New Normal

For your definitive documented "X is not Y" atlasing needs.

In a strange coincidence, President Obama, as reported by Bloomberg, just followed Mario Monti's new normal and 'came clean' about the real state of the economy, following his earlier snafu:

*OBAMA SAYS `ABSOLUTELY CLEAR' ECONOMY NOT FINE, AP SAYS
*AP SAYS OBAMA SEEKS TO CLARIFY PRIVATE SECTOR REMARKS

The President went on to say that he knows the economy "needs to be strengthened" while clinging to his basic belief that there has been some momentum. Is 'truth' the new 'lie'? Or did hope and change just change on less hope?

While the ever-present analogs to the last few years of crisis-response-improvement-complacency (CRIC), as Morgan Stanley so clearly described, have provided a clear picture of what to expect, the treja vu is now starting to fade in one very important market indicator. As BofA notes, the forward expectations of Fed Funds rates have finally started to shift from an endless string of 'hope' for growth and reflation just around the corner and rate hikes any quarter now (despite the Fed's 'exceptional' chatter) to a much less sanguine pit of despair that rates will indeed stay low for 'ever' reflecting a stagnating deleveraging economic reality. At some point they will be right as the Japanization of rates around the fiat world becomes the new normal and 'smart/fast-money' traders appear hope-less.

Remember when the retail investor was the butt of all jokes, abused by the "smart money" hedge funds and prop desks to soak up hot potatoes and even hotter grenades? Well, to quote Matthew, those who are last now will be first then, and those who are first will be last: because the dumb money just got very smart. As the latest update from ICI shows, in the last week of May, when all the "smart" money was selling hand over fist, it was the retail investor who bottom-timed the market perfectly.

When Iran's nuclear facilities were publicly crippled in 2011 by what then was considered a revolutionary computer virus which destroys physical equipment, many immediately assumed the virus originated in Israel for obvious reasons. They were wrong. In what can be described as the first presidentially-mandated and condoned act of cyberwarfare, one circumventing the War Powers Act of course, the NYT informs us that the order to physically impair Iranian sovereignty came from none other than the Nobel Peace prize winning president: Barack Obama.

Repress extend-and-pretend; dismiss the can-kicking; and forget fake-it-til-you-make-it; Charles Biderman of TrimTabs recalls Jim Bianco's quote of the day on Spain's 'Delay-and-Pray' as the new normal for what is rapidly moving beyond farce in Europe. Beginning with the nations' own 'silly' perspective that the problem is 'unquantified' at the moment - implying it is in the trillions (which we already knew, but as long as they don't actually quantify it, it's not real - like the tooth fairy) - Charles goes on to destroy the hope that Germany can save them all (too big a problem now) and with state and local debt mounting trouble upon trouble the only outcome is a failure of the Euro. But it's not just Europe, between benefit payments and deficits, unexpectedly low returns for pension funds (thank you Ben), and union ignorance, the US is set for just as big a problem (though given the printing press we may just last a little longer). This leaves our union pension and government offocials with the same solution of 'delay-and-pray' as they hide in ever more intricate ways how much they are stealing from the future to cover the here-and-now. Biderman's back and this time he's really 'ranty' right to the end as he calls them out for criminal fraud.

Back on March 27, following the epic disappointment that was the BATS IPO, we presented a detailed forensic analysis courtesy of Nanex, which demonstrated step by step how a Nasdaq-borne algo may have been the culprit shattering BATS' hopes of ever going public. Fast forward two months later to the most anticipated IPO in recent history, in which FaceBook's even more epic, if not quite as stark, implosion has set back the general public's faith in capital markets decades back. The irony, of course, is that FB didn't do anything that many weren't warning about: it simply plunged which would make perfect sense in a normal world. This in turn was the spark that provoked the public ire - had FB simply doubled since IPO day, nobody would care about what really happened on May 18. Alas, it didn't. And now the lawsuits come. The problem is we don't transact in a normal world, but one dominated by central banks and algorithms - which is why the most pressing question for those who grasp the real new normal is how come in a market as controlled and manipulated as the central bank-dominated venue we have now, was FB stock allowed to plunge? For what may be the actual definitive answer, as opposed to now trite philosophical ruminations on valuation, ethics, underwriter and shareholder greed, we once again go to Nanex, which has caught the perpetrator red handed once again... As Nanex' Eric Hunsader tells us: "Turns out just before Nasdaq's quote crossed and became non-firm, one copy of the same quote (crossed) was marked regular, and I think that caused other algos to react and immediately sell off the stock. When that crossed quote from nasdaq appears, bid prices from other exchanges suddenly evaporate and that causes the NBBO spread to explode from 1 cent to 70+cents in 1/10th of a second! Nasdaq's quote started doing this when the stock approached 42.99 -- that effectively prevented the stock from going higher (a few spurious trades right at the open came from BATS for 44 ~ 45 etc, before Nq's quote was in play). So these stupid Algos effectively short circuited the stock for Facebooks IPO! Unreal."

