The Fed's Bubble Solution.






So I buy an apple for a buck from you but I sell it back to you for 2 bucks. I Have 2 bucks and you have a 2 buck apple. You sell that to me for 4 bucks and you have 4 bucks and I have a four buck apple. 8 bucks, 16 bucks... We do this a few times until you have just bought a million+ buck apple from me and I can't afford to buy it back for 2 million bucks. So you cut the price to 1.4m and sell me a 50% share in the apple for 700k. So we are now back flat on our cash positions but we both own a 700k share in the apple (example here). Wow. As we have that sort of wealth behind us we needn't be so tight about buying that new Tesla now or that new home cinema or that holiday. So we go and spend some of our cash savings on STUFF. And when we do, that real money will stimulate the real economy.

It would be very topical to suggest that the Twitter IPO pricing is today's apple but TMM's broader concern is that the Fed think the apple scenario is a viable solution for creating growth where the stock market (or more generally risk assets, as we should include housing) is the apple. The Fed isn't mandated to inflate asset prices but it would appear that this is exactly the effect that these academics with their models are prone to produce and those models tend to exclude the negative repercussions that have occured every other time a population ultimately had their quasi-wealth evaporate in front of their eyes (tech stock, property etc). It has been a disaster and more real money has had to be printed to replace its function.

Whereas a reduction in leverage is needed, the Fed is in effect encouraging it. Leveraging at the personal level was what got us into this mess in the first place and to create an environment that is doing nothing to quench credit demand whilst at the same time stifling credit supply through increased bank regulation and balance sheet restriction is similar (and probably as equally short sighted) as most government policies towards drug addiction. They do nothing to alleviate the reasons people crave the narcotic, instead they try to restrict supply. And the result? The addicts go underground and pay way over the odds for bad product and get into a worse predicament which causes yet another outcry. Underground dealers = payday loan companies. Wonga = Whoonga. It's all self inflicted.

There is a huge hypocrisy in the demand for careful lending from banks and a demand for the provision of "social" lending. Perhaps, if governments are really that concerned they should take on the burden themselves. How about raising Fed funds or base rates to 1.5% and allowing the consumer direct access? But that means that the taxpayer is taking risk. Much easier to utilise the bank scapegoat as middleman and fine away excess profits. (It is interesting to note the lack of media noise about malpractice and the huge fines levied on the pharmaceutical industry recently compared to the noise about banks)

But back to this rally. There appears to be a lot of grumbling annoyance that equities are still grinding higher as they "aren't supposed to". If this follows the psychology of grief, we obviously haven't reached the stage of "acceptance" yet which would imply there is a way to go yet.

We have read plenty of research talking about record longs in fund mangement positions together with minimum cash balances all presented with overlay price comparison charts of 1987 and 2000 crashes etc., but we are sceptical. It's a pretty easy game to find visual fits for Price/time overlay charts (especially when you stretch scales) and only the winners tend to be waved as survivor bias results of proof. As for the positional data, though the normal sectors of fund management are captured in much of this data we wonder if the true extent of the flows of reserve managers are showing up. These behomoths of investment only have to swing small fractions of their huge portfolios from bonds to equities to see large responses in price. The big difference this time is the message from the CB's (other than the Bundeathstar) is "go long, stay long". So we will.

We would like to also thank our great friends the Benchmarks for helping us out further. Nothing worse for a fund manager than to under-perform your peers however right you may be in the long term. And nothing worse than under-performing the main equity indices as for some strange reason many consider them the risk free benchmark that you have to be an idiot not to outperform. So, break from the herd and the jackals of fund consultants will snap at your heels, which leaves you with the choice of rejoining the pack and going over the cliff with your peers later or being eaten by the jackals now.

So despite the Central Banks tilling the ground and sowing the seeds for one, we are still a way off this being a bubble. We are invoking our DTTVI (Day Time TV indicator) along with a few other indicators and all suggest this has a good way to run yet as it's not a bubble until -

Daytime TV has shows for the masses dedicated to running portfolios in it.
People give up normal jobs to trade in it.
People mortgage their houses to buy it.
And finally our old favourite.. the 25year old BMW 3 series drivers are bragging about their portfolios in it

——
P.S. and the ECB have just added their dose of detergent to the bubble solution.
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Anonymous
admin
November 7, 2013 at 2:01 PM ×

C Says
One whole quarter cut...my oh my, Tesla here I come twitting as I go. This Xmas I shall enquire of the Florentian taxi driver as to how he chose to spend this windfall.

