In our busy days, it is all too easy to fall into the trap of hearing (and believing) the latest headline and its associated spin. For some reason, three minute videos can quickly and easily remove these 'spins' without the need for a PhD. In today's 3:06 un-spin, the broken-window-fallacy is addressed as the seen versus unseen impact of the idiocy of a broken-window's (or war, or destroying homes, or...) positive impact on an economy is explained in cartoon style. The sad fact is that this fallacy remains at the core of mainstream policy-making and as the video notes, the government's 'creation' of jobs via public works programs (or any number of stimulus-driven enterprises) it does so at the expense of the tax-payer via higher taxes or inflation and that 'spending' which would have otherwise gone to new fridges or iPads is removed and this does nothing to significantly improve aggregate demand (should there be such an amorphous thing) and in fact (as we recently noted here and here) leaves us more and more dependent on the state for corporate profit margins leaving any organic growth a dim and distant memory.
The Deepwater Horizon incident demonstrated that most of the oil left is deep offshore or in other locations difficult to reach. Moreover, to obtain the oil remaining in currently producing reservoirs requires additional equipment and technology that comes at a higher price in both capital and energy. In this regard, the physical limitations on producing ever-increasing quantities of oil are highlighted, as well as the possibility of the peak of production occurring this decade. The economics of oil supply and demand are also briefly discussed, showing why the available supply is basically fixed in the short to medium term. Also, an alarm bell for economic recessions is raised when energy takes a disproportionate amount of total consumer expenditures. In this context, risk mitigation practices in government and business are called for. As for the former, early education of the citizenry about the risk of economic contraction is a prudent policy to minimize potential future social discord. As for the latter, all business operations should be examined with the aim of building in resilience and preparing for a scenario in which capital and energy are much more expensive than in the business-as-usual one.
While the S&P closed lower for the day, the dramatic save as ES (the S&P 500 e-mini) hit 1399.5 (again) pushed it all the way back to the safety of VWAP and perfectly unchanged from pre-FOMC news. Meanwhile, Gold and Silver lost around 2%, Treasuries snapped 13-15bps higher in yield and the USD ripped 0.6% higher closing pretty much at their extreme levels of the day. AAPL was unphased as the rest of the world appeared to sell any and everything on news of no more Fed liquidity in the short-term as the stock clung to its VWAP ending with new all-time highs once again. VIX, which managed to surge over 16.5% once again - above yesterday's highs - recovered all the way back to practically unchanged by the close (outperforming the small loss in stocks on the day). With Treasury yields and the USD back at one-week highs and stocks just 0.5% off their multi-year highs, it looked for a moment like equities were going to reconnect with credit's much less sanguine perspective - and indeed they covered half the difference at one point - but by the close HY and IG credit remains unchanged from Friday 3/23 while the S&P is up over 2% from then. Volume was average today but concentrated in the sell-off period of the day but we note that average trade size was very near the lowest of the year (suggesting algos using small lots to tickle us up to VWAP for the close) and some larger blocks going thru in the last few minutes as we peered above VWAP - combined with the shrug from credit, significant weakness in the major US financials, and unwinds in every other asset class - make us nervous for unhedged equity longs here - especially with European weakness now a trend and not a one-off.
Jan Hatzius was on TV earlier, stating he expects a whisper of Twist extension in today's minutes, as per Hilsenrath. He did not get what he wanted. His take: it is now just deferred to June. To wit: "March FOMC minutes make easing at April meeting unlikely without substantial deterioration in the outlook. However, an announcement of additional asset purchases remains our baseline, with June the most likely timing at this point."
...For those confused why the market is reacting like a stung bee to today's announcement that contrary to Jan Hatzius' expectations, Twist may not be extended (at least not before we get a 20% market correction), here is where all, repeat all, market "growth" has come from in the past three months. Hint: $2 trillion in central bank easy money. Because the ECB is now shooting blanks, the Fed will find it difficult to ease so close to the debt ceiling farce, and the BOJ is irrelevant. And if the spigot is shut off, watch out below.
Equities tumbled but Gold/Silver and Treasuries were the hardest hit as the potential reality of lower chance of more massive LSAPs was evident in the FOMC minutes. As we have argued for weeks now, the Fed is cornered and is unable to enact QE3 without a much more significant drop in markets and implicitly the economy. We assume now that the sell-side will refocus its efforts on telling us all just how bad the economic picture really is...
So much for the Hatzius and Hilsenrath prognostications. Headlines coming in:
- FOMC SAW NO NEED TO EASE ANEW UNLESS GROWTH SLOWS, MINUTES SHOW
- MOST FOMC PARTICIPANTS SAW `LITTLE EVIDENCE OF COST PRESSURES
- FOMC PARTICIPANTS SAID LABOR MARKET CONDITIONS HAD IMPROVED
- MOST FOMC PARTICIPANTS EXPECTED INFLATION RATE AT 2% OR LESS
- MANY FOMC PARTICIPANTS SAW `EASED' STRAINS IN GLOBAL MARKETS
- MOST ON FOMC SAW TEMPORARY IMPACT FROM RISING OIL, GAS PRICES
- FOMC SAID SIGNIFICANT OUTLOOK CHANGE COULD ALTER 2014 RATE PLAN
Apparently $4 gas has an impact.
