This is it! The holy grail of forecasting, Jeffrey Kleintop has discovered it. You'll never have to worry about actual earnings reports, a massive bubble in junk debt, the sluggishness of the economy, new record levels in sentiment measures and margin debt, record low mutual fund cash reserves, the pace of money supply growth, or anything else again. Just watch the yield curve! Unfortunately, as we showed here in the US, this advice could turn out to be extremely dangerous for one's financial health - and has been across many nations throughout time. People remain desperate for excuses as to why the latest bit of asset boom insanity will never end
The first big wave of embracing a liberal international economic order - relatively free trade, rising international capital flows and rapidly growing global economic integration - resulted in something remarkable. Between 1870 and 1914, there was a 45-year span of rising living standards, stable prices, massive capital investment and prolific technological progress. In terms of overall progress, these four-plus decades have never been equaled — either before or since. Then came the Great War. It involved a scale of total industrial mobilization and financial mayhem that was unlike any that had gone before. In the case of Great Britain, for example, its national debt increased 14-fold.
The US is tapering, with the Fed knowing any further monetization of private sector bonds will lead to a crash in the already illiquid bond market; Japan is stuck with its massive QE, jawboning every day a rumor that first appeared in November of 2013 (and which sent the USDJPY 500 pips higher and has so far been nothing but a lie) that it may do more, but has unleashed such a firestorm of imported inflation, plunging real wages and collapsing exports that there is nothing Abe or Kuroda can do to boost the Nikkei "wealth effect" or halt what now appears an almost certain 2014 recession. Europe, too, saw a rumor emerge in November 2013 that it would also launch QE, however it won't: instead the ECB just went NIRP and is threatening to do ABS purchases, which just like the OMT pipedream will never happen simply because there aren't enough unencumbered assets to monetize (most of which are already have liens with local banks) while an outright QE would require redrafting Article 123. So what is a world starved for "outside money" to do? Why make up another rumor, this time focusing on the last possible source of QE: China.
Moments ago, at 4:22am local time, a major 6.8 magnitude quake struck eastern Japan, off the Fukushima coast.
FLASH:M6.8 QUAKE JOLTS OFF FUKUSHIMA, JAPAN, TSUNAMI ALERT
EARTHQUAKE EARLY WARNING ISSUED FOR JAPAN, OFF FUKUSHIMA:JMA
EARTHQUAKE EARLY WARNING ISSUED FOR JAPAN, OFF FUKUSHIMA:JMA
TSUNAMI WARNING ISSUED AFTER JAPAN QUAKE: AP
The world sits their looking on at China’s economy wondering how they can do it and that we can’t. But, there’s a price to pay for being economically sound and for having a growth rate that is much better than the Western world, even if there are some that say that the figures have been stir-fried in a wok.
- Carl Icahn says 'time to be cautious' on U.S. stocks (Reuters)
- Banco Espirito Santo Lifts Lid on Exposure to Group (BBG)
- Slowing Customer Traffic Worries U.S. Retailers (WSJ)
- Insurgents enter military base northeast of Baghdad (Reuters)
- Obama tells Israel U.S. ready to help end hostilities (Reuters)
- Japan economics minister warns of premature QE exit, sees room for more easing (Reuters)
- Greek Banks See Quadrupling of Housing Loans by Next Year (BBG) ... to fund buybacks like in the US?
- Piggy Banks Being Raided Signal Swedish Housing Dilemma (BBG)
- London Seeks New Spenders as Russians Skip $719 Champagne (BBG)
This clown parade of clueless opinions (did we mention Goldman had BES at a buy until this morning?), stretched all the way to the very top with Bank of Portugal itself issuing the following pearl:
- BANK OF PORTUGAL SAYS BES DEPOSITORS CAN STAY CALM
Uhhh, what else would the Portugal central bank say? Panic and withdraw your deposits from a bank whose exposures to insolvent entities have been largely unknown until today (and even now).