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Anonymous
admin
November 7, 2013 at 2:15 PM ×

C says
Twitter to me is the 'tallest building' equity stand-in. Once it is up what's left?

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Leftback
admin
November 7, 2013 at 3:05 PM ×

This is the kind of day when you short some beta at the open. Any beta.

We are fresh out of good news after the ECB rate cut, and there is a risk that we see something tomorrow morning in the US jobs numbers that might be very unpalatable.

So Dr Aghi isn't Tricky. He doesn't want to be the one who is late to cut, ease, print etc. So despite the surge in spoos that greeted this rate cut and the backward-looking US GDP, you'd have to ask the question "why did he do that? too much growth in Europe? Uh, no....."

Short EURUSD was a good trade into this morning. The EURJPY carry monkey just fell out of the tree. After the 2.8% US GDP, I fancy short USDJPY here.

Whisper number for Twits buying TWTR is in the $40s, which is insane. Qs are lagging out of the gate. Short some beta. It's Frothy, Man.

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Leftback
admin
November 7, 2013 at 7:03 PM ×

Long yen/short beta/TLT calls all working a treat out there today. FINRA suspended OTC issues. A bit thin in some of those today, no doubt. Shock horror - the NAZ is actually down by MORE THAN 1%. Imagine.....

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Leftback
admin
November 7, 2013 at 9:16 PM ×

A bit of follow through is likely overnight and into the morning session. EURJPY broke down below the 50dma and through 132. That pair hasn't tagged the 200 dma since December, which is fairly amazing; the 200 dma is at 129 ish.

Some commentators estimate below 100k for NFP bingo tomorrow, although consensus is +120k on Bloombags. One or two estimates and the whisper number are much lower, and the bond market seems to be hinting at this already.

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amplitudeinthehouse
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November 8, 2013 at 2:06 AM ×

I can only guess what it would be like to be long in size in the S&P, but just off the top of my head, maybe there is similarities of being in a Dayclub on a Monday around noon after three days straight and not wanting to call it quits until you finally hear a track that you can chill out too and declare that was worth the small poultice you've thrown away worth it..

http://www.youtube.com/watch?v=U2YDZOItGWU

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Anonymous
admin
November 8, 2013 at 9:05 AM ×

Is this perhaps a problem? Or just more zerohedge type stuff?


www.rollingstone.com/.../chase-isnt-the-only-bank-in-trouble-20131105


Rossmorguy

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Polemic
admin
November 8, 2013 at 10:36 AM ×

ross.. it's an article that isn't worth the pixels it's displayed with. No news, no understanding mixed with a bucket of skewed maybe's.

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Owe
admin
November 8, 2013 at 12:53 PM ×

About Wonga... maybe it's just my browser, but the number of "recommend to a friend" changes every second, even though it's supposed to come from a 2012 survey. Lovely company, resonable interest rate.

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Owe
admin
November 8, 2013 at 2:11 PM ×

On a tangent, I tried to calculate the breakeven point for wonga in reference to the probability of default of the creditors... seems its around 100 days with an average pd of 90% in the portfolio. http://www.econinfo.de/2013/11/08/payday-lending-how-low-can-they-go/

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Anonymous
admin
November 8, 2013 at 3:30 PM ×

LOL that people think this jobs # means there's ANY chance of taper ANY time soon...

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Leftback
admin
November 8, 2013 at 3:32 PM ×

Hilarious morning in the U.S. and utter chaos on rates desks everywhere. Whoever is doing the non-farm payroll reports this month has got to have a really really long nose....

Another great day to buy slow growth economy income vehicles and avoid the social media stocks. The Carry Monkey has hardly budged so far this morning, EURJPY showing little bounce to this point.

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Anonymous
admin
November 8, 2013 at 3:42 PM ×

Good stuff. Could we also mock the Fed's 70-1 leverage? Man, what a joke! How can this shit be happening again 5-6 years later?

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Anonymous
admin
November 8, 2013 at 4:47 PM ×

can someone explain to me what what sort of theoretical NFP report would have sent the market down this morning?

