NFIB

While economists are raising their forecasts for 2014, there seems to be little change in the real underlying fundamentals. Much has been made of the modest uptick in NFIB optimism last month, but small businesshope remains 6 points below pre-recession average levels; and as Bill Dunkleberg notes so succinctly: "The President thinks the way to address the malaise in the economy is to give another $26 billion to the long-term unemployed, shown to produce new jobs by 'independent economists' (we know who that is) according to the President. If you borrow $26 billion from China and give it to consumers, it probably does have a positive impact, but does nothing to fix the economy or encourage labor force participation or improve the labor force." It is quite apparent from both individuals and businesses that the government is the real issue that is impeding economic progress.  Maybe it's time that the current Administration did a little less talking and did a little more listening to what the real drivers of the economy are saying.

Following yesterday's major market drubbing, in which the sliding market was propped up by the skin of Nomura's (and BOJ, and Fed's) teeth at 103.00 on the USDJPY, it was inevitable that with Japan returning from holiday there would be a dead cat bounce in the Yen carry pair, and sure enough there was, as the USDJPY rose all the way back up to 103.70, and nearly closed the Friday gap, before starting to let off some air. However, now that US traders are coming back online, Japan's attempts to keep markets in the green may falter, especially since it only has a couple of ES ticks to show for its efforts, as for the Nikkei which dropped 3% overnight, it has now lost all US "Taper" gains.

There has been much debate in Washington about how to get the economy growing again.  Unfortunately, fiscal policy has done little to address the core of economic growth, which is the consumer, or the productive investment required to generate real employment and wage growth. As Schumpeter observed, "there are no entrepreneurs without capital." Simply put, there are no companies, and no jobs, without investment first. For anyone irrespective of ideology to deny the latter brings new meaning to willful blindness. Until we focus on creating an environment that leads to greater investment opportunities by business owners we will likely see a further deterioration in personal consumption.  There is currently a fine line between expansion and contraction within the overall economy, and while hopes are that 2014 will be a "breakout" year for the economy, the current economic data trends suggest otherwise.

The grind higher in equities, and tighter in credit, continues as markets brush aside concerns about a December taper for the time being. Overnight futures levitation has pushed the Fed balance sheet driven record high S&P even higher, despite as Deutsche Bank points out, the fact that we had three Fed speakers advocate or talk up the possibility of a December taper, including the St Louis Fed’s James Bullard who is viewed as a bit of a bellwether for the FOMC. Bullard said the probability of a taper had risen in light of the strengthening of job growth in recent months. Indeed, he noted that the best move for the Fed could be a small December taper given the improving jobs data but below-target inflation readings. The Fed could then pause further tapering should inflation not return toward target during the first half of 2014.  Looking at today’s calendar, the focus will be on US JOLTs job openings - a report which Yellen has previously highlighted as an important supplement to more traditional labour market indicators. US small business optimism and wholesale inventories are the other major data releases today. As mentioned above, US financial regulators are due to announce Volcker rules at some point today although as we just reported, the CFTC's meeting on Volcker was just cancelled due to inclement weather.

The US data flow is relatively light which is typical of a post-payrolls week but it’s worth noting wholesale inventories on Tuesday and retail sales on Thursday. Importantly US House and senate negotiators are supposed to come to an agreement on a budget before the December 13th deadline. A lot of optimism has been expressed thus far from members of congress, and there are reports that a budget deal will be unveiled this week.

In yet another miracle of modern-day macroeconomics, despite the soaring stock market and better-than-expected government-provided data (soft surveys mostly), the small-business (supposedly the core driver of jobs and growth in the US economy) saw optimism collapse at the fastest rate since Sandy (supposedly due to the government shutdown). This is the fifth month in a row that NFIB optimism has missed expectations (the worst - absent Sandy - since March 2012). 7 of the 10 sub-components were negative with the biggest plunge coming from those who expect the economy to improve. Seems like another good reason to BTFATH...

Following a brief hiatus for the Veterans Day holiday, the spotlight will again shine on treasuries and emerging markets today. The theme of higher US yields and USD strength continue to play out in Asian trading. 10yr UST yields are drifting upwards, adding 3bp to take the 10yr treasury yield to 2.78% in Japanese trading: a near-two month high and just 22 bps away from that critical 3% barrier that crippled the Fed's tapering ambitions last time. Recall that 10yr yields added +15bp in its last US trading session on Friday, which was its weakest one day performance in yield terms since July. USD strength is the other theme in Asian trading this morning, which is driving USDJPY (+0.4%) higher, together with EM crosses including the USDIDR (+0.6%) and USDINR (+0.6%). EURUSD is a touch weaker following a headline by Dow Jones this morning that the Draghi is concerned about the possibility of deflation in the euro zone although he will dispute that publicly, citing Germany’s Frankfurter Allgemeine Zeitung who source an unnamed ECB insider. The headline follows a number of similar stories in the FT and Bloomberg in recent days suggesting a split in the ECB’s governing council.

To many institutional investors, buying the Russell 2000 is merely the highly levered bet with which the bulk of institutions (recall that almost all hedge funds, and a majority of mutual funds, are underperforming the S&P for a 5th consecutive year) seek to make up for losses in their portfolios by chasing high (and even higher with leverage) beta.  Which is why as the next chart below shows, in a furious scramble to catch up by year end, the institutional Russell net futures (i.e. levered) positioning just hit a record high: the biggest investors are now all-in the smallest names.  So is the massively overbought small cap sector due for a correction? With these manipulated, centrally-planned markets, nobody has any idea. However, for those who have once again bet all in, which just happens to be most plain vanilla dumb money, it may be time to reevaluate.

