The investment game is becoming more suspect and dangerous as asset price levels continue to ignore economic weakness and the lack of necessary political reform. Instead, many investors (not just in the EU) have become conditioned like B.F. Skinner rats to bid up financial risk assets whenever a central banker makes a promise about accommodation or further stimulus; this even occurs when data disappoints, because investors expect ‘the promise’ to soon follow. Fear of missing the upside and underperforming peers and benchmarks is what makes this reflexivity work. This is actually a sad state of affairs and an ever-more dangerous and epic game of chicken. This conditional response pattern is unsustainable. Indebtedness and market speculation continue to soar. In the end, printing is a not a solution, but a source of long-term harm to markets and national economies.
The selling is because the dominant Common Knowledge regarding energy sector stocks is that they move up and down with the price of oil. Common Knowledge is not what everyone knows; that’s the consensus. Common Knowledge is what everyone knows that everyone knows, and it’s the driving force behind the Game of Sentiment. Everyone knows that everyone knows energy stocks are tied to oil prices, we just took another sharp leg down in oil prices, and so energy stocks must be sold. The fact that energy stocks are down “proves” the relationship (a wonderful example of Soros’s concept of reflexivity), which adds to the selling. The reality (not that it matters) is that energy stocks are barely correlated with the price of oil, and their correlation with each other is barely driven by oil prices. What’s really driving this across-the-board decline is the fact that “long energy” has become a very crowded trade.
Amid the recent weakness in stocks and strength in the USDollar, we are constantly reassured by talking heads that major stock market declines only happen during recessions. While that may be technically correct, perhaps it is worth pondering: "Did a recession cause the correction, or did the correction cause the recession?"
"When the market is in the depressive phase of what President Lockhart referred to as a bipolar disorder, crafting policy to satisfy it is like feeding Jabba the Hutt—doing so is fruitless, if not dangerous, because it simply will insist upon more." - Fed's Dick Fisher
"Financial systems are unstable with excessive risk-taking," warns PIMCO's now solo guru Bill Gross, telling Bloomberg TV's Stephanie Ruhle that in a "Soros reflexivity... Once you get the levered system going, it hardly knows when and where to stop." Credit, as we have noted, has been relatively more stable (though less positive on the the way up) Gross notes and "the way to get rich in the past was to borrow money and to lever [up]," but Gross explains that now, "assets are artificially priced... from this point forward, double-digit returns, getting rich on leverage, no. You better look elsewhere for – for your profits," and not Asia. China is "the mystery meat" of emerging market countries, Gross cautions, "nobody knows what’s there and there’s a little bit of baloney."
"... the announcement of a reduction in asset purchases at this meeting might trigger an additional, unwarranted tightening of financial conditions, perhaps because markets would read such an announcement as signaling the Committee’s willingness, notwithstanding mixed recent data, to take an initial step toward exit from its highly accommodative policy...the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market... it was noted that if the Committee did not pare back its purchases in these circumstances, it might be difficult to explain a cut in coming months, absent clearly stronger data on the economy and a swift resolution of federal fiscal uncertainties.... postponing the reduction in the pace of asset purchases would also allow time for the Committee to further discuss and to implement a clarification or strengthening of its forward guidance for the federal funds rate, which could temper the risk that a future downward adjustment in asset purchases would cause an undesirable tightening of financial conditions."
As it turns out, a lot... and also very little.
As JPM's Michael Feroli notes, the September FOMC Taper announcement (which certainly isn't assured, although if the Fed does not taper, it will end up monetizing 0.4%-0.5% of the total private TSY stock per week before year end) may just be a sideshow to a previously undiscussed main event: the Fed's first forecast of 2016 interest rates.
Elliott Management's 22-page letter to investors has something for everyone as Paul Singer ascribes his uniquely independent wisdom. From the fragility of the financial system to the hubris of academic pretenders; from inflation's various devious impacts on assets and reality to the floundering of the world's bankers; from America's "cooked data" to the pending social unrest in Europe and the perils of centralized power, Singers stresses "the temptation to debase fiat currencies... means owning claims on paper money is an act of either faith or denial." Recent market movements, Singer warns "indicate a world on life-support," and "for every day, month and year that policymakers try to substitute failed, inappropriate and risky QE policies for pro-growth policies, the debt mounts, as does resentment among middle-income families that their situation is not improving." The fact of the matter is that "no government has ever reached fiscal 'nirvana,' yet our central bank (and its peers) continues to push the envelope of risk, confidence and inflation." Despite the confident and brave words in which they are wrapped, central bank actions currently seem underscored by quiet panic.
