The lesson from the events of 2007-2008 should have been clear: Boosting GDP with loose money can only lead to short term booms followed by severe busts. A policy of artificially cheapened credit cannot but cause mispricing of risk, misallocation of capital and a deeply dislocated financial infrastructure, all of which will ultimately conspire to bring the fake boom to a screeching halt. The ‘good times’ of the cheap money expansion, largely characterized by windfall profits for the financial industry and the faux prosperity of propped-up financial assets and real estate (largely to be enjoyed by the ‘1 percent’), necessarily end in an almighty hangover. The crisis that commenced in 2007 was therefore a massive opportunity: An opportunity to allow the market to liquidate the accumulated dislocations and to bring the economy back into balance. That opportunity was not taken and is now lost – maybe until the next crisis comes along, which won’t be long. It has become clear in recent years – and even more so in recent months and weeks – that we are moving with increasing speed in the opposite direction: ever more money, cheaper credit, and manipulated markets (there is one notable exception to which I come later). Policy makers have learned nothing. The same mistakes are being repeated and the consequences are going to make 2007/8 look like a picnic.
There was a brief period of confusion for a while when Goldman didn't have clear muppet-stomping trades on the book, and those who wished to frontrun the Goldman prop desk (and do the opposite of the muppet flow) were stuck furiously scratching their head. And granted while it's not a "Stolper", tonight we got two gifts (in the parlance of Whitney Tilson) with Goldman first telling its clients to sell gold following Goldman's lowering of its price target for the yellow metal (which as always means the hedge fund known as Goldman is buying what its clients are selling). And then, moments ago, we also learned that Goldman is also selling the 10 Year, which it advise muppets to buy.
One of the simplest, most overused and popular assertions is that claim that stocks must rise because interest rates are so low. In fact, you cannot get through an hour of financial television without hearing someone discuss the premise of the Fed Model which is earnings yield versus bond yields. The idea here, once formalized as the "Fed Model," is that stocks' "earnings yield" (reported or forecast operating earnings for the S&P 500, divided by the index level) should tend to track the Treasury yield in some fashion. This simply doesn't hold up in theory or practice.
Earlier this morning the BoJ introduced a comprehensive change to its monetary policy framework. The asset purchasing program will be merged with the outright JGB purchase program (rinban), and JGB purchases will be expanded to include all maturities, including 40-year bonds. The pace of JGB purchases by the BoJ will be accelerated to ¥7trn per month from just under ¥4trn currently (on a gross basis), and purchases of ETFs and J-REITs will also be increased. The main operating target for money market operations was changed to a monetary base control (a quantitative index) from the uncollateralized overnight call rate.
Krugman compared apples to oranges to make his point.
Over the past four years one of the dominant "deflationists" has been Gluskin Sheff's David Rosenberg. And, for the most part, his corresponding thesis - long bonds - has been a correct and lucrative one, if not so much for any inherent deflation in the system but because of the Fed's actual control of the entire bond curve and Bernanke's monetization of the primary deflationary signal the 10 and certainly the 30 Year bond. The endless purchases of these two security classes, coupled with periodic flights to safety into the bond complex have validated his call. Until now.
When it comes to popular finance myths, cash hoarding by corporates may be one of the most perpetuated. It's not that the data is wrong; US companies are holding more cash on their balance sheets than at any time in the past, as a report by Moody's this week notes. What's misguided is the narrative, in Citi's view, in particular among equity investors. What they most take issue with is the implication that corporates have lots of cash to return to shareholders. Indeed, there's plenty of data to the contrary that challenges the prevailing notion that corporates are the picture of good health.
