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Where Are We Now? And What Does It Mean For The Fed
Via Scotiabank's Guy Haselmann,
The current market environment means that prices of securities can move wildly and to previously unforeseen and unexpected levels. For many, P&L management and financial survival will trump economic valuation. Capital is flowing quickly in a market place rife with compromised market depth. It also follows a multi-year period where the Fed had given the green light to rampant market speculation; thereby, propagating herd-like positions which are in the initial stages of unwind. This will take time. As I have been warning, investors should not underestimate just how low long-dated Treasury yields can fall.
Below is a summary of some facts and thoughts (not a comprehensive list):
The Russian Ruble is the worst performing currency in the world losing about 60% of its value this year. The Norwegian Krone is down 20%. The Turkish Lira hit an all-time low of 2.41 last night.
In dollar terms, the Russian Micex Benchmark Equity Index is down over 30%... this month!!
Russian corporations and banks have an estimated $135 billion of foreign currency debt that needs to be repaid by the end of 2015. With the ruble 60% weaker, refinancing will be monumentally challenging. Defaults will impact banks and investors – the level of contagion is uncertain.
Large intervention in the Ruble currency markets yesterday had little effect. In a desperate move to halt the plummeting Ruble, the Central Bank of the Russian Federation hiked rates from 10.5 to 17%. This also had little immediate impact as the currency is down 10% overnight, a bounce from the lows of down 20%. Capital controls are the likely next step.
Venezuela 5yr CDS is pricing a 97% chance of default.
Greece has (the first round of) a Presidential election tomorrow. A failure to gain 180 votes or a strong showing by Syriza may cause a steep widening of EU periphery spreads currently priced to perfection.
EU periphery rates are at low levels and at historically tight spreads to Germany partially due to expectations of the ECB initiating sovereign QE next months. Again, valuations appear to have this fully priced in. Yet, here are some quotes over night from the Bundesbank President Weidmann:
- *WEIDMANN SAYS DON'T EXPECT QE MIRACLE AS EFFECTS WOULD BE MUTE
- *WEIDMANN SAYS BALANCE-SHEET TARGET NOT SENSIBLE POLICY STRATEGY
- *WEIDMANN SEES `WHOLE ROW' OF ECONOMIC REASONS AGAINST QE
- *WEIDMANN: CURRENT DEVELOPMENTS DON'T WARRANT POLICY RESPONSE
The energy industry is highly-capital intensive. US energy companies have more than $200 billion of junk bonds outstanding, not including large amounts of bank debt. (Our energy analyst Jerod Lenderman wrote a note this morning about the Oil Market)
The FT has a front page article about how plunging crude prices threaten $1 trillion worth of energy projects.
The High in Junk Bonds was in June. The HYG (High Yield ETF) is down 9% since that time and down 4% this month. The high in the S&P was on December 5th. Such divergences have historically acted as a warning sign for equities.
IN CONCLUSION: I could extend the list of bullet points for many more pages, but the overall conclusion that market turmoil and volatility will be here to say has been made.
So, what does this mean for the Fed meeting tomorrow?
I believe the Fed is best served to focus on the domestic economy and not delay the path to policy exit, due to overseas troubles, and foreign economic and political mismanagement. The US economy is improving and showing plenty of signs of normalization. I believe the FOMC should try to instill confidence by acknowledging this domestic economic improvement, while down-playing concerns aboard.
There is never a good time to remove accommodation and waiting may only delay the inevitable, potentially make the ultimate fall-out even worse. The drop in oil is a boon to the US consumer and elevates disposable income.
The Fed should increase its flexibility by removing the forward guidance language, and mitigate that action by adding language that they are watching developments closely, will act accordingly (and that rates will only move slowly, as outlined in my “Sooner, but Slower” note from Oct 23).
So, how should active accounts tactically trade the market until then?
Global capital is moving. Portfolios are adjusting exposures after years of over-extended risk to piggy-back off of central bank stimulus in an attempt to beat peers and benchmarks. The high point of stimulus is behind us. Global central banks followed Fed rates down toward zero and the G-5 provided $13 trillion in QE balance sheet expansion. The arsenal has already been depleted.
US QE has now ended. Forward guidance is likely to end tomorrow and a rate hike looms. BoJ QQE is beginning to be challenged as ineffective. ECB QE promises are also beginning to be questioned. The central bank ‘put’ is now weaker and farther out-of-the-money.
Geo-political and economic uncertainties are high and rising. Portfolios recognize the need to become more conservative and protect against downside risk. Cash equivalents and Treasuries are the clear winners.
As I stated last Monday, “I would not underestimate just how low Treasury yields can fall”, but that is now tactically true until 1:45 PM tomorrow. Since I still expect a hawkish Fed and a removal of the Forward Guidance language, it will be tactically prudent to leg from a long into a flattening trade just in front of the meeting. I believe a hawkish Fed will flatten the curve quite a bit. Much can happen between now and tomorrow afternoon, as market movements will be dictated by positions and safety. At 2:00 PM tomorrow the focus will shift to being all about the Fed.
