With the return of Federal Reserve Chair(wo)man odds at PaddyPower (leaving Summers a dreary 28% likelihood of winning) comes the Irish bettors' latest gamble... when will the US Fed initiate Tapering of QE? Based on the month during which the first reduction of QE bond-buying from the current $85bn per month, it seems (unlike the majority of prognosticators and standing blithely in the face of technical, political, and deficit reasons) that tapering will not begin until December at earliest with most believing 2014-or-later...
We had absolutely no concern about the outcome of today's 5 Year auction: after all, when push comes to shove, Bill Gross who yesterday was pitching 5 Year bonds to twitter would have certainly bought up the entire issue. Yet we were surprised to find that Direct Bidders, among which such bond kings as PIMCO, tendered only $6 billion (a 47% hit rate) in bids into today's $35 billion auction. Odd - could Bill Gross have been untruthful in expressing his interest in the bond and was merely looking for greater fools? Unpossible.
— PIMCO (@PIMCO) July 23, 2013
Gold surged over 3% yesterday due to what appears to be have been significant short covering due to concerns about gold backwardation and the continual haemorrhaging of gold inventories from the COMEX.
Concerns about a default on the COMEX, once the preserve of a few observant market watchers, are becoming more widespread as we appear to be witnessing a run on the highly leveraged bullion banking system.
Very robust physical demand from the Middle East, Asia and particularly China and a decline in the dollar also helped prices log their biggest one-day gain in over a year and their first close above $1,300 an ounce in nearly five weeks.
Gains in silver futures, meanwhile, outpaced gold’s rise, with silver surging 5%.
Based on the following quotes just uttered by the Chairman...
- BERNANKE: WALL STREET HASN'T BENEFITED MORE THAN MAIN STREET
- BERNANKE SAYS FED `VERY FOCUSED' ON MAIN STREET
... Bernanke's next career as a sit-down comedian smash hit is guaranteed.
Is the global economic downturn going to accelerate as we roll into the second half of this year? There is turmoil in the Middle East, we are seeing things happen in the bond markets that we have not seen happen in more than 30 years, and much of Europe has already plunged into a full-blown economic depression. Sadly, most Americans will never understand what is happening until financial disaster strikes them personally. As long as they can go to work during the day and eat frozen pizza and watch reality television at night, most of them will consider everything to be just fine. Unfortunately, the truth is that everything is not fine.
From Bill Gross: "In trying to be specific about which conditions would prompt a tapering of QE, the Fed tilted overrisked investors to one side of an overloaded and overlevered boat. Everyone was looking for lifeboats on the starboard side of the ship, and selling begat more selling, even in Treasuries. While the Fed’s move may ultimately be better understood or even praised, it no doubt induced market panic. Without the presence of a “Bernanke Put” or the promise of a continuing program of QE check writing, investors found the lifeboats dysfunctional. They could only sell to themselves and almost all of them had too much risk. A band somewhere on the upper deck began to play “Nearer, My God, to Thee.”"
This a fairly broad topic, and any "rules" would be vague at best, so i'll use recent trading activity as an example. Often markets (and traders) are described as schizophrenic...and perhaps that should even be part of the job description....here's an example why...
Bill Gross, of PIMCO and serious bond duration pain, finally comes clean: the man who has been criticizing the Fed for years for one after another misguided policy (all of which ultimately culminate with the New York Fed's markets desk going "wave it in" this or that) to the point where he began sounding like a Zero Hedge broken record, opines on the taper. And it is here that Bill's colors truly shine through: "We agree that QE must end. It has distorted incentives and inflated asset prices to artificial levels. But we think the Fed’s plan may be too hasty." In other words, please let me have my Fed and central-planning criticizing cake (but don't actually enact my free market suggestions) and let me eat my management fees too (and no monthly redemptions please). And there you have it: populist critic by day, pandering P&L defender by night.
Did you know there was a large POMO Thursday? And, did you know Friday is quadwitching? Do you care?
The table is set for a counter-trend rally Friday given these events.
But, as with any oversold or overbought condition, markets can remain that way for longer than you expect—just look at gold as an example.
If anyone thought Bill Gross would take what is likely the worst P&L day in PIMCO history without a fight, they would be wrong.
Gross: To paraphrase #Bernanke 2002: “Regarding the Great (Re)pression. You’re right Milton, we did it. Sorry. We won’t do it again.” ???
— PIMCO (@PIMCO) June 20, 2013
So did Bernanke just do it again?
The biggest bond fund manager on the planet likely had a bad day today and judging by his comments during the following Bloomberg TV interview, he is not too impressed with the current Fed head, who is "driving in a fog," or the front-runner to fill Ben's shoes, Yellen "is a Siamese twin in terms of policy... [preferring someone] who would emphasize Main Street as well as Wall Street - which has been the emphasis for the past three or four years." The mistake the Fed is making, Gross explains, "is blaming lower growth on fiscal austerity and expects towards the end of the year once that is gone, all of the sudden the economy will be growing at 3%," or more simply the error of their policy-making ways is "to think that is a cyclical as opposed to a structural problem in terms of our economy." The bottom-line is that Gross sees less Taper (due to disinflation) and warns "those who are selling treasuries in anticipation that the Fed will ease out of the market might be disappointed."
We have discussed the idea of a VaR shock (driven by Abe/Kuroda's loss of control) a number of times recently but as Saxo's Steen Jakobsen fears, reality is about to hit as the marginal cost of capital normalizes. The world, so far, has been kept in artificial equilibrium by the way quantitative easing (QE) and fiscal policies bring support and endless liquidity to the 20 percent of the economy that mostly comprises large and already profitable companies and banks with good credit and good political access. The premise for supporting these companies is based on the non-existent wealth effect which unfairly culminates in supporting the haves to the detriment of the have-nots. However, as Jakobsen notes below, things are rapidly changing; the recent increase in yields has happened despite no real improvement in the underlying data. The the next few days are potential major game changers – the bloated VaRs will make people hedge and over hedge, and the normalization process of rising risk premiums and higher real rates (higher yield plus lower inflation) will lead to more selling off of those trades that have "worked so far"... and increase volatility in their own right.
"While we are not likely to see a repeat of that type of [30Y bond] bull market any time soon, we also do not believe we are at the beginning of a bear market for bonds."
"We are concerned by the growing downside of zero-based money and QE policies – among them a worrisome distortion in asset pricing, the misallocation of capital and ultimately a dis-incentivizing of risk taking by corporations and investors."
"We believe caution is warranted not just for fixed income investors, but for investors in all risk assets; avoiding long durations, reducing credit risk away from economically vulnerable companies and sectors"
Gross: Fed’s “Deep Throat” stops delevering for now. Markets await main man next week. Hilsenrath’s focus on policy rate VERY interesting.
— PIMCO (@PIMCO) June 14, 2013