When even the political elite are voicing concerns about the possible social implications of youth unemployment rates in Europe being so egregiously high, you know that there are problems. The question many have is that until now riots have been few and far between (most notably Sweden and Switzerland recently); so why are the main areas of massive unemployment not seeing the widespread chaos? The answer, perhaps unsurprisingly, is in government handouts but as Stratfor notes, time is running out for the benefit-beholden generation and perhaps the governments will finally see what so many have been fearful of.
Over 1.2 million people filed for bankruptcy in 2012, more than double the lows of 600,000 in 2006 (and yet the stock market is at all-time highs?). The following infographic provides some clarfying data on the increasingly necessary option but it is the 'signs you are in danger of bankruptcy' section that enthralled us - and perhaps is worth a read by some on Capitol Hill.
“The Federal Reserve, any central bank, should not be asked to do too much to undertake responsibilities that it cannot responsibly meet with its appropriately limited powers,” Volcker said. He said a central bank’s basic responsibility is for a “stable currency.” “Credibility is an enormous asset,” Volcker said. “Once earned, it must not be frittered away by yielding to the notion that a little inflation right now is a good a thing, a good thing to release animal spirits and to pep up investment.” “The implicit assumption behind that siren call must be that the inflation rate can be manipulated to reach economic objectives,” according to Volcker. “Up today, maybe a little more tomorrow and then pulled back on command. Good luck in that. All experience demonstrates that inflation, when fairly and deliberately started, is hard to control and reverse.”
Abenomics is riddled with inconsistencies. He wants the world's biggest bond market to sit still while he tells them they are going to lose money year-after-year (if his inflation goals are met). He wants to spark a renaissance by lowering the JPY and creating inflation but he doesn't want real wages to drop. Of course, the CNBC anchor's ironic perspective that the 80% domestic bond holdings of JGBs will 'patriotically sit back and take the loss' is in jest but it suggests something has to give in the nation so troubled. In fact, as Diapason's Sean Corrigan notes, that is not what has been happening, "every time the BoJ is in, the institutional investors are very happy to dump their holdings to them." On the bright side, another CNBC apparatchik offers, this institutional selling will lead to buying other more productive assets to which Corrigan slams "great, so we have yet another mispriced set of capital in the world, that'll help won't it!" The discussion, summarized perfectly in this brief clip, extends from the rate rise implications on bank capital to the effect on the deficit, and from the circular failure of the competitive devaluation argument.
While some (such as Bloomberg) see the unprecedented rise in orders to withdraw copper supplies from inventory at the LME as an indication of "improving demand," we suspect the huge demand bias from Asia (read China) suggests more is at play here than 'hope' in economic surprises. While the reasons are still unclear, the timing of this spike in demand is very close to our recently discussed concerns over the collapse in the Chinese Copper Financing Deal (CFFD) rehypothecation-based funding system. The unlimited "collateral" capacity of the previously described funding chains means that there may simply not be enough copper in bonded warehouses to meet the Letter of Credit needs once the copper warrants start being demanded upon LC termination. So, perhaps, the surge in LME delivery requests reflects a desperate demand for physical copper to meet these unwinding funding deals' needs. Either way, just as we saw gold vaults promptly emptied post the mid-April precious metals crash (especially that of JPMorgan), this sudden surge in physical demand bears very close watching.
UPDATE: JPY weakening rapidly back to US day-session lows (101.25), equities rising modestly (still down ~2%), JGBs tumbling back to unchanged. The correlation is in motion now so the BoJ will have to decide what they want...
...And cue Amari, Kuroda, or Abe proclaiming that it's all under control. Japanese stocks (the broader TOPIX index) are now down 3% with financials and utilities getting monkey-hammered. JPY is surging back under the Maginot line of 101.00 to its strongest since the big-break-of 100.00 day three weeks ago. JGBs are rallying (so that's one thing) but are half-way to being halted limit-up. But - with the rally in JGBs, hedgers are scrambling to protect gains as JGB implied vol surges back over 48% (its highest in over a month). So, apart from that...
