New Normal

China warns "the outside world doesn't get it, we do," in a statement related to the "stealth QE" they unleashed yesterday, noting investorsd "do not realize that today's Chinese economy is moving towards "new normal" in the process," and "need to accept the volatility of economic data," during this transition. Crucially, PBOC adviser Chen Yulu clarifies what Western central banks simply cannot grasp: "Hoping for stimulus policies in the face of increased economic pressure is short-sighted and does no good to long-term economic development," warning investors should not expect "strong stimulus." Wall Street is less than exuberant about the liquidity injection, as the impact on real economy may be limited due to lenders' risk aversion.

The Fed Chairman has some words of encouragement for the tens of millions of Americans who live at or below the poverty level, including that threatened with extinction class, affectionately known as "the middle." Her message? Build assets, or said otherwise...  get rich.

Aside from the "sure thing" of buying the Alibaba IPO, achieving a 10% yield return in the new normal world requires leverage and excess risk-taking. To compare the risk/reward of various assets, Citi accounts for haircuts and leverage costs of the typical investor and finds an investors needs a 1.9x leverage in the S&P 500, 8.1x leverage in Treasuries, and 2.3x leverage in high-yield to achieve (based on historical norms) the required return. However, after accounting for downside risks, high-yield cash and leveraged loans both top the S&P 500 as the best way to meet a 10% bogey yield.

Because what's two weeks between propaganda spewing friends?

In the New Normal, yellow  may or may not be the new black, but stock buybacks are certainly the new CapEx. And yet, companies are still forced to continue their sad existence in which the bulk of their cash is handed over to a few loud activist investors, and thus have no choice but to spend the bare minimum on capital investments. The following table shows where it all goes.

Even the most avid Bulls should grasp that market corrections of 10% to 20% are statistical features of all markets. Cranking markets full of financial cocaine so they never correct simply sets up the crash-and-burn destruction of the addict.

Something appears to have changed not only because the USDJPY is not some 100 pips higher overnight on, well, nothing but because the S&P, which is treading water, has yet to spike on no volume reasons unknown. That something may be algos which are too confused to buy ahead of this week's Fed announcement which may or may not have some notable changes in language or the Scottish referendum on the 18th. Or it could simply be that algos are no longer allowed to openly manipulate and rig the market on the CME as of today now that "disruptive market practices" are banned (why weren't they before)? In any case, keep a close eye on the market today: not all is at it has been for a while, unless of course it is still just a little early and the rigging algos (which haven't gotten the Rule 575 memo of course) haven't woken up just yet.

The depression that followed the stock-market crash of 1929 took a turn for the worse eight years later, and recovery came only with the enormous economic stimulus provided by the second world war, a conflict that cost more than 60 million lives. By the time recovery finally arrived, much of Europe and Asia lay in ruins. The current world situation is not nearly so dire, but there are parallels, particularly to 1937. Now, as then, people have been disappointed for a long time, and many are despairing. They are becoming more fearful for their long-term economic future. And such fears can have severe consequences.

While we doubt the pope is much of a trader, based on his latest comments, speaking during a visit to Italy's largest military cemetery, where he was commemorating the centenary of World War I and where he said that a "piecemeal" World War III may have already begun, we assume he too would join the confusion of the BIS and every other carbon-based life form, wondering how it is possible that risk assets are at all time highs which the world is not only teetering on the edge of a new global conflict but may have already in fact entered it. Oh wait, the central banks, never mind.

• Olive Garden's breadsticks are part of the brand equity, as they come to every table. The breadsticks need to be of the highest quality, with a better taste and a firmer texture, and each table must receive hot breadsticks.
• The pasta at Olive Garden must be significantly improved. It must be prepared at the proper water temperature, boiled in salted water, precisely timed to not overcook, and tossed with sauces for each dish instead of the current practice of ladling sauce on top of heaps of coagulated pasta.
• We must rethink the amount of items from the flyer. Most fried foods are not authentically Italian and it slows service.
• We will explore a few gluten-free options, as many consumers prefer gluten-free dishes (1) Based on extensive research and discussions with culinary experts and suppliers, we believe we can accomplish these goals at Olive Garden's current price points without hurting margins

Even the escalating cold war (as in European winter cold) between Russia and the west will pale by comparison to what may happen in the far east, if the pent up for generations tensions between China and Japan, which have historically hardly been in a state of "amicable relations", finally spill over into an all out war. Which, incidentally, is precisely what a majority, or 53% of Chinese respondents, and some 29% of their Japanese peers, expect will happen in the coming years.

As usual, every European snaction (sic) has an equal and opposite Russian reaction. Here is how the Russian Foreign ministry responded to what van Rompuy announced earlier today would be a new round of Russian sanctions, which wil finally be enforced tomorrow. First from the Russian foreign ministry:

• NEW EU SANCTIONS AGAINST RUSSIA LEAVE RUSSIA NO OTHER CHOICE BUT TO GO FOR CERTAIN COUNTER-MEASURES - RUSSIA'S PERMANENT REP TO THE EU CHIZHOV

And the punchline from the foreign ministry statement: "Finally, give people a chance for peace." So Obama channels Dubya and Putin channels John Lennon. The New Normal sure is strange.

It has been an odd session: after yesterday's unexpected late day swoon despite the ECB launch of "Private QE", late night trading saw a major reversal in USDJPY trading which soared relentlessly until it rose to fresh 6 year highs, briefly printing at 105.70, a level not seen since October 2008, before giving back all gains in overnight trading. It is unclear if it was this drop, or some capital reallocation from the US into Europe, but for whatever reason while Europe has seen a stable - if fading in recent hours - risk bid, and European bonds once again rising and Irish and Italian yields both dropping to record low yield, US equity futures have slumped and are now trading at the lows of the session ahead of a US nonfarm payroll print which is expected to rise and print for the 7th consecutive time above 200K, at 230K to be precise, up from 209K in July (down from 288K in June). It is unclear if the market is in a good news is bad news mood today, but for now the algos are not taking any chances and have exited risky positions, with the ES at the low end of the range the market has been trading in for the past week centered aroun S&P 2000.

It seems like it was only yesterday when Goldman was predicting either two-thirds chance of a 10% correction in stocks, said that the S&P is either 30% or 45% overvalued relative to its historical value, or warned about a market slide when it downgraded the S&P500 "to neutral over 3 months as a sell-off in bonds could lead to a temporary sell-off in equities." Alas, that was the old Goldman: the one which still considered the impact of fundamentals in a centrally-planned world. The new one is far more pragmatic for the New Normal times, and overnight David Kostin, who has consistently fluctuated on either his year end S&P500 price target in 2014, or the justification for getting there (first higher bonds yields, then lower), came out with his latest thesis why now is the time to own stocks. Naturally, his catalysts have nothing to do with actual fundamentals, and instead all focus on the three only relevant metrics of the new normal: beta, momentum and career risk, which can be summarizes as follows: buy stocks because Hedge Funds suck.

Superficially, there are two amusing observations to make about a New Normal in which the S&P, courtesy of its Chief Risk Officers Yellen, Draghi and Kuroda, continues to vastly outperform virtually all hedge funds for a 6th year running: the first is that one of the very few funds in our universe which is doing better than the broader market is named Tulip Trend Fund, which in itself speaks volumes, while the other fund that is creating outsized "alpha" is Bill Ackman's Pershing Square, which has made the bulk of its gains on the back of the Allergan deal where he frontran the investing public, knowing full well Valeant would make a hostile bid, a transaction which the SEC better strike as illegal or else the farce of a market will get even more farcical.