Beatings Will Continue Until Morale Improves

The debate over the efficacy of austerity as part of the adjustment programs for economically suffering nations has long been the debate (and indeed a banner) of many with their own political or academic agendas.  But austerity has rarely been discussed in the context of monetary policy in the age of QE and negative rates (mostly real, but occasionally nominal). Yet there have been a couple of triggers to change that and the markets have spent the last 36 hours adjusting to the potential arrival of monetary austerity.

But there is austerity and then there is austerity. Just as there is "being restrained" and "being given a severe beating and sent tumbling down the stairs". TMM believe that the modus operandi is, simply: "the beatings will continue until morale improves".

1) FOMC beatings - There is no easy way out of QE. No matter how far off actual rate rises may be, the Fed statement and Bernanke's presser have dished out a severe beating to equity and bond holders, with commodity and gold bulls ending up as collateral damage.  Ironically the only beneficiary across every class has been the supposedly worthless paper currency called the US dollar, which has gone up against EVERYTHING.  The baton passing of global QE saw it move from US action, to European talk (no trousers), to Japan action  and when Japan appeared to drop it recently, the world hoped that the US would pick it up again.  But Ben ain't playing anymore and the baton is lying in the dirt, leaving the markets now sure that the game is over.  US don't want to inject as they feel that a) they ve done enough to bail out the world and b) they don't have to do it as much as the others, given the relative health of the US economy (here's looking at you, Mario).  The result of this particular beating is the particularly eye-watering move in many things, but, most notably, US real yields.



2) PBOC beating - Meanwhile China is not just refusing to play ball, but instead actively turning the screws.  The downturn in economic data would traditionally suggest that rate cuts or some other form of easing would be imminent, but rates are pushing higher with 1 week hitting a  rather unfortunate 30% intraday. Hopeful reasoning is that this is a short term technical situation and will pass (these things do happen occasionally in other money markets).  But TMM are of the opinion that this is a predictive "ducking stool" remedy being dished out by the authorities on quasi-financial institutions. Hold them under water long enough, let the weak drown, rescue those you want, who will be indebted to you politically.  And those that survive? Well, they can be branded as witches anyway should the political need arise. Whilst this may be sound domestic medicine in the long run, the timing, coinciding with a market worrying about global liquidity reduction, is far from helpful.  TMM won't stick any charts here, as there's been enough ink spilled on this particular subject, with charts galore.

3) Carry Monkey beating - Rather than a cause, this is as much an effect, but it's an effect that becomes a cause due to feedback loops, so though the beating may have started with a basic whipping from funding concerns, it has exploded into an orgy of autoflagellation.  Exiting through doors the size of diffraction gratings has left many trapped inside.  Now while carry monkeys have proliferated and have infested pretty much all corners of the market, juicy EM has been one of their favorite haunts.  It's, therefore, not too surprising that there's been a bit of a curious incident of "get me the hell out of this mess".



4)  Hedge fund beating - Consequences of consequences have seen EM hedge fund teams shown the door. Apocryphal stories of dedicated funds having most of their capital redeemed and the more public release of famous hedge fund managers from even more famous hedge funds shows that the beatings have become fatal to careers.  But, really, this is EM and the famous dictum of "you live by the sword, you die by the sword" very much applies.

While beatings can be expected to improve morale in the long-term in places like US and China, there is one area where they might just have the opposite effect: Europe.  Draghi should be sh*tting himself.  We are experiencing a tightening in global liquidity when Europe, with its staggering unemployment, lukewarm economic performance and dangerously low inflation, needs all the help it can get.  To add insult to injury, ECB-specific liquidity has been dropping steadily through a combination of LTRO repayments and rising autonomous factors.  We're now fast approaching the magical €200bn barrier, where it just might start affecting EONIA (a topic in and of itself).



