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Credit Doesn't Care What the FOMC Says: The "Recovery" That Never Was Is Over

Tyler Durden's picture




 

Authored by Alhambra Partners' Jeffrey Snider, via Contra Corner blog,

The stock market takes off in holiday celebration of the FOMC being even less clear than it really has been in some time; perhaps going all the way back to Alan Greenspan’s intentional mush. Equity “investors” are happy that the Fed may be happy about the economy, even though there is nothing in actual markets (outside of stocks) to suggest that anything the Fed proclaims carries even the slightest validity. Growth and inflation are going to be good, so the philosopher kings in DC say for the sixth year in a row, this time enough to end ZIRP (after almost seven years) and get to tightening.

Axiomatically, ambiguity is not certainty but the degree to which ambiguous language is taken as a comfortable conviction shows exactly the game being played here. Stock investors expected this exact vagueness and since the received abstruseness was as expected it was certainly reassuring to bid equity prices. This is how far rational expectations theory has devolved.

It is very curious, then, to see vastly larger markets unperturbed by anything that occurred at the FOMC this week. Sure, nominal yields rose in the treasury market a bit, though only slightly after an immense buying spree. Overall there was a distinct lack of distinction, and thus positive conviction, in credit and funding. The eurodollar market is only slightly tighter in the shorter tenors to where it was before the FOMC’s “radical” and “revolutionary” semantical modification.

ABOOK Dec 2014 Considerable Period Eurodollars

The eurodollar market’s companion forward rate gauge, interest rate swaps, were also less than impressed by so much mushiness. There is nothing but more of the same here:

ABOOK Dec 2014 Considerable Period Swaps

Given how much noise has been made over this last policy statement, you would think there would at least be a small imprint somewhere. Swap spreads have settled into this spread level going back to the first “dollar” tightening back in late June/early July which coincided with exactly zero FOMC policy shifts. Now, as the FOMC proclaims greater economic accomplishment, spreads remain undisturbed instead of decompressing still further as in stock-based rapture.

That was the case, though again not drawn out by policy language, in certainly the 5-year swap spread that had finally broken above 20 bps for the first time in over a year in late September and early October. However, the end of that trend on October 8 suggests reasoning there had nothing to do with economic confidence and everything to do with hedging against growing illiquidity and downright desperation. The timing of that and the following durability of the flatline trend in swap spreads more than suggests little anxiety about what the Fed might do and instead a concern about the world as it really is.

Again, we see that the illiquidity prior to October 15 was rather narrowly focused, and instead of being the end of the episode contributing to stability it has spread far and wide since then. That is particularly true of December, as there have been no shortage of global instability for stock markets to ignore.

ABOOK Dec 2014 Considerable Period Breakevens ShortABOOK Dec 2014 Considerable Period Breakevens Longer

The yield curve collapse (and breakdown of “inflation” expectations) in December is strikingly reminiscent of the tumble in Brazilian reals and even the collapse of the Russian ruble. The treasury curve is plumbing new depths of flattening in a trend that is totally contrary to the end of “considerable period” consideration. The bearishness in credit and funding did not just start this month; not even back to October or June. This is a trend that has been in place for one day shy of thirteen months. That “resilience” plus the unbelievable size of these moves argue that shifting from “considerable period” is totally and completely irrelevant.

ABOOK Dec 2014 Considerable Period 30s

The latest iteration of credit revulsion on October 15, 2014, is shaping up in retrospect much like November 20, 2013. The first “event” back in November last year showed that exiting from QE-driven positions and capacities was going to be fraught with extreme difficulty, to the point, as expressed in the change in yield curve shape going back to that day, that it would be impossible without incurring significant disorder. Thus, the illiquidity that began in June 2014 was really confirmation of that, leading up to the liquidity system deformities that finally broke open on October 15.

Try as they might to address it differently, the commonality of the eurodollar standard here is actually the erasure of central banks’ last stand. Looking at the charts for the UST curve (below) two aspects really stand out – that the curve had actually drawn steeper starting with Mario Draghi’s July 2012 “promise” to save the euro (followed not long after by Bernanke’s entrant into the “last ditch” efforts) and that “market” expression of economic “normalcy” along those lines has not just been erased but rather completely obliterated these past thirteen months.

ABOOK Dec 2014 Considerable Period 5s10sABOOK Dec 2014 Considerable Period 5s30s

So the difference between the credit reaction in May 2013 and that of March 2014, as I keep harping on, was not only that central bank exits would eventually be messy due in full part to the artificial approach which artificially pulled resources in artificially inefficient directions (especially liquidity capacity), but, more importantly, that there was and is no true economic recovery there to cushion the blow. In other words, October 15 and the behavior of the funding markets (the “dollar”) thereafter combines both aspects of monetary failure; that exits are messy and there is no sustainable or actual economic progress to successfully absorb either withdrawal or comprehensive and global recognition of this monetary miscarriage.

Thus, not only has the treasury curve flattening completely unwound any past optimism about what really amounted to nothing more than faith in monetary efficacy (steepening in 2012 and most of 2013), it has gone so far beyond as to revisit 2009 and even 2008. Central banks had only one more shot at it back in 2012 and credit markets have figured out that not only did it fail to work on the real economy, the distortions they created were actually harmful and thus there is nothing really left to support any of this.

The recovery is over because it never was. The Fed is now kamikaze and stuck on this course, having painted itself into a smaller and smaller corner in which to operate. Their only hope is that their confidence turns into your confidence, but credit and funding markets are impenetrable at this moment to such utter nonsense. For many places, it is already “look out below.”

 

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Sat, 12/20/2014 - 17:51 | 5576087 kowalli
kowalli's picture

high oil price - high inflation, low oil price -dead end for credits...

