Under widespread NIRP, pensions, annuities, insurers, banks and ultimately all savers will suffer a slow but steady decline in real wealth over time. Just as ZIRP has stuck around since the early 2000’s, NIRP may be here to stay for many years to come. Looking back at how much widespread damage ZIRP has caused since its introduction back in 2002, it’s hard not to expect that negative interest rates will cause even more harm, and at a faster clip. In our view, NIRP represents the death knell for the financial system as we know it today. There are simply too many working parts of the financial industry that are directly impacted by negative rates, and as long as NIRP persists, they will be helplessly stuck suffering from its ill-effects.
Just when we thought we had seen and heard it (and by it we mean lies, innuendo and desperation) all, here comes the one thing that confirms where the ECB, and Europe, is concerned, we ain't ever seen nuthin' yet. According to Bloomberg, the ECB may set secret ceilings on the yields of govt bonds from countries requiring bailout aid, Welt reports, without citing anyone. Note the words "secret" and "without citing anyone" because they really are key. Because it is unclear whether Bild is truly stupid enough to assume that what amounts to a limitless bond purchase operation could remain a secret and not show up on the ECB balance sheet. What it really is, is merely a last step desperation attempt by Mario to keep on talking down bond yields, since a month into his "believe me" speech, the ECB has yet to do anything, let alone secret or not so secret yield caps, let alone Spain demanding a bailout, let alone the ECB even reaching a consensus with Germany and Bundesbank both opposing any incremental money printing. Welt says that the ECB could also set a range for yields, merely another absolutely idiotic "detail" in the ECB's "secret" plan. Supposedly the advantage of a range is that the ECB wouldn’t need to defend a set price at any cost, could tolerate S/T deviations. The (lack of) logic for this measure is that central bankers no longer believe that announcing a ceiling and making it public would be enough to calm markets. But nothing, nothing, can prepare one for what comes next: Secret yield ceilings would only work if they aren’t leaked says Welt. Yup. They said that. This is where blood shoot be shooting out of your nose at escape velocity.
It was the best of times (US equities); it was the worst of times (the world's growth engine - China). HSBC-Markit just announced the Flash PMI for August and it's not pretty - printing at a nine-month low (47.8 vs 49.3 in July). Of course, China's own version remains in the Schrodinger-like >50-expansion state for now but with all 11 sub-indices in this evening's data pointing to weakness, we suspect not even the Chinese can sell that data for much longer. So what next - RRR? Massive stimulus? - don't hold your breath given the recent reverse repos and the already creeping-inflation in food and energy prices. The piece-de-resistance of the data-dump though has to be (in line with Japan's trade data last night) is the New Export Orders slumped to 44.7 - lowest since March 2009 when trade finance collapsed post-Lehman.
In as-comprehensive-an-explanation-as-we-have-seen of the monetary malfeasance and misunderstanding of the standard Keynesian central-banker, Gloom-Boom-Doom's Marc Faber addressed an instutional audience in the Middle East earlier this year. Faber begins by explaining his (correct) view that 'Keynesian' intervention into the free-market or capitalistic society (with fiscal and monetary measures), in order to 'smooth' the business cycle, has in fact created a more violent business cycle - as they attempt to address long-term structural problems with short-term fixes (or bubbles). His lecture expands from his insight that in 1970 not a single investment bank was public - they were all private partnerships (implicitly playing with their own money as opposed to other-people's - dramatically impacting the risk profile in the world) to the notion that central bank money printing (pushing dollars out the door) does have inflationary symptoms - but they do not necessarily have to show up in wages or CPI in the US (think Chinese wage inflation, or commodity price rises, or Aussie housing bubbles). Central bankers can determine the quantity of money but they cannot determine what we do with those USD bills. Must watch.
The evolution of currency systems over the past two centuries, as it turns out, is far more exciting than is usually let on (think political thriller as opposed to economic textbook!). GoldMoney presents, in all its glory, the quixotic history of exchange-rate regimes from 1821 to the present day.
Just over 16 months ago, the NASDAQ did an unusual thing. As the WSJ noted at the time, AAPL, which had reached a 20% weighting in the NASDAQ-100, was rebalanced to 12.3%. This weighting was apparently too much for the index-provider who feared "the tech company's big weighting means that a change in fortune for the maker of iPhones, iPods and iPads has a huge impact on one of the most heavily traded indexes in the market." Since 04/05/11, when that rebalance occurred, AAPL's market cap has doubled, while the NASDAQ-100 is up just under 20% ($627bn versus $3.15tn). With the current weighting of AAPL in the NASDAQ-100 at 19.8%, we wonder what is next - as the WSJ noted at the time, any "rebalancing is likely to kick off waves of trading... as money managers scramble to adjust holdings to reflect the new composition of the index." Interestingly, AAPL has reached 20% of the index twice this year already - which just happened to coincide with significant selling pressure on the stock - will third time be the charm?
In a "new normal" "market" that has long since given up discounting fundamental news, and merely reacts to how any given central planner banker blinks, coughs, sneezes, or otherwise hints on future monetary injection plans at any given moment, it is useful to know the only market players that matter. Courtesy of Guggenheim, they are listed out below - these are no longer the major TBTF banks, Jamie Dimon and Lloyd Blankfein ambitions to rule the world notwithstanding; they are now the world's central banks, whose assets are rapidly approaching their host sovereign GDPs even as their overall leverage is increasing by leaps and bounds on a daily basis, putting such recent Investment Bank overlevered behemoths to shame. It is in this playing field where the price of any one "risk asset" is no longer indicative of anything more than monetary, and in a world in which politicians have long been made obsolete by the central planners, fiscal policies. It also means that capital markets are only whatever the various central bankers want to make them... and nothing else.
