Everyone loves a good conspiracy theory debate. Regardless of whether you argue for it, or against, there are times when suddenly the ramifications for plausible truth are realized that overshadow the conspiracy. This is where the plot of truth can get far more sinister than the imagined conspiracy ever could.
Quality stocks along with everything else are expensive. Increasing risk while valuations in the equity market are so elevated seems dangerous, so the obvious answer is to hide in cash. Given valuation dispersion is so tight, avoiding risk will be pivotal in 2015. To that end, avoiding or even shorting companies with a high degree of earnings manipulation seems sensible. This style was a particular strong performer in Europe and Japan last year. We expect to see similar effects emerging in US stocks this year. Simply put, the lack of quality income stocks to invest in is often a precursor to a market downturn.
My conclusion is that the SNB deliberately screwed the market, and in the process shot itself in the foot for 30-50 billion dollars. What were they thinking?
Top ten things that investors will likely be watching in the week ahead.
Next week will be crucial for Super Mario...
We’re getting back to normal, and though normal’s going to hurt – and far more than you realize yet - it’s hugely preferable to upside down; you hang upside-down long enough, it makes your brain explode. The price of oil was the first thing to go, central banks are the next. And then the whole edifice follows suit. The Fed has been setting up its yes-no narrative for months now, and that’s not without a reason. But everyone’s still convinced there won’t be a rate hike until well into this new year. And the Swiss central bank said, a few days before it did, that it wouldn’t. And then it did anyway. The financial sectors’ trust in central banks is gone forever. And none too soon. Now they’ll have to cover their own bets. If anything spells deflation, it’s got to be that. But not even one man in a thousand understands what deflation is.
A promise is a promise is a promise... especially if it's from a Central Bank. That was true and undeniable for decades of BTFD 'equity market put'-provision by the world's central planners... until Wednesday. But now, on the heels of the Swiss National Bank's 'victory' against the vicious cycle of currency wars and monetary debauchment, The Asian Nikkei Review reports stirrings in the Bank of Japan as one official warns, "we have caused tremendous trouble for the financial industry," and many others growing anxious about continuing its massive purchases of government bonds (confronted with the program's negative side effects) and pressure from the financial industry is strengthening by the day "to scale back monetary easing soon."
At this point the current financial system was irrevocably broken. We simply had yet to feel it.
The utter lunacy of the ECB is reaching its inevitable end because lunacy itself cannot create economic, or even financial, normalcy. The Keynesian heart of all of this is that they fully believe redistribution can make for potent economic tonic, but redistribution is at its root a very negative factor.
Late on Friday afternoon, desparate to relive his mid-October 'world-saving' heroics, The Fed's Jim Bullard unleashed some more Fedspeak aimed at the promise of moar money to save the world (i.e. stocks) if things don't work out. But it is his concluding comment that sparked the most 'keyboard-smashing-angst' for those not buying the spoon-fed omnipotence of the central planners. Bullard stated unequivocally that "the lesson of QE is that it works fairly well." While we are not exactly sure what his definition of 'works' is, as the chart below and Richard Koo's QE-dream-crushing commentary shows, by reflating assets by their hand, the central planners are putting the cart before the horse... and Japan is a perfect example of the vicious economic spiral that leads to...
When it comes to America's foreign creditors, only two names matter (except for Belgium whose Euroclear service continues to be used by an anonymous entity(s) to buy up US Treasurys): Japan and China. And it is in the Treasury buying and selling dynamics of these two entities that we can see how Japan's monetary policy has impacted its holdings of US paper, which just hit a new all time high of $1,242 billion, while on the other hand Beijing's official holdings of Treasurys have remained unchanged since the summer of 2011, and which in July declined yet another month to just $1,250 billion, the lowest since January 2013.
At the moment, the US dollar is choice. This isn’t necessarily a vote of confidence for the dollar. It’s more like a vote against all the others. If big institutional investors must choose between bankrupt America and bankrupt Europe, right now they choose America. But this is a decision that can and will be changed in an instant. Just look at the Swiss franc...
Reuters just reported that none other than the HFT's bestest buddy exchange, BATS, which earlier this week was slapped with the biggest monetary penalty ever for continuing the practice of Hide Not Slide (at least until UBS' dark pool was slapped with an even bigger fine for conducting subpennying without informing most of its clients), is about to buy the FX trading platform of KCG, formerly Knight Capital which too blew up after one of its algos went haywire and blew up the firm in milliseconds.
- BATS GLOBAL MARKETS IN TALKS TO BUY FX TRADING PLATFORM HOTSPOT FROM KCG HOLDINGS KCG.N FOR NEARLY $400 MLN - SOURCES KCG.N - RTRS
Which, of course, is great news for all those who have stepped back from the rigged circus and merely enjoy "markets" for the comedic farce they have become
"The first lesson is never trust a central banker when he or she makes a commitment or gives guidance..."
What we see now is the recovery of price discovery, and therefore the functioning economy, and it shouldn’t be a big surprise that it doesn’t come in a smooth transition. Six years is a long time. Moreover, it was never just QE that distorted the markets, there was – and is – the ultra-low interest rate policy developed nations’ central banks adhere to like it was the gospel, and there’s always been the narrative of economic recovery just around the corner that the politico/media system incessantly drowned the world in. That the QE madness ended with the decapitation of the price of oil seems only fitting.