Markets are so obsessed by developments with the US debt ceiling, that absolutely nobody noticed that the Japanese Current Account (JPY152Bn, Exp. JPY520bn), Industrial Outuput in Spain (-2.0%, Exp. -1.6%), Factory Orders in Germany (-0.3%, Exp. +1.2%), Trade Balance in Germany (€13.1bn, Exp. €15.0 bn) and that the Jan-Aug tax revenue in Greece below expectations by 5.7%, all missed horribly, and that for all the talk of a European recovery (which was merely driven by a brief surge in Chinese credit spending making its way into the European pipeline) is once again fully and entirely premature. But with Congress on everyone's mind, even increasingly China and Japan, who cares about fundamentals: after all there is a Federal Reserve to mask the fact that nothing but liquidity injections matters. Even if that means a complete collapse in the actual economy as those separated from the Fed by one or more layers of banks, crash and burn.

Overnight trading over the past week has been a bipolar affair based on algo sentiment about what is coming out of D.C. But which the last session was optimistic for some inexplicable reason that a deal on both the government shutdown and the debt ceiling out of DC was imminent, today any optimism is gone in the aftermath of the latest comments by Boehner on ABC, in which he implied that a US default is not unavoidable and that it would be used as more political capital, as it would be once again blamed on Obama for not resuming negotiations. As a result both global equities and US futures are down sharpy in overnight trading. And since the government shutdown, better known as a retroactively paid vacation, for everyone but the Pentagon (whose 400,000 workers have been recalled from furlough) continues it means zero government economic statistics in today's session with the only macro data being the Fed-sourced consumer credit report at 3 pm. This week also marks the unofficial start of the Q3 reporting season in the US with Alcoa doing the usual opening honous after the US closing bell tomorrow. JPMorgan’s and Wells Fargo’s results on Friday are the other main ones to watch to see just how much in reserves are released to pretend that banks are still making money.  As usual, expect disinformation leaks that send the market sharply higher throughout the day, which however will only make the final outcome that much more painful, because as during every US government crisis in the past, stocks have to plunge so they can soar again.

While the world is currently glued to the events surrounding Syria; the reality is that such an event has very little to do with the real economy.  The surges in expectations by business is very interesting given the actual demand that drives the real economy.  Real employment remains weak and corporate earnings are struggling given the diminishing returns of cost cutting. The recent increases in interest rates also have a very important "tightening" effect on the "Main Street" economy which will also likely suppress consumption in coming months somewhat.  Also not likely factored in to current survey's is the upcoming debt ceiling debate and the onset of the Affordable Care Act (ACA).  The ACA is a de facto increase in taxes and there is a potential for further tax hikes coming from the budget debate. The current NFIB survey suggests that the economy is still stuck in "struggle mode" and an acceleration above 2% real economic growth is currently unlikely.  The divergence between expectations and real demand will likely converge in the next couple of months so we will see businesses follow through with their optimisitic outlooks - "Overall, the Index of Optimism says the small business sector is going nowhere and that's what it feels like."

One of the main reasons that investors so often get caught up in major market meltdowns is due to the short-sighted, near term, focus of market analysts and economists.  The data has to be analyzed with relation to the longer term trends and a clear understanding that all things, despite ongoing central bank interventions, do eventually end.  The problem with the current environment is that the artificial inflations have detached the market from the underlying economic fundamentals which has historically led to larger than expected reversions and outright crashes.

Overnight news began in China where the CPI came in 2.7% versus consensus of 2.5% although PPI continues to decline at a faster pace than expected (-2.7% v -2.6%). While nobody believes the actual print, that the PBOC is telegraphing an inflationary "leak" shows its willingness to continue with pro-tightening measures which is why despite an Alcoa "beat", the SHCOMP was up only 0.37%. Elsewhere in China, Bloomberg news quoting Xinhua said that some district governments of Ordos of Inner Mongolia is struggling with finances and had to borrow money from companies to pay salaries of municipal employees. Ordos is the infamous "ghost town" spurred by the mining boom in Inner Mongolia. The Bloomberg article noted that Ordos local government entities have CNY240bn of debt versus CNY37.5 billion of revenue last year.  And while the Alcoa "beat", helped handily by a hilariously "tapered" consensus into reporting day, did little for China it was the catalyst that pushed global stocks higher worldwide.

Not much in terms of economic data but lots of corporate news with the official Q2 earnings season kick off, as well as a plethora of Fed speakers which in a centrally-planned world, is all that matters.

Overnight, following the disappointing BOJ announcement which contained none of the Goldman-expected "buy thesis" elements in it, things started going rapidly out of control, and culminated with the USDJPY plunging from 99 to under 96.50 as of minutes ago, which was the equivalent of a 2.3% jump in the Yen, the currency's biggest surge in over three years. Adding insult to injury was finance ministry official Eisuke Sakakibara who said that further weakening of yen "not likely" at the moment, that the currency will hover around 100 (or surge as the case may be) and that 2% inflation is "a dream." Bottom line, NKY225 futures have had one of their trademark 700 points swing days, and are back knocking on the 12-handle door. Once again, the muppets have been slain. Golf clap Goldman.