Open Market Operations
One hundred years ago today the world was shook loose of its moorings. Every school boy knows that the assassination of the archduke of Austria at Sarajevo was the trigger that incited the bloody, destructive conflagration of the world’s nations known as the Great War. But this senseless eruption of unprecedented industrial state violence did not end with the armistice four years later. In fact, 1914 is the fulcrum of modern history. It is the year the Fed opened-up for business just as the carnage in northern France closed-down the prior magnificent half-century era of liberal internationalism and honest gold-backed money. So it was the Great War’s terrible aftermath - a century of drift toward statism, militarism and fiat money - that was actually triggered by the events at Sarajevo.
The NY Fed has been kind enough to just release a pic of the NY Fed's "Open Market Operations" team - i.e., its last line of defense tasked with preserving the American way of life - as it was first seen in the heat of World War II, some time in 1944. Because when one thinks of the veterans, one must not forget the men and women who quietly held it all together by BTFD.
Still unsure of whether tin-foil-hat-wearing blogs suggesting central bankers are directly buy stocks is just another wonkish conspiracy theory (if yesterday's report was not enough proof), we offer today's "market" with some helpful hints at who (or what) was responsible for stocks 10 point surge...
Tuesday looks to be a busy day in June ($7.45bn or 30% of POMO buying on that day) as the Fed announces the schedule for its Permanent Open Market Operations (POMO) buying. The tapered $25 billion buying schedule does offer some 'investing' insights as The Fed refuses to buy on a Friday... (that should make for long weekends and even greater weekly cyclicality in stocks)...
The New York Fed's historical appreciation society has looked back at what was likely the US' first crash and foud that Alexander Hamilton's actions in 1792 which they claim "appears to have effectively managed the crisis with little or no long-term spillover to the economy," has now become the blueprint for manipulative intervention until this day by the central planners who know far better than 'us' collectively... but there are some lessons that Bagehot has that are worth remembering...
A week ago we wrote: 'While it has been public for a long time that i) JPM is eager to sell its physical commodities business and ii) the most likely buyer was little known Swiss-based Mercuria, there was nothing definitive released by JPM. Until moments ago, when Jamie Dimon formally announced that JPM is officially parting ways with the physical commodities business. But while contrary to previous expectations, following the sale JPM will still provide commercial gold vaulting operations around the world, it almost certainly means farewell to Blythe Masters." Sure enough:
JP MORGAN COMMODITY CHIEF BLYTHE MASTERS LEAVING, WSJ SAYS
Farewell Blythe: we hope your replacement will be just as skilled in keeping the price of physical gold affordable for those of us who keep BTFD every single day.
As expected, the Federal Reserve has released its Permanent Open Market Operations (POMO) non-monetizing-of-the-debt schedule for April with $30 billion of Treasury purchases (and $25 billion MBS). This is a 33% reduction from the 'normal' $45 billion Treasury purchase of last year. The POMO schedule very generously allows traders 3 days of non-money-printing potential shorting opportunities (Friday 4th, Thursday 17th, and Wednesday 30th)... however, this Friday is non-farm payrolls day and we will not be allowed a red day after that...
While the "developed" world scrambles to find a way to provide Ukraine with a bailout in such a way that Russia doesn't turn off the gas, Ukraine is doing some scrambling of its own to assure the local banks, which have been plagued by both bank runs and a collapse in the currency to record lows over the past few days, that it will be there to provide funding on a business as usual basis. Itar-Tass reports that "Ukrainian banks will be provided with necessary liquid assets, including cash." But there is a condition: the funding will only come "if they will remain under open control of the National Bank of Ukraine, the newly-appointed NBU Chairman Stepan Kubiv is quoted as saying on the bank’s official website."
- Ukraine Seeks $35 Billion as Yanukovych Warrant Is Issued (BBG)
- Ukraine's fugitive president wanted for mass murder (Reuters)
- Polar Vortex to Bring More Snow on Return to U.S. This Week (BBG)
- China property prices continue to rise (FT)
- Microsoft Said to Cut Windows Price 70% to Counter Rivals (BBG)
- Pentagon to propose shrinking Army, scrapping some jets (Reuters)
- Hedge Funds Turn Bearish on S&P 500 as VIX Advances (BBG)
- Draghi’s Data Jigsaw Takes Shape as ECB Readies Showdown (BBG)
- China, eyeing Japan, seeks WW2 focus for Xi during Germany visit (Reuters)
The 'cash on the sidelines' myth has more lives than a cat. No matter how often the logical fallacy underlying it is pointed out, Wall Street continues to propagate it. Nevertheless, money and credit are of course extremely important factors in the analysis of asset markets. The below provides what are hopefully a few useful pointers as to which data one should keep an eye on in this context.
