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JPMorgan: "Fed Stimulus Inflated Prices Of Financial Assets.... Removal Could Create Tail Event"
Then: Risk-On/Risk-Off. JPMorgan's Marko Kolanovic head of Equity Derivatives Strategy explains:
Over the last 5 years, Treasuries and Equities had strong negative correlation. This was the risk-on / risk-off (RORO regime) in which Treasuries were the most broadly used ‘safe haven’ asset. In the RORO regime, investors would hold treasuries and sell them to buy risky assets (and vice versa) while being reassured that Fed will keep the price of Treasuries supported. While we are still on average in a RORO regime, the bond-equity correlation started significantly weakening due to increased risk of Fed tapering and a bond selloff. The effect of the Fed reducing the stimulus could result in lower bond prices as well as lower prices of stocks, commodities and other risky assets whose prices were inflated by the Fed’s stimulus.
Over the past month, in several instances bonds and stocks moved together as investors re-assessed the probability of early tapering. Figure 1 below shows equity-bond correlation (calculated from high frequency intraday data). Correlation turned positive on May 9, 22, and 31 and most recently over the past few days. May 9th and 31st brought better than expected macro data (jobless claims, consumer confidence and Chicago PMI). Ironically, positive data caused equities and bonds to trade lower on increased probability of tapering (good data were bad for stocks). Similarly, on May 22nd, bonds and stocks sold off as Bernanke indicated the possibility of tapering over the next few meetings.
And Now: the "Fed Regime"
A byproduct of these new bond-equity dynamics is that USD is losing its status as a ‘risk off’ currency. As expectations of more (less) stimulus pushes up (down) treasuries and US stocks (both USD denominated), resulting currency flows are weakening the historical negative USD-Equity correlation. Historically, USD had strong negative correlation to equities (i.e. EUR and EM currencies had a positive correlation to equities). This recent relationship is now undermined as treasuries are losing their appeal as a safety asset. This weakening of EM FX and EUR correlation to the S&P 500 (Figure 2) was also helped by investors putting money in US stocks, while avoiding European and Emerging markets in the last leg of market rally.
Fears of Fed tapering the massive QE program is now changing bond-equity correlation from a RORO regime towards a ‘Fed Model’ regime (coincidentally, the name ‘Fed Model’ was crafted in 90s long before invention of quantitative easing). We do not think equity-rate correlation will fully revert back to the ‘Fed Model’ regime, but the recent spikes in rate-equity correlation are worrying signs. Recent bouts of positive correlation of equities, bonds and commodities, suggest that the Fed’s stimulus inflated prices of a broad range of financial assets, and removal of the stimulus could create a tail event in which prices of all assets could go down. While it is expected that the Fed will try to avoid such a scenario by maintaining an appropriate level of stimulus, in the absence of more robust growth, this may turn out to be a difficult task (akin to driving a car without brakes). On this account, we expect more volatility in H2 as compared to the first part of the year. To reduce risk of a bond and equity tail event, investors could diversify ‘safe haven’ assets away from treasuries and into other assets that are at lower risk in case of tapering. For instance investors could increase allocations to cash or Equity Put options.
Helpful. It also appears that Marko and Tom Lee, who sees nothing but smooth sailing from here until S&P 2,000, don't talk much.
And just so the message of JPM's derivatives group is clear, they look at the unprecedented (and previously documented) surge in NYSE margin debt, which has risen at the fastest pace ever so far in 2013, and analyze the empirical evidence of what happens after such a radid move. The result is below:
Last month, NYSE published April data on aggregate debt balances in stock margin accounts. This measure shows how much funds were borrowed to purchase securities, and it reached all time high of $384bn. Net margin debt (calculated as a difference of debt in margin accounts and all credit balances) also reached a high level of $106bn, and the pace of net margin debt increase YTD ($87bn) was the highest on record. We have been asked whether this increase in leverage is a sign of an impending market selloff. To analyze the relationship between S&P 500 prices and margin debt we look at their historical levels over the last 15 years. Figure 7 shows a strong correlation between S&P 500 and NYSE net margin debit. Positive correlation between the S&P 500 and net margin debt indicates that clients tend to finance a fraction of their equity exposure with margin debt. We also note that peaks in margin debt are usually followed with a sharp market correction. However, this on its own does not imply that high margin debt leads to market correction (given the positive correlation of net margin debt and S&P 500, highs in margin debt coincide with highs in S&P 500).
