The Federal Reserve is saying one thing, but is actually doing the complete opposite...
- Futures rally after BOJ ramps up stimulus (Reuters), Japan's central bank shocks markets with more easing as inflation slows (Reuters)
- Kuroda Jolts Markets With Assault on Deflation Mindset (BBG)
- Japan Mega-Pension Shifts to Stocks (WSJ)
- Russia Raises Interest Rates (WSJ)
- Oil-Price Drop Has Saudi Officials Divided (WSJ)
- Not anymore, the BOJ is here: Fed Exit Could Spark Slump in All Markets, ATP CEO Says (BBG)
- Wal-Mart Weighs Matching Online Prices from Amazon (WSJ)
- Euro-Area Inflation Picks Up From Five-Year Low on Stimulus (BBG)
- Big Banks Brace for Penalties in Probes (WSJ)
- Ex-UBS Trader Defense Could Be Threat to U.S. Forex Cases (BBG)
Europe is fast turning into a freak comedy show. Very fast. Or maybe we should say it’s always been one, and it’s just that the Larry, Curly and Moe moves are only now coming out in droves. Or maybe, what do I know, we’re just starting to understand how much talent for farce and slapstick the boys from Brussels have always had. Someone finish off that inane union before it starts to do real serious harm. Because it will.
130 banks are being tested. 12-18 will fail. And on top of that, almost a third of 130, that’s over 40, will pass while still getting their feet wet. That means anywhere between 40% and 44% of Eurozone banks either fail or are in bad shape. If 40% of your banks are either dead in the water or barely floating, I’d say you have a major problem. We all know our world, be it politics or economics, consists almost exclusively of spin these days, but in the face of these numbers we very much wonder how many people will be willing to bet their own money that Europe can get away with another round of moonsmoke and roses come Monday.
Once upon a time, one of the best sell-side analysts in the MBS space was Merrill Lynch's "Convexity Maven" Harley Bassman: he was so good, in fact, he was quickly soaked up to the buyside, or at least the prop-trading side, when several years ago he left Merrill to join Credit Suisse as a prop trader. It was here that he provided some insightful trade ideas such as "The "Anti-Widowmaker" Trade: Get Paid To Wait For The Japanese House Of Card To Collapse" and previewed the "Inevitable 'Taper'" at a time when most still didn't think the Fed was running out of paper to monetize. Then, about a year ago, Bassman disappeared again, only to reappear in a new capacity at recently-troubled bond manager Pimco. It is from here that following a year-long silences, he has just sent out his latest letter, in which he picks up on his favorite topic: implied volatility in rates, and the arbitrage opportunities it provides courtesy of epic risk mispricing in the current quote-unquote market, courtesy of the Fed's 6 year+ centrally-planned manipulation of, well, everything.
The ECB may not release its minutes to the public (opting instead to keep these secret for 30 years) at least for now, but earlier today a transcript of its internal deliberations was made public by the NYT, which revealed how the ECB governing council once again snubbed its responsibilities, and in January 2013 bailed out a failing Cyprus bank, Cyprus Popular Bank, just months ahead of the now infamous Cypriot "bail-in" i.e., deposit confiscation. The story in a nutshell: following much internal wrangling and posturing by the "northern" states, notably the usual suspects such as Wiedmann and Knot, the Cypriot bank, which the ECB continued to bail out even though it should not have as the bank had obtained an ECB lifeline based on fake financials and glaringly impossible assumptions, the bank ultimately failed. Who was left holding the bag? Why Cyprus' depositors of course.
It’s generally considered that higher volatility in bond markets would accompany higher rates. Thus, if rates are falling, volatility will remain subdued. However, as the PIMCO Eurodollars liquidation showed, the market was already short. So the position liquidation is coming in a rally, rather than a sell-off. On top of that, inflation is falling and with oil under pressure should remain low. Meanwhile the Fed hawks evidently lost the argument to the doves in September, and their hand has been strengthened by the dollar rally. So the conditions are set for higher vol to accompany the fall in rates.
This could be the hidden message of Bill Gross’ departure...
By now it is clear to everyone that the force-feeding of free-money into financial markets by The Fed et al. has led to a scale of financial repression never before witnessed as bond yields for even the riskiest of risky names collapse to record lows and cheap-financed share buybacks raise leverage to record highs and support an ever more fragile equity wealth creation machine. As Blackrock (and many others) have recently proclaimed, the corporate bond market is "broken" and the risk posed by investors trying to dump bonds is"percolating right under" the noses of regulators; so it is with grave concern we suggest the following two charts - showing the massive out-sized holdings of PIMCO's funds in the high-yield and emerging market debt markets leave a bond marketplace in fear that forced sales via redemptions are the straw that breaks the 'central bank omnipotence' narrative's back...
Investors worldwide poured a net $15.8 billion into bond funds in the week ended Oct. 8. As Reuters reports, this is the biggest inflows in dollar terms since records began in 2001, according to EPFR Global. Money market funds also saw the biggest inflow since October 2013 as it appears the real great rotation is from stocks (biggest outflows in 9 weeks) into 'safe' assets. The up-in-quality, and up-in-capital-structure trade is alive and well, as BofA notes, investment grade inflows exploded as high-yield spreads widened further - now at one-year wides (despite small inflows). "Money is flowing out of PIMCO," warned one analyst but as BofA notes, PIMCO flows are reported monthly and so it is unclear as to the extent these flows are "overstated."
"Financial Markets Are Artificially Priced: What Do You Do?" - Bill Gross' First Janus Capital LetterSubmitted by Tyler Durden on 10/10/2014 12:37 -0400
Financial markets are artificially priced.... We have had our Biblical seven years of fat. We must look forward, almost by mathematical necessity, to seven figurative years of leaner: Bonds – 3% to 4% at best, stocks – 5% to 6% on the outside. That may not be enough for your retirement or your kid’s college education. It certainly isn’t for many private and public pension funds that still have a fairy tale belief in an average 7% to 8% return for the next 10 to 20 years! What do you do?
Curious how Bill Gross feels in his new digs at Janus Capital (aka old digs in Newport Beach)? Curious how much money he is managing now or how he will manage it? Curious why he has a band aid under his right eye? All should be revealed in the Janus Capital live webcast going on now.
- Five U.S. airports to screen for fever (Reuters)
- Danger, central banks trading with each other: Bipolar U.S. Stocks See Biggest Mood Swing in Three Years (BBG)
- Draghi Policies Blunted in Berlin as German Protests Grow (BBG)
- White policeman kills black teen in St Louis, triggering fresh protests (Reuters)
- Au Revoir to France’s Welfare Model as Socialists Cut Spending (BBG)
- Here comes Roberto Cavalski (Reuters)
- There are 49 U.S. venture-capital-backed companies with a valuation of $1 billion or more—the highest number on record (WSJ)
- Pressure mounts on Hong Kong leader over payout amid crisis (Reuters)
The most surprising data point in today's 10 Year auction was the plunge in Directs, which tumbled from 13.5% to only 6.6%, which was the lowest since August of 2012 when they ended up with 5.2%. Just how much of this lack of Direct interest is due to Bill Gross no longer being on the bid? And what happens to future auctions in a world without the Old "New Normal" Pimco?
The integrity of markets is clearly at risk. And we have long sought alternatives that offer much lower credit and counterparty risk. The time-honored alternative has been gold. As the chart below shows, gold has tracked the expansion in US debt pretty handily (the correlation between the two is a strong +0.86) and if one expects that relationship to resume (we do), then gold looks anomalously cheap relative to the rising level of US debt.