While the market will do everything in its power to forget yesterday's Hung Parliament outcome ever happened, and merrily look forward to today's Bernanke testimony (first of two) before the Senate, Europe is not quite so forgiving. Because moments after today's Italian Bill auction in which the now government-less country sold €8.75 billion in 6 month bills at a yield of 1.237% nearly double the 0.731% yield for the same issue previously, things went bump in the night, leading Italian 2Y yields to surge +38bps to 2.086%, vs 2.063% earlier, while the benchmark Italian 10Y yields soared +28bps to 4.766%, vs 4.739% earlier, and just shy of JPM's 5% target. Spain is not immune from the Italian developments, and while it will take the market some time to realize that the next political scandal may be dropping this time in Spain (as reported yesterday), the Spanish 10 Year is already up 7% to 5.23%. Suddenly talk of parity between Italy and Spain may be on the table all over again. And while unlike yesterday there is US macro data, in the form of US consumer confidence, new homes sales and house price data, all the market will care about is soothing Wall Street sellside spin that Italy is not really as bad as everyone said it would be if precisely what happened, happened. With the EURUSD on the verge of breaking down the 1.3000 support, it is very unclear if they will succeed.
European economies straight from script of Les Miserables. The dispensing of horsemeat on the Continent in food and otherwise. The oncoming of some sort of Asian Flu. Class warfare in America and the entire construct supported by a House of Cards relying solely on the printing presses housed in Washington, Frankfurt, London, Tokyo and Beijing. The beginnings of a small game of “Currency Wars” and the markets sit and ask the famous question; “What, me worry?” Getting it right is NOT as important as not getting it wrong. Besides an event then, the next Black Swan that may appear on the horizon, there is a fundamental mis-match now caused by the actions of the central banks. The money pours out like honey and must be used somewhere and so it is but the economic fundamentals are horribly out of tune with the next high notes that are being played in the markets.
Work in the mortgage market? Never read about Kamala Harris or the CA "Home Owner Bill of Rights?" Read on....
With JPY bleeding lower once again overnight extending to 28-month lows against the USD (and the long-end of the JGB curve starting to show some signs of anxiety), it is perhaps timely to revisit Kyle Bass's five key reasons why Japan is the epicenter of the world's failed monetary policy experiment. In this excellent and much-requested summary 8-minute clip, Bass summarizes his Japan thesis and destroys several of the myths that talking-heads like to assign to the so-called widow-maker trade.
By the Deceptive means of Misinformation and Manipulation of economic data the Federal Reserve has set the stage for broad based moral hazard. Through Distortions caused by Malpractice and Malfeasance, a raft of Unintended Consequences have now changed the economic and financial fabric of America likely forever. The Federal Reserve policies of Quantitative Easing and Negative real interest rates, across the entire yield curve, have been allowed to go on so long that Mispricing and Malinvestment has reached the level that markets are effectively Delusional. Markets have become Dysfunctional concerning the pricing of risk and risk adjusted valuations. Fund Managers can no longer use even the Fed's own Valuation Model which is openly acknowledged to be broken.
FX markets just opened and the market's reaction to the in-the-bag election of Shinzo Abe is 'expectedly' negative for the JPY. Trading up towards 84.50, JPY is back at 20-month lows against the USD with 85.50 the next target. With JPY weakness and the long-end of the Japanese sovereign bond curve at its steepest on record, it seems Abenomics 2.0 may be about to prove out the Keynesian Endgame. As Kyle Bass noted in the past, from the mouth of a Japanese finance minister "It's only money printing when the market says it is" - well, we suspect the market is getting the joke, finally.
After the success of the 'scariest charts for equity bulls', the following 12 charts are the most important, in CitiFX's view, to establish a 'starting point' for views on markets as we head into 2013. From employment trends echoing the 1970s, one-last-low in Treasury yields and '90s analogs, to EURUSD and its mid-'80s mirror, and the ongoing trend higher in gold; there is something here to scare equity and bond bulls and bears alike.
Regardless of the reasons, Ben’s got a major problem on his hands. That problem is the fact that Treasuries are on the verge of breaking their upward sloping trendline. If Treasuries begin to collapse at a time when the Fed is buying up over 70% of debt issuance, then the Great Treasury Bubble is finally about the burst: