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It Ain't Priced In
A Thought on China
I had an e-mail exchange with an old fried who now works for a large macro hedge fund up in Greenwich. The broad topic was the very long list of signs that the global economy is hitting the skids. He had this to say:
…certainly does not point to robust job growth…manufacturing activity globally really falling sharply..think weakness in Europe spilling over to those who export to the region..retail sales in Europe plunging…China growth may now be down to 3% in our view…U.S. q2 may be sub 1.5%..Europe- contraction…Brazil sub 3%...Australia slowing sharply...
I almost fell of the chair reading this. Say this group is right about China. What does it mean if its growth rate falls to 3%? A very hard landing for all manner of things, is the answer.
There have been many China bears the past year or so, but against these bearish views there has been a widespread belief that China will muddle through. My point is that China GDP = 3% is absolutely not priced into today’s market.
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On the Swiss Franc
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Swiss reserves jumped an incredible CHF 59B ($61B) in June. The only question in my mind is, “How long can this last?” Switzerland can’t increase reserves on an unlimited basis; they can’t absorb Euro60B a month.
The current boss at the Swiss National Bank (SNB), Thomas Jordan is responsible for the Peg policy that is behind the unwanted reserve creation. It’s important to remember that Jordon is relatively new to the job. He stumbled into the hot seat when the former head of the SNB, Philippe Hildebrand’s wife got nailed trading currency when she shouldn’t have been.
Jordan is a well-educated technocrat who is also an old hand at the SNB. He inherited the currency peg policy from Hildebrand, but history will mark his name in the books if the policy fails. I’m sure that Jordon is aware of this. What’s his state of mind?
Jordan doesn't have the full support of the government behind him. The same domestic politics that successfully dumped Hildebrand are working against Jordon.
If Switzerland is to maintain the current 1.2000 peg to the Euro, there has to be something more in the offing. The endless intervention is not going to work. The FX market is much bigger than the capacity of the SNB. The only option left for Jordon is exchange controls and a complete shutdown of the Swiss border. Jordon has hinted that these steps are coming on several occasion in the past month.
When Switzerland adopts exchange controls, the rest of Europe will soon follow. What will be the global market response from these measures? It will scare the crap out of capital. I think exchange controls will bring a panic; there is no safe place to hide in a panic. The possibility of this happening is not in the price of assets today.
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On FX
I jumped on the short EURUSD ship last Friday (link). A gain of nearly four big figures in a week would normally have me taking the quick leveraged profits. Actually, I doubled down.
To my old eyes there was something different in the Euro trading on the week. What was missing was a “bid”.
The relative stability of the FX market (particularly the EURUSD) has been a mystery for me the past year or so. It’s as if there has been an invisible hand in the market, quietly intervening at critical times. This type of “official guidance” would explain the range trading and low volatility. I have given credit to the BIS for this activity in the past, although there is no confirmation of that.
Last week the FX market appeared to be missing that support (from whomever). We raced down from Monday through Friday, and ending up at the lows of the year. To me, it looks like a run to 1.200 is in the cards.
The question is, "What happens when that magic number is achieved"? There is very little technical support under EURUSD 1.200. It looks like it is all “air” below that level:
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While the idea of the EURUSD at parity is not news to my readers, I don’t think this possibility is in the "mind" of the market today. A big down move EURUSD move would crush the S&P.
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More EU Lies
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Last Sunday there was some euphoria in the markets and press over the EU Summit. The source of that optimism was an agreement to recapitalize Spanish banks in a fashion that did not add to the debt burden of Spain. The deep thinkers in Brussels lead us to believe that the money for Spain’s banks was coming from the ESM or EFSF. That there would be a “true” transfer of risk out of the country.
Unfortunately, those technocrats lied to us a week ago. Seven days later we find that there is no transfer of risk at all.
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Not only will Spain be on the hook for any investments made in Spanish banks by either the EFSF or ESM (via a state guarantee), but the actual guarantee has been structured such that the liability will not be recorded on Spain’s books as a debt.
The question of whether the Spanish bank bailout subordinates existing bond holders has now been answered. The bondholder are sitting in the back of the bus. And they wont like being there.
Do those technocrats think the markets are stupid, and won't notice this sham?
As it turns out, the much-touted Spanish bailout is more of the same crap we have been seeing from the EU leaders for the past two years. They are unable to realize a loss, their only response is to kick the same can a bit father down the road. I’m surprised that the change in terms for Spain's bank bailout has not gotten more attention in the press this weekend. I think it will be a topic of conversation next week.
If I’m right, the Europe story goes to Red Alert status for the balance of the month. Once again, I don’t think this is “priced in”.
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All I know is that long term charts of the SP show around a 80% chance of complete total destruction on the way. Just based on certain patterns that play out a high% of the time. Of course the Fed's technicians see it also, they have won the small games but the overall picture is still the same. At one time I thought it was impossible to see or predict future events on these charts but after years of study I now know it's entirely possible and in fact happens all the time. The plotted outcome is SP 450. Which btw many laugh at. Really? Weren't we at 666 not long ago? What would've happened without massive intervention? Can they keep that up.......I doubt it. Time will tell.
Enough people and now algos follow the charts to make them real even if they had no underlying basis. People laugh at S&P 450 because of the Bernanke put yet if/when the put it called into question that massive psychological BTFD support will vanish like the morning mist. I'm not sure what will make people doubt Bernanke's magic but it's likely to happen since HE HAS NO MAGIC. When is always the big question. Thank you Bruce for winging an opinion on the 'when'. Even if you're wrong it gives food for thought and is so much better than the "it's coming someday soon posts".
Bernanke has no magic but he does have power. He has the unlimited power to issue FRNs or their electronic equivalent. If he wanted to, he could declare a permanent bid under the S&P 500.
Yea, well, a couple of weeks of $50 per gallon gas would have Ben's head on a pike.
What's your opinion of what happens to BB if S&P is at 450 for a couple of weeks? Just wondering the difference?
That'll not happen...Bernank will backfill long before that.....or pension funds go big boom.,,,and all else will go bigger boom too
What other choice does the SNB have in regards to the CHF peg?
LOL. Is it possible that we've reached a tipping point now that the futility of currency wars is in plain sight even for the most blind?
What capital? It'll just be another episode of Ice-9 dropped in the credit market which will again induce the banking racket into another PR campaign to placate the few people left who are still paying attention for at least a little longer.
What other choice does the SNB have in regards to the CHF peg?
The SNB could weaken their currency by buying back the gold they sold, with outright QE.
To get around IMF restrictions, they could mark it as an asset rather than explicitly pegging their currency to it.
Though why the fuck anyone would genuinely want to be part of the IMF is beyond me. Oh, yeah, that's right, I remember now - the IMF's handy to have on your side if you want to rescue your banking sector after it's run out of muppets to rape.
Thanks Bruce. Excellent overview. It seems EURUSD at parity should crush SP, but SP should already be well below 1100 and is floated up by rather visible hand.
Some unsolicited advice to Thomas Jordan: stop the peg policy and have someone else's wife on behalf of your nation short the shit out of your currency and right into gold ;) It will happen sooner or later, and it won't be a gradual uh correction.