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:
You want to invest $100,000 in agency paper but find the yield to be too low. How can you increase your yield without assuming additional risk? Easy, here is how...
- In Hong Kong, ex-CIA man may not escape U.S. reach (Reuters)
- Backlash over US snooping intensifies (FT)
- Apple to Revamp IPhone Software, Ending Product Funk (BBG)
- Nothing like revising history: Japan revises up Q1 growth to annual 4.1% (FT), just don't look at the trade deficit
- Coffee Exports From Indonesia Seen Slumping to Two-Year Low (BBG)
- Euro bailout Troika nears end of road with patchy record (Reuters)
- Treasuries Little Changed Before Bullard Speaks Amid QE Debate (BBG)
- Schwab Topping Goldman Sachs Presages Return to Stocks (BBG)
- Hedge funds take over another city: London’s Forced Renters Fuel Apartment Investing Boom (BBG)
Goldbugs the world over may not know it, but the one catalyst they are all waiting for, is for the PBOC to throw in the towel to Bernanke's and Kuroda's liquidity tsunami and join in the global reflation effort. Alas, those hoping the Chinese central bank would do just this on Friday were disappointed. Moments ago the 21st Century Business Herald, via MNI, reported that the People's Bank of China "decided to shelve plans to inject short-term liquidity into the market late Friday because of concerns it would be sending the wrong signal in light of the government's ongoing commitment to its "prudent" monetary policy stance. Rumors hit the market mid-afternoon about an injection in the region of CNY150 bln via the PBOC's rarely-used short-term liquidity operation (SLO) tool. But how much longer can it avoid the inevitable: what happens when overnight loan yields soar to 20% or 30% or more, and when the repo and SHIBOR markets lock up and no overnight unsecured wholesale funding is available? Because when China finally does join what is already an historic liquidity tsunami then deflation will be the last thing the world will have to worry about. In the meantime, we welcome every chance to dollar cost average lower on physical hard assets, the same hard assets that none other than 1 billion concerned Chinese will direct their attention to when inflation makes it long overdue comeback to the world's most populous country.
Following widespread discussion of the impact that Wall Street investors (gorging on the Fed's free-money extravaganza) have had on home prices, today's final straw for Blackstone appears to be the New York Times' editorial suggesting/blaming them (and others) for driving up the prices of single family homes and reducing the supply of affordable housing for first-time home owners. Blackstone decided to hit back with some of its own version of real estate truthiness via its' blog and why it is "proud of what it is doing in the housing market." So here are the six reasons that Blackstone believes laying the blame for housing bubble 2.0 at their (them being Wall Street) feet is wrong (and a few short responses to their perspective).
As we noted just two weeks ago - before the hope-and-change-driven exuberance in Japanese equities came crashing down - "those who believe in Abenomics are suffering from amnesia," and Nomura's Richard Koo clarifies just who is responsible for the exuberance and why things are about to shift dramatically. Reasons cited for the equity selloff include Fed Chairman Ben Bernanke’s remarks about ending QE and a weaker than expected (preliminary) Chinese PMI reading, but, simply put, Koo notes, more fundamental factor was also involved: stocks had risen far above the level justified by improvements in the real economy. It was overseas investors (particularly US hedge funds) that responded to Abe's comments late last year by closing out their positions in the euro (having been unable to profit from the Euro's collapse) and redeploying those funds in Japan, where they drove the yen lower and pushed stocks higher. Koo suspects that only a handful of the overseas investors who led this shift from the euro into the yen understood there was no reason why quantitative easing should work when private demand for funds was negligible... The recent upheaval in the JGB market signals an end to the virtuous cycle that pushed stock prices steadily higher.
The last couple of weeks have been very interesting. Remember that, certain regional differences aside, Japan has, for the past two-plus decades, been the global trendsetter in terms of macroeconomic deterioration and monetary policy. The West has been following Japan each step on the way – usually with a lag of about ten years or so, although it seems to be catching up of late. Now Japan is the first developed nation to go ‘all-in’, to implement a no-holds-barred money-printing regime to (supposedly) ‘stimulate’ the economy. We expect the West to follow soon. In fact, the UK is my prime candidate. Wait for Mr. Carney to start his new job and embrace ‘monetary activism’. Carnenomics anybody? But here is what is so interesting about recent events in Japan. At first, markets did exactly what the central bankers wanted them to do. They went up. But in May things took a remarkable and abrupt turn for the worse. In just eight trading days the Nikkei stock market index collapsed by 15%. And, importantly, all of this started with bonds selling off. Are markets beginning to realize that all these bubbles have to pop sometime and that sometime may as well be now? Are markets beginning to refuse to dance to the tune of the central bankers and their printing presses? Are central bankers losing control?