The market was not exactly ecstatic at the FOMC minutes but certainly squeezed up off its pre-minutes lows to end very fractionally green (S&P small up, Dow down, NASDAQ up - thanks to AAPL's 2% gain - it's 7th in 3 month). Post-FOMC the QE-on trade was very clear - Treasury yields tumbled, stocks popped, USD weakened, and Gold soared. These were quite significant moves relative to recent ranges: Gold broke above its 200DMA - back to early May highs; Treasury yields dropped 10bps - biggest plunge in rates since start of June (as it bounces off its 200DMA). On the week, the NASDAQ is the only major US index in the green (+0.1%) while the Dow is down 0.78%.
"Prolonged economic weakness will persist - especially in the peripheral countries - with further periods of intense financial market stress" is how Citi's Willem Buiter's economics team sees the future in Europe. While they continue to believe that the probability of a Greece exit from the Euro is around 90% in the next 12-18 months; but more critically it is increasingly likely in the next six months - conceivably as soon as September/October depending on the TROIKA report. There is a crucial series of meetings and events in coming weeks and while they believe that the ECB's conditional bond-buying (and ESM/EFSF) may help avoid a 'Lehman moment' around the GRExit, they believe that there will still be considerably capital flight out of periphery assets should it occur. The reason being simply that even if funding costs were reduced, the current mix of fiscal austerity and supply-side reform will not return any periphery country to a sustainable fiscal path in coming years.
Moments ago, the FOMC members formalized their opinion on where inflation is heading: "Most members continued to anticipate that, with longer-term inflation expectations stable and the existing slack in resource utilization being taken up very gradually, inflation would run over the medium term at a rate at or below the Committee’s objective of 2 percent." The only conclusion one can derive from this is that since the perpetually wrong FOMC committee, which has never accurately predicted any one thing in its entire history, sees little to no inflation, inflation is most likely about to soar. A convenient independent confirmation of this assumption comes from none other than bond manager PIMCO which moments ago announce that it was adding to its gold holdings "on inflation concerns...as it bets that global inflation rates will pick up over the next three to five years." Specifically, "The Pimco Commodity Real Return Strategy Fund, which has about $20 billion in assets, has increased its gold holdings to 11.5% of total assets recently, from 10.5% two months ago, and has been adding to the position when gold prices dipped toward $1,500 a troy ounce, says Nic Johnson, the fund's co-portfolio manager." And with global asset managers allocating about 1% of their AUM to the precious metal, should the majority of them copycat PIMCO in this move, then gold would cross the psychological $2,000 barrier in minutes. The irony is that for a bond manager, which Pimco just happens to be the biggest in the world, inflation is your worst friend. So acknowledging its imminent creep, is hardly "talking one's book."
The FOMC minutes were full of doom and gloom: if things get worse then we'll save the day; the economy is deteriorating; growth is not great etc. All of which for one glorious moment raised speculation that the 'many' may get their way on the committee sooner than some think. However, a funny thing happened since their last meeting - US Economic Data has improved dramatically relative to expectations. As the chart below shows, the rise in Citi's economic surprise index in the last four weeks is nearly record-breaking since the crisis began. Perhaps, the 'many' could explain which economy they are looking at and just what their economic projections look like now?
FOMC Minutes Indicate No Shift In Fed's Views, Even As Many Members See More Easing Likely WarrantedSubmitted by Tyler Durden on 08/22/2012 14:02 -0400
The thoughts of the FOMC from a mere three weeks ago - before a 30bps rise in 10Y yields (40bps in 30Y), 5% rise in the NASDAQ, 8.5% rise in AAPL, and 85bps compression in Spanish bond spreads - are out. It appears little has changed in their muddle-through, always at-the-ready, wish-it-were-better view of the world. Via Bloomberg,
- *FOMC PARTICIPANTS SAW ECONOMY DECELERATING AFTER JUNE MEETING
- *MANY FOMC PARTICIPANTS SAID MANUFACTURING WAS SLOW OR FALLING
- *FOMC PARTICIPANTS DISCUSSED QE, EXTENDING 2014 FORECAST ON RATE
- *FED STAFF SAID MARKETS HAVE LARGE CAPACITY TO HANDLE MORE QE
- *MANY FOMC PARTICIPANTS SAW NEW QE AS BOLSTERING U.S. RECOVERY
- *MANY ON FOMC FAVORED EASING SOON IF NO SUSTAINED GROWTH PICKUP
Translation: "Many on FOMC want the S&P at all time highs without actually doing any QE, ever, because that will mean the Fed is officially out of bullets"
As European markets have rallied - just like in the US - forward earnings estimates have inched down, leading to a significant multiple (eurhopia) re-rating. As we noted last week, this multiple expansion is dramatically 'rich' compared to sovereign risk changes and is now at the top-end of the euro-zone crisis range. Meanwhile, sentiment has become palpably positive - put/call ratios near lows (highs in complacency; and at the same time European cash equity trading volumes have plunged to 12-year lows (with no high-priced AAPL to 'defend' this with); while fundamentally earnings momentum among cyclical stocks has continued to deteriorate since May 2012. But apart from that, it's all good...