Perhaps there is a reason why Morgan Stanley is 'giving up' on its fixed income business. It seems, yet again Morgan Stanley has hired an ex-Goldman Sachs criminal opportunistic trader. Glenn Hadden, the very head of interest rate trading at Morgan Stanley, has been found guilty of engaging in trading that violated CME rules in Treasury futures on December 19th 2008 - while was employed by Goldman Sachs. While Goldman faces a $875,000 slap on the wrist, Hadden, somewhat remarkably will face a mere $80,000 fine and the wonderfully timed (given the summer doldrums) 10-day suspension from trading. Doing God's work wherever they trade... that'll teach him! And now, back to Glenn manipulating buying and selling the 10 Year.
Following Russia's first shipment of S-300 Rockets and the CNN-reported deaths of American and British citizens, it seems the situation in Syria is escalating 'behind-the-scenes' with little attention being paid in general. Whether it is the deaths or not, but according to the FT, the 'war-by-proxy' is growing in numbers as the UK is poised to ship arms to some rebel factions in Syria as soon as this summer. "The precise timing has not yet been finalized and no decision has yet been taken. But we are likely to be ... shipping arms to the rebels by August," one official noted, adding that "the rebels need ammunition, and a lot of it, just to keep fighting." The US had secretly undertaken significant lobbying efforts of EU member states to get the EU arms embargo amended and this week Britain and France forced through that deal opening the door for the supply of weapons. Adding to the angst, Russia's MiG aircraft makers said on Friday that it planned to sign a new agreement to ship at least 10 fighter jets to Syria.
Just three weeks ago we noted Apollo Group's Leon Black's comment that his firm was "selling everything not nailed down," and that he sees "the market is pricey... in our view, priced for perfection." It seems he is not alone in the 'buy-low-sell-high' crowd. If wonderful times are ahead for U.S. financial markets, then why is so much of the smart money heading for the exits? Does it make sense for insiders to be getting out of stocks and real estate if prices are just going to continue to go up?
Is there a better phrase to describe modern government than “a seedy circus which is perpetually in debt?” It is perfect. Government is exhausted. It, like Whipsnade’s circus, is out of resources, ideas and solutions. Government has painted itself into a fiscal and financial corner from which there is no escape. As a result of its profligacy, government is no longer able to sustain itself. That is the real reason for the Fed’s quantitative easing program(s). Taxes and traditional government bond sales no longer provide enough money to run the monster. QE, more properly described as counterfeiting, is a euphemism to disguise the insolvency of the government. Without the Federal Reserve, government would have to pare down dramatically. Government is now a facade, with guns. It has failed miserably at governance and shifted its focus to survival.
"QE detractors... see something quite different. They see QE as not responding to the collapse in the money multiplier but to some extent causing it. In this account QE – and the flatter yield curves that have resulted from it – has itself broken the monetary transmission mechanism, resulting in central banks pushing ever more liquidity on a limper and limper string. In this view, it is not inflation that’s at risk from QE, but rather, the health of the financial system. In this view, instead of central banks waiting for the money multiplier to rebound to old normal levels before QE is tapered or ended, central banks must taper or end QE first to induce the money multiplier and bank lending to increase."
In the 15th century, the highest standard of living in the world belonged to China. Places like Nanjing had reached the pinnacle of civilization with incredibly modern infrastructure, robust economies, substantial international trade, great healthcare, and a rising middle class. If you had told a Chinese merchant at the time that, over the course of the next several hundred years, global primacy would shift to Europe (and a relatively unknown American continent), you would have been laughed at. It was simply unthinkable given how advanced China was over the west. And yet, it happened. Ironically, the tables are turning yet again; in total objectivity, the patient is beyond cure at this point… and the math is quite simple. Nations typically enter this vicious cycle once they start having to borrow money just to pay interest on what they already owe. The US is already way past this point.
While the dollar is pricing in the Taper, stocks are already looking beyond this transitory event, and in line with what happened after the end of QE1, QE2, Operation Twist, and QE3, has started pricing in the 'Untaper'. As an aside, we also we had a monster $5.016 billion POMO today... Though frankly, one glance at the charts below and it is pretty clear what is really driving today's action in stocks - cough JPY cough...
