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Frontrunning: December 2

  • America’s Role as Consumer of Last Resort Goes Missing (BBG)
  • Holiday sales sag despite blitz of deals (WSJ)
  • Abe Support Falls Below 50% for First Time Amid Secrecy Drive (BBG)
  • U.S. airlines give China flight plans for defense zone (Reuters), while Japan: no change to airlines' notification policy when flying in East China Sea zone (Reuters)
  • Thai protesters seek to topple PM after clashes (Reuters)
  • Hilton Seeks as Much as $2.4 Billion in Biggest Hotel IPO (BBG)
  • Biden on delicate mission to defuse tensions in East Asia (Reuters)
  • Fed eyes financial system weak link (WSJ)
  • Pentagon in line of fire in US budget war (FT)
  • China’s monetary squeeze collides with housing bubble (FT)
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China Bond Yields Soar To 9 Year Highs As It Launches Crackdown On "Off Balance Sheet" Credit

As we showed very vividly yesterday, while the world is comfortably distracted with mundane questions of whether the Fed will taper this, the BOJ will untaper that, or if the ECB will finally rebel against an "oppressive" German regime - with $3.5 trillion in asset (and debt) creation per year, is China. China, however, is increasingly aware that in the grand scheme of things, its credit spigot is the marginal driver of global liquidity, which is great of the rest of the world, but with an epic accumulation of bad debt and NPLs, all the downside is left for China while the upside is shared with the world.  Which is why it was not surprising to learn that China has drafted rules banning banks from evading lending limits by structuring loans to other financial institutions so that they can be recorded as asset sales.  And while we are confident Chinese financial geniuses will find ways to bypass this attempt to curb breakneck credit expansion in due course, in the meantime, Chinese liquidity conditions are certain to get far tighter. This is precisely the WSJ reported overnight, when it observed that yields on Chinese government debt have soared to their highest levels in nearly nine years amid Beijing's relentless drive to tighten the monetary spigots in the world's second-largest economy.

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6 Things To Ponder This Weekend

The third stage of bull markets, the mania phase, can last longer and go farther that logic would dictate.  However, the data suggests that the risk of a more meaningful reversion is rising.  It is unknown, unexpected and unanticipated events that strike the crucial blow that begins the market rout.  Unfortunately, due to the increased impact of high frequency and program trading, reversions are likely to occur faster than most can adequately respond to.  This is the danger that exists today. Are we in the third phase of a bull market?  Most who read this article will say "no."  However, those were the utterances made at the peak of every previous bull market cycle.

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Guest Post: How China Can Cause The Death Of The Dollar And The Entire U.S. Financial System

The death of the dollar is coming, and it will probably be China that pulls the trigger.  What you are about to read is understood by only a very small fraction of all Americans.  Right now, the U.S. dollar is the de facto reserve currency of the planet.  Most global trade is conducted in U.S. dollars, and almost all oil is sold for U.S. dollars.  More than 60 percent of all global foreign exchange reserves are held in U.S. dollars, and far more U.S. dollars are actually used outside of the United States than inside of it.  As will be described below, this has given the United States some tremendous economic advantages, and most Americans have no idea how much their current standard of living depends on the dollar remaining the reserve currency of the world.  Unfortunately, thanks to reckless money printing by the Federal Reserve and the reckless accumulation of debt by the federal government, the status of the dollar as the reserve currency of the world is now in great jeopardy.

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Frontrunning: November 8

  • Fed Anxiety Rises as QE Raises Risk of Loss With Political Cost (BBG)
  • Iran Nuclear Deal Expected as Early as Friday (WSJ)
  • Israel rejects mooted interim Iran nuclear deal, Kerry heads to talks (Reuters)
  • JPMorgan Banker Backed $200 Million Madoff Loan in 2008 (BBG)
  • Unleashing the food nazis - FDA Says Trans Fats Aren't Safe in Food (WSJ)
  • Draghi Aggression Shows Pledges Backed by Rate Surprise (BBG)
  • S&P Cuts France's Credit Rating by One Notch to Double-A (WSJ)
  • S&P criticises France’s high tax rates for stifling growth (FT)
  • Payroll Gains in U.S. Probably Cooled Amid Government Shutdown (BBG)
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Frontrunning: November 6