It may come as a surprise to some that the total level of commercial bank loans outstanding as of the most recent week, May 22, was "only" $7.303 trillion. We say only because this number is $20 billion less than the total commercial loans outstanding as of the weeks following the Lehman failure, just before the most epic deleveraging episode in recent US history began. It is also just $600 billion higher than the cyclical lows of $6.7 trillion (net of the February 2010 readjustment of the commercial loan terminology). So does this mean that deposits in the US financial system have been unchanged in the past nearly 5 years? Not at all. As the chart below shows, while commercial loans have flatlined, deposits, which previously used to track loans on a dollar for dollar basis, took off, and are now at $9.4 trillion (as per the latest H.8), or $2.2 trillion more than the $7.2 trillion when commercial banks loan hits a record in October 2008, just after Lehman filed. What's more notable, is that as of the latest week, the excess of deposits over loans just hit an all time record of $2.079 trillion
The Conference Board's measure of just how awesome everyone feels just hit its highest level since February 2008 driven by an impressive surge in 'Expectations'. This should surprise nobody: as we previewed earlier today, "just to make sure that the market closes well green today, the only actual "data" will be yet another reading of consumer "confidence" this time from the Conference Board. Expect this to surge on news that it is Tuesday and stocks have nowhere to go but up, which in turn will send stocks, where else but, up." In short: reflexivity in all its glory. And to think it was just 10 days ago that the market reacted in absolutely the same way to a UMichigan confidence print that beat expectations by the most ever and to the highest since 2007. Perhaps if the US had one consumer confidence metric for every day of the week, all days would be like Tuesdays.
Normally the New York Fed would not have to bother itself with such Series 7, 63-registration requiring, "financial advisor"-type things as predicting where the stock market will go, especially when it is its own trading desk that provides the impetus for more than 100% of the current equity rally. However, these are not normal times - they are New Normal. And as a result, Fed economists Fernando Duarte and Carlo Rosa have penned a "research" paper titled "Are Stocks Cheap?" in which they view the same reflexive "evidence" that Ben Bernanke himself used to answer a question during a recent press conference if he would still be buying stocks at record levels, namely the risk premium. This is what the NYFed's economists say on the matter: "We surveyed banks, we combed the academic literature, we asked economists at central banks. It turns out that most of their models predict that we will enjoy historically high excess returns for the S&P 500 for the next five years."
Reuters Releases George Soros Obituary By Mistake: "Enigmatic Financier, Liberal Philanthropist Dies At XX"Submitted by Tyler Durden on 04/18/2013 18:04 -0400
First CNN, then AP, now Reuters: the entire media is increasingly starting to look like amateur hour. Unless, of course, Soros is like Osama, and had several "reincarnated" body doubles, with the original specimen long gone. Here is our suggestion for another prepared article: "Today after XX centuries of monetizing debt, the Emperor of the Galactic Central Bank, Gaius Maximus Printius Bernankius the DCLXVIth, ended QE in the year of the alien invasion, XXXXX. Bread costs XXXXXXXXXXX."
While it will be no surprise to any ZeroHedge reader, academic research from ETH Zurich shows that not only are "commodity markets becoming very financialized and computerized... and more susceptible to minor shocks," but "at least 60-70% of price changes are now due to self-generated activities rather than novel information." In other words, only about a third of commodity price moves are caused by real fundamental news now (as opposed to 75% pre-HFT).
Citi's Willem Buiter sums it all up: "...the improvement in sentiment appears to have long overshot its fundamental basis and was driven in part by unrealistic policy and growth expectations, an abundance of liquidity and an increasingly frantic search for yield. The key word in the recovery globally, and in particular in Europe, growth is fragile. To us the key word about the post summer 2012 Euro Area (EA) asset boom is that most of it is a bubble, and one which will burst at a time of its own choosing, even though we concede that ample liquidity can often keep bubbles afloat for a long time." His conclusion is self-evident, "markets materially underestimate these risks," as the EA sovereign debt and banking crisis is far from over. If anything, recent developments, notably policy complacency bred by market complacency, combined with higher political risks in a number of EA countries highlight the risks of sovereign debt restructuring and bank debt restructuring in the EA down the line.