Discussion of a market bubble (in stocks, credit, bonds, Farm-land, residential real estate, or art) have dominated headlines in recent weeks. However, QEeen Yellen gave us the all-clear this morning that there was "no bubble." Are we currently witnessing a market bubble? It is very possible; however, as STA's Lance Roberts notes, if we are, it will be the first market bubble in history to be seen in advance (despite Bullard's comments in opposition to that "fact"). From a contrarian investment view point, there is simply "too much bubble talk" currently which means that there is likely more irrational excess to come. The lack of "economic success" will likely mean that the Fed remains engaged in its ongoing QE programs for much longer than currently expected - and perhaps Hussman's pre-crash bubble anatomy is dead on...
Japan growth cut in half, Europe growth cut by more than half, but none of that matters: today it will be all about the coronation of QEeen Yellen, who testifies before the Senate Banking Committee at 10am. Not even Japanese finance minister Aso's return to outright currency intervention warnings (in addition to the BOJ's QE monetary base dilution), when he said that Japan must always be ready to send signal to markets to curb excessive and one sided FX moves and it is important that Japan has intervention as FX policy option, which sent the USDJPY back up to 100 for the first time since September 11 made much of an impact on futures trading which after surging early in the session following the release of Yellen's prepared remarks, have now "tapered" virtually all gains. Certainly, the follow up from Europe doing the same and also warning it too may engage in QE, has been lost. Which is odd considering the entire developed world is now on the verge of engaging in the most furious open monetization of virtually everything in history.
With a shiny red ballon dog selling for $58 million, perhaps it was time to take a little profit in the equity exuberance. S&P futures are down 9 points from last night's close - which in the new normal is considerable (sadly) - with no macro data headlines this morning to spark a move, we will be watching JPY (which for now is rallying awkwardly) for signs of ignition. Meanwhile, as the USD flatlines (despite dispersion in FX), Bitcoin just toppped $400 for the first time ever - doubling in the last two weeks. Precious metals are up modestly; treasury yields are limping lower; and European equities (and sovereign bonds) are having another tough day.
As DB notes, it appears that markets continue to steadily price in a greater probability of a December taper judging by the 2bp increase in 10yr UST yields, 1.2% drop in the gold price and an edging up in the USD crosses yesterday. Indeed, the Atlanta Fed’s Lockhart, who is considered a bellwether within the Fed, kept the possibility of a December tapering open in public comments yesterday. But his other comments were quite dovish, particularly when he said that he wants to see inflation accelerate toward 2% before reducing asset purchases to give him confidence that the US economy was not dealing with a “downside scenario”. Lockhart stressed that any decision by the Fed on QE would be data dependent - so his comments that the government shutdown will make coming data "less reliable" than might otherwise have been, until at least December, were also quite telling. The dovish sentiments were echoed by Kocherlakota, a FOMC voter next year. In other words, an Oscar-worthy good-cop/bad-cop performance by the Fed's henchmen, confusing algotrons for the second day in a row.
While chart analogs provide optically pleasing (and often far too shockingly correct) indications of the human herd tendencies towards fear and greed, a glance through the headlines and reporting of prior periods can provide just as much of a concerning 'analog' as any chart. In this case, while these 3 pictures can paint a thousand words; a thousand words may also paint the biggest picture of all. It seems, socially and empirically, it is never different this time as these 1936 Wall Street Journal archives read only too well... from devaluations lifting stocks to inflationary side-effects of money flow and from short-covering, money-on-the-sidelines, Jobs, Europe, low-volume ramps, BTFD, and profit-taking, to brokers advising stocks for the long-run before a 40% decline.
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.
Did you know that there are more than 102 million working age Americans that do not have a job? Right now, there are more than 11 million Americans that are considered to be "officially unemployed", and there are more than 91 million Americans that are not employed and that are considered to be "not in the labor force". When you add those two numbers together, the total is more than 102 million. Overall, the number of working age Americans that do not have a job has increased by about 27 million since the year 2000. But aren't things getting better? After all, the mainstream media is full of headlines about how "good" the jobs numbers for October were. Sadly, the truth is that the mainstream media is not being straight with the American people. As you will see below, we are in the midst of a long-term unemployment crisis in America, and things got even worse last month.