Global liquidity abundance has been a huge assist to Europe, doing much of the heavy lifting, leaving Dr Aghi free to crow about the success of his OMT invisible bazooka.  As we have said before, the Europeans, once cattle prodded off their domestic agenda behinds, are capable of cobbling together rescue programs when they all feel jointly threatened, but being adaptive enough in policy between the extremes of "all OK" and  "end of the world"  has never been their forte.  As we have witnessed recently, the ECB appears to be contained within traditional fences policed by the Herr Weidmann and his buddies.  Interestingly enough, in the latest bout of EM-a-geddon, European periphery has been suffering somewhat with both Italy and Spain creeping towards 5% in 10y.  Whether this is enough, together with the latest headlines out of Greece and Cyprus, to produce some sort of a response, remains to be seen.

So Dr Aghi, the stock markets you last referred to as a sign of policy success have dumped, your peripheral bond yields are motoring higher again and the market is looking under the stones for euro specific woes (Greek politics, Cypriot banks, etc).

So whatcha going to do now, son?
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admin
June 21, 2013 at 12:21 PM ×

Another day, another continent.

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abee crombie
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June 21, 2013 at 1:09 PM ×

Cheers for the China thoughts Pol. I do wonder how much effect that is having on the markets. Still not sure but cant be helpful at the margin

EDD is the ticker to watch

I heard that BH's Geraldine has a lot of individual China stocks as well. Wouldnt be surprised to see a plunge there as well.

As for US, BB might not care that EM or rates rise a little. But if mortgage rates go >5% you better believe he will be worried. New homes sales are what matter for GDP growth and jobs. And to buy a new home you get a mortgage. Stating the obvious but if the 'convexity' hedgers keep pushing the market, it could be a quick move there..3.5% 30 yr already here, which is my turning point. Lets see

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abee crombie
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June 21, 2013 at 2:25 PM ×

"PBOC has absolute control over Shibor. However, as the PBOC is the sole liquidity provider in the system, it could intensify the
effect of short-term liquidity shortage in the system, which might be initiated by seasonal factors. As long as the PBOC maintains such a policy, Shibor will become more volatile and spike will happen more frequently. The next major spike is likely to come again in the last few days of June 2013. Watch out for that!!"

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Anonymous
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June 21, 2013 at 2:27 PM ×

abee where's that quote from?

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Anonymous
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June 21, 2013 at 4:33 PM ×

Someone has to say it: many thanks for the increased production in times such like this.

Now, fixed income in a world of hurt again today. Mind the gap in equities if catchup process gets started.

DD

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abee crombie
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June 21, 2013 at 6:18 PM ×

clsa...

Was doing a little thinking. EM we know is being thrown out, but is it the start of a structural trend change or just the nature of the beast.

If rates are indeed on a secular path upwards, then those EM economies whose business cycles are out of sync with the US might indeed have a very big adjustment going forward. Give me a monster bounce please to reverse some

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abee crombie
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June 21, 2013 at 9:19 PM ×

30yr Bond to Mr Bernanke,

"How you like me now?"

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Anonymous
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June 22, 2013 at 3:23 AM ×

Re: EDD

similar carnage is happening in the municipal closed end funds, see NQI.

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Anonymous
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June 22, 2013 at 7:16 PM ×

Beating should be good for India too in the long run. Since energy and gold are imported, positive on balance of payments. Cheaper energy good for the economy!

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Anonymous
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June 22, 2013 at 8:27 PM ×

Yes, short AUDINR is one of my more spicy FX trades...

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Leftback
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June 24, 2013 at 11:28 AM ×

More beatings ahead for EMs apparently. Chinese equities crashed 5% overnight. That's been coming for a while. Even down here, those stocks don't look cheap. So never mind Chinese Kevlar Gloves, wouldn't touch 'em with yours, mate.

Today may be another difficult day to negotiate. Punters should not rule out the possibility of dovish commentary emanating from the Fed this week, and a neck-snapping move in Treasuries as a result.

The seat belt sign has just been illuminated....

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Anonymous
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June 24, 2013 at 11:59 AM ×

Nevermind dovish commentary. Watch out if data shows the economy decelerates, or shock horror, housing does not respond well to higher rates.
In other news, if we hear another person refer to the Fed's PnL losses, we are going to break something.
DD

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Leftback
admin
June 24, 2013 at 12:39 PM ×

Quite so, BB probably doesn't sweat the PnL in the same way as say, a leveraged long only emerging markets manager is this morning.