Equities and broad risk-assets were generally in sync today until around 1430ET when between rumors of a Euro-wide deposit-guarantee 'scheme' - which we had already dismissed as impossible short-term, very unlikely medium-term, and not a long-term solution to redenomination/insolvency risk - and Kocherlakota's hints as NEW QE if the fiscal cliff arrives - US equity markets took off (as did Gold). S&P 500 e-mini futures (ES) pushed to more than 12pts rich to CONTEXT (our proxy for risk-assets based on TSYs, FX carry, credit, and commodities) on all that hope - stalling at yesterday's late-day heavy volume swing highs. Of course the high-beta momo monkeys were pounced on and AAPL as well as the major financials all popped notably - breaking above yesterday's closing VWAP. Today was a low average trade size day - the lowest in a week (but a relatively high volume day) - after a large average trade size day yesterday which smells like algos pushing to enable larger selling (especially as we expect a denial any moment from Europe). VIX plunged off its highs but closed only marginally down with ES closing very marginally higher on the day - so some context is required to avoid anchoring bias intraday and while TSY yields did pop and EUR rallied after equities got going, they remain notably divergent from that sur-reality. Gold and Silver surged on the QE/EU hopes as well but remain down 2% and 3% on the week.

Today's MSM headlines pre-filtered for the frontrunning defense fund :-) Caution! Those allergic to real, unbiased analysis should move on...

Yesterday we saw the first part of the HBO Documentary "The Weight Of The Nation" focusing on America's Obesity Epidemic which could be summarized as follows: "68.8% of Americans are overweight or obese - what are the consequences?" Today, the premium cable channel has released the next episodes in the series, titled Choices. The second film poses a question that almost anyone who’s struggled with excess weight has asked, if only in jest: For all the remarkable high-tech tools available to medicine, for all the billions of dollars in drug research, there’s still no highly effective medication to prevent or reverse obesity – why?

One of the few things we know with certainty is that which is unsustainable will go away and be replaced by another more sustainable arrangement. Whether we like it or not, or are willing to accept reality or not, unsustainable public pensions will go away. What makes "defined benefit" pensions unsustainable? 1) Promised cash/benefits packages that are not aligned with the fiscal realities of what can be contributed annually to the pension funds 2) New Normal low yields on low-risk investments and 3) skyrocketing costs of healthcare benefits.

This is easily illustrated with basic math.

If the establishment is to be believed — it’s in the interests of “long-term financial stability” that creditors who stupidly bought unrepayable debt don’t get a big haircut like they would in a free market.  And it’s in the interests of “long-term financial stability” that bad companies who made bad decisions don’t go out of business like they would in a free market, but instead become suckling zombies attached to the taxpayer teat. And apparently it is also in the interests of “long-term financial stability” that a broken market and broken system doesn’t liquidate, so that people learn their lesson. Apparently our “long-term financial stability” depends on producing even greater moral hazard by handing more money out to the negligent. The only real question is whether or not it will just be the IMF and the EU institutions, or whether Bernanke at the Fed will get involved beyond the inevitable QE3 (please do it Bernanke! I have some crummy equities I want to offload to a greater fool!)

Dump-'em, Pump-'em, Dump-'em - The New Normal 'buy-and-hold' model is stable this week. Equity market continued to follow the same path day-in and day-out this week as the distance between the 50DMA and Monday's morning gap becomes smaller and smaller. 

Given both the ECB (we must give LTRO time to work) and the Fed (it would be reckless to risk inflation for a few jobs) appear to be disappointing the addicts in the equity markets, perhaps it is time to reflect on what the relative size of the Fed and ECB balance sheets say about the new normal fair-value for EURUSD. Given the current levels, it appears 1.20 is not such a leap of faith here. Or alternatively, assuming all else equal, the market is obviously still pricing $700 billion in more QE by the Fed.

Traders were watching Spain cautiously this morning which at around 4 am Eastern sold €2.52 billion of three- and five-year government bonds, in its first bond auction since Standard & Poor's cut its sovereign rating by two notches last week. The results were mixed because while more than the maximum range of €2.5 billion was sold (on solid total demand of €8.07 billion) or €2.52 billion, Spain paid up for the privilege, with yields rising across the board, reaching just why of 5% for the 2017 bonds and more importantly pricing with tails to secondary market prices, confirming that the trend in rising yields at primary issuance is very much unsustainable. This in turn caused the EURUSD to get spooked and slide to overnight lows, a move not mimicked by broader equity futures which this morning are again in a world of their own, and now simply await to see if the Initial Claims number later will be far worse than expected in order to soar.