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Turmoil
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Bitchez
It's a great time to start a garden!
Unemployed? Try WWOOFing!
http://naturecoastpermaculture.com/2014/12/unemployed-try-wwoofing-work/
It means the Fed has run out of death row appeals and should be considering where they want their final resting place to be.
Given Hollywood's habitual foreshadowing of things (false flags) to come (remember X-Files nailing 9/11 in 2000) I'll just leave this here;
https://www.youtube.com/watch?v=qq0ykF2mHgQ
It takes one to recognize one. Psychopaths, in this case.
I remember watching this and explaining to my gal how these things "work." Way to bring it back up as their is certainly turmoil going on.
"It's a great time to start a garden!"
Yup, it's a REALLY bad time to start a Russian pipeline to... anywhere. Except to China, maybe.
As long as the US attacks Russia financially and economically, it will keep driving them into waiting Chinese arms. And as long as that happens, China won't hurt the US.
Timeless Divide & Conquer at its finest. The Chinese got nothing on the real Rulers (dual citizens in NY), it seems. But let's see what happens.
the fed will be all proud of itself, how they kept us from the peril Russia now finds itself in, and they'll brag it up just short of claiming responsibility for their problems, if not publicly than at least privately, among the cronies.
Shouldn't we be talking about ebola right about now?
Ebola after we talk about sunblock 55,000,000, waiting in the wings a "flash" planned accident! As a side note may want to look into some UVA/UVB 96,000,000,000 sun glasses just in case.
Politifact's 2014 lie of the year: EBOLA! Where are Parrotile and Miffed?
No, we shouldn't be talking about ebola right now. Geez, there are much more important things to talk about. Like what Kim Kardashian was wearing when she went out to dinner last night. Come on people! Get with the program.
She was wearing her double extra large booty.
Well, if I were a NY Banker, I'd start celebrating the "Festival of Lights" (aka Hanukka/Chanuka) right about now. This year it's Dec. 16-24.
Egg Nogg all around. They figure that there's lots of it on Putin's face, thanks to the Financial War Groups at the Fed, Pentagram, CYA and GS.
We are at the end of here...
The Consummation of Empire
You can see the Emperor Caniggula, dressed in red on the bridge.
Which comes right before here...
Destruction
That is Lady Liberty, in white, leaping to her death.
http://en.wikipedia.org/wiki/The_Course_of_Empire
looks more like Lady Liberty got pushed
She got tired of being raped, repeatedly.
Some infamous politician once said that "you should lay back and enjoy it." Rape, that is.
It appears to me it is the rapist who said that. Politician, that is.
I saw that .... "Emperor Caniggula"
The deep question relating thereto is: Does he really understand what is happening around him or, is he so distraught with himself, the internal cognitive dissonance so great, the shroud of the office so enveloping, the propaganda of the sycophants so illusory, that he is blind to the reality?
"The deep question relating thereto is: Does he really understand what is happening around him or, is he so distraught with himself, the internal cognitive dissonance so great, the shroud of the office so enveloping, the propaganda of the sycophants so illusory, that he is blind to the reality?"
More like - He doesn't care. He is basically just a puppet. And as such, will be taken great care of..long after she burns.
I still don't understand the POTUS bashing on this or any other site?
He is a tool with specific orders to carry out. Deviate from the plan, get assasinated.
The (admitted) preoccupation with sports/ESPN-type activities along with the teleprompter and the overall 'aloof' (and in many instances, uncultured) nature of his behaviour, lends credibility to your last paragraph, of which I wholeheartedly agree.
Fundamentally transforming America one golf game at a time.
The country hasn't gotten better and neither has his golf game.
"The drop in oil is a boon to the US consumer and elevates disposable income." -- interesting, I wonder how the oil workers will feel about this statement when they lose their jobs?
Yeah, but they don't matter. They live in places like Texas and North Dakoda for gods sake.
But there is some financial risk taken on by Banksters that will be dealt with (bailed out).... It is for the children.
The response I usually get is "this is a tax break for taxpayers".
My response to that is, "even when those same tazpayers have to bailout the banks who may those leverage loans to unprofittable and bankrupt oil producers, good luck with that cognitive dissonance."
The simple truth is, this would be a tax break if defaults and bankrupcies were actually allowed to happen!!!
They are allowing the middle class to go bankrupt.
It doesn't end with a mere BK filing. Oh no.
Banks Ignore Bankruptcy Laws
http://dealbook.nytimes.com/2014/11/12/debts-canceled-by-bankruptcy-stil...
http://crooksandliars.com/2014/11/collection-companies-are-still-collecting
http://jonathanturley.org/2014/11/16/banks-ignore-the-bankruptcy-laws/
If they didn't sire any more idiot offspring and/or *buy* another pick-up truck and another McMansion, they'll be okay.
That is to say, of course, they WON'T be okay.
Hate to say it, but when a person can buy a new crew cab 4x4 Diesel for under 50K, its a good deal.
People spend that much on a bottle of wine.
Until a common rail fuel injector goes out, or single source injector pump then you better have a few bottles of Mouton Rothschild to sell.