  • Christie Sets Himself Up for Run in 2016 (WSJ)
  • De Blasio Elected Next New York City Mayor in Landslide (WSJ)
  • Hilsenrath: Fed Study: Rate Peg Off Mark (WSJ)
  • MF Global Customers Will Recover All They Lost (NYT) - amazing what happens when you look under the rug
  • Virginia, Alabama Voter Choices Show Tea Party Declining (BBG)
  • Explosions kill 1, injure 8 in north China city (Reuters)
  • Toyota boosts full-year guidance as weak yen drives revenues (FT)
  • Starbucks wants to recruit 10,000 vets, spouses to its ranks (Reuters)
  • U.S. Economy Slack Justifies Stimulus, Top Fed Staff Papers Show (BBG)
  • Israel set to become major gas exporter (FT)
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Bob Janjuah: "Bubble Still Building"

"The major themes are unchanged – anaemic global growth/mediocre fundamentals, what I consider to be extraordinarily and dangerously loose (monetary) policy settings, very poor global demographics, excessive debt, an enormous misallocation of capital driven by the state sponsored mispricing of money/capital, and excessive financial market/asset price speculation at the expense of any benefit to the real economy. As I expect marginal higher highs before the big reversal, and while my target for this high in the S&P over the next five months remains anchored around 1800, an ‘extreme’ upside target could see the S&P trade up to 1850. Put it another way – before we see any big risk reversal over 2014 and 2015, we need to see more complacency in markets. I am looking – as a proxy guide – for the VIX index to trade down at 10 between now and end Q1 2014 before I would recommend large-scale positioning for a major risk reversal over the last three quarters of 2014 and over 2015.... Beyond Q1 2014, the longer term will all likely be driven by the growth data and the credibility of policymakers and what seems like an all-in ‘bet’ on QE as the solution to our ills."

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Frontrunning: October 29

  • U.S. spy chiefs face Congress amid spying rift with Europe (Reuters)
  • Deutsche Bank income hit by €1.2bn of legal provisions (FT)
  • China's second tapering attempt fails: China central bank seeks to reassure money markets after rate spike (Reuters)
  • UBS Takes Action Against Staff in Foreign-Exchange Probe (WSJ)
  • Saudi Arabia frees man jailed for Mohammad tweets (Reuters)
  • Tax Revolts Hit Hollande as Farmers, Soccer Clubs Protest (BBG)
  • German parliament to meet over U.S. spying scandal (Reuters)
  • Google Nears Smartwatch Launch (WSJ)
  • How to end gridlock in DC? Pork projects (Reuters)
  • UBS ordered to increase capital reserves (FT)
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Fourth Day Of Hope For "Imminent Deal" Should Be Sufficient For New Record High Close

If mere hope of an "imminent" deal starting on Thursday and continuing through Monday, with no actual deal but who cares about details, was enough to push the DJIA up by 600 points, then all it would take to set a new record market high today, is for another day to pass - one day before the October 17 X-Date when one Senator can filibuster the US through the deadline on their own, and when the House still has to have a voice on what the Senate has been doing - without an actual debt deal. After all, the market is so "centrally-planned" all that is needed is knowledge that Bernanke will get to work, and is getting to work to the tune of $85 billion a month, mixed in with some hope. And with today's "market for idiots" facilitating POMO of over $5 billion which guarantees a green close, all that is needed is a complete failure in talks for the SPX to go limit up on even more hopes things will be fine any second now... if not right now.

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Earnings Season Starts With Government Still Shut; 9 Days Till The Debt X-Date

Markets are so obsessed by developments with the US debt ceiling, that absolutely nobody noticed that the Japanese Current Account (JPY152Bn, Exp. JPY520bn), Industrial Outuput in Spain (-2.0%, Exp. -1.6%), Factory Orders in Germany (-0.3%, Exp. +1.2%), Trade Balance in Germany (€13.1bn, Exp. €15.0 bn) and that the Jan-Aug tax revenue in Greece below expectations by 5.7%, all missed horribly, and that for all the talk of a European recovery (which was merely driven by a brief surge in Chinese credit spending making its way into the European pipeline) is once again fully and entirely premature. But with Congress on everyone's mind, even increasingly China and Japan, who cares about fundamentals: after all there is a Federal Reserve to mask the fact that nothing but liquidity injections matters. Even if that means a complete collapse in the actual economy as those separated from the Fed by one or more layers of banks, crash and burn.