To test for a causal relationship we looked at the changes in net margin debt against S&P 500 performance 3, 6 and 9 months afterwards. Figure 8 shows that large increases of net margin debt are indeed on average followed by weak equity returns. Note that the YTD increase of margin debt is the highest on record, as indicated by the arrow.
Another test we performed is to look at levels of margin debt normalized by the level of the S&P 500. Dividing margin debt by the level of the S&P 500 may give a more accurate measure of leverage (by remove the bias coming from correlation of S&P 500 and margin debt levels).
Figure 9 shows the ratio of margin debt to S&P 500 (red) as well as ratio of net margin debt to S&P 500 (blue). One can see that these normalized measures of leverage peaked prior to the tech bubble burst, in H2 2007 and H1 2008, and in H1 of 2011 – in all cases ahead of significant market corrections. While these are effectively only three data points and hence do not amount to a reliable statistical sample, we think that the quick increase of net margin debt, and high ratio of margin debt to S&P 500 do point to an increased probability of a market correction and volatility increase in the second half of the year.
But don't worry. The Fed is on top of it. All of it.
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No shit! People pay for this 'analysis'?
There are a lot of suckers to be had out there.
Could create a tail event or create a mushroom cloud?
It's priced in.
I hope Bernanke hasn’t shipped all his barbarous “ tradition” for when really bad things happen to his tail to the Chinese already.
Oh, wait.. I know..
He sent the Chinese all of Europe’s tradition that he had hostage for swaps against those first two LTRO’s.
Exactly. JPM is now stating the obvious? WTF? These paper-pushers continue extracting real wealth while adding nothing of real value to the economy. Roll the motherfucking guillotines and clean house america!
JPM is stating the obvious and over the weekend the obvious was stated about DB. Looks like they have their turkey picked out, and it's a big one.
Exactly! Jamie must have thought that up all by his-self.
You can't make this shit up...that has to be the most obvious statement those dipshits have made in recent years. Accurate too....very strange.
No. It's free. And what's wrong with it? I think the rise in margin debt is the most important future indicator for the stock indexes that exists; and Tyler deserves credit for pointing it out here, previously. The Bold type conclusion that a slide and correction is due is probably right; and could savve someone a lot of grief if they acted accordingly.
What's wrong with it? It's pointing out what is painfully obvious to 99.9% of the readers here. My comment isn't a rap on Tyler. It's a rap on the Morgue and the fact people pay for their advice.
Whether you like to hear it or not - if you traded solely on what is "obvious to 99.9% of the readers here," you would have busted more often than Sandusky at Disney World. Literally, you would have lost money the entire time the market was grinding up and "obviously" due for a correction.
I mean, I'm just guessing...
It's not like I've, err, lost a bunch of money shorting this market on the way up...
Gotta run!
There are people who would not find the actual arrival of the actual four horsemen of the apocalypse actionable without a paid-for recommendation they could point to later to cover their ass in the case where it turned out to be only the four hamsters of the apocalypse.
I'm betting on the four unicorns of the apocalypse.
pods
Glad I read the prior comments for once, but I was gonna add.....no fuckin' shit!
'Let's see....if we prop up all banks and markets on nothing but fake money, then the fake money stops, there might be some consequences'?
No WAY!
Fuck you Bernanke
JPig is short DB. Dog eat dog.
I'm surprised JP Morgan let this horse out of the stable.
Tyler said: "...surge in NYSE margin debt, which has risen at the fastest pace ever so far in 2013, and analyze the empirical evidence of what happens after such a radid move."
I'm sure you meant what happens after such a "rapid" move, or perhaps even "rabid" move. ;-)
That margin debt chart is a doozy.
C'mon Ben, Taper!
(good data were bad for stocks)
Sums up the new inverted normal where good means bad.
We need to legalize lynching since anything short of that beside full out collapse is not going undo the no means yes inverted nature of the new normal.
You remember "opposite day"?
This is "opposite decade"!
bad is good, good is good, all is burrish! raff out roud for global Abenomics
Golly gee wilikers, they sure have some really sharp, smart cookies working at JP Morgan...
Now hold on a second. Doesn't JPM have 57 different people on TV 24 hours a day screaming buy buy buy?
fuck u jpm.
are these assholes just waking up after having been in a coma for the past few years?
no shit assets are inflated, and by inflated, its not just like 5 -10 percent inflated, these assets are fucking 70 percent or so inflated.
look at companies like jcp, bby, and hpq for example. these companies stocks were free falling, and then qe infinity started, and even these fucking shitty companies stocks are up like over 60 percent from the lows in november, specifically hpq and bby. sickening.
fuck u jamie dimon
Who at the JP Morgue might we wish to be driving a car without brakes?