Despite being responsible for some deaths and numerous injuries already, the downgrade from SuperTyphoon to Tropical Storm means the mainstream media has lost interest in the impact of Neoguri on Japan. TEPCO hasn't! As NHK World reports, the operator of the damaged Fukushima Daiichi nuclear plant is bracing for damage; pumping out water accumulated in barriers surrounding storage tanks for radioactive water to prevent it from overflowing the barriers. The building of "The Ice Wall" has been delayed as just like last Summer, when heavy rains overflowed protective barriers, spilling radioactive cooling water. Neoguri is expected to hit Fukushima Friday early morning.
just to make sure that the abysmal Q1 GDP which has now spilled over into Q2 and will likely see the US economy growing in the mid-2% range, has a sufficiently broad "excuse" in the third quarter of the year, here comes - in the middle of July - the polar vortex 2.0. As WaPo reports, "However you choose to refer to the looming weather pattern, unseasonably chilly air is headed for parts of the northern and northeastern U.S at the height of summer early next week."
But... but... the VIX said everything is ok, and European rates were the lowest they have been in centuries... How can something possibly go wrong?
It just did.
A repeated theme on financial-TV in recent weeks is that there cannot be a recession without a yield-curve inversion first because in each of the last 6 recessions stretching back 50+ years, short-term rates rose above long-term rates before the recession. However, if you study the period after The Great Depression and even in Japan's last 25 years (that are the best examples of balance sheet recessions), it is very common to have a recession without a yield curve inversion first. In-fact, there were 6 of them following The Great Depression into the 1950's.
While recent US relations with Russia plumbed lows unseen since the Cold War, at the same time "succeeding" in cementing relations between Russia and China, the so-called Eurasian, anti-Petrodollar axis, and leading to an accelerated groundbreaking natgas deal between Kremlin and Beijing, at least the department of state had managed to not completely alienate China. Which maybe why China just issued a rather out of place tongue-in-cheek warning overnight, when China’s President Xi Jinping called for greater military communication with the U.S., saying as he opened high-level talks between the two countries that any conflict would be a global disaster.
It is no secret that unlike other banks who, while directly intervening in the bond market only manipulate equity prices in relative secrecy (usually via HFT-transacting intermediaries such as Citadel), the Bank of Japan has historically had no problem with buying equities outright, traditionally in the form of REITs and equity-tracking ETFs. Which explains why overnight it was revealed that in order to boost the stock market, pardon, economy, the Bank of Japan is preparing to purchase exchange-traded funds based on the JPX-Nikkei Index 400 as an "option to boost the impact of unprecedented easing," according to people familiar with BOJ discussions.
While the situation between Israel and Gaza continues to escalate, pulling the markets' attention away from the recent developments in Iraq (as for the Ukraine civil war, forget it), the big news overnight came out of Chine which reported another contraction in consumer prices, which both declined to 2.3% and missed expectations of a 2.4% print (down from 2.5%). Producer Prices had another negative print, the 28th in a row, and have remained negative since 2012. This led to the Hang Seng Index falling at the fastest rate since late June to erase all YTD gains. However, as has now become the norm, macro news hardly impacted US equity futures, which are driven exclusively by the Yen carry trade, which unlike yesterday's pounding, has traded rangebound between 101.6-101.7 keeping US equity futures just barely in the green. We expect the momentum ignition algo to kick in at some point, for absolute no fundamental reason beside the NY Fed trading desk issuing a green light, sending the USDJPY surging, taking the Spoos with them, and helping stocks forget all about the weak Asian session.
Many seem to believe that if we worked our way out of debt problems in the past, we can do the same thing again. The same assets may have new owners, but everything will work together in the long run. Businesses will continue operating, and people will continue to have jobs. We may have to adjust monetary policy, or perhaps regulation of financial institutions, but that is about all. I think this is where the story goes wrong. The situation we have now is very different, and far worse, than what happened in the past. We live in a much more tightly networked economy. This time, our problems are tied to the need for cheap, high quality energy products. The comfort we get from everything eventually working out in the past is false comfort.