I am liking the prospects for bonds more than equities. When the Treasury market turns and yields start to fall again, a lot of people are going to be caught offside. With HFs obviously involved and quite a few leveraged bets, better look out - this one is going to be an absolute ripsnorter.

A lot of this recent trade mirrors the April 2010 bond market action, when people kept on yapping about rising inflation, surging US growth etc. and yields did spike a bit, but the underlying weakness of the economy was very obvious and deflationary pressures were soon revealed again. With 10y TIPS spread now below 2.00%, the recent yield surge seems completely unsustainable.

Don't Panic....

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Anonymous
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June 24, 2013 at 12:44 PM ×

C Says
"don't panic". The herd is thundering along right now so they didn't hear you.

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Leftback
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June 24, 2013 at 1:09 PM ×

No doubt, C. Hoof beats all around us. Some evidence of Real Money making its characteristic late moves out of asset classes that are declining and into asset classes that have now become extremely crowded. That is a repeat of 2010. There will be some nice trading opportunities ahead created by the thundering herd.

Once again, some dim-witted individuals are playing this as a normal recovery from a normal recession and a normal exit from a normal easing cycle. It's not. We will see within weeks why exit from QE is fraught with all kinds of problems and why the liquidity trap created by ZIRP really is a Black Hole that the US economy is currently too weak to escape.

US equity market still a truly bizarre entity at this point, made up in part of highly overvalued spec vehicles that seem to be merely inflated helium balloons, while the rate-sensitive sector has been hammered, despite the fact that those are real businesses and will continue to make money. As always, the behavior of stocks and sectors over the short term reflects the identity and state of mind of their ownership more than anything else.

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Leftback
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June 24, 2013 at 2:06 PM ×

Bucky rally at the expense of everything else on the planet is probably short-lived and self-limiting. The release of weaker US data and/or more dovish intimations from the Fed will cap this move, once Paulson & Co are done unwinding the usual monkey trades.

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Anonymous
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June 24, 2013 at 2:43 PM ×

C Says
Now don't be a killjoy and get them milling around too quickly. I'd really like to see them work up to some real capitulation stuff then I would get a setup worth buying into for longer than 5 minutes.

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Anonymous
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June 24, 2013 at 2:59 PM ×

C
We'd like this capitulation to occur sooner rather than later since some of us have unfortunately donned the Kevlar gloves a little too early it seems. Still some dry powder to go and not too much leverage than you, but this has been a very uncomfortable last ten days.
Hopefully by Labor Day we can all laugh this off but so far, not so good for Detapering Partners LLC.
DD

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abee crombie
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June 24, 2013 at 3:09 PM ×

LB, i was in your camp before but the move in Treasuries is just too much this time for me to continue to step in. Add to that the 5min macro crowd going on about Shibor, protests in brazil and turkey and I think the trend continues until we get real capitulation. Not selling but not buying here yet. Better to let the markets settle. I think there is a very good chance long rates go 100bps higher in the next month before reversing.

Front running the end of QE trade is not done and is a major shift from a few months ago when ppl were worried about excess Japanese liquidity doing another lift off. Agreed this is not a normal exit, and I will fill the boots if yields go that high, but not until then

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Anonymous
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June 24, 2013 at 3:19 PM ×

C Says
It appears clear enough that once again we prove the old maxim. You want to know how much leverage and lack of cash is in play then don't look at what is being said, look at the reaction to what is being said. Enough said ;)

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Anonymous
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June 24, 2013 at 3:20 PM ×

And on the markets, exploitation says it out loud:
I am only just beginning

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abee crombie
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June 24, 2013 at 3:59 PM ×

agreed C.

But not sure it is leverage that amplifies the moves, more so the nature of market participants.

Low inventory at dealers, Fast money, carry monkeys, trend followers, EM money managers, 5min macro crowd and most importantly the under invested(risked) real money guy.

