"To say Greece simply cannot repay isn’t the end of the story. As Europe moves towards a more rational debt policy with Greece, there is an enormous economic cost, not to mention social and perhaps political, to any delay. I worry about the terrifyingly low level of sophistication among policymakers and the economists who advise them when it comes to understanding balance sheet dynamics and debt restructuring. Greece’s debt overhang imposes rising financial distress costs and increasingly deep distortions in the institutional structure of the economy over time, and the longer it takes to resolve, the greater the cost."
Asian Markets In Turmoil - Weak Japanese Bond Auction; Surprise Aussie Rate Cut; India Holds Rates, Cuts Reserve RatioSubmitted by Tyler Durden on 02/03/2015 01:27 -0400
UPDATE: *INDIA'S CENTRAL BANK KEEPS BENCHMARK POLICY RATE AT 7.75%, CUTS SLR TO 21.5% OF NDTL FROM 22%
UPDATE: Dow Futs -80 points, S&P Futs -9pts
Following the 15th surprise rate cut of 2015 (Singapore, Europe, Switzerland, Denmark, Canada, India, Turkey, Egypt, Romania, Peru, Albania, Uzbekistan and Pakistan, Russia and now Australia), the Aussie Dollar has cratered to its lowest since May 2009 against the US Dollar at 0.7650 (and bond yields crashed by the most since 1997 to record lows). Aussie stocks kneejerked higher (on an extremely dovish RBA statement) but are fading (as are Chinese stocks). Perhaps even more concerningly indicative of the central banks losing control, following this morning's weak Japanese auction (or more properly expressed - BoJ monetization farce), USDJPY (under 117), Japanese stocks (down 350 points from US session highs), and JGBs (yields up 6-8bps) are all being sold.
While all the algos are programmed and set to scan today's FOMC statement for whether both "patient" and "considerable time" are still there (as it did last time when it supposedly sent a pseudo-hawkish message while telling Virtu and Getco to buy, buy, buy), the market is torn between the trends observed in recent days: on one hand finally succumbing to the adverse impact of USD strength, which overnight also saw the Singapore Dollar admit defeat in the ongoing currency wars, is crushing both revenues and EPS, as well as outlooks, for the bulk of US companies, even as millennials - long since given up on buying a house - allocate their meager savings to the annual incarnation of Apple's flagship product as seen in yesterday's record, blowout numbers by AAPL which is up 8% in the premarket and sending Nasdaq futures soaring compared to the stagnant DJIA or S&P. And then there is Europe where the mood is decidedly sour this morning, with Greece imploding on fears Tsipras really means business and concerns the Greek "virus" may spread to other peripheral nations whose bonds have also seen a lack of a bond bid this morning.
"My humble thesis tonight is that the entire 20th Century was a giant mistake. And that you can put the blame for this monumental error squarely on Thomas Woodrow Wilson - a megalomaniacal madman who was the very worst President in American history... well, except for the last two."
Over the past 48 hours, the world has been bombarded with a relentless array of soundbites, originating either at the ECB, or - inexplicably - out of Greece, the one place which has been explicitly isolated by Frankfurt, that the European Central Bank's QE will benefit everyone. Setting the record straight: it won't, and not just in our own words but those of JPM's Nikolaos Panigirtzoglou, who just said what has been painfully clear to all but the 99% ever since the start of QE, namely this: "The wealth effects that come with QE are not evenly distributing. The boost in equity and housing wealth is mostly benefiting their major owners, i.e. the wealthy." Thank you JPM. Now if only the central banks will also admit what we have been saying for 6 years, then there will be one less reason for us to continue existing.
Those curious to learn why Greece is the only country excluded form the ECB' QE (for now), will not find any additional information in the ECB's supplement on its asset purchase program. Neither will they learn why something that is in effect monetary financing, and is prohibited by Article 123, is not monetary financing. However, they will learn that the proceeds from the ECB's money printing can be used "to buy other assets and extend credit to the real economy." The ECB adds that "In both cases, this contributes to an easing of financial conditions." Actually the only thing it will contribute to is making the world's billionaires into the world's trillionaires.
