Since we are now in the middle of the final month of a quarter, checking repo stats shows what we have come to expect of a fragile liquidity system. Once again, repo fails spiked sharply. The problem for “markets” is that repo is a primary liquidity conduit indicating significant and persistent degradation under, again, very benign conditions. There is no doubt that QE is the primary culprit here and that its removal is not “allowing” a healing process to begin but instead revealing the damage. With the Fed’s reverse repo program having no impact whatsoever, it just adds to the weight of evidence that policymakers don’t really know what they are doing and are just making it up as they go.
Since it is the NY Fed, headed by an ex-Goldmanite, which will ultimately be tasked with exiting 6 years of "unconventional monetary policy" - at some point during this "recovery" if not now or any time soon for that matter - it is probably best to listen to Goldman for its post-mortem on what the chairwoman did or did not say. Which is why we present a "Q&A" with Goldman's head economist, Jan Hatzius, known to occasionally exchange a sandwich and the occasional policy guidelene, with NY Fed's Bill Dudley at the Pound and Pence, in which he explains how Yellen managed to be both more dovish and more hawkish than the "market" expected.
If the global equity "markets" were in need of a sharp "horrible news is great news" boost overnight, it came courtesy of Germany's ZEW investor confidence survey, which printed at a stunning 8.6, a plunge from the 27.1 in July and far below the 17.0 expected - the lowest print since December 2012 -largely suggesting that a European triple-dip is all but assured. And if that wasn't enough, strong language from John Kerry, assured to fan the flames of geopolitical instability, came hours ago when the US SecState said even more Russian sanctions may be coming. And just to make sure the NY Fed trading desk has to come up with a new narrative is the latest development in the Russian "humanitarian convoy" saga, which as we reported last night, has departed Russia but which Ukraine is now refusing to allow into its country. All in all, it's is setting up to be another super bullish day in the rigged markets for which all that matters is... Tuesday.
Unlike last week's economic report deluge, this week has virtually no A-grade updates of note, with the key events being Factory Orders (exp. 0.6%), ISM non-mfg (exp. 56.5), Trade balance (Exp. -$44.9 bn), Unit Labor Costs (1.2%) and Wholesale Inventories (0.7%).
To those who believe the correlation of Fed monetary heroin and the stock market is eternal and cannot possibly come undone, please consider this line from songwriter Jackson Browne: "Don't think it won't happen just because it hasn't happened yet."
Who best to summarize what Yellen just said (aside from Bernanke of course, however he will demand at least $250,000/hour for his profound insight), than the bank which actually runs the NY Fed: Goldman Sachs. So without further ado, here is Goldman's Jan Hatzius on what Yellen really said. "BOTTOM LINE: The Q&A of Yellen's semi-annual monetary policy testimony contained a few bits of interesting information, including a slightly hawkish shift in her description of when FOMC participants think the first rate hike may occur."
This is a big deal. On the heels of our pointing out the surge in Treasury fails (following extensive detailing of the market's massive collateral shortage at the hands of the unmerciful Fed's buying programs), various 'strategists' wrote thinly-veiled attempts to calm market concerns that the repo market (the glue that holds risk assets together) was FUBAR. Even the Fed itself sent missives opining that their cunning Reverse-Repo facility would solve the problems and everyone should go back to the important business of BTFATHing... They are wrong - all of them - as yet again the Fed shows its ignorance of how the world works (just as it did in 2007/8 with the same shadow markets). As JPMorgan warns (not some tin-foil-hat-wearing blogger with an ax to grind) "the Fed’s reverse repo facility does little to alleviate the UST scarcity induced by the Federal Reserves’ QE programs coupled with a declining government deficit." The end result, they note, is "higher susceptibility of the repo market to collateral shortages" and thus dramatically higher financial fragility - the opposite of what the Fed 'hopes' for.
Goldman Sachs listened (and read) Janet Yellen's remarks at The IMF and see them "generally in line." Despite waffling on for minutes about risk management and monitoring, no one at The Fed has mentioned the total carnage in the repo market, spike in fails-to-deliver, and record reverse repo window-dressing that just occurred. The use of the term "reach for yield" twice and "bubble" 5 times, and admission that the Fed should never have popped the housing bubble, leaves us less sanguine than Goldman and wondering if this was Janet's subtle and nervous 'irrational exuberance" moment.
