The problem is central banks have created a vast pool of credit-money that is far larger than the pool of sound investment opportunities. Why are asset bubbles constantly popping up around the globe? The answer is actually quite simple. Asset bubbles are now so ubiquitous that we've habituated to extraordinary excesses as the New Normal; the stock market of the world's third largest economy (Japan) can rise by 60% in a matter of months and this is met with enthusiasm rather than horror: oh goody, another bubblicious rise to catch on the way up and then dump before it pops. Have you seen the futures for 'roo bellies and bat guano? To the moon, Baby! The key feature of the New Normal bubbles is that they are finance-driven: the secular market demand for housing (new homes and rental housing) in post-bubble markets such as Phoenix has not skyrocketed; the huge leaps in housing valuations are driven by finance, i.e. huge pools of cheap credit seeking a yield somewhere, anywhere:
Portugal suffered the most - with its bond spreads now a huge 45bps wider on the week. It seems between the ever-increasing vol in Japan, a rapidly fading JPY carry funding mechanism, and lack of fresh meat from Draghi, Italian and Spanish bonds and stocks are losing their 'greater fool' bid. Sovereigns are seeing their worst day since February; stocks among their worst days since Feb - with several Spanish and Italian banks halted limit-down (as ECB's QE-like collateralization was not eased); and EUR is strengthening against the USD as risk-flows are repatriated. Italian and Spanish stocks are now at 6 week lows, and Spanish, Italian, and Portuguese credit spreads at six-week highs. European financial and corporate credit are now wider (worse) on the year and equities are catching down. And the ultimate 'greater fool' momentum trade - GGBs - is fading - now down 9.5% in the last week...
Another day, another sell off in Japan. The Nikkei index closed down 0.9%, just off its lows and less than 1% away from officially entering a bear market, but not before another vomit-inducing volatile session, which saw the high to low swing at nearly 400 points. Hopes that a USDJPY short-covering squeeze would push the Nikkei, and thus the S&P futures higher did not materialize. And while the weakness in Japan is well-known and tracked by all, what may come as a surprise is that the Chinese equities are down for the 6th consecutive session marking the longest declining run in a year. Elsewhere in macro land, the Aussie Dollar continues to get pounded on China derivative weakness, tumbling to multi-year lows of just above 94 as Druckenmiller, who called the AUDUSD short nearly a month ago at parity shows he still has it.
That concept of the Chinese Dream "came just in time" and will "benefit the world"
Last night's over-promised and under-delivered 'third arrow' from Abe appears to have solidified market opinions about the chances of Abe slaying his deflation-monster nemesis. UBS' CIO Alex Friedman fears that Japan may face a fearsome stagflation - where accelerating inflation in asset prices is not met by higher growth rates - a scenario he calls "Abegeddon." In an "Abegeddon" scenario, Friedman said "investors may grow increasingly concerned about the sustainability of Japanese debt levels that could lead to a 'stampede' out of government bonds." With Nikkei 225 futures having faded their European morning bounce and pressuring back towards the 20% 'bear market' correction levels once again, it seems the 'stampede' is out of growth-expectation-driven equities as JGBs are bid for now. That bid (no matter how hard the BoJ tries) is unlikely to last if the doubt grows as Japan's debt-to-GDP would rise above 300% (from 226% currently) and the 10Y JGB yield could approach 5%!
It's a central bank world, and we are all just suckerfish attached to the Great Central Planning Whites, hoping for little scraps to trickle down as trillions (Yen-denominated) in bonds are monetized every day.
Global Risk Off: Nikkei Plunges 700 Points From Intraday Highs, Whisper Away From 20% Bear Market CorrectionSubmitted by Tyler Durden on 06/05/2013 06:50 -0400
Anyone expecting Abe to announce definitive, material growth reform instead of vague promises to slay a "deflation monster" last night was sorely disappointed. The country's PM, who may once again be reaching for the Immodium more and more frequently, said the government aims for 3% average growth over the next decade and 2% real growth, raising per capita income by JPY 1.5 million. The market laughed outright in the face of this IMF-type silly vagueness (as well as the amusing assumption that Abe will be still around in 7 years), which left untouched the most critical aspect of Abenomics: energy, and nuclear energy to be specific, and sent the USDJPY plummeting well below the 100 support line, printing 99.55 at last check. But more importantly, after surging briefly at the opening of the second half of trading to mask a feeble attempt at telegraphing the "all is well", it rolled over with a savage ferocity plunging 700 points from an intraday high of 13,711 to just above 13,000 at the lows: yet another 5% intraday swing in a market which is now flatly laughing at the BOJ's "price stability" mandate. Tonight's drop has extended the plunge from May 23 to 18.4% meaning just 1.6% lower and Japan officially enters a bear market.
UPDATE 2: Nikkei 225 touches 13,000 - down 750 from Abe highs (12,815 is 20% correction from highs)
UPDATE 1: Well that escalated quickly... Abe Speech ended- NKY -450 from Abe spike highs, TOPIX -3% from Abe spike highs, JPY cracked back under 100 (80 pips from Abe spike), JGBs surging
For about 2 minutes there it looked as if we were back on track and by the power of jawbone alone, Abe could lift Japan from its malaise.
