It is time for the centrally-planned markets to "try" for the round number trifecta of 16000, 1800 and 4000 again, although it may be a tad more difficult on a day in which there is no double POMO and just $2.75-$3.50 billion will be injected by the NY Fed into the S&P - perhaps it is Bitcoin that will hit the nice round number of $1000 first? Overnight, the Chinese Plenum news rerun finally was priced in and the SHComp closed red, as did the Nikkei 225 as the Asian euphoria based on communist promises about what may happen by 2020 fades. What's worse, the Chinese 7-day repo rate is up 140bp this morning to 6.63% amid talk of tightening domestic liquidity conditions, and back to levels seen during the June liquidity squeeze. All this is happening as China continues leaking more details and hope of what reform the mercantilist country can achieve, and how much internal consumption the export-driven country can attain: overnight there were also additional reports of interest rate liberalization and that the PBOC are to set up a floating CNY rate. Good luck with that.
"I can only say: I'm sorry, America. As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed's first plunge into the bond-buying experiment known as quantitative easing.... We were working feverishly to preserve the impression that the Fed knew what it was doing... The central bank continues to spin QE as a tool for helping Main Street. But I've come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.... Having racked up hundreds of billions of dollars in opaque Fed subsidies, U.S. banks have seen their collective stock price triple since March 2009. The biggest ones have only become more of a cartel: 0.2% of them now control more than 70% of the U.S. bank assets. As for the rest of America, good luck..... The implication is that the Fed is dutifully compensating for the rest of Washington's dysfunction. But the Fed is at the center of that dysfunction. Case in point: It has allowed QE to become Wall Street's new "too big to fail" policy."
In what is the biggest black eye for Bill Gross and the largest bond manager in the world, moments ago Bloomberg reported that the title of the world's largest mutual fund has just changed hands:
- PIMCO TOTAL RETURN LOSES LARGEST MUTUAL FUND TITLE TO VANGUARD
- GROSS'S PIMCO TOTAL RETURN BECAME LARGEST MUTUAL FUND IN 2008
- PIMCO TOTAL RETURN HAD $247.9 BILLION IN ASSETS AS OF OCT. 31
This comes on the heels of what Reuters reports is the sixth consecutive month of outflows for the TRF, with $4.4 billion withdrawn in October, while on the other side Vanguard, now at $251 billion, has more than tripled in size since the end of 2008 as the scramble for equities in Bernanke's new normal has become the only game in town.
The Fed will have to increase QE (not taper it) because systemic debt is compounding faster than production and interest rates are already zero-bound. Lee Quaintance noted many years ago that the Fed was holding a burning match. This remains true today (only it is a bomb with a short fuse). Thirteen years after the over-levered US equity market collapsed, eleven years following Bernanke’s speech, five years after the over-levered housing bubble burst, and four years into the necessary onset of global Zero Interest Rate Policies and Long-Term Refinancing Operations, global monetary authorities seem to have run out of new outlets for credit. In real economic terms, central bank policies have become ineffective. In other words, the US is now producing as much new debt as goods and services.
There was a time when the Fed's QE was, at least on paper, supposed to generate jobs (the broad inflation will come on its own, in due course). After all, the prospect of injecting $85 billion in liquidity into a market with the sole goal of pushing the stock markets that benefit the purchasing power of about 10% of the population would hardly have received broad approval even by the co-opted Congress. So, to all those who still naively claim Fed is not the sole reason for the market's relentless march higher, those billions in liquidity must go into the economy, and specifically into job creation, right? As a result, we decided to back into what the average private sector job has ended up costing the US population in pure dollar terms (which in turn ultimately manifests itself in terms of unsustainable government debt and pent up inflation) via the Fed's monetary pathway. Well, according to the ADP data released earlier, in which a paltry 130K private sector jobs were created in a month in which the Fed, as always, injected $85 billion, the bottom line came to a whopping $654K per job! And taking the average job growth throughout 2013, this number, as can be seen on the chart below, is a laughter-inducing $553K!
Remember when minutes before the September FOMC announcement everyone was absolutely certain the Fed would announce tapering, only to leave a lot of very angry traders fuming? Fast forward one month when everyone is absolutely certain, again, that there is no way the Fed can announce anything even remotely suggesting a taper. One wonders though: since the Fed has by now burned all credibility bridges, and since the capital market bubble is now far greater than it was when both Stein and Bernanke, implicitly, warned about a building asset bubble (a chorus which has now been joined by JPM, Pimco and BlackRock) in early 2013, would today not be the best opportunity for the Fed to once again stun the market with a dramatic policy U-Turn, just to teach those momentum wave-riding vacuum tubes who is in charge? Probably not. However, as Lloyd Christamas noted, there is a chance. Deutsche Bank's Jim Reid explains why.