- 550,000 SPY shares
- 10,000 June 2013 eMini futures contracts
- 1,400 Nasdaq 100 futures contracts
- 800 Dow Jones futures contracts
- 350 Russell 2000 futures contracts
- 125 S&P 400 Midcap futures contracts
- 300 Crude Oil futures contracts
- 900 Dollar Index futures contracts
- 800 Gold futures contracts
- 10,000 10yr T-Note futures contracts
- 2,500 5yr T-Note futures contracts
- 3,500 T-Bond futures contracts
- 5,000 Eurodollar futures contracts
- 750 Japanese Yen futures contracts
- 600 Euro futures contracts
When two weeks ago we reported on the core retail sales "beat", we were surprised. Here's why: "Retail sales ex autos were in line with expectations at -0.1%, on expectations of a -0.2% print, but it was the sales number ex-autos and gas which surprised the most, rising 0.6% on expectations of a +0.3% increase, up from a -0.1% decline." We are no longer surprised. Reuters has the answer:
- US APRIL RETAIL SALES EX-AUTOS/GASOLINE REVISED TO +0.2 PCT (PREV +0.6 PCT)
And, as a reminder, the consensus was for a +0.3% print. So instead of a 100% beat relative to consensus, it was a 50% miss. Why did this happen: from the Census Bureau: "retail sales estimates were revised to reflect the introduction of a new sample, new seasonal factors, and results of the 2011 Annual Retail Trade Survey." Of course, the algos who bid stocks up on the flashing read headline of this now outdated and flawed "beat", will certainly go back and sell all the stocks they were otherwise going to buy, since it is now a "miss."
It doesn't get any better than this. For the fifth month in a row, UMich consumer confidence has beaten expectations and its final print at 84.5 for May is the highest in six years. This 'confidence' survey fits with the conference board's exuberance also. We can only assume that it is the one-year high mortgage rates and considerably lower-than-expected income and spending that is driving it? As a gentle reminder, the US consumer was this cock-a-hoop just before the market last topped in Q3 2007 - so we are not sure if it is 'useful' for anyone but a self-aggrandizing anchoring-biased asset-gatherer. Current economic conditions (at Oct 2007 highs) are surging (as are expectations) by their most since Sep 2009. Of course, in perfect 'correlation' with this 'confidence', these consumers decided that May was the first time in a year to cut spending...
So much for all the other diffusion indices, both around the world and in the US, telegraphing manufacturing contraction. Three minutes before its official release, the rumor was that the subscribers had seen a 58.7 print, on expectations of a 50.0 number, and up from 49.0 Sure enough, this is just what happened when the official number hit, leading the Chicago PMI to the highest print since March 2012: a 8 sigma beat to the consensus print and far higher than the biggest forecast. And while last time the plunge in the PMI was bullish for stocks as it meant no Tapering, today the beat is also bullish because it means QE is working, and as a result the stock market has wiped out all earlier losses. Looking at the report, backlogs, deliveries and employment all snapped out of sub 50 contraction, while production soared from 49.9 to a ridiculous 62.7. Even employment soared from 48.7 to 56.9. Amusingly, the only thing that dipped in April was Inventories, down from 40.6 to 40.4.
Sadly, that "something" has nothing to do with the real economy, but it has everything to do with the stock market which is all that matters to the Fed. Presenting the Adjusted Reserves held by Fed banks: it is, logically, at a fresh all time high. This is the low-powered money that due to capital allocation preferences continues to go, every day for the past 4 years, not into the broader economy (blame it on the 2s10s, or the disastrous state of the US consumer who has no desire for loans, or what have you) but straight into the S&P500. Since the full blown launch of QE3 excess bank reserves have grown by $500 billion, or roughly a 30% increase in six months. Which is also the reason why the S&P has correlated not with any actual fundamental data, but only this chart for the past 6 or so months.
Ireland has seen its youth unemployment rate drop for 10 of the last 11 months and has dropped to a 'mere' 26.6% - the lowest since July 2010 - in what is truly the only possible silver lining in today's absolutely dreadful data release. All four of the other PIIGS nations now have broken the dismal Maginot Line of 40% youth unemployment with Italy finally joining the club (Italy 40.5%, Portugal 42.5%, Spain 58.2%, and Greece 62.5%). What is even more concerning is that not only are these rates extremely high but they are accelerating with all four of these dark nations seeing their rates rising faster than in recent months (this was the 2nd fastest rise in Greek youth unemployment ever). Overall, Europe's youth unemployment rate continues to march higher (to 24.4%) having not fallen for 24 months, but it is Spain that is the 'winner' with 41 consecutive months without a drop in youth unemployment. With welfare benefits running dry, and Sweden and Switzerland already running hot, we fear this summer may bring the much-feared unrest so many have been concerned about.
In yet another confirmation that the US consumer continues to get slammed, and is respectively slamming the GDP by spending less, today's April personal spending and personal income both missed expectations, printing flat and declining -0.2% from the March numbers, much as expected following the Q1 spending spree, which means that economic growth in Q2 and onward as a function of consumer spending will only "taper" going forward especially with the delayed impacts of the payroll tax negative effect on spending finally starting to trickle down. What's worse, is that since incomes did not improve in April, the savings rate remained flat at a minuscule 2.5%, or just off the lowest its has been since the start of the Second Great Fed-propped Depression.