Bond

Over-promise and under-deliver appeears to have been the Draghi meme as the ECB chief's loss of control of market front-running  has left traders rapidly reversing their buy-the-rumor positions. EURUSD is spiking higher, Bund yields - most focused at the short-end - are surging, DAX is dumping, and US equity and bond markets are being sold. USD weakness has sparked gold and crude strength. We are gonna need a lot more jawboning in the press conference to save this...

Yesterday's market swoon which unwound all of Tuesday's gains on concerns about a hawkish Fed and fears about terrorism in the US, are now completely forgotten, and have been replaced with the latest daily round of pre-ECB euphoria, driven by hopes that Mario Draghi will announce even more dovish details to Europe's Q€ 2 than just a 10 bps rate cut and a boost to QE more than €10 billion, both of which have been already priced in.

In Part I , readers were presented with the inherent criminality and fraud of the crime-euphemism known as “fractional-reserve banking.” In Part II , readers saw how the banking crime syndicate has exploited the opportunities that this institutionalized fraud presents and turned our entire financial system into a teetering Ponzi scheme about to suffer its final collapse.

There isn’t much as far as confirmation, but it increasingly appears as if “something” just hit the triple hooks (CCC) in the junk bond bubble. At least as far as one view of it, Bank of America ML’s CCC implied yield, there was a huge selloff that brought the yield to a new cycle high (low in price) above even the 2011 crisis peak.

"Do I think they’re going to pay within 30 days? No. The 30 days are not going to make any difference."

The global Central Banks have literally bet the financial system that their theories will work.  They haven’t. All they’ve done is set the stage for an even worse crisis in which entire countries will go bankrupt.

In arguably the most important ECB meeting since the introduction of QE, Draghi and Co. are expected by the majority of analysts to act further, with the most likely actions including a cut to the deposit rate and an increase in the Quantitative Easing program. Signalling from the central bank, and particularly Draghi himself over the past month has heavily indicated further stimulus, with Draghi notably saying that `the ECB will do what it needs to in order to raise inflation, as quickly as possible`.

We are talking of course, about the infamous RRR-hike of 1936-1937, which took place smack in the middle of the Great Recession.

With the EUR plunging and everyone primed for dramatic action by Draghi, especially following today's disappointing inflation data where November CPI rose just 0.1%, below the 0.2% expected, the former Goldmanite may still disappoint. According to Market News, "the high bar set by expectations, coupled with notable opposition against aggressive action on the Governing Council as economic data developed largely as expected, creates a risk that the ECB will under-deliver Thursday."

It is only logical that a day after the S&P500 surged, hitting Goldman's 2016 target of 2,100 more than a year early because the US manufacturing sector entered into a recession, that Europe would follow and when Eurostat reported an hour ago that European headline inflation of 0.1% missed expectations of a modest 0.2% increase (core rising 0.9% vs Exp. 1.1%), European stocks predictably surged not on any improvement to fundamentals of course, but simply because the EURUSD stumbled once more, sliding by 40 pips to a session low below the 1.06 level.

In a perfectly timed update to his infamous April 2009 "worse then The Great Depression" chart, Kevin O'Rourke has unveiled his latest chart-du-poor. With US manufacturing collapsing, bond yields tumbling, and The Fed about to hike rates to prove they can, this so-called 'recovery' has fallen below that following The Great Depression. As O'Rourke sums up, "pretty dismal stuff. Let’s hope that we can at least avoid the famous 1937-38 double dip."

"The exception to this global picture is in the US, where sector performance was a Pavlovian response to the much expected upcoming US rate rises (Utilities down and Basic Materials up). Global investors may be cyclically bearish, but US investors appear distracted by the historically cyclically positive message US rate rises might imply. We think this may prove a mistake."

Long term risk has increased quite a bit, no matter which data points one happens to consider. Whether one looks at valuations, market internals, leverage or positioning, there are now more warning signs than ever. With the support provided by strong money supply growth declining as well, it becomes ever more likely that these potential dangers will actually materialize. It is an accident waiting to happen.

With December rate-hike odds sliding the most since the last FOMC meeting (down from 75% to 70%), following abysmal data this morning, it appears investors are reaching for the safety of Treasuries as either a fed policy error is about to be unleashed and/or growth is signficantly weaker than all the talking heads proclaim. With traders the most net short in years, this rapid plunge in yields could quickly accelerate.