The epic voyage of USD Longs and Treasury Shorts continues...
The Swiss establishment has been reliant upon the public’s ignorance, but now they are up against a formidable opponent in Egon von Greyerz. Not only that, but they can clearly see that, as elsewhere around the world, the public is fast becoming disenchanted with the status quo; and that is potentially very dangerous for these people. What is important to understand here is that if the initiative passes it will be part of the Swiss constitution IMMEDIATELY - as some are suggesting. This means that the government and parliament cannot touch it. Only another referendum can change it. This is proper democracy for you. The closer we get to the vote on November 30, the bigger this story is going to become, and the bigger it becomes, the higher the chance that the yes vote wins. Should that happen, it will undoubtedly set off alarm bells throughout the gold market, as yet more physical gold will need to be repatriated and another sizeable, price-insensitive buyer will enter the marketplace.
"Markets are slowly coming to grips with reality is not going to be as easy as everybody thought," Peter Schiff tells CNBC's Rick Santelli, noting the pick up in volatility across asset classes recently. What The Fed clearly does not understand, Schiff blasts, is that "you cannot end quantitative easing without plunging the US into a severe recession." Because of the Fed's extreme monetary policy and the mal-investment that flows from it, Schiff says, "The US economy is more screwed up now than it's ever been in history." Most prophetically, we suspect, Santelli agrees that "a messy exit is a given," and Schiff believes they know that and that is why QE4 is coming simply "because it hasn't worked and they can't admit it's been a dismal failure."
"Central Bankers have moved from being 'nudgers' on monetary policy to basically managing fiscal policy," warns Rick Santelli, adding that "in the West, it's now basically the same." As Santelli points out so accurately, the central bankers have admitted as such, noting "they have to dabble in that direction because nothing can get done in 'politics'" in the US or Europe "for the people - the voters." What this has done, Santelli chides calmly is "take the voters out of the game." Simply put, he blasts, "if central banks hadn't had such a large foray into politics, politicians would have had to sink or swim on the merit - or lack therein - of their policies... that weren't creating the growth." He concludes ominously that the 'spread' between central-bank-inspired "stability" and real-world fiscal-policy-inspired "growth" has never been wider.
"You can't eat GDP, and you can't live in a rising stock market" is the striking phrase from NY Times' Neil Irwin as he offers the most damning chart of the decline of America's Economic Model (and dream). As we have explained vociferously, the most important thing to understand about today’s economy is: Around 1999, growth in the United States economy stopped translating to growth in middle-class incomes. The choice, by Greenspan and carried on by his followers, was to enable the financialization of the US economy for the benefit of the few, at the cost of the many. As Irwin concludes, and we explained previously, Americans feel disappointed by the economy; the new data show that they have good reason.
In American society, 'debt' and 'income' have become increasingly synonymous over the past 3 decades; but as Rick Santelli blasts (commonsensically), "they certainly shouldn't be." It appears the average joe has been led to this conclusion by the Central Banks. Rhetorically asking "where's the horsepower in the economy coming from?" Rick reflects on the auto-loan fears we discussed earlier, santelli notes that 55% of used cars (and 30% of new cars) are financed by subprime lenders... and rages, "if we continue as a country to fuel our consumerism with debt, there is no way the bond market's going to be wrong."
Forget international capital flows, forget central banks (even though the world's reaction to the ECB enacting such an extreme policy - QE- this far down the 'recovery' raises questions about the entire false state of the world), and forget positioning... Rick Santelli - stunned at the disconnect between stocks and bonds off the February lows... says there is only one number that matters for lower rates - Nasdaq 3996.
In his first major speech since The White House got their 'flexible' man in to manage the GSEs, Mel Watt outlined his strategic plan for Fannie Mae and Freddie Mac. Predicated on the maintenance of liquidity, competition, and resilience of the national housing finance market, Watt's remarkably blind to the past proposal will, as CNBC's Rick Santelli warns, create Subprime 2.0. Easing lending standards, not lowering limits, and raising the possibility of principal reduction seems to do anything but reduce taxpayer risk and merely creates more perverse incentives. Santelli steams, as the orthodox monetary policy channel of the last 30 years continues to be pumped ever higher, "immense fiscal and monetary stimulus has gotten us nowhere." As we suspect Rich might have concluded... Watt the fuck!? "if you believe any of this, you have to be crazy after what we've been through."