When the cover of barrons/economist has something about the death of bonds I will step in. Until then just watching the red on the screen ;-)


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Anonymous
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June 24, 2013 at 4:54 PM ×

Rampagingruss says:
It looks to me like people are long a lot of EM fixed income and other illiquid stuff that they can't or won't sell for fear of crashing the market, so they are selling what they can - including Aussie bonds and CDS etc.. Unfortunately for these guys I can see a big rally in Aussie bonds coinciding with a further sell of in EM fixed income. Cross hedging never works - and I suspect the carnage is only just beginning. I sense blood in the water - and the sharks are moving in on the EM bond funds.....

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Anonymous
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June 24, 2013 at 4:59 PM ×

Hopefully the beatings won't be as fatal as this classic Rowan Atkinson sketch may suggest....

Can the market really be as hilariously cruel as Atkinson's headmaster? lol

http://www.youtube.com/watch?v=fZMoB6ms2mE

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Leftback
admin
June 24, 2013 at 6:29 PM ×

This is awesome Fedspeak ... Richard Fisher says that "feral hogs" are selling bonds,

- perhaps they are just reacting to tapir talk? OK, I'l get my coat.

Feral Hogs

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Anonymous
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June 25, 2013 at 12:16 AM ×

C Says
Far as the US treas goes that looks about it now at the long end until at least it's reset this huge puke.

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Leftback
admin
June 25, 2013 at 4:24 AM ×

Speaking of puke, China down almost 2% again so far. Floggings 'r' us for EM enthusiasts.

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Leftback
admin
June 25, 2013 at 1:30 PM ×

Looks like we have a bottom. PBoC chatter overnight turned around the Shanghai index and the Spoos followed. So mark that bottom at 1560.

Yesterday we pointed out sharp reversals in DX and TNX and those are holding as well. So, tentatively “that’s it” for now, we think.

We really enjoyed the “feral hogs” narrative….

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Leftback
admin
June 25, 2013 at 1:36 PM ×

Now it doesn’t take a technical genius to chart the SPX from here, and I’m not, so I will jump right in here with the ruler and pencil method and immediately point out support at yesterday’s low of 1560. Below that we have levels of 1540, 1525 and the 200 dma at 1510. Resistance from here is found at 1600, 1610 and the 50 dma at 1620.

Yesterday’s low marked the nadir of a drop from 1655, so that’s 85 points. The fib retracements from the low would target approximately 1602 (50%), 1612 (61.8%) and 1624 (76.4%). The rough agreement between fib numbers and resistance bands seems satisfying. Mr Shorty, beware...

VIX peaked yesterday at 22 in the morning following June expiration. Here come the vol sellers? We may have a boring range trade for a bit as the market digests "accommodative" comments, and the "feral hogs" return to the sty, exhausted after a three day orgy of unwinding excess dollar carry trades.

Cor, this investing lark is a larf some days, innit guv'nor?

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amplitudeinthehouse
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June 25, 2013 at 3:22 PM ×

>So whatcha going to do now, son?<


I'm in bed watching the market at the moment...Yep! goodluck with that..b\c I don't give a fuck anymore. Intellectual Property has just been murdered.

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Anonymous
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June 25, 2013 at 3:38 PM ×

C Says
"Intellectual etc etc"
I have to say I do not agree with that although I think one ,or two old style hedge fund managers might.
For me this has always been a game you play so you win overall by playing the players playing the game and that actually never changes and indeed that is the essence of "intellectual property".

Considerations of the ugly words morality and the like can be kept to oneside for consideration after we have all cashed in our chips for counting.

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amplitudeinthehouse
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June 25, 2013 at 3:46 PM ×

Sorry, C...but staring into a wall over last handful of years changes ones essence.

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Leftback
admin
June 25, 2013 at 6:31 PM ×

Is there a futures contract for Feral Hogs?

We are back to the old style ZIRP trade where equities go up, bonds go down. I can handle that. RORO was easier to trade than QE Tapering, or Non-Tapering as might be closer to the truth. It is hard for me to trade yields rise and equities fall b/c that is a real recovery dynamic and we don't have one. Not yet.

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