A dispassionate discussion look at the rally in US Treasuries
The complete implosion in volume and vol, not to mention bond yields continues, and appears to have spilled over into events newsflow where overnight virtually nothing happened, or at least such is the algos' complete disregard for any real time headlines that as bond yields dropped to fresh record lows in many countries and the US 10Y sliding to a 2.3% handle, confused US equity futures have recouped almost all their losses from yesterday despite a USDJPY carry trade which has once again dropped to the 101.5 level, and are set for new record highs. Perhaps they are just waiting for today's downward revision in Q1 GDP to a negative print before blasting off on their way to Jeremy Grantham's 2,200 bubble peak after which Bernanke's Frankenstein market will finally, mercifully die.
“Life's greatest comfort is being able to look over your shoulder and see people worse off, waiting in line behind you.” -Chuck Palahniuk
First it was JPM, then it was, surprisingly, none other than NY Fed chief Bill Dudley - the head of the trading desk that proudly boasts trader extraordinaire Kevin Henry, then Citi, and now joining the chorus of banks and Fed presidents blaming all that is wrong in the banking system on near record low volatility resulting in a collapse in trading is none other than Goldman Sachs, whose president Gary Cohn spoke at a Sanford Bernstein conference earlier today, said that fixed income volumes - the bread and butter of Goldman's juggernaut FICC division - are under significant pressure, and blamed low interest rates and, drumroll, the Fed's QE on the drop in volatility, summarizing the current trading environment as "Abnormal." It appears increasingly more are voicing their displeasure with the New Centrally-Planned Abnormal... but only after their balance sheets are full to the brim with some $2.8 trillion in fungible reserves.
If there was some confusion yesterday why in the first quarter, seemingly having no better capital allocation option S&P500 corporate CEOs spent a record $160 billion on stock buybacks, then the following report should explain it: According to a new study by the AP, the median pay package for a CEO rose above eight figures for the first time last year. The head of a typical large public company earned a record $10.5 million, an increase of 8.8 percent from $9.6 million in 2012, according to an Associated Press/Equilar pay study.
With the Fed having tapered its liquidity injections into the stock market from $85 billion to "only" $45 billion per month, retail investors getting burned by the recent high beta and momentum stock flame out and "greatly unrotating" into the renewed safety of bonds, not to mention a churning market that until last week was unchanged for the year, and hedge funds ever shorter into this latest ramp, many are asking themselves: who is buying?
Here is the answer.
The 2 words "collapsing" and "unsustainable" do not conjure images of confidence-inspiring animal spirits or all-time highs in stocks... and yet European earnings expectations have utterly collapsed from their exuberant early year levels and the gap between earnings growth in the US and revenues tumbling is entirely unsustainable. But then - none of this 'fundamental' malarkey matters: we've got the Fed 'put' and the Draghi 'promise'.
Because it worked so well for housing finance in the last bubble, the US government is poised to ease loan standards on this cycle's biggest bubble - student debt. It appears being punched in the face by over-leveraged, over-debted, over-priced housing finance was not enough and as Bloomberg reports, parents whose financial standing disqualify them from most loans will have an easier time borrowing to pay their children’s college costs under a U.S. government proposal to ease credit standards. Come on in - the debt-serf water is warm. With student loan delinquencies already soaring to record highs, some are actually questioning the government's sanity as consumer advotaes warn "a decent number of people are going to get in trouble."
When investors hear "bull markets are bull markets until they aren't," their initial response is "no, duh!." However, if that statement is so obvious, why do we spend so much time in trying to predict the future? It is interesting that we are extremely skeptical of fortune tellers, palm readers and psychics but flock to Wall Street analysts and economists that are nothing more than "fortune tellers" in suits. The reality is that no one is actually prescient. It is all a "best guess" with nothing assured except what "is." Currently, the bull market cycle that began in 2009 remains intact. It is, what "is." The hypnotic chant of the "bullish mantra" will lull individuals from a momentary state of consciousness back into the dream world of complacency. It is from that place that investors have typically harbored the worst outcomes.
With the Fed tapering and both China “I don't think the markets are discounting what’s really happening in China,” and Japan’s currencies likely to weaken, the net impact on the U.S. will be deflationary, Kyle Bass warned in a recent presentation. That trend will be accelerated by the improvement in the balance of trade for the U.S., which had its current account deficit shrink due to increased hydrocarbon production. Bass warns, the crucial moment will come when the U.S. reports a sub-6% unemployment rate, meeting the target it has set for normalizing its monetary policy by ending QE and raising rates. He predicted that will come in July. That will be the Fed’s “worst nightmare,” he said. Raising rates would stifle growth and recreate unemployment problems, which would be disastrous politically, according to Bass.
The CBO report is screaming, "This is F-ed up! Fix this now, or pay a price later!"
It was almost inevitable: a week after we wrote "From Rothschild To Koch Industries: Meet The People Who "Fix" The Price Of Gold" and days after "Barclays' Head Of Gold Trading, And Gold "Fixer", Is Leaving The Bank", earlier today the UK Financial Conduct Authority finally formalized what most in the "tin-foil" hat community had known for years, when it announced that it fined Barclays £26 million for manipulating "the setting of the price of gold in order to avoid paying out on a client order." Furthermore, the FCA confirmed that those inexplicable gold raids which come as if out of nowhere, and slam gold with a vicious force so strong sometime they halt the entire market, had a very specific source: Barclays, whose trader Daniel James Plunkett, born 1976, "sent out a burst of orders aimed at moving the price of the yellow metal."
On the surface, the economic atmosphere of the U.S. has appeared rather calm and uneventful. Stocks are up, employment isn’t great but jobs aren’t collapsing into the void (at least not openly), and the U.S. dollar seems to be going strong. Peel away the thin veneer, however, and a different financial horror show is revealed. With the Ukraine crisis now escalating to fever pitch, BRIC nations are openly discussing the probability of “de-dollarization” in international summits, and the ultimate dumping of the dollar as the world reserve currency. The U.S. is in desperate need of a benefactor to purchase its ever rising debt and keep the system running. Strangely, a buyer with apparently bottomless pockets has arrived to pick up the slack that the Fed and the BRICS are leaving behind. But, who is this buyer? At first glance, it appears to be the tiny nation of Belgium. Clearly, this is impossible, and someone, somewhere, is using Belgium as a proxy in order to prop up the U.S. But who?
The days of Bernanke's "non-Giffen good" speech circuit may come to an end far sooner than the ex-Chairsatan wishes: "UBS and Goldman Sachs considered his fees too high." Others were quick to point out the obvious:"You can spend $250,000 for Bernanke’s time at a private dinner, or you could just sit down and read what people like Janet Yellen and Mark Carney have to say," David Rosenberg said"... Indeed, this is one deflation which we are confident the Fed Chairman wishes he was 100% certain he could stop in 15 minutes. Sadly, like in the case of everything else relating to Bernanke, when paying for smoke and mirrors it is only a matter of time before everyone, even the uber-richer poseurs, realize that the product they are buying is nothing but a cheap commodity.