Testimony

Well the hits just keep on coming. The U.S. Government Accountability Office (GAO), recently conducted a study in which investigators attempted to use fake identities to sign up for subsidized healthcare under ObamaCare. The results are frightening. All but one phony applicant was successful. Moreover, the GAO more broadly notes that “about 2.6 million ‘inconsistencies’ existed among applicants who had chosen a health plan.”...  The GAO’s account of fictitious applicants obtaining subsidized coverage goes beyond a related problem that surfaced this spring and that the investigators also cited: The government may be paying incorrect insurance subsidies to a significant share of the 5.4 million Americans who signed up for health plans for this year through the federal marketplace.

In an odd admission of the possible fallibility of a centrally-planned economy, none other than Chinese Premier Li recently noted, "we should never assume that we few at the top have more insight or power but should try to mobilize the intelligence and creativity of the many thousands of our people so as to create unrivaled value." Perhaps the Federal Reserve would do well to listen. However, Li did not excuse himself from the need to spin how well things were going. On the heels of our 11 awkward Chinese fact charts, Li explains "the Chinese market is booming, the economy strong [sic]. Enterprises are the mainstay of the market." However, as Diapason Commodities' Sean Corrigan, when trying to confirm this 'fact', "discrepancies abound."

"The head of the International Monetary Fund warned on Friday that financial markets were "perhaps too upbeat" because high unemployment and high debt in Europe could drag down investment and hurt future growth prospects." To summarize: first the BIS, then the Fed and now the IMF are not only warning there is either a broad market bubble or a localized one, impacting primarily the momentum stocks (which is ironic in a new normal in which momentum ignition has replaced fundamentals as the main price discovery mechanism), they are doing so ever more frequently.

Fed history is riddled with examples of how ‘too-low-for-too-long’ Fed policies have created booms that caused busts.   The crazy irony now is that current policy is specifically trying to create the boom with the belief that rules, promises, and a gradual change of any policy will be enough to massage a soft landing.   Equally disturbing is the fact that the FOMC appears to believe that it has no choice but to keep policy exceptionally easy, because with rates at zero, it has no bullets left should the economy falter.  It reminds me of that movie when Sargent Foley (Louis Gossett) was trying to get Mayo (Richard Gere) to quit boot camp and a broken Mayo cries out, “I’ve got nowhere else to go”.

What if Janet Yellen is wrong?

Yellen’s acting routine is worthy of an Academy Award. In her role, she plays a caring, sweet, grandmotherly type figure all concerned about the poor and middle-class, when reality points to a career as a staunch, frontline protector of the bankster oligarchy.

Slowly but surely, all those cans that many hoped were kicked indefinitely into the future, are coming back home to roost. The biggest impact on global risk overnight have been undoubtedly the expanded Russian sanctions announced by Obama yesterday, which have sent the Russian Micex index reeling to six week lows (as it does initially after every sanction announcement, only for the BTFDers to appear promptly thereafter), with the biggest hits saved for the named companies such as Rosneft -5.6%, Novatek -5.1%, and others Alrosa -5.7%, VTB Bank -4.3%, Sberbank -3.4% and so on. Then promptly risk off mood spilled over into broader Europe and at last check the Stoxx600 was down 0.8%, with Bund futures soaring to record highs especially following news (from the Ukraine side) that a Russian warplane attacked a Ukrainian fighter jet. Not helping matters is the end of the dead cat bounce in Portugal where after soaring by 20% yesterday on hopes of a fresh capital infusion, Espirito Santo has once again crashed, dropping as much as 11%, driven lower following downgrades by both S&P and Moodys, as well as the realization that someone was pulling everyone's legs with the rumor of an equity stake sale.

This week’s market reaction to Fed chair Janet Yellen’s Humphrey Hawkins testimony – which was initially perceived as hawkish – provided another highlight of just how nervous investors have become about the risk of tighter monetary policy, post the very strong June payrolls report. As BofA warns, the current pace of jobs creation mirrors what forced the Fed’s hand in the 1994 rate hiking cycle, which led to lower stocks and wider credit spreads. Simply put, as the indicator of just how insane "markets" have becomes, rapidly improving job growth (as fallacious as it is under the surface) means BOFA thinks that hedges should be set and long positions in risky assets reduced.

Presenting: the Price to Equity ratio. Because stocks are cheap and stuff.

The sell off was greeted by Chinese buyers as Chinese premiums edged up to just over $1 an ounce on the Shanghai Gold Exchange (SGE).

Gold price drops this year have led to a marked increase in demand for gold as seen in very large increases in ETF holdings (See chart - Orange is Gold, Purple is absolute change in gold ETF holdings). The smart money in Asia, the West and globally continues to use price dips as an opportunity to allocate to gold.

If last week's big "Risk Off" event was the acute spike in heretofore dormant Portugese bank troubles (as a reference Banco Espirito Santo has a market cap at the close last night stood at around €2.1bn ($2.9bn), contrasting to Goldman Sachs ($78.1bn) and JP Morgan ($220.5bn)), then yesterday's acceleration in the Portuguese lender's troubles which as we reported have now spread to its holding company RioForte which is set to default, were completely ignored by the market. Today this has conveniently flipped, following a Diario Economico report that Banco Espirito Santo has the potential to raise capital from private investors. No detail were given but this news alone was enough to send the stock soaring by nearly 20% higher in early trading. Still, despite the "good", if very vague news (and RioForte is still defaulting), Bunds remained bid, supported by a good Bund auction, in part also dragged higher by Gilts, which gained upside traction after the release of the latest UK jobs report reinforced the view that there is plenty of spare capacity for the economy to absorb before the BoE enact on any rate rises. Also of note, touted domestic buying resulted in SP/GE 10y yield spread narrowing, ahead of bond auctions tomorrow.

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."

Fed Chair Janet Yellen will provide Congress with an update on the state of the economy, how rosy the future is, why she needs to keep rates lower for longer, and that there are no bubbles (oh apart from in bonds which everyone should sell because we need the collateral). These are her first comments since the FOMC press conference in mid-June and stocks have soared since then (as bond yields have tumbled) and she will have to tread a fine line between exuberant over headline job improvements and the need to keep over-inflated bubbles pumped full of cheap/free money for longer...

It has been a mixed overnight session, following data out of China first showing that any hopes of ongoing PBOC tapering are dead and buried, following the June report showing money and loan creation (1.08 trillion Yuan up from 871 billion in May and above the 980 billion expected) in China soared, slamming expectations and indicating that Beijing is once again set on masking slowing growth with a surge in money creation. Should the Chinese not so secret any more money laundering channel be plugged this means local inflation may be set to surge in the coming months. More worrying was the release of a big drop in the German ZEW Survey expectations print at 27.1, down from 29.8 and below the expected 28.2. The low print has prompted several banks to warn that Europe's growth spurt has finally ended and there may be substantial downside surprises ahead, and certainly even more cuts to the IMF "forecast" for European growth. Finally, the Portuguese situation may be out of sight, but it is certainly not out of mind as the stock of BES continues to tumble and now the contagion has finally moved over to Espirito Santo Financial Group whose shares dropped to the lowest since 1993. Keep a close eye on this "not so lonely" cockroach.

Now that the World Cup is over, and following last week's global macro reporting slumber (aside for the Portuguese risk flaring episode of course), things pick up quite a bit in the coming week. Here are the key events.