One really wonders why people have lately sold gold. It seems to make little sense in light of the widespread mainstream views on what the 'correct' monetary policy should consist of. Monetary cranks abound wherever one looks. The ultimate outcome of all this inflationary experimentation is preordained, so people have every reason to be very concerned about preserving the value their assets. Of course we are well aware that markets can often behave in an irrational manner for extended time periods. In fact, this is what allows astute speculators and investors to make profitable trades, as there are frequently opportunities created by the markets getting it wrong. In this particular case it is still astonishing, considering how blindingly obvious it is in which direction things are currently moving. Mr. Woodford wants to 'scare the horses'. We are wondering why they are not scared yet – but we suspect they will be soon enough.
The Bank of England's Financial Policy Committee (BoEFPC) warns there is "evidence of the re-emergence of... behavior in financial markets not seen since before the financial crisis," citing the increased issuance of synthetic products and added that banks have "little margin for error against a backdrop of low growth in the advanced economies," despite what we are told about their 'fortress balance sheets. Bloomberg Businessweek adds that the BoE were careful not to scare the public, they add, events currently "did not appear indicative of widespread exuberance in markets. But developments would need to be monitored closely." This following the Fed's warnings of 'froth' in the credit markets suggests central bans are considerably more concerned at blowing bubbles than they want to admit in public. ECB's Weber recently commented that he feared, "the recent rally in financial markets could be a misleading signal," which appears confirmed by the BoEFPC noting that equity performance since mid-2012, "in part reflected exceptionally accommodative monetary policies by many central banks... But market sentiment may be taking too rosy a view of the underlying stresses."
The enduring myth of the post-2008 era is that central-planning money printing and deficit spending would soon spark a self-sustaining recovery. Once consumers and businesses stepped up their own borrowing and spending, the central bank and state would then pare back money printing and deficit spending, as the increase in private-sector spending would fuel further borrowing and spending, i.e. become self-sustaining. The reality is the mythical self-sustaining recovery is the carrot dangled in front of a credulous public: though we're constantly reassured "we're almost there" (the promised land of self-sustaining recovery), the mythical recovery remains out of reach, no matter how much money is printed or borrowed and blown in fiscal stimulus. There are several key reasons for this.
One of the simplest, most overused and popular assertions is that claim that stocks must rise because interest rates are so low. In fact, you cannot get through an hour of financial television without hearing someone discuss the premise of the Fed Model which is earnings yield versus bond yields. The idea here, once formalized as the "Fed Model," is that stocks' "earnings yield" (reported or forecast operating earnings for the S&P 500, divided by the index level) should tend to track the Treasury yield in some fashion. This simply doesn't hold up in theory or practice.
As the fast-money flabber-mouths stare admiringly at the rise in nominal prices of Japanese (and the rest of the world ex-China) stock prices amid soaring sales of wheelbarrows following Kuroda's 'shock-and-awe' last night, it is Kyle Bass who brings these surrealists back to earth with some cold-hard-facting. Out of the gate Bass explains the massive significance of what the Japanese are embarking on, "they are essentially doubling the monetary base by the end of 2104." It is a "Giant Experiment," he warns, but when you are backed into a corner and your debts are north of 20 times your government tax revenue, "you're already insolvent." Simply put, Bass says they have to do something and they have to something big because they are "about to implode under the weight of their debt." For a sense of the scale of the BoJ's 'experimentation', Bass sums it up perfectly (and concerningly), "the BoJ is monetizing at a rate around 75% of the Fed on an economy that is one-third the size of the US!"
Witches Brew: Part 4 - Reality Bites
- The Specter of Things to Come
The road to ruin is on plain display and the playbook is easily seen at this juncture. Let’s take a look at how that playbook will unfold. Contrary to popular outrage of the SOLUTION being IMPOSED it is the correct one once the insured depositors where PROTECTED. In this edition the elites suffered FIRST followed by the private sector depositors who foolishly believed false BALANCE sheets which were POLITICALLY CORRECT but PRACTICALLY incorrect fictions approved by fiduciarily (regulations and regulators allowed ONGOING insolvent operations rather than protect the public by ending and prohibiting them) challenged governments (work for the banks and crony capitalists not for the public at large).