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On The Third Day Of Shutdown, Equity Futures Are Still Largely Unfazed Despite Obama's Warning

Despite the president's tongue-in-cheek warning to Wall Street that this time it's different, and it that "it should be concerned", that same Wall Street continues to roundly mock his attempts to talk it lower on the third day of America's "shutdown", knowing very well that if things ever turn bad, Mr. Chairman, aka the S&P chief risk officer, will get to work, and rescue everyone from that pesky thing known as losses. Whether the offsetting optimism was driven by made up China non-manufacturing PMI rising from 53.9 to 55.4, the highest in six months, or just as made up non-core European PMI data which also beat expectations despite Germany Services PMI continuing to telegraph a weakness, dropping from 54.4 to 53.7, is unknown and once again not important. So while futures are modestly lower if only until such time as the daily 3:58pm VIX slam takes place just before market close, do not expect any major moves in stocks until either the GOP finally folds and lets Obama have his way, or bundles all shutdown legislation into the debt ceiling negotiation, and careens the US right into the debt ceiling deadline on October 17 without any legislation in place.

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Wall Street Responds To The Government Shutdown

No, we are not talking the stock market reaction, which is driven purely by trillions in excess global, fungible liquidity sloshing around and as a result stocks are up on government shutdown day in a complete mockery of, well, everything. Instead, this is what Wall Street sellside strategists believe will be the impact of the shutdown (and how it ties in with the far more important debt ceiling negotiation). It should not be at all surprising that to virtually everyone, the shutdown (or any other negative development) is a "buying opportunity" which makes sense: after all the person who is truly in charge of the "wealth effect" will be up and running uninterrupted and there is no risk today's $2.75 - $3.50 billion POMO will be even modestly delayed.

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"90% Odds of Government Shutdown" Democrats Warn

Following Nomura's estimate of a 40% chance of government shutdown yesterday, thanks to the pending vote for the Republican's "Obamacare-Delay" bill, Democrats note the odds of a shutdown of the government are now at 90%. A Democratic congressional aide added, "the only reason I’m not putting it at 100 percent is because nothing’s certain in American politics."  As we previously noted, this likely means the Fed will be flying blind at their next meeting with the BLS unable to "manufacture" jobs data for them to make their judgments.

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Government Shutdown Odds: 40%, Nomura Estimates

In a world in which everyone has become an ultra-short term pathological gambler, and every outcome is a zero-sum prop bet, it was only a matter of time before someone tried to quantify the probability of the event that the market (for some inexplicable reason) is so transfixed on: the government shutdown (inexplicable, because anything more than a few day shutdown risks a full blown mutiny by the tens of millions of government workers). So without further ado, here is Nomura, with its "estimate" of a government shutdown on October 1: 40%.

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China Beige Book Exposes Government Lies: "Conventional Wisdom Of Economic Expansion In China Seriously Flawed"

There are facts; then there are completely fabricated, made up numbers. And then there is Chinese "data." After having been exposed in the past several years countless times on these pages alone as being absolute manipulated propaganda hogwash, it is amazing that anyone, anywhere still believes anything to come out of the official Beijing mouthpiece, which merely adjusts a few variable cells in the big central planning goalseeking excel spreadsheet and reports the answer. Yet the recent myth of a China "rebound" is one of the factors why stocks recently hit fresh all time highs: forget all that stuff about a CNY1 trillion deleveraging (yes, China's credit bubble is still the biggest in the world) - all that matters is made up garbage. Well, it may be more difficult this time. As Bloomberg reports, a "Beige Book" survey of the Chinese economy conducted in late August showed that "China’s economy slowed this quarter as growth in manufacturing and transportation weakened in contrast with official signs of an expansion pickup, a private survey showed." Surprise: China was lying again.

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