Sat, 12/20/2014 - 18:29 | 5576150 max2205
max2205's picture

We ZIRP'd some folks

Sat, 12/20/2014 - 18:35 | 5576157 I am more equal...
I am more equal than others's picture

 

 

Got greased with a ZIRP gun.

 

Sat, 12/20/2014 - 21:02 | 5576641 Debt-Is-Not-Money
Debt-Is-Not-Money's picture

Yep, and their fixin' to get NIRPED!

Sun, 12/21/2014 - 11:56 | 5577989 El Oregonian
El Oregonian's picture

NIRPED, or NIPPED?

(as in a veterinarian  visit)

Sun, 12/21/2014 - 15:32 | 5578617 Jumbotron
Jumbotron's picture

That's a fine scalpel line looking for a difference.

Sat, 12/20/2014 - 18:03 | 5576108 Carpenter1
Carpenter1's picture

Canada's business paper, "The Globe and Mail," had a piece in the investing section recommending people to "consider a contrarian investing style, buy energy stocks."

And because most Canadians are still delirious with real estate and believe whatever the state tells them, they took this advice and are buying tarsands companies.

Their losses will be epic.

Sat, 12/20/2014 - 18:14 | 5576121 Consuelo
Consuelo's picture

"Their only hope is that their confidence turns into your confidence, but credit and funding markets are impenetrable at this moment to such utter nonsense."

"If only you knew, the Power of the Dark Side..."

 

 

Sat, 12/20/2014 - 18:20 | 5576135 alexmark2013
alexmark2013's picture
Those Who Predicted the Economic Crisis now Giving New Warnings http://investmentwatchblog.com/those-who-predicted-the-economic-crisis-now-giving-new-warnings/
Sun, 12/21/2014 - 10:19 | 5577807 breadonwaters
breadonwaters's picture

Well Done .... facinating to see the talking heads laugh at Peter Schiff.  In the land of the blind, the man with one eye is legion.

 

It's a Big Club and you ain't in it

Sat, 12/20/2014 - 18:20 | 5576137 Seasmoke
Seasmoke's picture

OT...2 BROOKLYN COPS SHOT AND KILLED EXECUTION STYLE......THIS IS SOMETHING THAT IS NOT OVER !!!!

Sat, 12/20/2014 - 18:28 | 5576144 negative rates
negative rates's picture

Sounds to me like it's just beginning.

Sat, 12/20/2014 - 18:38 | 5576163 kareninca
kareninca's picture

This sort of article is just not the same without fonzanoon commenenting.

BTW, is this the same fonzanoon?

http://imgur.com/user/fonzanoon/index/newest

I would guess so.

Sat, 12/20/2014 - 20:43 | 5576582 ArtOfLife
ArtOfLife's picture

Real currency futures have curves.

Sat, 12/20/2014 - 22:38 | 5576953 Manipuflation
Manipuflation's picture

I have never said that I was a nice guy but I have always been fair and honest.  I only expect the same back to me and that is all that I ever asked but that is not what we get.  Ever.  I have had many years to think about this and I know exactly what I am going to do and the bankers and politicians won't like it.  You see, I have spent years divesting myself.  I think I am approaching the end of what assets can be seized.  

Some folks are like, "Wow that is mean".  So what?  I stood for Ron Paul twice and stood on my own dime.  No one wanted to listen.  Fine, I will just buy a shit ton of PM's on credit and I won't pay them back.  I won't leave anything titled to me.  Some folks think they need title to everything and I say I don't.  I want my money back for all of the taxes I have paid for the 2008 bailout and hence.  

I am going Nomad.  Not only that there are US born children involved and a Russian mother citizen.  What will they do about that?  You have some serious legal issues to deal with there.  Not only that you have with Russia.  Now it is international.  What will you take from me?  

I like scrambled eggs for breakfast.           

Sun, 12/21/2014 - 03:17 | 5577488 honestann
honestann's picture

Yes... completely evade the system.  Don't "register" ownership.  Your stuff is yours because you physically hold onto it (or better yet, hid it), and nobody else can demonstrate they own it.  Period.

Don't own land "officially", because they fleece you every year (protection racket).

Your plan is excellent... especially if when you finally cut the cord, you also get outta dodge (in a way that nobody can figure out where you went).  Never again show ID... wherever you go.  To hell with them.  Let the predators suck vacuum.

Sat, 12/20/2014 - 22:40 | 5576961 robnume
robnume's picture

Yup, heard that credit card companies are charging as much as 28% interest these days. WTF? That interest rate used to be called "usury." Thank CONgress for yet another fucking sell out.

Sun, 12/21/2014 - 04:30 | 5577528 AbbeBrel
AbbeBrel's picture

Yup Hi-Yield (aka "Junk" and nope I am NOT talking about the stuff in the Dollar store) had a 10% off pre-Holiday sale on, for example, DHY:

 

https://www.google.com/finance?q=NYSEMKT%3ADHY&ei=FYOWVOGDHuzXwAOp5oGQBA  (hit 3m - for 3 months)

 

Credit Suisse High Yield Bond Fund (ETF)

If it hits a buck again like in 2008 - for a 66.6% off sale, then I just might pick me up some.   And a couple of fire extinguishers - as it will truly be a "Fire Sale"...

Sun, 12/21/2014 - 05:34 | 5577569 GreatUncle
GreatUncle's picture

Ha,ha tightening load of bollocks.

The 80 billion cut in MOM QE was the tightening and the money flow has already started to slow.

Sun, 12/21/2014 - 11:17 | 5577914 Ewtman
Ewtman's picture

Credit bubbles are bursting all over the world. But none will be greater that the U..S. debt collapse...

 

http://www.globaldeflationnews.com/anatomy-of-a-bubble-how-the-federal-r...

 

Do NOT follow this link or you will be banned from the site!