Goodbye ZIRP, hello NIRP. Today's decision by the ECB to officially lower the deposit facility rate to negative (as in you pay the bank to hold your deposits) is shocking, but not surprising: we previewed just this outcome precisely two years ago in "Europe's "Monetary Twilight Zone" Neutron Bomb: NIRP." Here is what we wrote in June 2012 about Europe's unprecedented NIRP monetary experiment.
As we reported yesterday, the third largest Chinese port of Qingdao is being investigated for after a source at a local warehouse said that "it appears there is a discrepancy in metal that should be there and metal that is actually there... We hear the discrepancy is 80,000 tonnes of aluminium and 20,000 tonnes of copper... It's either missing or it was never there - there have been triple issuing of documentation." This has resulted in a prompt and acute selloff of copper and other commodities as we further documents, but the problems may only now be starting and the banks. As Reuters reports, worries over a probe into commodity stockpile financing at China's Qingdao port appeared to deepen on Wednesday as Standard Bank Group and a part-owned unit of Louis Dreyfus Corp warned of potential losses and copper prices fell further."
Borrowing heavily from Albert Edwards "Ice Age" analogy of our new normal, PIMCO's Bill Gross, after explaining why he does not have a cell phone, discusses the "frigidly low" levels of "The New Neutral" in this week's letter. Confirming Ben Bernanke's "not in my lifetime" promise for low rates and a lack of normalization, Gross explains that the "the new neutral" real policy rate will be close to 0% as opposed to 2-3% (just as in Japan) leaving an increasingly small incremental rise in rates as potentially responsible for popping the bubble. Gross concludes, "if 'The New Neutral' rates stay low, it supports current prices of financial assets. They would appear to be less bubbly," clearly defending the valuation of bonds knowing that he can't expose stocks as 'bubbly' without exposing his firm to more outflows.
"Banks are worried about their exposure," warns one warehousing source, "there is a scramble for people to head down there at the minute and make sure that their metal that they think is covered by a warehouse receipt actually exists." The rehypothecated catastrophe that we discussed in great detail here (copper financing), here (all commodities), and here (global contagion) appears to be gathering speed as the China's northeastern port of Qingdao has halted shipments of aluminum and copper due to an investigation by authorities after they found "there is a discrepancy in metal that should be there and metal that is actually there."
A dispassionate look at some of the reasons people are offering for low volatility.
Despite all the shadow banking system hand-wringing, macro-data-collapsing, real-estate-bubble-bursting, stock-market-tumbling reality facing the China; somehow, China's official government manufacturing PMI just printed 50.8 - its highest in 2014 and the 20th month of expansion in a row. Given the mini-stimulus efforts of the government, perhaps it is not surprising that the official (more SOE-biased) data signals all-clear (when HSBC's PMI is still in contraction for the 5th month in a row). The employment sub-index fell to a 3-month lows and the Steel industry's output and new orders has cratered... So what's wrong with this chart?
The temptations of extrapolation are hard to resist. The trend exerts a powerful influence on markets, policymakers, households, and businesses. But discerning observers understand the limits of linear thinking, because they know that lines bend, or sometimes even break. That is the case today in assessing two key factors shaping the global economy: the risks associated with America’s policy gambit and the state of the Chinese economy. It is often said that a crisis should never be wasted: Politicians, policymakers, and regulators should embrace the moment of deep distress and take on the heavy burden of structural repair. China seems to be doing that; America is not. Codependency points to an unavoidable conclusion: The US is about to become trapped in the perils of linear thinking.
Western strategists and talking heads, we are sure, will know better and continue to pitch China as the renewed engine of growth in the world and that everything will be fine... but when the country's largest property developer says, the "golden era" for China’s property market has passed, adding that "The period in which everybody makes money out of property is gone," perhaps it is time to listen? Of course, we are sure there will be an orderly exit (just as there was in CNY last night which crumbled to 19-month lows) but as China Vanke Co's Yu Liang warns, "the phase where 'whoever buys makes money' is gone." Property sepculators are frustrated that the government won't bail them out "are they tryng to kill us?" as one analyst notes "this downturn is more serious than 2008."
Four years after he left the firm, PIMCO is hiring back Paul McCulley to save its brand and provide just enough ammo to defend its bullish/bearish positions now that El-Erian's disagreements have left. Unlike some firms who believe that 'chief economists' must be full-time - adding value each and every day with their extrapolations of every macro tick - McCulley will spend up to 100 days per year working in PIMCO offices. Bearing in mind McCulley's previous lazer-like focus on Capex (which is dismally flat still) and his belief in a "W" shaped recovery not a "U" or a "V", we suspect the bearded prognosticator will have a bullish bond bias - especially as the trillions of ticking time bombs in the shadow banking system remain as incendiary as ever.
After the crisis, many expected that the blameworthy would be punished or at the least be required to return their ill-gotten gains—but they weren’t, and they didn’t. Many thought that those who were injured would be made whole, but most weren’t. And many hoped that there would be a restoration of the financial safety rules to ensure that industry leaders could no longer gamble the equity of their firms to the point of ruin. This didn’t happen, but it’s not too late. It is useful, then, to identify the persistent myths about the causes of the financial crisis and the resulting Dodd-Frank reform legislation and related implementation...."Plenty of people saw it coming, and said so. The problem wasn’t seeing, it was listening."
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.
"You’re picking up pennies on a train track. You are not getting paid much but you are sure that there will be a very negative surprise at some point. The risk / reward profile is as bad as ’07." - Portfolio manager speaking to Citigroup
"New starts contracted 15% yoy (vs. -21.9% yoy in March); property sales fell 14.3% yoy (vs. -7.5% yoy); and land sales (by area) plunged 20.5% yoy (vs. -16.9% yoy previously). ... the housing market situation has undoubtedly turned quite gloomy. There has been a constant news stream of falling property prices everywhere, even in the 1-tier cities. A number of local governments, as we expected, have started to ease policy locally, especially relaxation of the home-purchase restrictions." - Soc Gen
China is a case of bastardized socialism on credit steroids. At the turn of century it had $1 trillion of credit market debt outstanding—-a figure which has now soared to $25 trillion. The plain fact is that no economic system can remain stable and sustainable after undergoing a 25X debt expansion in a mere 14 years.
The PBOC's willingness to a) enter the global currency war (beggar thy neighbor), and b) 'allow' the Yuan to weaken and thus crush carry traders and leveraged 'hedgers' is about to get serious. The total size of the carry trades and hedges is hard to estimate but Deutsche believes it is around $500bn and as Morgan Stanley notes the ongoing weakness means things can get ugly fast as USDCNY crosses the crucial 6.25 level where losses from hedge products begin to surge. This is a critical level as it pre-dates Fed QE3 and BoJ QQE levels and these are pure levered derivative MtM losses - not a "well they will just rotate to US equities" loss - which means major tightening on credit conditions...