*ABE VOWS TO SLAY DEFLATION MONSTER WITH FISCAL, MONETARY POLICY
*ABE CALLS GROWTH STRATEGY CENTERPIECE OF ECONOMIC POLICY
*ABE WILL THOROUGHLY REMOVE ALL BARRIERS TO CORPORATE ACTIVITY
But a mere 10 minutes after vowing to slay the deflation monster, Japanese stocks have retraced their spike gains and JPY has retraced its spike lower - but on the bright side - JGBs are bid.
Ongoing monetary stimulus is leading to heightened volatility, and the bull market which has been in place since 2009 is becoming overextended. The recent string of surprise downside moves in markets may be the canary in the coal mine for global investors. This is where we are today. The tide is rising for U.S. and Japanese markets and asset prices will ultimately move higher. The size and violence of each wave that advances or recedes will continue to increase due to the surge of liquidity from central banks. These tides of liquidity are strong, as are the currents underneath. We must guard ourselves from the risk of being pulled under.
Following on from our annual update on the wealth (re)distribution of nations, we thought it important to look at the other side of the household balance sheet - that of 'debt' to see just how much 'progress' has been made in the world. In the aftermath of the credit crisis (and the ongoing crisis in Europe), government debt levels continue to rise but combining trends in household debt highlights countries that have sustainable (and unsustainable) overall debt levels - and thus the greatest sovereign debt problems. Whether the 'number' is from Reinhart & Rogoff or not, the reality is that moar debt is not better and the nations with the highest debt-per-capita may surprise many. Critically, despite the rise in 'wealth' from 2000-2008, the ratio of debt-to-net-worth rose on average by about 50% (and in many nations continues to rise). The bottom line - in almost all countries, government liabilities exceeded government financial assets in 2011, leaving the government a net debtor.
House prices - with respect to both levels and changes - differ widely across OECD countries. As a simple measure of relative rich or cheapness, the OECD calculates if the price-to-rent ratio (a measure of the profitability of owning a house) and the price-to-income ratio (a measure of affordability) are above their long-term averages, house prices are said to be overvalued, and vice-versa. There are clearly some nations that are extremely over-valued and others that are cheap but as SocGen's Albert Edwards notes, it is the UK that stands out as authorities have gone out of their way to prop up house prices - still extremely over-valued (20-30%) - despite being at the epicenter of the global credit bust. Summing up the central bankers anthem, Edwards exclaims: "what makes me genuinely really angry is that burdening our children with more debt to buy ridiculously expensive houses is seen as a solution to the problem of excessively expensive housing." It's not different this time.
If we see the economy as a system, we understand why removing or suppressing feedback inevitably leads to financial crashes. The essential feature of stable, robust systems (for example, healthy ecosystems) is their wealth of feedback loops and the low-intensity background volatility that complex feedback generates. The essential feature of unstable, crash-prone systems is monoculture, an artificial structure imposed by a central authority that eliminates or suppresses feedback in service of a simplistic goal--for example, increasing the yield on a single crop, or pushing everyone with cash into risk assets. Resistance seems futile, but the very act of suppressing feedback dooms the system to collapse.
Following April's surprising drop in crude imports which led to a multi-year low in the March trade balance (revised to -$37.1 billion), the just released April data showed an 8.5% jump in the deficit to $40.3 billion, if modestly better than the expected $41.1 billion. This was driven by a $2.2 billion increase in exports to $185.2 billion offset by a more than double sequential jump in imports by $5.4 billion, to $222.3 billion. More than all of the change was driven by a $3.2 billion increase in the goods deficit, offset by a $0.1 billion surplus in services.The Census Bureau also revised the entire historical data series, the result of which was a drop in the March deficit from $38.8 billion to $37.1 billion. In April 233,215K barrels of oil were imported, well above the 215,734K in March, and the highest since January. Furthermore, since the Q1 cumulative trade deficit has been revised from $126.9 billion to $123.7 billion, expect higher Q1 GDP revisions, offset by even more tapering of Q2 GDP tracking forecasts. And since the data is hardly as horrible as yesterday's ISM, we don't think it will be enough on its own to guarantee the 21 out of 21 Tuesday track record, so we eagerly look forward to today's POMO as the catalyst that seals the deal.
- Whale of a Trade Revealed at Biggest U.S. Bank With Best Control (BBG)
- ECB backs away from use of ‘big bazooka’ to boost credit (FT)
- Turkish unions join fierce protests in which two have died (Reuters)
- Europe Floods Wreak Havoc (WSJ)
- Beheadings by Syrian Rebels Add to Atrocities, UN Says (BBG)
- RBA Sees Further Rate-Cut Scope as Aussie Remains High (BBG)
- China’s ‘great power’ call to the US could stir friction (FT)
- J.C. Penney Continuing Ron Johnson’s Vision on the Cheap (BBG)
All traders walking in today, have just one question in their minds: "will today be lucky 21?" or the 21st consecutive Tuesday in which the Dow Jones has closed green.
All else is irrelevant.