Investors who believe that history has lessons to teach should take our present concerns with significant weight, but should also recognize that tendencies that repeatedly prove reliable over complete market cycles are sometimes defied over portions of those cycles. Meanwhile, investors who are convinced that this time is different can ignore what follows. The primary reason not to listen to a word of it is that similar concerns, particularly since late-2011, have been followed by yet further market gains. If one places full weight on this recent period, and no weight on history, it follows that stocks can only advance forever. What seems different this time, enough to revive the conclusion that “this time is different,” is faith in the Federal Reserve’s policy of quantitative easing. The problem with bubbles is that they force one to decide whether to look like an idiot before the peak, or an idiot after the peak...
Bond markets may be closed today for Veterans' Day, but equities and far more importantly, FX, are certainly open and thanks to yet another overnight ramp in the ES leading EURJPY, we have seen one more levitation session to start off the week, and an implied stock market open which will be another record high. There was little overnight developed market data to digest, with just Italian Industrial Production coming in line with expectations at 0.2%, while the bulk of the attention fell on China which over the weekend reported stronger Industrial Production and retail sales, while CPI was just below expectations and additionally China new loans of CNY 506 billion (below est. of CNY 580bn) even as M2 in line, should give the Chinese government the all clear to reform absolutely nothing. That all this goldilocks and goalseeked data is taking place just as the Third Plenum picks up pace was not lost on anyone.
A dispassionate overview of the investment climate and what to expect this week.
Recent activity in asset markets suggests dangerous bubbles are building everywhere. It's time to bunker down and we look at ways to best protect your capital.
This past week saw the initial public offering of the single most anticipated IPO of 2013 - Twitter. If you tweeted about it then you are not alone as the news dominated the media headlines and the market. With Twitter already sporting a 11x price-to-sales ratio, and no earnings, what could possibly go wrong? However, it is that growing complacency among investors that should be the most concerning as the general sentiment has become that nothing can stop the markets as long as the Fed is in the game. This week's issue of things to ponder over the weekend provides some thoughts in this regard...
While today's big event is the October Non-farm payrolls print, which consensus has at 120K and unemployment rising from 7.2% to 7.3%, there was a spate of events overnight worth noting, starting with Chinese exports and imports both rising more than expected (5.6% and 7.6% vs expectations of 1.9% and 7.4% respectively), leading to an October trade surplus of $31.1 billion double the $15.2 billion reported in August. This led to a brief jump in Asian regional market which however was promptly faded. Germany also reported a greater trade surplus than expected at €20.4bn vs €15.4 bn expected, which begs the question just where are all these excess exports going to? Perhaps France, whose trade deficit rose from €5.1 billion to €5.8 billion, more than the €4.8 billion expected. Of note also was the French downgrade from AA+ to AA by S&P, citing weak economic prospects, with fiscal constraints throughout 2014. The agency added that the country has limited room to maneuver and sees an inability to significantly cut government spending. The downgrade, however, was largely a buy the EURUSD dip event as rating agencies' opinions fade into irrelevance.
When it comes to US equities today, the picture below summarizes it all... the only question is whether the NYSE breaks to celebrate the year's overhyped social media IPO.Aside from the non-event that is the going public of a company that will likely not generate profits for years, if ever, the overnight market has been quiet with all major stock indices in Asia trading modestly lower on the back of a modestly stronger dollar, although the main currency to watch will be the Euro (German Industrial production of -0.9% today was a miss of 0.0% expectations and down from 1.6% previously), when the ECB releases its monthly statement at 7:45 am Eastern when it is largely expected to do nothing but may hint at more easing in the future. On the US docket we have the weekly initial claims (expected at 335k) which now that they are again in a rising phase, have been the latest data item to be ignored in the Bizarro market, as well as the latest Q3 GDP estimate, pegged by consensus at 2.0%.
It was the deep of illiquid night when the momentum ignition trading algos struck. Out of the blue, a liftathon in all JPY crosses without any accompanying news sent the all important ES leading EURJPY surging by 50 pips, which in turn sent both the Nikkei up over 1% in minutes, and led to an E-Mini futures melt up of just about 8 points just when everyone was going to sleep. All of this happened completely independent of the actual data, which was chiefly European retail sales which missed (-0.6%, Exp. 0.4%, prior revised lower to 0.5%), Eurozone Service PMI which dropped (from 52.2 to 51.6) but beat expectations of 50.9 (notably the Spanish Service PMI of 49.6, up from 49.0 saw its employment index drop from 46.5 to 45.3, the lowest print since June), and finally, German Factory Orders which surged from last month's -0.3% to +3.3% in September. And while all this impacted the EUR modestly stronger, it had little if any residual effect on the ES. The bigger question is whether these slightly stronger than expected data point will offset the ECB's expected dovishness when Mario takes to the mic tomorrow).