Rate of Change

UPDATE: Nikkei futures now -500 from US day-session highs

In what must be quite a surprise to Goldman (as we discussed here), the BoJ has decided not to give in to the market's demands:

*BOJ REFRAINS FROM EXPANDING J-REIT, ETF PURCHASES (expected lifting of cap)
*BOJ LEAVES FUNDING TERMS UNCHANGED AFTER JGB YIELD VOLATILITY (expected extension from 1Y to 2Y)

The market's angry reaction... NKY -400 from US day-session highs, USDJPY gapped down 80 pips to 98.00, JGB Futs closed, JGBs unch. Full statement to follow:

"By propping up asset markets, the Fed has created an illusion that wealth is being created. The next step, according to Bernanke’s plan,  should be for growth to follow. In fact, there is no reason why the rise in prices of financial assets should lead to actual investments or a rise in the median income. So far, it has not. There has been no real increase in the private sector propensity to borrow, and the danger may be that any further public sector borrowing will hasten the decline because of our “permanent asset hypothesis”. This means that, should the Fed lose control of asset prices (is this what is now happening in Japan?), then the game will be up and the downside move in markets may well be terrifying."

One thing is for certain -- the job market is very tight as layoffs and discharges have reached the lowest levels since the turn of the century.  While this is leading to lower initial jobless claims it is not translating into higher levels of full-time employment relative to the population. It is not surprising that with an economy that is mired at a near 2% economic growth rate that employment is "muddling" right along with it.  While the economy is indeed creating jobs, it is a function of population growth rather than a sign that the economy is on the road to recovery. What is clear is that current detachment between the financial markets and the real economy continues.

Against this economic slowdown, stocks are priced quite richly. There is a word for when markets are totally disconnected from reality: it’s a bubble.

"Time in the digital era is no longer linear but disembodied and associative. The past is not something behind us on the timeline but dispersed through the sea of information." In effect, change no longer flows linearly like time anymore, it flows in all directions at once. History and meaningful context are both fatally disrupted by this non-linear flow of time and narrative. If the causal chains of history and narrative are disrupted, then how can anyone fashion a meaningful context for actions and narratives, and effectively frame problems and solutions? If everything is equally valid in a non-linear flood of data, then what roles can authenticity, experience and knowledge play in making sense of our world? "We're essentially the victims of a marketing and capitalist machine gone awry... we no longer are the active source of our own experience or our own choices. Instead, we succumb to the notion that life is a series of product purchases that have been laid out and whose qualities and parameters have been pre-established."

"The economy is amazing right now - employment is recovering, innovation is going and housing is reviving.  What's not to love?"  This was a statement we heard in the media to justify the recent rise in the stock market. However, back in the real world, what is clear from the two composite indexes is that the broad economy, and by extension underlying employment, has clearly peaked and has began to weaken.  This is well within the context of historical trends and time frames.  While the mainstream analysts and economists continue to have optimistic views for a resurgence in economic activity by years end the current data trends, both globally and domestically, suggest otherwise.

Surging nominal imports and a miss for exports just about sums up perfectly just how the reality of Abenomics is crushing the real economy as the market goes from strength to strength on the hope that recovery is just around the corner. For the 28th month in a row Japan trade deficit has dropped YoY and its 12-month average is now at its worst ever. Energy costs are driving up imports (and adjusted for the devaluation in the JPY, the data is simply horrendous. Of course, there are green shoots - CPI is not deflating as fast as it was... and 'some' inflation expectations are rising (though as we noted here that is simply due to the tax expectations). Contrary to expectations held by some in the bond market, the BOJ did not comment on the sharp fluctuation in JGB yields since April as a result of monetary relaxation - on the basis, we assume, that if they don't mention it, it never happened. The result post a nothing-burger of 'more uncertainty' from the BoJ, the Nikkei keeps screaming higher, JPY rallied then fell back, and JGBs are sliding higher in yield.