The whispers about private equity exiting the rental market are now out in the open. A few reports are highlighting that some private equity investors are testing the waters for an exit via IPOs. Some have asked why it is necessary for these investors to hold onto properties for a few years before exiting. One of the main reasons is for valuation purposes given that it takes a few years to gather enough workable data on say a block of 1,000 homes and their overall vacancy rates, rental rates, and expense ratios. This would be important if this pool of homes were to be converted into an income stream for investors. Yet many are now looking to exit given how hot the stock market is. You want to sell into momentum. A few other key points include rents falling in places like Las Vegas where investor demand has been incredibly high. Is the hot money planning an exit?
It is immeasurably easier to digitally create claims on real-world assets than it is to create real-world assets. The Fed can digitally print a trillion dollars at no cost, but that doesn't mean the money flows into the real economy. Once again we are compelled to ask: cui bono, to whose benefit?
Earlier today the Fed released its quarterly Flow of Funds report for the first quarter of 2013, widely used to calculate the level of US household net worth. For those whose wealth is primarily in the form of various financial assets (about 1% of the population) it was a good, quarter, actually the best ever: following a $2.1 trillion increase in financial assets, coupled with a $0.8 trillion rise in tangible assets (including real estate), total household net worth rose from $67.3 trillion to $70.3 trillion, which is the new record high number, surpassing the $68.1 trillion record in Q3 2007. What is curious is that back in 2007, tangible assets amounted to $29 trillion compared to $26 trillion now, which means the bulk of asset creation has come thanks to the Fed reflating its final bubble and leading to all time highs in all assets that are directly correlated with the size of the Fed's balance sheet.
The problem is central banks have created a vast pool of credit-money that is far larger than the pool of sound investment opportunities. Why are asset bubbles constantly popping up around the globe? The answer is actually quite simple. Asset bubbles are now so ubiquitous that we've habituated to extraordinary excesses as the New Normal; the stock market of the world's third largest economy (Japan) can rise by 60% in a matter of months and this is met with enthusiasm rather than horror: oh goody, another bubblicious rise to catch on the way up and then dump before it pops. Have you seen the futures for 'roo bellies and bat guano? To the moon, Baby! The key feature of the New Normal bubbles is that they are finance-driven: the secular market demand for housing (new homes and rental housing) in post-bubble markets such as Phoenix has not skyrocketed; the huge leaps in housing valuations are driven by finance, i.e. huge pools of cheap credit seeking a yield somewhere, anywhere:
- Global Stocks Tumble as Treasuries Rally, Yen Strengthens (BBG)
- China Export Gains Seen Halved With Fake-Data Crackdown (BBG) - so a crash in the GDP to follow?
- FBI and Microsoft take down botnet group (FT)
- Quant hedge funds hit by bonds sell-off (FT)
- Russia's Syria diplomacy, a game of smoke and mirrors (Reuters)
- Obama Confidantes Get Key Security Jobs (WSJ)
- BMW to Mercedes Skip Summer Breaks to Keep Plants Rolling even as European auto demand slides to a 20-year low (BBG) - thank you cheap credit
- Paris threat to block EU-US trade talks (FT)
If you look at the history of financial crises in Argentina, you will see there is almost no 10-year period when there isn't a financial crisis. Argentines have become masters at dealing with things like inflation and ridiculous government policies. How can the actions of the Argentine government give us insight into what a desperate government is capable of and what might be in store for the United States? The current Argentine government is dominated by true believers – young people who have that idealistic notion of equality for all, and who believe that government mandates can fix anything that ails. They are hardcore socialists, leaning towards communism. But, as is the case in the United States, they really don't know what they are doing and so pursue policies that are incredibly shortsighted. They are uninformed as far as history and economics are concerned and blunder from one harebrained policy to another. There is literally nothing that they will not try. It is like a textbook case in government gone mad. There is a lesson to be learned from all of this, and I think it is a very important one. When it comes right down to it, any government – not just the Argentine government, but the US government as well – will simply do whatever it thinks it needs to do to keep the status quo intact, with no moral or ethical considerations.
Amid the cozy world of X-Factor, American Idol, and Dance Moms, we can often be lulled into the belief that all is well in the world. But once the cocoon of mind-numbing media is shrugged off, the realities of the world are all too 'Matrix-like' exposed. Simon Black's travels have exposed these three things...
That concept of the Chinese Dream "came just in time" and will "benefit the world"