US autos the gift that keeps on giving
Oh yea,,, a real necessity for us all!
Oh yes, buy STAWKS instead, hold on, how is 500 shares of Crapple going to launch my boat.
"People spend that much on a bottle of wine."
People? Egotistical sociopaths are included in the group: people. Yes.
Yea, no kidding. Of course that fact does not play in thia narrative.
Joe Sixpack pays $80.00 less a month on gas, he will go right out and blow it on beer and redbull.
Boom! E-con-o-me takes right off!
I wonder how the oil workers will feel about this statement when they lose their jobs?
.....or everyone that has piled into Green energy (with taxpayer funds)...
"I wonder how the oil workers will feel about this statement when they lose their jobs?"
OIL BE BACK!
Moar??
Sum Ting Wong. Kevin, this is no time to be taking a break...
"The US economy is improving and showing plenty of signs of normalization."
Comedy gold, right there.
Hey man, don't look now, someone farted in DC.
http://www.netc.com/
wouldn't that be don't breathe now, or don't sniff now?.....unless they are lighting their farts again....
it's too late for the FED to save the day - ships going down.
"At 2:00 PM tomorrow the focus will shift to being all about the Fed."
'Cause you know it's all about the Fed, about the Fed, about the Fed, no TA.
Well we get a Picture Painted...no mention that Russia is in the Top 20 Holders of US Debt (over $100Billion), plus the Talking Points given to our transparently puppetized MSM would have us believe that OIL is the only thing Russia has ... has anyone Researched this??? Doesn't look like it. I can even use the IMF or Reuters numbers and people would be amazed....geez..and let's get this out of the way, in case you haven't figured it out yet
When you think about I believe most here will agree. The nominations for Pres in 2016 has to be Bush, Clinton. They have to put these two up in order to Protect and Guarantee that Nothing will be done to any of the past Pres.'s for any wrong doing that might show with anyone else holding the Office of Pres. You know the country is so, so ready for someone other than a DEM or REP. Ron Paul would win if he ran as a 3rd Party Candidate...a new Party, something like Party of the People. Imagine a Ron Paul, Elizabeth Warren Ticket...covers both parties, adds a woman, and both despised by the Wall Streeters & NeoCons.Is a good time for a new Party of the People to run in Every Election, Local and Federal .. and they could add many of the brave people that had the guts to speak the Truth these past years..just one example: Paul Craig Roberts, many others
BTW, if things are so bad in Russia how did they do this...again ..last QTR Russua bought 55 Tonnes Gold, makes Germany getting only 5 Tonnes in a whole year of their ow gold back..a problem
=============
Russia, China, India Central Banks Buying More Gold as Oil Prices DropMetal Miner - 12/15/2014 12:59:45 PM
Russia’s central bank bought more than 130 tons of gold ... Following two days of rising prices, the price of Chinese platinum bar dropped 0.4% to CNY 263.00 ($42.47) per gram. The price of US platinum bar held steady at $1,236 per ounce.
"Imagine a Ron Paul, Elizabeth Warren Ticket...covers both parties, adds a woman, and both despised by the Wall Streeters & NeoCons."
Imagine small plane crashes, boating accidents, sudden heart failure etc. if the wrong candidate gets too close to the nomination.
"Imagine a Ron Paul, Elizabeth Warren ticket ... "
Right. Like that makes a lot of sense. A small-government "big L" Libertarian coupled with a big-government statist who has apparently fooled a lot of people here on ZH simply because she is hostile to the Fed.
Look at how low the rate of inflation is priced over the next 5 years.
US 5Y Yield 1.528 1.577 1.571 1.433 -0.049 -3.11% 18:55:56
Tell me how the Fed. raising rates improves that inflation outlook with the 2.0% target they want to achieve?
I blame global warming and Vladimir Putin.
El Nino
"I blame global warming and Vladimir Putin."
What, no Dual Citizens (DC) or Ancient Aliens? Or Aliens in charge of DC, and these in charge of all earth? Just kidding.
The US economy IS consumer driven. However, the consumer is increasingly dependent on extraordinary central bank policy in order to spend. Disposible income for the 90%ers is NOT increasing. The fuel price decline offsets SOME, but hardly ALL of the increasing costs faced by the 90% household as we head into 2015, which will most assuredly bring another round of 15%+ increases in health insurance costs. For a family of 3, that 15% increase equates to $75-170 bucks, which is likely to completely offset monthly fuel savings. And then there is food price inflation, plus continued upward trends in education expenses. So no, disagree that the US economy is recovering. Rather, massive structural issues remain unaddressed. The consumer is increasingly pressured. More consumer credit is have decreasing positive impact on 'GDP'. In my view, the global economy is being pulled into a massive economic black hole. Russia and Greece will be first into the singularity, but Japan is on an inevitable approach. The US is as well, but may yet delay and potentially soften the blow (like only getting hit in the head with a 2 x 4 rather than a 1-inch thick round of steel rebar).
what's the map say ?:
http://www.youtube.com/watch?v=xoM8UcB8tIg