Here is the paradox as succinctly summarized by Deutsche Bank, which notes that the current -29% year-over-year drop in the CRB index implies YoY headline CPI inflation falling from 0.1% to -0.9% over the next couple of months, or just in time for the September or December FOMC meetings both proposed as the "lift off" date. This would be the largest year-over-year drop since September 2009 (-1.3%) and one of the lowest prints in modern history.
After yesterday's latest drop in stocks driven by "old economy" companies such as CAT, which sent the Dow Jones back to red for the year and the S&P fractionally unchanged, today has been a glaring example of the "new" vs "old" economy contrast, with futures propped up thanks to strong tech company earnings after the close, chief among which Amazon, which gained $40 billion in after hours trading and has now surpassed Walmart as the largest US retailer. As a result Brent crude is little changed near 2-wk low after disappointing Chinese manufacturing data fueled demand concerns, adding to bearish sentiment in an oversupplied mkt. WTI up ~26c, trimming losses after yday falling to lowest since March 31 to close in bear mkt. Both Brent and WTI are set for 4th consecutive week of declines; this is the longest losing streak for Brent since Jan., for WTI since March.
In almost all cases, including the most recent rise, the intermittent change in psychology that drove interest rates higher in the short run, occurred despite weakening inflation. There was, however, always a strong sentiment that the rise marked the end of the bull market, and a major trend reversal was taking place. This is also the case today. Presently, four misperceptions have pushed Treasury bond yields to levels that represent significant value for long-term investors. While Treasury bond yields have repeatedly shown the ability to rise in response to a multitude of short-run concerns that fade in and out of the bond market on a regular basis, the secular low in Treasury bond yields is not likely to occur until inflation troughs and real yields are well below long-run mean values.
The US Treasury sold $25 billion of one-year T-bills at an interest rate of 33bps yesterday, the highest since June 2010. It appears the short-end of the yield curve is increasingly pricing in 'liftoff' sooner rather than later (and the long-end is responding by rallying - lower in yield - as medium term growth expectations fade) but it raises significant questions about the economic trajectory after the hike (and the ebbing confidence in The Fed).
Is China (or the US) the next Greece?
You don’t hear it much, but the S&P 500 has been a bit of a “One trick pony” in 2015. No, it isn’t the 4% weighting in Apple that makes it such; it is the combination of a 15% weighting in Health Care AND that sector’s 12.9% return year to date. When you compare the S&P 500’s price return year to date of 3.37%, you can see that the Health Care sector’s contribution is essentially just over half the market’s price return for 2015 (12.9 times 15% is 1.90 of that 3.37). Layer on the fact that 5 of the 10 industry sectors in the S&P 500 are still down on the year: Materials (-2.7%), Industrials (-2.9%), Telecomm (-0.7%), Utilities (-8.6%) and Energy (-9.7%).
China stocks have fallen by as much as -30% over the past three weeks. What would Janet Yellen do if the S&P 500 Index was falling by -30% in similarly short order?
Among all the mindless blather served up by the talking heads of bubblevision is the recurrent claim that “its all priced-in”. That is, there is no danger of a serious market correction because anything which might imply trouble ahead—-such as weak domestic growth, stalling world trade or Grexit——is already embodied in stock market prices. Yep, those soaring averages are already fully risk-adjusted! Nothing to see here, it will be argued. Today’s plunge is just another opportunity for those who get it to “buy-the-dip”. And they might well be right in the very short-run. But this time the outbreak of volatility is different. This time the dip buyers will be carried out on their shields.
The US Federal Reserve has been universally lauded for the apparent success of its extreme monetary policy of recent years. With key world stock markets near record highs, traders universally love the Fed’s zero-interest-rate and quantitative-easing campaigns. But this celebration is terribly premature. The full impact of these wildly-unprecedented policies won’t become apparent until they are fully normalized. The most-extreme monetary experiment by far in US history is just at half-time now, the fat lady hasn’t even taken the stage. The full normalization of ZIRP and QE is likely to be as negative for stock and bond prices as its ramping up proved positive for them.
While we showed what the all important Goldman jobs preview looks like, here is a quick snapshot of what consensus expects will be reported in 15 minutes:
- US Change in Nonfarm Payrolls (Jun) M/M Exp. 233K (Low 160K, High 290K), Prev. 280K, Apr. 221K
- US Unemployment Rate (Jun) M/M Exp. 5.4% (Low 5.3%, High 5.5%), Prev. 5.5%, Apr. 5.4%
- US Average Hourly Earnings (Jun) M/M Exp. 0.2% (Low 0.1%, High 0.3%), Prev. 0.3%, Apr. 0.1%
Greece, Europe and the world are being crucified on a cross of Keynesian central banking. The latter’s two-decade long deluge of money printing and ZIRP has generated a fantastic worldwide financial bubble, and one which has accrued to just a tiny slice of mankind. That much is blindingly evident, but there’s more and it’s worse. The present replay of high noon on Greece’s impossible mountain of debt clarifies an even greater evil. Namely, that the central bank printing presses have also utterly destroyed the fundamental requisite of fiscal democracy. To wit, in the modern world of massive, interventionist welfare states, fiscal governance desperately needs an honest bond market.
today is Friday taken to the nth degree, with the markets having already declared if not victory then the death of all Greek "contagion" leverage, following news that a new Greek proposal was sent yesterday (which as we summarized does not include any of the demanded by the Troika pension cuts), ignoring news that Greece had again sent Belgium the wrong proposal which the market has taken as a sign of capitulation by Tsipras, and as a result futures are surging higher by nearly 1%, the German DAX is up a whopping 3.1%, on track for the biggest one day gain in three years, Greek stocks up over 8%, German and US Treasurys sliding while Greek and peripheral bonds are surging.
Today’s style of heavy-handed monetary central planning destroys capitalist prosperity. Real capitalism cannot thrive unless inventive and enterprenurial genius is rewarded with outsized fortunes. Warren Buffett’s $73 billion net worth, and numerous like and similar financial gambling fortunes that have arisen since 1987, are not due to genius; they are owing to adept surfing on the $50 trillion bubble that has been generated by the central bank Keynesianism of Alan Greenspan and his successors.
It is fair to say, Bloomberg’s Richard Breslow dares to say - without being trite, that this really is a very interesting pivotal week we are heading into. The FOMC trying to thread the needle of moving on, keeping everyone calm and keeping a wary eye on a geopolitical landscape that isn’t getting better. Greek negotiations that layer existential questions of problem resolution paralysis on top of default and Grexit. And let’s not forget MERS, Turkey coalition issues, Hong Kong bomb makers, Ukraine and meaningful MPCs given Kuroda’s comments, CHF wariness and NOK economic projections. Feels to me like Act 4 of Macbeth, “Double, double toil and trouble.” Lots of predictions, forecasts and pronouncements, but what will it all really mean and should we beware what we ask for?