Equity Blow Off Top Takes Brief Overnight Rest, Prepares For Another Session Of Low Volume LevitationSubmitted by Tyler Durden on 05/30/2014 07:03 -0400
Last night's docket of atrocious Japanese economic data inexplicably managed to push the Nikkei lower, not because the data was ugly but because the scorching inflation - the highest since 1991 - mostly driven by import costs, food and energy as a result of a weak yen, and certainly not in wages, has pushed back most banks' estimates of additional QE to late 2014 if not 2015 which is as we predicted would happen over a year ago. As a result the market, addicted to central bank liquidity, has had to make a modest reassessment of just how much disconnected from reality it is willing to push equities relative to expectations of central bank balance sheet growth. However, now that the night crew trading the USDJPY is replaced with the US session algo shift which does a great job of re-levitating the pair, and with it bringing the S&P 500 higher, we expect this brief flicker of red futures currently observable on trading terminals to be promptly replaced with the friendly, well-known and "confidence-boosting" green. The same goes for Treasurys which lately have been tracking every directional move in stocks not in yield but in price.
It was interesting over the last couple of days to watch a series of both hosts and analysts scratching their heads and fumbling for answers over the recent decline in interest rates. After all, how could this be with inflation creeping up due to much stronger economic growth? More importantly, asset prices are clearly telling investors to get out of bonds as the "great rotation" is upon us as we launch into this new secular bull market, right? The recent decline in interest rates should really not be a surprise as there is little evidence that current rates of economic growth are set to increase markedly anytime soon. Consumers are still heavily levered, wage growth remains anemic, and business owners are still operating on an "as needed basis." This "economic reality" continues to constrain the ability of the economy to grow organically.
Anyone who buys their own groceries (as opposed to having a full-time cook handle such mundane chores) knows that the cost of basic foods keeps rising, despite the official claims that inflation is essentially near-zero. Common-sense causes include severe weather and droughts than reduce crop yields, rising demand from the increasingly wealthy global middle class and money printing, which devalues the purchasing power of income. While these factors undoubtedly influence the cost of food, it turns out that food moves in virtual lockstep with the one master commodity in an industrialized global economy: oil.
Our response to a question asked by CNBC-- “Why if everybody is talking about inflation is the bond market not moving?
With the Fed tapering and both China “I don't think the markets are discounting what’s really happening in China,” and Japan’s currencies likely to weaken, the net impact on the U.S. will be deflationary, Kyle Bass warned in a recent presentation. That trend will be accelerated by the improvement in the balance of trade for the U.S., which had its current account deficit shrink due to increased hydrocarbon production. Bass warns, the crucial moment will come when the U.S. reports a sub-6% unemployment rate, meeting the target it has set for normalizing its monetary policy by ending QE and raising rates. He predicted that will come in July. That will be the Fed’s “worst nightmare,” he said. Raising rates would stifle growth and recreate unemployment problems, which would be disastrous politically, according to Bass.
The near-term outlook for the US dollar appears to be improving. Here is why.
"Words speak louder than actions until words stop working then we promise some actions... or more talk about actions." That appears to be the communication method-of-choice for the world's central bankers and The Bank Of Japan's Kuroda stepped into the breach today with his own demands. As Citi's Steven Englander translates, Kuroda is telling investors not to buy JPY just because the BoJ is being very reticent on policy ease (do as we say, not as we do). However, there is an important second message which is intended to be delivered to the Japanese bureaucracy - "Mr. Kuroda also acknowledged limits to what the BOJ can do to generate long-term growth."
For two decades now mainstream Keynesian economists have been gumming about China’s remarkable economic boom and its accumulation of unprecedented foreign exchange reserves. The latter hoard has now actually crossed the $4 trillion mark. But this whole narrative is PhD jabberwocky with a Wall Street accent.
Central banks see their main role now in supporting asset markets, the economy, the banks, and the government. They are positively petrified of potentially derailing anything through tighter policy. They will structurally “under-tighten”. Higher inflation will be the endgame but when that will come is anyone’s guess. Growth will, by itself, not lead to a meaningful response from central bankers. No country has ever become more prosperous by debasing its currency and ripping off its savers. This will end badly...
Given that zero economists surveyed expected any further QQE in this May BoJ statement, the market's positive knee-jerk reaction to the "unchanged" nature is odd:
*BOJ RETAINS PLAN FOR 60T-70T YEN ANNUAL RISE IN MONETARY BASE (coz it's working so well)
*BOJ SEES DECLINE IN DEMAND AFTER SALES TAX HIKE (whocouldanode?)
*BOJ SAYS EASING IS HAVING INTENDED IMPACT ON ECONOMY (crushing consumer through increasingly expensive import costs?)
The excitement must be based on them saying that "exports have leveled off more or less" and the economy is "recovering moderately." One can't help but feel like this run-stop pop will be faded very quickly... as hope is pushed to July for moar QQE.
European officials are purposely talking the euro lower, but objected when Japan and China did. See why curency manipulation is different than interest rate manipulation.
They say that gold is a geopolitical metal. Gold is real money with no counterparty risk and, furthermore, an excellent wealth preserver in time and space. Like fiat currencies (dollar, euro, yen, Yuan etc.), gold’s price is also influenced by political events, especially those having an international impact. Alan Greenspan, ex-chairman of the Federal Reserve, said that gold is money “in extremis”. This is why gold is part of most central banks’ reserves. It is the only reserve that is not debt and that cannot be devalued by inflation, contrary to fiat currencies.
Underappreciated risks to electronic bitcoin and all forms of investments and savings today, including gold, that are held electronically come in the form of modern warfare - involving as it does cyberwarfare and electromagnetic warfare. No electricity and no computer or internet access and you cannot access your savings, investments and money ...
Rogers tells us he's buying Chinese financials, remains long the yen and thinks gold could be going much lower.
A look at the technical condition of the foreign exchange market.