With less than two hours until the ECB unveils its first official quantitative easing program, the markets appear to be in a unchanged daze. Well, not all markets: the Japanese bond market overnight suffered its worst sell off in months on a jump in volume, although for context this means the 10Year dropping from 0.25% to 0.32%. Whether this is a hint of the "sell the news" that may follow Draghi's announcement is unclear, although Europe has seen comparable weakness across its bond space as well and the US 10 Year has sold off all the way to 1.91%, which is impressive considering it was trading under 1.80% just a few days ago. Stocks for now are largely unchanged with futures barely budging and tracking the USDJPY which after rising above 118 again overnight, has seen active selling ever since the close of the Japanese session.
And so with less than 24 hours to go, the ECB has decided to leak its deliberations not only to Merkel and Hollande, but Dow Jones. To wit:
DJ: ECB EXEC BOARD'S QE PROPOSAL CALLS FOR ROUGHLY EUR50B IN BOND BUYS A MONTH - SOURCES
ECB SAID TO PROPOSE QE OF 50 BILLION EUROS A MONTH THROUGH 2016
More as we see it, but if indeed this will be a program without risk-mutualization and conditional and limited burden-sharing, where the hope was that Draghi would "shock and awe" the world with the size of the bond purchasing program instead, €600 billion per year looks decidedly on the low side of any "surprise" announcement where the whisper number was for €1 trillion per year, and if indeed this is the final formulation may result in a substantial disappointment for stocks after the initial kneejerk reaction.
"we doubt inflation expectations will spike sustainably higher on any announcement given the “failed” history lessons of US and Japan as well as doubts about QE making a difference quickly in the Euro zone." - Deutsche Bank
Every couple of years the same identical European drill repeats itself: 1) Greece makes loud noises as it approaches an election, 2) Europe says it couldn't care what the outcome is and that Greece should stay in the Euro but if it exits it won't be a disaster, 3) the ECB reminds everyone of the lie that it is not preparing for Plan B (it is) despite holding on to over €100 billion in "credibility-crushing" Greek bonds, 4) panicking Greek banks say the deposit outflow situation is completely under control (adding that "The Bank of Greece along with the European Central Bank are monitoring closely the developments and intervene whenever this is necessary," which is code word for far more familiar, five-letter word), and meanwhile 5) all non-Greek banks quietly start preparing for the worst case scenario. So far this time around, we had everything but step "5". We do now.
A Permabull Throws In The Towel: "Stocks Are Massively Overvalued", Key Multiples Are Post-War RecordsSubmitted by Tyler Durden on 01/10/2015 23:15 -0400
"The median New York Stock Exchange (NYSE) stock is currently at a postwar record high P/E multiple, a record high relative to cash flow, and near a record high relative to book value! As of June 2014, the median U.S. stock was priced at a post-war high at slightly more than 20 times earnings! Similarly, at about 15 times, the median stock is also currently priced at a record high relative to cash flow. Finally, the median price to book value ratio has only been higher than it is currently in two years since 1951 (in 1969 and in 1998 which were both followed by significant declines)!" - Jim Paulsen
"... investors are so certain about inflation that there is no insurance value in breakeven contracts. If the liquidity premium hasn’t changed, then current breakevens are consistent with 1.8% expected PCE inflation. In other words, either the market believes that even five years from now, the Fed will not achieve its target or the liquidity premia has jumped to 30bp."
Just 2 short months ago we warned of the rising voice among the cognoscenti tilting their windmills towards the concept of "helicopter money," as Deutsche bank noted, "perhaps there's an increasing weariness that more QE globally whilst inevitable, is a blunt growth tool and that stopping it will be extremely difficult (let alone reversing it) without a positive growth shock." Committing what Commerzbank calls "the ultimate sin" is now reaching the mainstream as Germany's Der Spiegel notes it is becoming increasingly clear that Draghi and his fellow central bank leaders have exhausted all traditional means for combatting deflation; and many economists are demanding that the European Central Bank hand out money to consumers to stimulate the economy.
Calls for a decoupling between the Fed's balance sheet and the "market" may have been premature: following the latest selloff, the S&P's "strange attractor" is once again a very old and familiar one: the size of the Fed's assets, which - if only for the time being - have stopped growing. Ironically, those calling for a selloff after the end of QE3 were right, if wrong on the asset class: crude is down 40% since the end of QE3!
If you want to know where the global experiment in massive money printing is heading - just take a look at the monetary madhouse in Europe. And that particular phrase has full resonance once again as it becomes more apparent by the hour that Europe and the Euro were not fixed at all. Indeed, beneath the surface of Draghi’s “whatever it takes” time out, the crisis has been metastasizing into ever more virulent deformations.