Over the years, Jim O'Neill, former Chairman of GSAM, rose to fame for pegging the BRIC acronym (no such luck for the guy who came up with the far more applicable and accurate PIIGS, or STUPIDS, monikers, but that's neither here nor there). O'Neill was correct in suggesting, about a decade ago, that the rise of the middle class in these countries and their purchasing power would prove to be a major driving force in the world economy. O'Neill was wrong in his conclusion as to what the ultimate driver of said purchasing power would be: as it has become all too clear with the entire world drowning in debt (and recently China), it was pure and simply debt. O'Neill was horribly wrong after the Great Financial Crisis when he suggested that it would be the BRIC nation that would push the world out of depression. To the contrary, not only is the world not out of depression as the fourth consecutive year of deteriorating economic data confirms (long since disconnected with the actual capital markets), but it is the wanton money (and bad debt) creation by the central banks of the developed world (as every instance of easing by China has led to an immediate surge of inflation in the domestic market) that has so far allowed the day of reckoning, and waterfall debt liquidations, to take place (and certainly don't look at the stock index performance of China, Brazil, India or Russia). Despite his errors, he has been a good chap having taken much of the abuse piled upon him here at Zero Hedge somewhat stoically, as well as a fervent ManU supporter, certainly at least somewhat of a redeeming quality. Attached please find his final, farewell letter as Chairman of the Goldman Asset Management division, as he moves on to less tentacular pastures.

Now that we have the first estimate of Q1 GDP growth in both rate of change and absolute current dollar terms ($16,010 billion), we can finally assign the appropriate debt number, which we know on a daily basis and which was $16,771.4 billion as of March 31, to the growth number. The end result: as of March 31, 2013, the US debt/GDP was 104.8%, up from 103% as of December 31, 2012 or a debt growth rate that would make the most insolvent Eurozone nation blush. There was a time when people were concerned about this unsustainable trajectory, but then there was an infamous excel error, and now nobody cares anymore.

How does it really work under irredeemable paper? It's more complicated than under gold.

With European stocks and bonds, US bonds, commodities and precious metals all hinting at problems, the near-all-time-highs levels of the US equity market remain a mirage. We discussed here whether we had seen 'peak economic recovery' and today we extend that analysis. The point of this exercise is to allow your brain to juxtapose visual data to the ongoing mainstream diatribe of economic recovery. Evidence continues to mount that we have seen the peak of activity for the current economic cycle.  The implications of such an occurrence are broad and suggests that the Fed's liquidity driven interventions, and zero interest rate policy, may have well seen the end of their effectiveness.

In what may be a first in at least 3-4 months, instead of the usual levitating grind higher on no news and merely ongoing USD carry, tonight for the first time in a long time, futures have drifted downward, pushed partially by declining funding carry pairs EURUSD and USDJPY without a clear catalyst. There was no explicit macro news to prompt the overnight weakness, although a German 10 year auction pricing at a record low yield of 1.28% about an hour ago did not help. Perhaps the catalyst was a statement by the Chinese sovereign wealth fund's Jin who said that the "CIC is worried about US, EU and Japan quantitative easing" - although despite this and despite the reported default of yet another corporate bond by LDK Solar, the second such default after Suntech Power which means the Chinese corporate bond bubble is set to burst, the SHCOMP was down only 1 point. The Nikkei rebounded after strong losses on Monday but that was only in sympathy with the US price action even as the USDJPY declined throughout the session.

The recent plunge in gold prices below $1500 an ounce has suddenly awoken, well, just about everyone.  The "gold bugs" are yelling that it is a conspiracy theory by the Fed while the stock market bulls say it is a sign that the Fed has achieved its goal of creating economic growth.  Unfortunately, both arguments, while great for headlines, are wrong. The real concern for investors should not be the fall of gold - but the overall stock market.  With investors fully allocated to the markets - the lurking correction therein is potentially far more dangerous to portfolios than the current fall in gold simply due to weighting differences. Even with earnings hurdles moved substantially lower in recent weeks it may not be enough to offset the softening global economy. Perhaps, just perhaps, this is what gold, commodities and interest rates are really telling us.

Today, the very orders that make HFT a beneficial trading strategy and one worth the massive capex, are controlled by the exchanges.  That's the difference between this form of "technological advancement" and those of the past, the direct ownership of the critical intersection between information processing and order execution.

Tax refunds, which can be an important source of cash flow for consumers early in the year, have totaled $20bn less year-to-date than refunds in 2012. Goldman Sachs notes that this is the equivalent of nearly 1% of disposable income over that period, and some consumer-oriented businesses have attributed lackluster sales in late January and early February to lower refund payments. Balancing the possibility of a small amount of additional catch-up with the possibility that some of the decline versus 2012 is fundamentally driven by the effects of tax law changes or other factors, the upshot is that Goldman believes the cumulative gap of around $20bn looks likely to persist. Since the current rate of change in tax refunds looks similar to last year's, this should not weigh further on consumer cash flow. However, it also implies that we should not expect the consumer to receive much of a tailwind from delayed tax refunds in March or April. It does make one wonder a little if this marginal cash-flow is the reason for the extremely unusual cyclical strength and weakness we have seen in macro data for the last few years.