- Here come the gates which we predicted in 2010: SEC Is Set to Approve Money-Fund Rules (WSJ)
- Dick's cuts 400 jobs as golf now less popular (MW)
- Kerry arrives in Israel, pushes for peace (Reuters)
- Pay Penalty Haunts Recession Grads as U.S. Economy Mends (BBG)
- Appeals Courts Issue Conflicting Rulings on Health-Law Subsidies (WSJ)
- Rebel Stronghold Donetsk Holds Breath as Shellfire Mounts (BBG)
- Business executive wins Georgia Republican runoff in U.S. Senate race (Reuters)
- Five held in China food scandal probe, including head of Shanghai Husi Food (Reuters)
- Jobs Hold Sway Over Yellen-Carney as Central Banks Splinter (BBG)
?Economics is like a Monet painting. Stand too close and all you see is a bunch of seemingly random paint strokes. Back up a few steps and an image emerges. The painting of bubblenomics started with the Plaza Accord, September 1985, where five nations agreed to manipulate the dominant currencies at the time. Japan enjoyed a 50% devaluation of the US$ vs the yen, artificially enriching its citizens so they could travel the world in busloads with eighty pounds of cameras around their necks. The consequences of that bubble have yet to be corrected. Based on healthy guidelines, the price of real estate is far too expensive today, or, more precisely, the cost of housing is too high but we may need another crisis before the market will wake up to the needed changes. In the meantime, money printing and hype will continue.
Then comes the moment when the hot money evaporates.
Presented with little comment aside to ask, if everything's so hunky-dory over in China then why, on the first day in a while that the PBOC decides not to conduct repo operations (i.e. inject a bucketload of cheap money), does the 7-day repo rate (the cost of borrowing money) spike to 6-month highs? (Hint: it's a rhetorical question)
In the absence of any major economic events, it will be another day tracking geopolitical headlines out of Ukraine (lots of accusations, propaganda and fingerpointing on both sides, zero actual evidence and facts - expect more European sanctions to be announced today to match last week's latest US-led round ) and Israel (where the death toll has now risen over 500, almost entirely on the Gaza side), and then promptly spinning any bad news as great news. For now, however, futures are modestly lower from the Friday close pushed down by the AUDJPY which has rebased around 95.00. We expect the momentum ignition correlation algos will promptly take of that as soon as the US market opens, a market which has now been described as bubbly by the BIS, the Fed and the IMF.
We show that equity markets are stretched (e.g., more than 80% of the S&P rally since last year is due to re-rating), but we also find that the fixed income market has become quite rich (we have been overweight European peripherals for more than a year on valuation grounds, we show that this argument no longer holds), and the same is true of the credit market. Second because capital has been flowing rapidly into risky assets, we document that argument and here too find evidence that the market might be ahead of itself. We read the market reaction last week to the Portuguese news as a sign that the market is indeed too complacent and could correct rapidly.
For a centrally-planned market that has long since lost the ability to discount the future, and certainly respond appropriately to geopolitical events, yesterday was a rough wake up call with a two punch stunner of not only the MH 17 crash pushing the Ukraine escalation into overdrive, but Israel's just as shocking land invasion of Gaza officially marking the start of a ground war, finally dragging global stocks out of their hypnotized slumber and pushing risk broadly lower across the globe, even if the now traditional USDJPY and AUDJPY ramp algos have woken up in the past few minutes and will be eager to pretend as if nothing ever happened.
It seems like it was only yesterday when the first official Chinese corporate default in history (there have been many other ones in the past but all were quickly masked by the government to avoid a panic), Chaori Solar, entered the history books. Now it's time for default number in the country's onshore bond market as Huatong Road & Bridge Group, a company whose businesses includ bridge and highway construction, real estate, coal, eco-friendly construction materials and agriculture-related projects, based in the northern province of Shanxi, said it may miss a 400 million yuan ($64.5 million) note payment due July 23, according to a statement to the Shanghai Clearing House yesterday.
Presenting: the Price to Equity ratio. Because stocks are cheap and stuff.
Beige Book summary:
- "Optimistic" or "Optimism": 24
- "Pessimism": 1
The sell off was greeted by Chinese buyers as Chinese premiums edged up to just over $1 an ounce on the Shanghai Gold Exchange (SGE).
Gold price drops this year have led to a marked increase in demand for gold as seen in very large increases in ETF holdings (See chart - Orange is Gold, Purple is absolute change in gold ETF holdings). The smart money in Asia, the West and globally continues to use price dips as an opportunity to allocate to gold.
Bank of America's $10 Billion In 2014 Legal Charges Mask Ugly Trends, Net Interest Margin Drops To Lowest On RecordSubmitted by Tyler Durden on 07/16/2014 08:00 -0400
Another quarter down, another desperate attempt by Bank of America to mask a serious underlying business deterioration using bells, whistles, and gimmicks.
Having glimpsed the ugly reality of the under-belly of the Chinese economy last week, and the divergence between that and the government's PMI survey fallacy, it is no surprise that by the magic of excel, GDP and Industrial Production modestly beat expectations (+7.5% YoY vs 7.4% exp and +9.2% YoY vs +9.0% exp respectuvely). However, despite epic credit injections, home prices tumbled 9.2% YoY and Retail Sales missed expectations rising only 12.4% YoY. Even as it is self-evident that re-flating the next chosen bubble, or attempting to socialize losses, is not sustainable in the long-run, it is clear (given the surge in deposit creation in recent months) that China has chosen the path of short-term easy-street as opposed to the reform-based hard-street they had promised.
While Banco Espirito Santo continues to exist on fumes and life support (that last ditch equity injection by Baupost a week ago may not have been Seth Klarman's wisest investment), a key link in the Espirito Santo Holding Company structure is preparing to default. According to Reuters:
ESPÍRITO SANTO GROUPS HOLDING COMPANY RIOFORTE PREPARING TO FILE FOR CREDITOR PROTECTION IN LUXEMBOURG - SOURCES
For those confused, "creditor protection" = bankruptcy.
"... signs of risk-taking have increased in some asset classes. Equity valuations of smaller firms as well as social media and biotechnology firms appear to be stretched, with ratios of prices to forward earnings remaining high relative to historical norms. Beyond equities, risk spreads for corporate bonds have narrowed and yields have reached all-time lows. Issuance of speculative-grade corporate bonds and leveraged loans has been very robust, and underwriting standards have loosened. For example, average debt-to-earnings multiples have risen, and the share rated B or below has moved up further for leveraged loans." - Janet Yellen