A dispassionate discussion of the technical condition of the dollar.
The Fed causes a perverse outcome: gorging corporations and dehyradted startups.
US GDP beat expectations 'proving' that government data shows the recovery meme is on track (as long as it doesn't snow ever again). The market's reaction... intriguing - stocks shrugged even as a USDJPY pump tried to get things going; gold and silver moved modestly higher; and Treasury yields... fell notably at the long end. 30Y is now trading with a 3.06% handle and 5s30s is back below 145bps...!
Once Europe closed, US equity markets rolled over on what is a new 'lowest-volume-day-of-the-year' led by recent winner Russell 2000. The Dow is now red on the week and the Nasdaq up 11 days in a row. Today was not about stocks though (aside from the close). While CAD saw its best gain in over 2 years, it was US Treasuries (as EUR weakened and Bund yields plunged) that made the flashing red headlines with 30Y back at 15-month lows (at 3.10%) and 10Y -3.5bps at 2.36% as the yield curve flattened even further. 2s30s dropped below 260bps - its flattest since Dec 2012. Un-de-escalation concerns evident in TSYs and credit finally started to bleed into VIX and stocks. Gold, silver, and oil limped higher as US weakened (and copper fell). A desperate buying panic into the close smashing S&P futures to VWAP magically enabled the S&P to close at the confidence-inspiring centrally-planned 'wealth effect' level of 2000.07!!
Another night, another sell-side bank suggests European QE must be getting closer and, along with more un-de-escalation in Russia-Ukraine, the bid for German bonds continues to surge as Europe's greater depression appears increasingly priced into bonds. Yields on all German bonds out to 3 years are now negative and 10Y Bunds have collapsed to 90.5bps - record lows. This in turn - as we explained here - is dragging Treasury yields lower (10Y 2.36%) but leaves the spread to Bunds at record highs.
Thanks to buybacks, multiple expansion has been the driver of equity market strength as non-economic actors know one thing - buying stocks at record highs pays better than 'investing' in Capex or growth. However, the Treasury market's yield curve is sending a message loud and clear that multiple-expansion is due to end. As Wells Fargo's Gina Martin Adams notes, "Index P/E is likely to fall," as the spread between 10Y and 2Y yields compresses. Historical data shows the P/E ratio contracted in seven out of eight periods when the curve flattened since 1975. As Bloomberg adds, Martin Adams expects the S&P to close 2014 -7.5% from here at 1850 (tied with Deutsche's David Bianco for lowest prediction among 20 strategists).
The soft July data have once again generated expectations of monetary easing from China. Goldman however thinks further monetary easing would have incrementally less of an impact and would come at the cost of financial stability. This diminishing impact, they argue, would result as overcapacity/oversupply restricts long-term borrowing demand and due to interest rate deregulation, which tends to move the long-term risk-free interest rate to a higher equilibrium, as seen in recent data. As the tradable sector continues to recover on the back of an improved global outlook, Goldman believes that a combination of sectoral policies aimed at easing financial stress and structural adjustment would be a better policy option. They do not expect broad macro easing or an interest rate cut in what remains of this year.
The main event of the week will be Yellen's long awaited speech at the Jackson Hole 3-day symposium taking place August 21-23. The theme of this year's symposium is entitled "Re-Evaluating Labour Market Dynamics" and Yellen is expected to deliver her keynote address on Friday morning US time. Consensus is that she will likely highlight that the alternative measures of labour market slack in evaluating the ongoing significant under-utilisation of labour resources (eg, duration of employment, quit rate in JOLTS data) have yet to normalise relative to 2002-2007 levels. Any sound bite that touches on the debate of cyclical versus structural drivers of labour force participation will also be closely followed. Unlike some of the previous Jackson Hole symposiums, this is probably not one that will serve as a precursor of any monetary policy changes but the tone of Yellen's speech may still have a market impact and set the mood for busier times ahead in September.
The ragged Keynesian excuse that all will be well in Japan once the jump in the consumption tax from 5% to 8% is fully digested is false. Here’s the problem: this is just the beginning of an endless march upwards of Japan’s tax burden to close the yawning fiscal gap left after the current round of tax increases, and to finance its growing retirement colony. There is no possibility that Abenomics will result in “escape velocity” Japan style and that Japan can grow its way out of it enormous fiscal trap. Instead, nominal and real growth will remain pinned to the flatline owing to peak debt, soaring retirements, a shrinking tax base and a tax burden which will rise as far as the eye can see. Call that a Keynesian dystopia. It is a cautionary tale for our times. And Japan, unfortunately, is just patient zero.
The Loudest Warning Yet: "This Stage Should Lead To Increased Risk... System Less Able To Deal With Such Episodes"Submitted by Tyler Durden on 08/06/2014 11:29 -0400
"Suppression of yield and vol induces investors to take on more risk (QE III). The market clings to perception of certainty regarding outcomes, despite the Fed shifting commitment modes from time or level-based to data dependent. This stage of policy should eventually lead to increased uncertainty and risk." Translation: the TBAC itself - i.e., America's largest banks - whose summary assessment this is, is now actively derisiking.
After several months of quite complacency, investors were woken up Thursday by a sharp sell off driven by concerns over potential rising inflationary pressures, rising credit default risk and weak undertones to the economic data flows. One of the primary threats that has been readily dismissed by most analysts is the impact from rising interest rates...
The attached Barron’s article appeared in December 2007 as an outlook for the year ahead, and Wall Street strategists were waxing bullish. Notwithstanding the advanced state of disarray in the housing and mortgage markets, soaring global oil prices and a domestic economic expansion cycle that was faltering and getting long in the tooth, Wall Street strategists were still hitting the “buy” key. In fact, the Great Recession had already started but they didn’t have a clue: "Against this troubling backdrop, it’s no wonder investors are worried that the bull market might end in 2008. But Wall Street’s top equity strategists are quick to dismiss such fears."
This is it! The holy grail of forecasting, Jeffrey Kleintop has discovered it. You'll never have to worry about actual earnings reports, a massive bubble in junk debt, the sluggishness of the economy, new record levels in sentiment measures and margin debt, record low mutual fund cash reserves, the pace of money supply growth, or anything else again. Just watch the yield curve! Unfortunately, as we showed here in the US, this advice could turn out to be extremely dangerous for one's financial health - and has been across many nations throughout time. People remain desperate for excuses as to why the latest bit of asset boom insanity will never end
A repeated theme on financial-TV in recent weeks is that there cannot be a recession without a yield-curve inversion first because in each of the last 6 recessions stretching back 50+ years, short-term rates rose above long-term rates before the recession. However, if you study the period after The Great Depression and even in Japan's last 25 years (that are the best examples of balance sheet recessions), it is very common to have a recession without a yield curve inversion first. In-fact, there were 6 of them following The Great Depression into the 1950's.
Felix Zulauf, James Montier and David Iben: Three legendary investors share their views on financial markets. Everything is pricey ("we will continue to swim in a sea of liquidity; but there might be other events and developments that may not be camouflaged by liquidity which could cause a change of investor expectations.") the European periphery is a bubble ("The Euro crisis is not over...the European economies are not going to change for the better for years to come despite all the cheating and breaking of laws"), Value investors need to venture to Russia ("when you look at today’s opportunity set, you’re left with a set of assets where nothing looks attractive from a valuation point of view") or buy gold mining stocks (" The down cycle could be much bigger than anybody believes if the market realizes that all the actions taken in recent years do not work.") Summing it all up, "there is no question that [sovereigns] lack the fundamental economic base to finally service their debts," trade accordingly.