It's as if we have two economies: the simulacrum one of stocks rising dramatically in a few months, and the real one of household earnings (down) and hours worked (down). It is difficult to justify the feeling that we are living in an extraordinary moment in time, for the fundamental reason that it's impossible to accurately assess the present in a historical context. Extraordinary moments are most easily marked by dramatic events such as declarations of war or election results; lacking such a visible demarcation, what sets this month of 2013 apart from any other month since the Lehman Brothers' collapse in 2008? It seems to me that the ordinariness of June 2013 is masking its true nature as a turning point. Humans soon habituate to whatever conditions they inhabit, and this adaptive trait robs us of the ability to discern just how extraordinary the situation has become.
Europe is a disaster-zone. Here’s the round-up of what’s going wrong right now. The longest day? It would have been a long day, whatever happened, so you might as well enjoy it.
Global financial markets are now in a very perilous state, and there is a much higher than normal chance of a crash. Bernanke's recent statement revealed just how large a role speculation had played in the prices of nearly everything, and now there is a mad dash for cash taking place all over the world. Collectively, the move away from commodities, bonds, and equities in all markets globally tells us that there's nowhere to hide and that this is a 2008-style dash for cash. Everything is being sold, as it must, to meet margin calls, pay down leverage, and get out of positions; all are signs of the end of a speculative phase.
Recent market actions have left many staunch gold advocates uncertain about what's ahead... not to mention how to invest wisely for both the short and long term. What gold assets are the best to buy? Should investors be buying today or holding for further drops? There is bad news and good news...
After Thursday night's global liquidation fireworks, the overnight trading session was positively tame by comparison. After opening lower, the Nikkei ended up 1.7% driven by a modest jump in the USDJPY. China too noted a drop in its ultra-short term repo and SHIBOR rate, however not due to a broad liquidity injection but because as we reported previously the PBOC did a targeted bail out of one or more banks with a CNY 50 billion injection. Overnight, the PBOC added some more color telling banks to not expect the liquidity will always be plentiful as the well-known transition to a slower growth frame continues. The PBOC also reaffirmed that monetary policy will remain prudential, ordered commercial banks to enhance liquidity management, told big banks that they should play a role in keeping markets stable, and most importantly that banks can't rely on an expansionary policy to solve economic problems. Had the Fed uttered the last statement, the ES would be halted limit down right about now. For now, however, communist China continues to act as the most capitalist country, even if it means the Shanghai Composite is now down 11% for the month of June.
If the Brazilian government thought that caving yesterday to popular demands against a $0.10 bus and subway fare hike would be enough to placate the millions and see a peaceful dissolution to the protests that had gripped the country in the past two weeks, it found out in less than 24 hours that ceding to the angry mob only emboldens the public to demand more (and with a list a grievances including corruption, violence, police repression and failed politicians the list of demands is sure to escalate). Sure enough, the very next day, the public emerged with newfound energy and momentum, as 300,000 people took to the streets of Rio de Janeiro and hundreds of thousands more flooded other cities in the largest protests yet.
Japan’s attack in the Currency War was SUPPOSED to make it more competitive in international trade
Bonds, shares plus gold and silver fell sharply around the world this morning after the U.S. Federal Reserve again suggested an end to their easy money policies. Data also showed China's economy slowing down amid growing concerns that a credit crunch in China is worsening.
We have long held the opinion that the markets, all of them, have been buoyed by what the Fed and the other central banks have done which was to pump a massive amount of money into the system. There are various ways to count this but about $16 trillion is my estimation. The economy in America has been flat-lining while the economies in Europe have been red-lining and while China has claimed growth their numbers did not add up and could not be believed. In other words, the economic fundamentals were not supporting the lofty levels of the markets which had rested upon one thing and one thing alone which was liquidity. Yesterday was the first day of the reversal. There will be more days to come.
- Bonds Tumble With Stocks as Gold Drops in Rout on Fed (BBG)
- Bernanke Sees Beginning of End for Fed’s Record Easing (BBG)
- Gold Tumbles to 2 1/2 Year-Low After Fed as Silver Plummets (BBG)
- PBoC dashes hopes of China liquidity boost (FT)
- U.S. Icons Now Made of Chinese Steel (WSJ)
- Emerging Markets Crack as $3.9 Trillion Funds Unwind (BBG)
- Everyone joins the fun: India sets up elaborate system to tap phone calls, e-mail (Reuters)
- China Manufacturing Shrinks Faster in Threat to Europe (BBG)
- More on how Syria's Al-qaeda, and now US, supported "rebels", aka Qatar mercenaries, operate (Reuters)
- Echoes of Mao in China cash crunch (FT) - how dare a central bank not pander to every bank demand?
The global liquidation wave started with Bernanke's statement yesterday, which was interpreted far more hawkishly than any of his previous public appearances, even though the Fed had been warning for months about the taper. Still, markets were shocked, shocked. Then it moved to Japan, where for the first time in months, the USDJPY and the Nikkei diverged, and despite the strong dollar, the Nikkei slumped 1.74%. Then, China was swept under, following the weakest HSBC flash manufacturing PMI print even as the PBOC continued to not help a liquidity-starved banking sector, leading to the overnight repo rate briefly touching on an unprecedented 25%, and locking up the entire interbank market, sending the Shanghai Composite down nearly 3% as China is on its way to going red for the year. Then, India got hit, with the rupee plunging to a record low against the dollar and the bond market briefly being halted limit down. Then moving to Europe, market after market opened and promptly slid deep into the red, despite a services and mfg PMI which both beat expectations modestly (48.6 vs 47.5 exp., 48.9 vs 48.1 exp) while German manufacturing weakened. This didn't matter to either stocks or bond markets, as peripheral bond yields promptly soared as the unwind of the carry trade is facing complacent bond fund managers in the face. And of course, the selling has now shifted to the US-premarket session where equity futures have seen better days. In short: a bloodbath.
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."
Almost exactly 8 years after Greenspan's now infamous "conundrum" comments about the unprecedented persistence of low, long-term interest rates, Bernanke is now "puzzled" at the dramatic rise in interest rates following his recent Taper remarks. Have no fear though, just as Greenspan noted, "I'm reasonably certain we would not automatically assume that it would mean what it meant in the past, " Bernanke said today that the "sharp rise in rates", was not about the Taper but "due to other factors, including optimism about the economy." Perhaps more importantly, today for the first time someone, not Hilsenrath of course, had the guts to ask Bernanke the hardest question: is the Fed's "Stock not Flow" worldview broken, and was it wrong all along? Of course, the implications of the Fed being wrong on this most critical aspect of monetary theory opens up a hornet's next of Pandora's boxes: just what else is the Fed wrong about, and how much will Bernanke be "puzzled" when one by one all of his flawed theories are revealed to be nothing but religious dogma.
The economic and asset bubble in Japan burst in 1990, at roughly the same time as its demographic structure reached a tipping point. As UBS' George Magnus notes, the working age population began to fall, marking the start of a relentless rise in both the total and old age dependency ratios; and, he adds, a comparable phenomenon occurred in the US and Europe between 2005-2010. On current trends, Magnus warns, China will replicate at least the demographic part of this phenomenon between now and 2016, against a backdrop of rising concern about the structural nature of the slowdown in economic growth, along with rising credit intensity, indebtedness, and misallocation of resources.
China is snugging, trying to rein in its financial system and shadow banking system.