CEO Of Italy's Largest Bank Says Haircuts Of Uninsured Depositors "Acceptable", Should Become A TemplateSubmitted by Tyler Durden on 04/04/2013 11:59 -0500
While the head of the ECB and his assorted kitchen sinks scramble to explain how Diesel-BOOM was horribly misunderstood when saying that depositor impairment may and will be the template for future European bank "resolution" (as should have been the case from Day 1), the CEO of Italy's largest bank appears to have missed the memo. As Bloomberg reports, according to the chief executive Federico Ghizzoni, "uninsured deposits could be used in future bank failures provided global rulemakers agree on a common approach." Or failing that, because if Cyprus taught us anything is that Europe will never have a common approach on anything, just use deposits as impairable liabilities, period, once the day of reckoning for Non-Performing Loans comes and these are forced to be remarked to reality, just as happened in Cyprus. One can only hope that uninsured deposits do not represent a substantial portion of the bank's balance sheet because the CEO basically just told them they are next if when risk comes back to the Eurozone with a vengeance. Especially since as Mario Draghi was so helpful in pointing out, "there is no Plan B."
A trade is officially deemed "crowded" when everyone is rushing into the market with eyes only on the upside and little concern for the downside--for example, buying homes as rentals. Why could the buy-to-rent housing party be running out of air? The basic reason is the difference between buying real estate as rental housing, which is a speculative market, and the rental property market itself, which is grounded in real-world supply and demand. Simply put, if the supply of rental housing exceeds demand, rents (the cost of renting shelter) decline. That jeopardizes the fat returns the speculative buyer was counting on. Crowded trades are often described as boats with everyone on one side. Boats loaded in this fashion tend to capsize once exposed to the slightest volatility (wave action). The buy-to-rent boat is looking rather overloaded, and the bullish side's gunwales are only a few inches above the water for these six reasons.
Yesterday it was all fixed, Cyprus was storm in a teacup, and as Barroso noted "the worst of the crisis over." It appears reality sunk in today as PMIs continue to disappoint and Europe's banking system implodes. Credit markets and financials have been flashing warning signals for a few weeks and once again European stocks (led by financials - mostly Italian - cough BMPS cough) were limit down and halted everywhere (with the broad EU bank index -3%). Italy's FTSEMIB is now -0.8% on the week (giving back all of yesterday's exuberance and some) and Spain is close behind. European sovereign bonds retraced their gains and ended slightly wider on the day. Swiss 2Y rates dropped (on safety bid) to -2bps (ahead of Bunds at 0%). EURUSD bucked the 'weak' trend and strengthened on the day back up to 1.2850 while Europe's VIX pushed back up to 21%.
Thanks to the Fed's ZIRP, the investing world is on a constant reach for yield; and due to the fact that the last bubble of investor largesse (ignoring leverage and reality) was not 'punished' but in fact 'bailed-out', participants in the financial markets learned nothing. Just as the last crisis was formed on the back of an insatiable mortgage-backed security market desperate for new loans (any loans) of increasingly dubious quality to securitize, so this time it is subprime auto loans that have taken over. As a Reuters review of court records shows, subprime auto lenders are showing up in a lot of personal bankruptcy filings. At car dealers across the United States, loans to subprime borrowers are surging - up 18% in 2012 YoY, to 6.6 million borrowers. Subprime auto lending is just one of several mini-bubbles the bond-buying program has created across a range of assets; "it's the same sort of thing we saw in 2007, people get driven to do riskier and riskier things." Of course, with auto production having been the backbone of so many macro data points that are used to 'show' the real economy recovering (despite the channel-stuffing), now that the growth in auto-sales are stalling, it is for the subprime originators "under extreme pressure to hit goals" in their boiler-room-like dealings to extend loans (at ever higher rates) and securitize while the Fed 'music' is still playing. It seems we truly never learn.