Back in the start of March, before the vertical ascent part of the parabolic move in Apple stock truly took off, we pointed out that out of nowhere, Dan Loeb, long well-known for being quite persuasive in getting his hedge fund friends to piggyback on his ideas, had made the iPad maker his Top 5th position as of the end of February, despite not owning one share two months prior. Well as of the end of March, per the firm's just released update of its top positions, Apple is no longer in the Top 5, even as it was his 2nd best performer of the month on March 15. Has Loeb, acutely aware of such things as blow off tops and manias, merely trimmed his position, or has he cut his exposure entirely? As a reminder, this wont be the first time Loeb "rented in" and out of the AAPL hedge fund hotel, having done so most recently in Q2 of 2011. And if Third Point is gone, are Loeb's idea dinner buddies out as well?
Anyone who hasn’t sensed a mood change in this country since the 2008 financial meltdown is either ignorant or in denial. Millions of Americans fall into one of these categories, but many people realize something has changed – and not for the better. The sense of pure financial panic that existed during September and October of 2008 had not been seen since the dark days of 1929. Our leaders used the initial terror and fear to ram through TARP and stimulus packages that rewarded the perpetrators of the financial collapse rather than helping the middle class who lost 8 million jobs, destroyed by Wall Street criminality. The stock market plunged by 57% from its 2007 high by March 2009. What has happened since September 2008 has set the stage for the next downward leg in this Crisis. The rich and powerful have pulled out all the stops and saved themselves at the expense of the many. Despite overwhelming proof of unabashed mortgage fraud, rating agency bribery, document forgery on a grand scale and insider trading based on non-public information, the brazen audacity of Wall Street oligarchs is reminiscent of the late stages of the Roman Empire.
Six centuries ago, when London and Paris were irrelevant, plague-infested backwaters, and New York City wasn’t even on the map, the greatest city in the world was Nanjing– the capital of the Great Ming. At the time, Nanjing was not only the most populous city on the planet, it was also the pinnacle of civilization. Art, science, technology, and commerce flourished in the Ming Dynasty’s liberalized economy, which constituted a full 31% of global GDP at the time. (By comparison, the US economy is roughly 25% of global GDP today…) Taxes were low, the currency was strong, and overseas trade thrived. For a time, Nanjing truly was the center of the world. Over the next several hundred years, the tide shifted. The Ming Dynasty fell, and power was transferred further west to the Ottoman Empire, and eventually to Europe which had finally emerged from the Dark Ages as the most advanced civilization on Earth... This phenomenon has lasted for several hundred years now… but as history has shown repeatedly, power centers frequently shift. The world is now witnessing yet another transition of power, this time from west to east, as the US-led western hierarchy suffocates within its own debt-laden Keynesian fiat bubble.
As Dick Bove opines and talking heads explain the money-on-the-sidelines and why AAPL is going to one cajillion, the major US financials have quietly been notably lagging the performance of the broad equity markets since yesterday's European equity close. Whether this is a catch up to credit's recent underperformance or simply a recognition that nothing in Europe is solved and the contagion is as real as ever is unclear but for now the buy-of-a-lifetime in Morgan Stanley is at a 3% 'discount' to yesterday's price...
Today brings the release of the Minutes of the March 13th FOMC meeting. As Steven Englander of Citi notes today, since the tone of the Minutes reflects the breadth of opinion among FOMC members the risk is that it reads somewhat more hawkish than recent comments by Chairman Bernanke. Persistent hawkishness from other FOMC members could foster the perception that Bernanke will face greater resistance in any push to introduce additional accommodation which could have a negative impact on risk appetite and lend support to USD. This would be particularly true if mentions of possible further easing by FOMC doves are few and far between. Given that interest rate expectations have declined over the past two weeks since the series of speeches by Chairman Bernanke, there does appear to be some room for investors to price in more Fed hawkishness. As reflected in implied yields for December 2013 eurodollar futures, interest rate expectations have dropped nearly 20 bps since March 20th. However, this drop in yields only reverses part of the rise seen in the wake of the Chairman’s earlier Senate testimony and the release of the FOMC statement, so ultimately scope for a rebound should not be open ended. Coupled with the fact that Bernanke’s comments are more recent than March FOMC meeting, this convinces us that risk return in chasing any bout of USD strength upon the release is unattractive.
Because as everyone knows, debt is wealth. And as everyone knows even better, it is much better to go 1000 days without any budget whatsoever. Finally, what is truly best in life is to have your own budget, Mr. President, get voted down 414-0 in Congress, even as Congress (i.e., the body representing the US population) passes the Ryan budget.