As China Orders Its Smaller Banks To Load Up On Cash, Is The Biggest Ever "Unlimited QE" About To Be Unleashed?Submitted by Tyler Durden on 02/10/2014 12:46 -0400
The Chinese new year may be over which following a last minute bailout of its insolvent Credit Equals Gold Trust product was largely uneventful, but already concerns about domestic liquidity are once again rising to the surface following reports that China’s banking regulator ordered some of the nation’s smaller lenders to set aside more funds to avoid a cash shortfall, which as Bloomberg notes signal rising concern that defaults may climb. Which brings us to the question du jour: is the PBOC is laying the groundwork for what developed markets would call an open-ended liquidity injection which can be use to bail out one and all banks on an a la carte basis. Or, in the parlance of our times, the biggest QE bazooka of all because with total banking assets of nearly $25 trillion, said bazooka better be ready to fire at a moment's notice?
After Friday's surge fest on weaker than expected news - perhaps expecting a tapering of the taper despite everyone screaming from the rooftops the Fed will never adjust monetary policy based on snowfall levels - overnight the carry trade drifted lower and pulled the correlated US equity markets down with it. Why? Who knows - after Friday's choreographed performance it is once again clear there is no connection between newsflow, fundamentals and what various algos decide to do. So (lack of) reasons aside, following a mainly positive close in Asia which was simply catching up to the US exuberance from Friday, European equities have followed suit and traded higher from the get-go with the consumer goods sector leading the way after being boosted by Nestle and L'Oreal shares who were seen higher after reports that Nestle is looking at ways to reduce its USD 30bln stake in L'Oreal. The tech sector is also seeing outperformance following reports that Nokia and HTC have signed a patent and technology pact; all patent litigation between companies is dismissed. Elsewhere, the utilities sector is being put under pressure after reports that UK Energy Secretary Ed Davey urged industry watchdog Ofgem to examine the profits being made by the big six energy companies through supplying gas, saying that Centrica's British Gas arm is too profitable.
If what happened in the last days of 2013 was indeed merely reverse repo-assisted window dressing, then we would expect the that first days of 2014 should see a comparable collapse in the magnitude of the Fed's reverse repo operations. Sure enough, as the chart below shows, this is precisely what has happened following today's far more modest $56.7 billion reverse repo operation conducted among 50 bidding counterparties and the Fed, of course.
If yesterday's price action in the moments following (and preceding) the FOMC announcement was just a little suspicious, with a seemingly endless supply of VIX selling originating as if from nowhere (or perhaps the 9th floor of Liberty 33) the morning after has so far been a snoozer. Perhaps this is to be expected following the third biggest one-day surge in the stock market in the year (1st = Jan 2nd, 2nd = October 10th), or perhaps the market is finally focusing on Bernanke's tongue in cheek suggestion that the taper may be lowered by $10 billion per month (we disagree as described previously). Or perhaps the creep higher in 10 Year yields, at 2.915% at last check and just shy of the 3.00% psychological level, is finally being noticed. Or perhaps the fact that China, very surprisingly, is also tapering concurrently is finally being appreciated as is the fact that despite all talk of preparedness, developing economies were hardly left unscathed following yesterday's development. Whatever the reason, the euphoria this morning has "tapered."
Those who adhere to the don’t-stop-til-you-get-enough theory of sovereign borrowing, and by extension argue for a scrapping of the debt ceiling, couldn’t be more misguided. In free markets with no Fed money market distortion, interest rates can be a useful guide of the amount of real savings being made available to borrowers. When borrowers want to borrow more, real interest rates will rise, and at some point this crimps the marginal demand for borrowing, acting as a natural “debt ceiling.” But when markets are heavily distorted by central bank money printing and contrived zero-bound rates, interest rates utterly cease to serve this purpose for prolonged periods of time. What takes over is the false signals of the unsustainable business cycle which fools people into thinking there is more savings than there really is. Debt monetization has a proven track record of ending badly. It is after all the implicit admission that no one but your monopoly money printer is willing to lend to you at the margin. The realization that this is unsustainable can take a while to sink in, but when it does, all it takes is an inevitable fat-tail event or crescendo of panic to topple the house of cards. If the market realizes it’s been duped into having too much before the government decides it’s had enough, a debt crisis won’t be far away.