When we reported yesterday's record reverse-repo surge, driven entirely by collateral-strapped financial entities scrambling to "window dress" their balance sheets with rented Fed-owned Treasurys for regulatory purposes, we said "Expect total reverse repo usage tomorrow to plunge by at least $150 billion as the banks will have fooled their regulator, which also happens to be the Fed, that they are safe and sound. Rinse, repeat, until the entire financial system collapses once again and people will ask "how anyone could have possibly foreseen this." Moments ago the Fed reported the daily reverse repo use. It turns out we were optimistic: it wasn't $150 billion, it was $189 billion. Following yesterday's $339 billion allottment, today this number tumbled to just $151 billion, meaing nearly $200 billion in fungible cash had to quick find a new home away from the Fed.
Behold: a record $340 billion in reverse repos submitted by the world's financial institutions with the Federal Reserve, an increase of $200 billion overnight, and amounting to a record $3.5 billion on average among the 97 operations participants. Considering this is a clear quarterly event, it goes without saying that all the reverse repo is, is a quarter-end window dressing mechanism underwritten by Mr. Chairmanwoman itself.
Pundits enjoy pointing to NYSE margin debt as an indication of overall system leverage, and how prone to margin calls and liquidations the investor class may be at any given moment. However, in the new normal, in which sophsiticated investors fund themselves via completely different mechanism - mostly involving repo and other shadow banking conduits - margin debt has become a very much irrelevant indicator of overall leverage.
These Fake Rallies Will End In Tears: "If People Stop Believing In Central Banks, All Hell Will Break Loose"Submitted by Tyler Durden on 06/24/2014 15:11 -0400
Investors and speculators face some profound challenges today: How to deal with politicized markets, continuously “guided” by central bankers and regulators? In this environment it may ultimately pay to be a speculator rather than an investor. Speculators wait for opportunities to make money on price moves. They do not look for “income” or “yield” but for changes in prices, and some of the more interesting price swings may soon potentially come on the downside. They should know that their capital cannot be employed profitably at all times. They are happy (or should be happy) to sit on cash for a long while, and maybe let even some of the suckers’ rally pass them by. As Sir Michael at CQS said: "Maybe they [the central bankers] can keep control, but if people stop believing in them, all hell will break loose." We couldn't agree more.
Spend any time watching business media, and you could not help but notice the extreme amount of optimism about the financial markets. Despite weak economic data and geopolitical intrigue, the complacency and "bullishness" are at extreme levels. Considering that the markets have been primarily advancing on the back of continued flows of liquidity from the Federal Reserve combined with artificially suppressed interest rates; what do you think the impact on the financial markets will be? “Success breeds complacency. Complacency breeds failure. Only the paranoid survive.” - Andy Grove
Another right of perfectly round number supports: while the Shanghai Composite once again dipped below 2000 overnight to as low as 1991 only to close modestly higher, and the Nikkei followed suit, also sliding below the psychological support level of 14,000 to an intraday low of 13,964 only to close just above 14,000 if in the red, it was the USDJPY that has suffered the most technical pain when shortly after 2:30 am eastern time, the USDJPY dropped by nearly 40 pips, hours after the BOJ indicated that not only is it happy with where in the QE process it stands, but hinted there may well be no more QE, and certainly nothing imminent . In the process, the USDJPY fully smashed the 200 DMA, with the next key parallel support being the 200DMA in the EURJPY at 138.08 (which was at 138.34 last). When that too gives way, it is a straight line to double digits in the USDJPY, and the countdown to the end of the Abe regime begins in earnest.
It was supposed to be a blistering Mega Merger Monday following the news of both AT&T'a purchase of DirecTV and Pfizer's 15% boosted "final" offer for AstraZeneca. Instead it is shaping up to be not only a dud but maybe a drubbing, with AstraZeneca plunging after its board rejected the latest, greatest and last offer, European peripheral bond spreads resume blowing out again, whether on concerns about the massive Deutsche Bank capital raise or further fears that "radical parties" are gaining strength in Greece ahead of local elections. But the worst news for BTFDers is that not only did the USDJPY break its long-term support line as we showed on Friday, but this morning it is taking even more technician scalps after it dropped below its 200 DMA (101.23) which means that a retest of double digit support is now just a matter of time, as is a retest of how strong Abe's diapers are now that the Nikkei has slid to just above 14,000, while China, following its own weak housing sales data, saw the Shanghai Composite briefly dip under 2000 before closing just above it. Overall, it is shaping up to be a less than stellar day with zero econ news (hence no bullish flashing red headlines of horrible data) for the algos who bought Friday's late afternoon VIX slam-driven risk blast off.