Spot the difference - one of these charts is an algorthmically-controlled oscillation and the other is... hhmm
To an extent that reveals a thorough misunderstanding of the market forces, the financial media has failed to consider the different motivations and beliefs that drive the different types of investors who are active in the gold market. By treating the gold market as if it were comprised of just one type of investor, analysts have drawn false conclusions about the recent volatility.
"While certain types of rehypothecation can be beneficial to market functioning, if collateral collected to protect against the risk of counterparty default has been rehypothecated, then it may not be readily available in the event of a default. This, in turn, may increase system interconnectedness and procyclicality, and could amplify market stresses. Therefore, when collateral is rehypothecated, it is important to understand under what circumstances and the extent to which the rehypothecation has occurred; or in other words, how long the collateral chain is... Financial intermediaries should provide sufficient disclosure to clients when collateral assets posted by them are rehypothecated; rehypothecation should be allowed only for the purpose of financing the long position of clients and not for financing the own-account activities of the intermediary; and only entities subject to adequate regulation of liquidity risk should be allowed to engage in the rehypothecation of client assets."
As the markets elevate higher on the back of the global central bank interventions it is important to keep in context the historical tendencies of the markets over time. Here we are once again with markets, driven by inflows of liquidity from Central Banks, hitting all-time highs. Of course, the chorus of justifications have come to the forefront as to why "this time is different." The current level of overbought conditions, combined with extreme complacency, in the market leave unwitting investors in danger of a more severe correction than currently anticipated. There is virtually no “bullish” argument that will withstand real scrutiny. Yield analysis is flawed because of the artificial interest rate suppression. It is the same for equity risk premium analysis. However, because the optimistic analysis supports the underlying psychological greed - all real scrutiny that would reveal evidence to contrary is dismissed. However, it is "willful blindness" that eventually leads to a dislocation in the markets. In this regard let's review the three most common arguments used to support the current market exuberance.
After a disastrous day yesterday a bounce in bonds was at least on-the-cards and they went out at the low yields of the day (-6bps). Equity markets oscillated around their opening level of the US day-session with the S&P futures ending the day down over 8 points (in the middle of the range) glued to VWAP at the day-session close. Credit markets faded rapidly and while stocks are unch from last Thursday's close, high-yield and investment-grade spreads are significantly wider. VIX had another up-day (breaking above 15% intraday) but closing at 14.8% (highest in 5 weeks) but more criticaly MOVE (bond VIX) spiked to its highest in 9 months. Many talked about bond-like stocks getting hammered but it is noteworthy that homebuilders suffered the most today. USD weakness (and JPY strength) were the theme in FX markets as carry continued to be unwound of yesterday's peak and in turn this helped gold and silver push around +0.5% on the week. Oil prices slumped most in a month, testing below $93 at their lows. Equity volume ended above average, average trade size was low, and the S&P closed below its up-channel trend.
Beneath the unemployment rate and headline jobs number is a world of labor market signals that few, if any, ever take the time to look at. ConvergEx's Nick Colas analyzes 10 under-reported signals to look for alternative clues about the direction of the job market and, in his words, the results aren’t pretty. We’re still 2 years away from full employment at the current pace of job growth, and more people are entering the labor force for the first time since the 1980s, adding to already fierce competition for open positions. Not to mention over 7% of those not in the labor force actually want a job right now (also intensifying competition), and the rate of job growth isn’t enough to offset the number of unemployed workers with expiring benefits. On the plus side, the number of re-entrants to the labor force is at a 4-year low. And for those who do have a job, average wages are higher than ever. However, the majority of the analysis shows the labor market remains stubbornly resistant to improvement - despite talking heads belief in 'taper'ing on improvements.
Today, another one of the original "big boys" has called it curtains on the landlord business: "We just don’t see the returns there that are adequate to incentivize us to continue to invest", according to the CEO Bruce Rose of Carrington, one of the first investors to use deep institutional pockets (in this case a $450 million investment from OakTree) and BTFHousingD. Rose's assessment of the market? "There’s a lot of -- bluntly -- stupid money that jumped into the trade without any infrastructure, without any real capabilities and a kind of build-it-as-you-go mentality that we think is somewhat irresponsible.... We’ll sit back in the weeds for a while and wait for a couple of blowups,” he said. “There’ll be a point in time when we’ll be happy to get back into the market at levels that make more sense.”