This week's data marked a crucial turning point in US monetary policy. For all those "rules-following" economists out there with their various adaptions of the infamous Taylor Rule (a model that stipulates how much the central bank should change the nominal interest rate in response to changes in inflation, output, or other economic conditions), this week marked the point at which ALL models suggest that Fed interest rate policy is simply too easy. This explains why the Fed has shifted to a qualitative forward guidance (reminding us of porn - we'll know when to tighten when we see it) as Rick Santelli so eloquently the fact that the Fed claims to be data-dependent "is a twilight zone" and as John Taylor himself notes, the Fed's QE policy "has not worked with few if any signs of success," and now, even as they taper, their rate policy is far too easy. Simply put, they're making it up as they go along (and it's never been more obvious).
Reflecting on the divergence between equities at all time-highs and drastically sliding bond yields, CNBC's Rick Santelli reminds that it seems bonds recognize that business cycles work in "fits and starts" and not in straight-lines as some (equity bulls) would believe and reminds (as we noted previously) that with revisions, Q1 GDP could be negative. His discussion moves from US Treasury 'cheapness' relative to global bonds and the 'weather' effect's over-exuberant expectations; but it is his final topic that raised an eyebrow or two. Santelli doesn't buy into the meme that "the reason the Fed is doing all this is because Congress does nothing;" in fact, he exhorts, it's the opposite, if the Fed wasn't hunkered down supporting the stock market - and stocks started throwing little hissy fits (a la TARP), it would send signals... and things would get done!"
With 30 year bond yields set to close their lowest in 10 months, CNBC's Rick Santelli is concerned at the signals that the Treasury yield curve is sending.If yesterday's minutes from the Fed were supposed to walk back their 'hawkish' tone, then Santelli slams they are "gonna need a really big billboard" because the term structure is still flattening. "When 'flattening' is the theme, that is not painting a rosy outlook for the long-term economy," and as Santelli warns, this is when the Fed is pulling out of its extraordinary policies. Santelli screams, "the entire monetary policy side has to be under review... and the only way you can keep the fallacy alive is "if you sell it as a 'deflationary' issue, where you can keep trying the same thing that isn't working."
For all the talk about how High Frequency Trading has rigged markets, most seem to be ignoring the two most obvious questions: why now and what happens next?
As the day began with every Joe, Jim, and Harry claiming to be an expert in HFT and having prophesied all of this long ago, we thought it would be intriguing to track just how well the retail investor was edumacated on the 'rigging of markets'. It didn't take long before Bob "I'm not trying to be an apologist for HFT, but..." Pisani explained that investors should not be concerned and another talking-head popped up on CNBC to proclaim, "being a little bit front-run is not a problem... remember, it's legal." Henry Blodgett made his 'takes one to know one' bubble perspective adding confidently that "the concept that the market is rigged is crazy." Crazy indeed - until the FBI gets involved. But we leave it to Rick Santelli who summed it all delightfully in a death-match with Pisani, "I'm sorry but if a large group of people can take that one cent all day long, day-in and day-out, then there's a problem."
Since the crisis, and more likely decades before, we (the people) have been apparently 'happy' to have a small group of people in charge of picking winners and losers. "While free markets may have their hiccups," CNBC's Rick Santelli notes, when it comes to allocating resources, "the aggregate behavior of the marketplace is better than individuals." Crucially, Santelli blasts, if you're a saver, you understand now that you weren't picked as winner." In fact, some might even say the 'saver' is the enemy of the recovery, but according to the Central Banks, as Rick rages, it is deflation that is the enemy. Bankers and governments love inflation because "if you owe a lot of people a lot of money, there's nothing better than to pay it back with cheaper money."
At the young age of 22 Henry Hazlitt figured out the future involves too many factors for anyone to predict, not to mention just knowing what the relevant factors are. Jim Grant admitted it took him 40 years in the business to finally realize he couldn’t understand the future, noting, however, unfortunately the folks working at the Eccles Building have not come to this realization. The PhDs believe they can depreciate the currency at the proper rate to cause everyone gainful employment and live happily ever after. Hazlitt also has a fan in Rich Santelli who notes that if government makes loans, that private lenders won’t make, to entities that can’t pay back, economic signals get destroyed, and chaos ensues. Chaos, indeed...