Non-Manufacturing ISM Joins All Other Economic Misses, Prints At Lowest Since August, Biggest Miss In A YearSubmitted by Tyler Durden on 04/03/2013 09:14 -0500
Spot the common thread: Chicago PMI, manufacturing ISM, ADP and now Non-manufacturing ISM. If you said all big misses, give yourself a pat on the back. Because in the New Normal, the recovery apparently goes backward and downward especially when funded by what is now some $400 billion in QEternity. Despite expectations of a modest decline from 56.0 in February to just 55.5, the March Services ISM dropped to 54.4, the lowest since August, and the biggest miss in one year, with the critical New Orders components declining by 3.6 to 54.6, Employment down by 3.9 to 53.3 - the lowest since November, and Exports down 4 with imports up 5 surely doing miracles for GDP. Why the big miss? Three reasons: the post Sandy rebuilding effort is over; the abnormally strong winter seasonal adjustments have phased out and now is the time to pay the piper, and of course, the complete collapse in global trade as we have been hammering for the past year, now that Europe is in the worst depression since the 19th century. But don't worry: there is a POMO for that, and for everything else to give the impression that just because the Bad Bank formerly known as the Fed will onboard every piece of toxic garbage that is not nailed down, one can safely ignore reality for ever and ever.
Am I a great investor? No, not yet. To paraphrase Ernest Hemingway’s “Jake” in The Sun Also Rises, “wouldn’t it be pretty to think so?” But the thinking so and the reality are often miles apart. When looking in the mirror, the average human sees a six-plus or a seven reflection on a scale of one to ten. The big nose or weak chin is masked by brighter eyes or near picture perfect teeth. And when the public is consulted, the vocal compliments as opposed to the near silent/ whispered critiques are taken as a supermajority vote for good looks. So it is with investing, or any career that is exposed to the public eye. The brickbats come via the blogs and ambitious competitors, but the roses dominate one’s mental and even physical scrapbook. In addition to hope, it is how we survive day-to-day. We look at the man or woman in the mirror and see an image that is as distorted from reality as the one in a circus fun zone.
In the theory of rational expectations, human predictions are not systematically wrong. This means that in a rational expectations model, people’s subjective beliefs about the probability of future events are equal to the actual probabilities of those future events. Now, we think that rational expectations is one of the worst ideas in economic theory. It’s based on a germ of a good idea - that self-fulfilling prophesies are possible. Mainstream economic models often assume rational expectations, however. And if rational expectations holds, we could be in for a rough ride in the near future. Because an awful lot of Americans believe that a new financial crisis is coming soon - 75 percent of respondents said that it’s either very or somewhat likely that the country could have another financial crisis in the near future.
There is no hope whatsoever of so-called U.S. "energy indepedence" unless three things happen. First, environmental rules have to be wound back to 1970 standards -- in other words, disband the EPA and make civil plaintiffs show actual harm, not just hypothetical harm because someone goofed on a sheaf of mandated paperwork. Second, stop wasting taxpayer money on nonsense like $25 per gallon biofuel. Third and most urgently, stop subsidizing Wall Street. Let the market decide what interest rates make sense, rewarding companies who can find and produce oil, instead of gorging themselves sick on artificially cheap junk bonds that money-losing shale swindlers will never pay off.
There are four traits that UBS identified as common trends around the breakup of a monetary union. So has Cyprus (as is tirelessly pointed out, only 0.2% of the Euro area measured by GDP) set a course for the Euro’s destruction? Indeed, with Cyprus having checked the first three items on that list, while it has not left the Euro (yet), UBS concludes, "it may well be occupying a seat very close to the exit."