Morning Murmuration



That's another set of Debt Ceiling re-sit exams behind us. Sort of, for whilst the preliminary results for the debt ceiling are a deemed to be a scraped "pass", further re-sits are inevitable later in the year, but in the meantime markets can now allocate a bit of freed up processing power to the background tasks of tapering and growth overlaid with a smear of collateral long term confidence damage to US process and reliability.

This morning's price action is a little underwhelming. Earnings are now upon us and the valuation camp are calling tops for US equities but the the core sectoral bulls are chomping to get back to buying now that the ceiling is on the back burner. Some have already cast their die. Dagong, one of China's credit rating agencies has downgraded US to below Botswana in their rankings, but in TMM's eyes Dagong is just China's answer to Zero Hedge. However, for many there is a lot of indecision as to which way today breaks. It feels as though everyone is watching the guy next to them for confirmation of the next move on to which to jump.

In other words, behaviourally, this morning feels like a murmuration of starlings.



TMM are hoping the flock rises.

Now back to bubbles. What do you do when you are not getting an income from anything or you consider the income too low relative to risk of underlying price moves to make it worthy of consideration? Well if you are like TMM you focus on the price change capital value part of the equation rather than the income or coupon side. Of course the price SHOULD be reflective of the income streams but that can easily be ignored when prices start to trend and rising prices are backfitted against future hope stories to justify monstrous P/E's. (Look what at Tesla).

This versions of the problem with the "relative" zero bound effect is something that we feel is destabilising the old balance between true valuation and bubble generation, with the bias moving to price chasing and a faster frequency and greater amplitude in the wave form of asset classes. Money will chase price moves amplifying them rather than seeing logic damping them. A great example of this is London property where the dividend (rent) is thought to be so insignificant that it ofeetn isnt even collected (empty properties). It is all to do with appreciation of a capital value which cannot even be truly measured other than against "last price paid".

TMM are not saying that London property is a bubble, though it does share many of the definitions of one, and are definitely NOT saying that UK property is a bubble. This (courtesy of housepricecrash.com) does not look like a bubble -



But we are saying that we expect this behaviour to become more redolent in financial markets as capital chases capital growth rather than income. It's all part of the super savings glut. As with a ship taking on water, the inpouring and sloshing of all this cash can destabilise and capsize any craft not fitted with protective bulkheads in the way that did for the the Herald of Free Enterprise and Titanic, but we believe we are a long way off that point in any of the markets currently being cited. Screaming "Stop! Bubble!", is hoped by many to stop the bus they have just missed allowing themselves a chance to get on board.

It's just desperation for performance driving herd mentality in a low yield world which is too driven by short term peer performance benchmarks.



Now, back to the Starlings..







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Hotairmail
admin
October 17, 2013 at 12:23 PM ×

You missed a trick TMM. I liken to all this 'liquidity' sloshing around to "The Herald of Free Enterprise" disaster.

Without septa between countries to stay the flow of trade surpluses sloshing around from the effects of globalisation, we will see increased instability as you say.

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Polemic
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October 17, 2013 at 12:28 PM ×

Hi Hotair .. thats exactly what i was thinking of but wondered if anyone would get the ref.

same as bulkheads in the Titanic ..

perhaps i should insert that now .. cheers pol

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CV
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October 17, 2013 at 2:01 PM ×

I agree with TMM to some extent on the whole global saving glut chasing few assets etc. The problem is that with central bankers the new Masters of the Universe, the whole thing can get ugly very quickly if they decide to say the wrong thing at the wrong time (which they will of course).

Just imagine the final journalist at the next Fed conference.

Journalist 1; So, Mrs Chairman what are you doing for the long weekend.

Chairman; Well, I am going tap dancing of course.

Journalist 2; Did she say tap dancing?!

Journalist 3; Well I only heard "tap .."

Journalist 2; "tap, tap" .. taper?

Journalist 3; Taper, taper!!!?

Journalist 1; Taper?! Taper?! OMG

Spoos gap down 75 points and the MOMO crowd gets stuck in illiquid limbo with their high yield bonds.

Just sayin ... :)

Claus

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theta
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October 17, 2013 at 2:03 PM ×

I am getting bored with this soap opera. Season 1 [2011] was pretty good, but went downhill from then on. Season 2 [2012] was ok-ish, season 3 [2013] very boring. They need to get a new writer, as the plot has become very predictable at this point, with even the season finales becoming a snoozefest. I'm not sure I will even bother watching Season 4.

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theta
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October 17, 2013 at 2:12 PM ×

Previous comment was obviously referring to the Debt Ceiling series.

Regarding UK house prices, this graph does NOT look like a bubble to you?? Seriously? Did you notice by any chance that there is an upward sloping trendline for the price of an asset that should be (almost by definition) move in line with inflation. If this trendline were to continue, eventually a house would be worth more than the country's GDP. So it's not. It will have to go back to the mean. Which is waaaay lower than today's level. Did you notice that the peak of the previous bubble is still lower than today's prices? I would say that we are headed for a level BELOW that previous peak. Which will probably happen via the usual strategy of above target inflation bringing down the real prices, while nominal prices remain sticky.

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Polemic
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October 17, 2013 at 2:17 PM ×

That doesn't look like a bubble. In fact a trend growth of 2.9% p/a fits with rough eyeballing of the background picture. If wage growth has been around 7.5% YoY over that period and inflation around 5% YoY thats roughly 2.5% real income gains over the period which isn't that far off 2.9% house price growth trend meaning that 0.4% as a result of supply constraint is neither here nor there.

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Leftback
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October 17, 2013 at 2:46 PM ×

The usual adjustment mechanism for UK housing prices, when the price peak arrives, is indeed via a fall only in inflation-adjusted home prices, often achieved by a sharp fall in the £, as nominal price flatlines.

The precipitous drop in GBP engineered by the BoE along with Gordon Brown on his exit not only stoked a little burst of Mervynflation but enabled UK home prices to remain relatively stable compared with, say, Florida. We can surely expect something similar the next time Jeremy and Jemima Estate Agent run out of Russians and Arabs to flog property to.

In the US markets, if Price is indeed News, then with Treasuries bid across the curve today, the USD down and equities down a bit and the US under-performing EMs, then one might perhaps infer that Mr Market is trying to tell us something. He is saying the following:

1) Rates are going to stay low.
2) Read #1 again. Yeah. For longer than you think.
3) US growth will remain slow but steady.
4) US politicians will continue to behave like.... Italians.
5) The USD will remain relatively weak, sans EU crises.
6) I have no clue what US Equities will do, but....
7) Emerging markets and Europe will outperform.
8) Did we mention rates are going to stay low?
9) US housing is probably going to be soft.
10) Receiving rates and dividends will continue to work.

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Anonymous
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October 17, 2013 at 3:59 PM ×

C Says
I expect the USD basket to to drop a little further ,but not much through into next year. This if it works and it does have seasonal probability on it's side raises interesting conflits because 'there can be only one' !
By that I mean on a weighting basis if the trend takes the Euro back to it's pre crisis area it becomes THE ONE which means another FX of weight must NOT BE the ONE..which means JPYEN compensatory strength ..which probably means....Jap Equity weak...which means I'm off back to Cheltenham confused.
And of course Euro equities need a Euro at this level of strength like they need a hole in the head.

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Anonymous
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October 17, 2013 at 8:47 PM ×

One take away for me from this whole debt ceiling saga of late has been the reaction of US rates. It would seem any notion of a safe haven bid eventuating has been quashed and we now have a road map for how to play US rates come the next deadlock. Personally a little suprised by the magnitude of 'credit risk' which was evidently being priced into Tsys as evidenced by the rally over the last 36hours... Thoughts appreciated.

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Polemic
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October 18, 2013 at 1:05 AM ×

Folks.. i m really sorry but looks like blogger moderator feed has gone completely mad in sending things to moderation. In the past it was only the odd comment that got filtered.. i ve just checked and found 56 sitting there. Ok,the usual load of spam but LOADS of real ones.. all been released now but i am sorry. Hadn t realised it s become so officious. I ll be more watchful.

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Anonymous
admin
October 18, 2013 at 1:52 AM ×

Draghi is preparing to provide an assessment of the European banks but will not conclude his assessment until the banks disclose their arrangements to recapitalize..."including through the provision of a public backstop,"

http://www.reuters.com/article/2013/10/13/us-eurozone-banks-idUSBRE99C03Y20131013

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Anonymous
admin
October 18, 2013 at 3:11 AM ×

IMF proposal for a one time confiscation of wealth...

“The sharp deterioration of the public finances in many countries has revived interest in a “capital levy”— a one-off tax on private wealth—as an exceptional measure to restore debt sustainability. The appeal is that such a tax, if it is implemented before avoidance is possible and there is a belief that it will never be repeated, does not distort behavior (and may be seen by some as fair)."

http://www.imf.org/external/pubs/ft/fm/2013/02/pdf/fms2.pdf

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Anonymous
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October 18, 2013 at 3:39 AM ×

LB who are you, Gundlach? He was practically falling out of his chair explaining the CEF discounts today.

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abee crombie
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October 18, 2013 at 4:17 PM ×

While I am not bearish (yet) the reasoning to be bullish simply because others are bullish and therefore we will have valuation expansion is not the greatest logic to me.