Breaking!
The Republic Czech prime minister just resigned because his wife spied on 3 people! While Obama spies on hundreds of millions of people... and don't give a fuck.
http://www.voanews.com/content/czech-prime-minister-petr-necas-has-annou...
FFS...
U.S FIGHTER JETS FLEW INTO SYRIAN AIRSPACE THIS EVENING, JORDANIAN ARMY SAYS
6 #US air fighters reportedly violated #Syria airspace 'mistakenly' at 6pm #Damascus time & entered a distance of 5 km!"
Did they also happen to have "accidentally" dropped any cluster bombs on a Damascus suburb?
I guess they're fighter jets cause all the drones are now flying over Detroit, Chicago, LA, New York....
The Czech thing shocked us too in Slovakia, because we don't care about law here same as in the US, but those people behind it flew away the night when police raided others involved in the scandal. The most important persons left before informed by someone from inside..
Sorry JP but "you can't have it both ways." The Fed BURST the bubble in 2008...now you're saying they've successfully reinflated one? really? you're saying QE IS RESPONSIBLE FOR THE ENTIRE RISE IN BOTH EQUITIES AND DEBT? this is completely ludicrous and goes to show why there is barely even a paen to data point in these missives...let alone to the entire economics profession. why not just come clean and say "i'm a rock star trader which means all of you are wrong" and leave it at that? at least then your boss will know how to actually MEASURE your performance! (you do have one of those, don't you?) simply put without stating what QE even is i cannot take this author seriously no matter WHAT his responsibility or title is. by all means...if it's "nothing more than a bunch of money printing bullshit" COME OUT AND SAY IT! (i'm as confused as anybody.) but don't come on-line here and start blabbing about how you know more than the market when everyone in your world understands "the markets lead ALL us and not the other way around." in other words...are you running a derivatives book...or is the derivatives book running you? wasn't "mark to model" what caused the whole banking system to collapse in order to be bailed out the last time? are you telling me "you hedged the entire rally higher" meaning you missed the whole thing.
It's over.
The more reserves increase, the more dollar is rejected.
That's what reserves are, rejected dollars, thus currency swaps between countries
QE was dead in January 2013, otherwise a couple of more years and no more dollar as reserve currency
.
Derivatives collapse sucks money into literally nothing, that's why everything will drop
CDS and other derivatives is where fiat goes to die as these things, much like sovereign debt, can never be claimed/paid. I have been saying this for years. Just more reason to hold physical assets of real value.
reserves held by the banks to recapitalize? why would that be classified as rejected dollars? more like hidden dollars that havent found their way into the economy.......................
banks do not need reserves to lend
"reserves held by the banks to recapitalize?"
Notice the first spike in excess reserves:
2001-08-01 1.203 2001-09-01 19.015 2001-10-01 1.327When did the next spike happen:
2008-08-01 1.875 2008-09-01 59.482Where is it now:
2013-05-01 1863.345"more like hidden dollars that havent found their way into the economy"
Are you telling me the banks just "haven't figured out how to deploy $1.86 trillion dollars"? Seriously Kito?
JPMorgan, you had me at "Over."
... at their San Fran soiree that went awry!
Summary: "Don't do it Ben!"
Translation: Ben Shalom if you even consider tapering you're gonna get disappeared.
+1 "Tail event" was Ben's word to Ron Paul. Hold on to your preciouses, Preciouses.
Are you kidding? Here's the deal: Bernanke doesn't create policy, he follows orders. If he tapers, it's because he was told to taper by his employers (Rothschilds, Rockefellers, Morgans, et al).
Tail Risk is when Gold comes in, recall the discussion with Ron Paul US Senator when the dope said that Gold was not money.
ybm2i
"dope said that Gold was not money."
Slight tangent/play on words, but both dope and gold are money, and dope dealers / oil barons / other traders in real goods are increasingly seeing the USD more as toilet paper than money. When the drug dealers no longer want to fuck with USD, shit starts disintegrating fast (hence the attack on Bitcoin, gold, and other means of non-USD settlement).
Damn, this whole time I thought it was the epic 2% world wide growth that was fueling this miracle.
Tail risk!
"Ben"-d over bitches! And don't forget to lube!
I just threw my chicken bones on the kitchen table and they made the nicest star design.
Obviously that is very bearish for stocks and FX of the former Yugoslav countries.
Don't state the Obvious, Marko!
It's time for OBVIOUSMAN!!
http://www.udel.edu/communication/COMM418/begleite/humor/nonsequitur.htm
Translation: If the market wasn't rigged it might go down, but it is, so it won't.
