "truce": Israel withdraws troops, 72-hour Gaza truce begins (Reuters)

It is unclear how much of this morning's momentum-busting weakness in futures is the result of China's horrendous Service PMI, which as we reported last night dropped to the lowest print on record at the contraction borderline, but whatever low volume levitation was launched by the market after Europe's close yesterday may have fizzled out if only until Europe close (there is no POMO today). Still, futures may have been helped by yet another batch of worse than expected European data, namely the final Eurozone PMI prints, which in turn sent the EURUSD to day lows and the offsetting carry favorite USDJPY to highs, helping offset futures weakness. Because in the New Normal there is nothing like a little bad macro data to goose the BTFATH algos...

New normal diplomacy...

It was ten days ago when on the heels of Russia's 30-minute detailed presentation of what it believes happened to MH-17, the US government released a satellite trajectory map of what it says was the flight's path and the site from which the missile was shot as well as various other satellite images "proving" the missile that took down the Boeing 777 was fired by the pro-Russian separatists.  Yesterday the Russian defense ministry finally responded to the US release stating that the "satellite images Kiev published as ‘proof’ it didn’t deploy anti-aircraft batteries around the MH17 crash site carry altered time-stamps and are from days after the MH17 tragedy." In other words, the evidence the US has present to form public opinion was in the form of "altered images carrying wrong time-stamps."

The economic "recovery" has been based on a simple premise: debt can be substituted for income with no ill effects. As real household incomes have declined, the legitimate foundation of additional spending--more income--has eroded for the bottom 90%. The Fed's substitution of debt for income has only doomed the nation to a deeper, more painful realignment of real income and expenses.

Whole Foods management seems to have read our lament and acted accordingly. On the chart below see if you can figure out which is the company's quarterly stock repurchase and capex activity without peeking at the legend.

While headlines are flashing red about how exuberant the consumer is, there appears to be some 'new normal' oddness under the covers. Projecting this positive news into the future (as every talking-head is) does not add up with the fact that "plans to buy a car" and "plans to buy a major appliance" both tumbled in July. But the biggest problem for the 'recovery', "plans to buy a home" collapsed to its lowest since Feb 2013...  perhaps not a total surprise when 77 million Americans have debt past due. Welcome to the new normal definition of confidence.

Earlier today, countless investors who still foolishly believe that in the new normal "fundamentals" matter, screamed out in terror when Zillow announced that it would acquire Trulia for $3.5 billion or a 20% premium to the Friday close, and were suddenly silenced. The reason: with 38% of its float short (making it the 30th most shorted stock in the Russell 2000), this was one of the most dramatic confirmations of what we said was the best trading strategy under the Fed's artificial and capital misallocation regime, namely "buying the most hated names to generate the most alpha." So for all those who still believe that the market has quite a ways to go under the yoke of the Fed's centrally-planning before it all crashes into a house of rigged cards, here is the list of the most shorted stocks in the S&P500 and Russell2000, sorted by descending short interest as a % of float.

Tomorrow is the 100th anniversary of the start of World War I. Perhaps just as importantly, this weekend is also the 120th anniversary of the first Sino-Japanese war: a war between China's Qing dynasty and Meiji Japan. A war which China lost, and which has been a chip on China's shoulder ever since. As Hong Kong's SCMP reports "China's loss of the first Sino-Japanese war has been attributed to a disorganised navy. Although the northern fleet equalled, some say exceeded, the Meiji navy in terms of firepower, it was annihilated because it lacked coordination among its military units." In the context of constant recent flare ups over various contested East China Sea islands, one can see why the anniversary of the war coupled with a sudden spike in nationalistic ambitions of Japan's PM Abe, would be a sensitive issue to China. However, as we can see below, China no longer has an inferiority complex when it comes to its navy compared to that of Japan.