I think most take it as a given that an improvment in the economy is a plus for the market, however I am not so certain. Will companies be able to maintain margins? if interest rates do go up, doesnt that at some point effect valuations?

confidence, confidence, confidence is all the stock market is. How long the ebullation stage lasts is unknown, but the game is changing from climbing a wall of worry into find me the hot stock. That never ends well but it doesnt mean you cant play along.

But watch out when corporate profits start declining.

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Anonymous
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October 18, 2013 at 4:23 PM ×

C Says
Abee,
"profits declining". Well even that in and of itself may not be the gamechanger for sentiment. As it stands I see enough corps holding ,or even increasing dividend payouts by thinning out their dividend cover. The search of excess capital for a return appears willing to overlook some of the stuff that would normally have us heading for the exit.
.

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Polemic
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October 18, 2013 at 4:42 PM ×

yeah abee that's the sort of point I'm trying to make. If prices are seen to be going up fast enough then even if it yields nothing folks will buy it and prices will go up further ( cf empty property investments)

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Leftback
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October 18, 2013 at 6:24 PM ×

Equities are surfing the tidal wave of liquidity unopposed for the time being, and possibly all the way to SPX 1800. But it's all a bit like those movies where the unmanned rogue locomotive is barreling down the tracks at about 100mph. One certainly doesn't want to be standing in front of it at the level crossing, but nor does one want to be a passenger on the train when it reaches the terminus, or even an unexpectedly sharp bend.

Markets like this are better to watch from the sidelines than to participate in broadly. Somewhere up ahead the army of performance chasers is going to become an army of performance savers and then we'll see another big swing back out of high beta momentum growth stocks. We suggest keeping half an eye open for potential margin hikes, as well. Lately that's been a more effective tool in curbing exuberance than Fed policy. Meanwhile your previously pounded fixed income and dividend vehicles are looking quite healthy, thank you.

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Anonymous
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October 18, 2013 at 7:59 PM ×

The past weeks main data points have been favorable, with Euro July-August industrial production growing again after a bit of floundering, China GDP increasing at a good pace and DC theater play shutdown. Also GOOG & GE leading the way to higher grounds in their own sectors. Perhaps as long as things stay quiet in the news front, absent of the next soap opera, equities shall keep on rolling. So Eurocrats keep up the good work and stay quiet.

It almost seems like a time when everyone in the market is magically transforming into a genius - just buy anything at any price, because that's what the guy next to you is doing. Who cares whether TSLA or SCTY make any meaningful profit compared to Market cap 2 years or 5 years from now, or perhaps never. There's a big fast-lane generation out there ready to reach a status of freedom asap: one TSLA might be all you need.

Perhaps a part of these developments are also caused by the lack, or long gap of non existent innovation (you know, after the invention of car, jet planes, computers, the internet etc.) It's a sellers market out there: just present some relatively unknown, exotic new idea and provide it with a relatively reasonable sounding forecast, add in the phrases "revolution of the century" and "innovative" and the fast lane crowds will be pretty much throwing $100's millions dollars toward you.

The power of consensus shouldn't be underestimated: there is a huge pile of excess capital from the savings glut to back it up (the Alphaville article was good and pointy TMM, thx). To me the housing market transforming into a form of a religious cult driving itself and more people to join through peer pressure is just another form of this.

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abee crombie
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October 18, 2013 at 9:15 PM ×

There are a few big picture questions for me that I am pondering on a day where the screen is green but I feel uncomfortable.

#1 Will US long term rates rise meaningfully from here (say above 3.5%) and if so what is the effect on EM in particular. Was July/Aug just a preview?

#2 Does the stock market continue to levitate and new hot shot millennial managers become en vogue. "Tesla goes up every day, why not buy it". If this is starting then I think it could provide feedback loops and last at least another year likely 2 or three before some shock brought everyone to earth. Interestingly Biotech has regained the highs yet

#3 Can China re balance without slowing down dramatically. It seems so, but many see the current upswing as a short cyclical upswing ending soon. This should be watched.

#4 will there be any systems traders left in a few years if their performance is like this

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Leftback
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October 18, 2013 at 9:57 PM ×

My view of the Taper Caper is that it was a trial run - an experiment to see what an actual taper might in fact do - and what kind of damage it would do to a market full of front running algorithms.

It was also an attempt to deflate the mini-bubble in US housing by spiking rates and deterring leveraged speculators and flippers. Whether or not the Fed succeeded in this aim will probably be revealed in the next 2-3 months data. The delay in the system is typically 60-90 days so we should start to see some softness in the low end soon. The high end is its own little bubble for the moment.

With mortgage applications clearly down, we think the writing is on the wall already and the data will soon reveal more of the truth beneath the ever-cheerful surface of the NAR's propaganda releases.

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