It won't go down because I have some uvxy dec calls. Market won't let me make money on those so no big problems until 2014.
the banks come out every day saying it might do this and it might do that. what they want is for everyone to make a lot of trades. they don't even care what those trades are. just buy or sell SOMETHING, ANYTHING.
The latest government bullshit...
http://www.mrconservative.com/2013/06/19229-dhs-claims-billions-of-bulle...
DHS Claims Billions of Bullets Purchased Were “Clerical Error”
Hm, then sell them to the public at-cost to recover tax-dollars.
systemically f'ed, yo
Those JPM folks are so amazing, preditced QE would inflate asset prices, sure enough it did, now predicting QE withdrawal will deflate asset prices. How much ya wana bet they're right again?
Of course QE won't stop. If it did, "tail event" would begin to describe the carnage. Wall Street and US govt would collapse.
It's the opposite plan, keep Wall Street and US govt going while economy collapses.
QE will keep going until US dollar collapses ..and keep going after that.
One might ask "Why didn't Zimbabwe stop printing? Why didn't Germany stop printing?"
When govts get desparate for money, printing is what they do. No govt can resist. And they print till the currency is worthless.
oh, heaven forbid if the jew money junkies get their monetary heroin taken away! poor babies. lots of hand waving and graphs pointing out the obvious that we have yet another rigged market. rigged market crony capitalism=FASCISM. NSA is really a giant spy agency for wall st. to gather intel on other small corporations not part of the jew mob, and to collect info on the american people to see how much they know about their criminal government!!!
Fuck the NSA, FBI, CIA, SEC, FEC, EPA, DOJ
fuck you obama, fuck you Holder, fuck you dick cheney you fucking traitor
long live Snowden!!! a true american patriot
This is the NSA and we have intercepted your communication.
Report to the nearest FEMA rehabilitation center. Will you comply?
/OS (Obvious sarc)
A house built in 1969 is now priced at 13X it's initial price. And I live in the middle of bum-fuck Canada.
condomz and spermicie, eh?
- Ned
{and, OT, when are the leafz, senz, habz gonna start playing a little ocky? eh?}
{{actually teasing, awaiting the next beat - down{{{{{{{{{
Canada has a future, unlike the United States.......btw, I have a nice place in Sable River NS
yep, that might cause something, might be from out of under the tail, but not a skoshi' tail event.
- Ned
Who here thinks it's not in the Obowel Movement's best interests to let the market crash? Not the country's best interests, but the Obowel movement's best interests......
"...Recent bouts of positive correlation of equities, bonds and commodities, suggest that the Fed’s stimulus inflated prices of a broad range of financial assets, and removal of the stimulus could create a tail event in which prices of all assets could go down..."
Suggest? Suggest that the stimulus inflated prices?? A tail event? Nobody expected this? Fucking hypocrite! JPM go fuck yourself!
The Morgue is probably getting close to a big margin call on their shorts so they're firing a shot to start the avalanche. Just another way to fleece the muppets.
Coming directly from one the shareholders of the private fed who are rigging markets daily.
Wow, that is some deep insight right there. Let me explain to the JPMs, the market will go down when the FED quits printing and raises rates. Got it?
Heads they win tails we lose. That's why Dimon gets paid the big bucks.
....WTF?, "Could" create "Tail Event". Fucking jaggoffs are rigging the markets, maybe thats not such a good idea? Maybe rigged markets can't last forever? Maybe people don't believe all this bullshit is real?
A derivatives imbecile talking about risk is a contradiction in itself.
In the last 4 years treasuries have rallied when equities fall - why on earth will it be different this time? Where can you earn 3.3% guaranteed (30 yr bond) while everything else is falling in value? Where are pension funds, insurance companies going to put their money when the players stop dancing? What has happened before when QE ends? Treasuries rally.
JPM is long physical metals now.
seems like jpm is scared of ben's tit being pulled out of it's mouth, cry baby cry!
market is up?! #IMPOSSIBRU!
Interesting article. However, there are two problems. One, its JPM so they are more likely to muppet-deceive than share anything useful into the public domain. Two, its a bit like betting on the duel in Scaramanga's maze of mirrors. If you think Scaramanga's gonna win as he built the bloody thing and its his home turf you're hopelessly overthinking it - he's up against James Bond for crying out loud. So, those without 'divine help' (nudge nudge) gonna lose - stocks will fall but not enough to benefit put holders, bonds will rise but not enough to send Japanese buyers elsewhere.