- FINK SAYS IT'S "IMPERATIVE" THAT THE FED BEGIN TO TAPER
- FINK CALLS MARKET `OVER-ZEALOUS'
- FINK SAYS THERE ARE "REAL BUBBLE-LIKE MARKETS AGAIN"
So... when the three largest banks/asset managers in the US say that Ben Bernanke has blown the largest asset bubble in history and that the time to taper has come, will Janet Yellen once again turn a blind ear to warnings that come not just from the "tinfoil" blogosphere but the "respected" legacy financial institutions made up of serious people, and after the cataclysm admit that, just like last time, she "never saw it coming?"
Gross: All risk asset prices artificially high. When won’t they be? When they don’t produce growth in real economy. Is 2% GDP enough?
— PIMCO (@PIMCO) October 29, 2013
Having fired a shot across Carl iCahn's bow yesterday, PIMCO's Bill Gross has a new target - once again talking his book...
Gross: By the way, I should spend more TIME like Bill Gates too -- we all should. He and Melinda are great paragons.
— PIMCO (@PIMCO) October 25, 2013
Perhaps more Americans should spend more time that way... instead of watching every tick in AMZN and dreaming of retirement...
— PIMCO (@PIMCO) October 24, 2013
Yesterday it was JPMorgan's money-market funds adjusting to their fiduciary duty and following Fidelity's lead in getting out of any and all short-term non-risk-free Treasury Bills. Today, another massive money-market fund provider sells it all...
- *BLK'S MONEY FUNDS HAVE NO ASSETS IN TREASURIES TIED TO DEFAULT
- *BLACKROCK SAYS `ZERO EXPOSURE' TO DEBT MATURING IN LATE OCT.
- *BLACKROCK SAYS NO HOLDINGS IN TREASURIES MATURING IN EARLY NOV.
It seems remarkable that all three of these funds would ignore the advice of blowhard bloggers who suggested this was nothing. But, as Barack Obama himself said yesterday, "Ultimately, what matters is: What do the people who are buying Treasury bills think?" It seems only the Fed (and PIMCO) is left.
GROSS: 6 weeks reprieve from the gallows. Washington sure knows how to put on a show. Buy 5yr Treasuries and Corps.
— PIMCO (@PIMCO) October 10, 2013
- The ice breaks; fiscal talks set (The Hill); Ryan steps up to shape a deal (The Hill), as predicted here yesterday
- Republicans consider short-term U.S. debt ceiling increase (Reuters)
- Shutdown Standoff Shows Signs of a Thaw (WSJ)
- JPMorgan Clients in Cash as Schwab’s Options Hedge Default (BBG)
- Mitch McConnell, Senate GOP search for way out (Politico)
- Meredith Whitney Winds Down Brokerage Unit After Setting Up Fund (BBG)
- Washington Budget Chaos Keeps Fed Rates Low for Longer (BBG)
- Chinese Premier Outlines US Debt Concerns (FT)
- Saudis brace for 'nightmare' of U.S.-Iran rapprochement (Reuters)
- Obama Urges Action on Yellen’s Fed Nomination (Reuters)
- Libyan Prime Minister Ali Zidan Freed After Kidnap (WSJ)
Gross: Don’t run for the hills b/c of the #shutdown or the debt ceiling – Run b/c the economy is slowing by itself.
— PIMCO (@PIMCO) October 3, 2013
A week ago, we first reported that Bridgewater's Ray Dalio had finally thrown in the towel on his latest iteration of hope in the "Beautiful deleveraging", and realizing that a 3% yield is enough to grind the US economy to a halt, moved from the pro-inflation camp (someone tell David Rosenberg) back to buying bonds (i.e., deflation). This was music to Bill Gross' ears who in his latest letter, in which he notes in addition to everything else that while the Fed has to taper eventually, it doesn't actually ever have to raise rates, and writes: "The objective, Dalio writes, is to achieve a “beautiful deleveraging,” which assumes minimal defaults and an eventual return of investors’ willingness to take risk again. The beautiful deleveraging of course takes place at the expense of private market savers via financially repressed interest rates, but what the heck. Beauty is in the eye of the beholder and if the Fed’s (and Dalio’s) objective is to grow normally again, then there is likely no more beautiful or deleveraging solution than one that is accomplished via abnormally low interest rates for a long, long time." How long one may ask? "the last time the U.S. economy was this highly levered (early 1940s) it took over 25 years of 10-year Treasury rates averaging 3% less than nominal GDP to accomplish a “beautiful deleveraging.” That would place the 10-year Treasury at close to 1% and the policy rate at 25 basis points until sometime around 2035!" In the early 1940s there was also a world war, but the bottom line is clear: lots and lots of central planning for a long time.