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theta
admin
November 8, 2013 at 5:17 PM ×

@4:47
theoretically? Either above 1m (therefore imminent tightening) or -1m (therefore recession).

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Leftback
admin
November 8, 2013 at 9:23 PM ×

Anon @4:47 and theta at 5:17, both comments were excellent...

Total insanity this week, never mind Cold Steel this week was Mr Whippy running amok in the Treasury market with a Taser. Absolute madness.

We did use today to don the Kevlar gauntlets once more in order to catch some descending cutlery. It's what we do. Finally dipped into the dumpster for some NLY common shares today to go with the preferreds. These income producing vehicles will be with us a lot longer than most people think, and certainly longer than profits of yesterday afternoon's Twitter buyers.

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Anonymous
admin
November 9, 2013 at 3:02 PM ×

“Some argue that what I have proposed—higher capital requirements and better incentives that reduce the probability of failure combined with a resolution regime that makes the prospect of failure fully credible—are insufficient. Perhaps, this is correct. After all, collectively these enhancements to our current regime may not solve another important problem evident within some large financial institutions—the apparent lack of respect for law, regulation and the public trust. There is evidence of deep-seated cultural and ethical failures at many large financial institutions.“
William C. Dudley
NY Federal Reserve
November 8, 2013

So what have you done about it?

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Polemic
admin
November 9, 2013 at 3:52 PM ×

anon 3.02


I would posit that there "is evidence of deep-seated cultural and ethical failures at many large "anything" institutions".

Should the severity of miss-selling that is currently being applied to UK banks be applied to other industries you could kiss good buy to homeopathy, gyms, diet plans, himalayan pink salt, ladies fashion and probably cosmetics... and if supermarkets had to publish the price they had paid for the product you are buying next to the price they are selling it for I reckon there would be riots (or at least angry letters in the Daily Mail).
Actually i think they should be made to. Class it under "full disclosure"

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Anonymous
admin
November 10, 2013 at 8:34 AM ×

C Says
Indeed Pol.
Like all really good witch hunts it always pays to set facts aside and let the bloodlust run free. I've been wondering for quite some time whether our Reggies make any distinction whatsoever between outright illegality and basic marketing processes. The latter of course existing only because of human 'frailties' in the first place.
Ironic in any case when one considers that central bank policies helping to drive down financial costs and skewing inflation to the upside also skew the potential returns from basic lending activities in favour of those attainable from what I would call 'gaming' activities.

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Blissex
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November 10, 2013 at 1:52 PM ×

«we both own a 700k share in the apple (example here). Wow. As we have that sort of wealth behind us we needn't be so tight about buying that new Tesla now or that new home cinema or that holiday. So we go and spend some of our cash savings on STUFF. And when we do, that real money will stimulate the real economy.»

You left out the missing ingredient, which is to use the apple as COLLATERAL for a LOAN.

Without that you have a purely theoretical "wealth" position, that is unrealized one.

Instead a huge credit bubble with an accompanying loosening of collateral regulations allows you to both realize and not realize your "wealth", by "buying" a loan collateralized by your half share of the apple, ansd that "purchase" will make you and the bankers involved rich, in different ways.

The latter is the key; the apple story is just the excuse that the bankers and you have agreed to cover up your looting.

And when it comes time to repay the loan collerateralized by your 50% of the $1.4m apple, the Fed Reserve will scream "liquidity crisis" and buy the loan at par, and hold it forever on their capacious balance sheet.

In the end the apple story is just a thin cover the "grwoth strategy" of asset stripping the USA financial sector, households, the government, companies, and ultimately the whole country.

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Anonymous
admin
November 10, 2013 at 2:35 PM ×

From The Fate of Empires......
"There does not appear to be any doubt that money is the agent which causes the decline of this strong, brave and self-confident people. The decline in courage, enterprise and a sense of duty is, however, gradual. The first direction in which wealth injures the nation is a moral one. Money replaces honour and adventure as the objective of the best young men. Moreover, men do not normally seek to make money for their country or their community, but for themselves. Gradually, and almost imperceptibly, the Age of Affluence silences the voice of duty. The object of the young and the ambitious is no longer fame, honour or service, but cash. Education undergoes the same gradual transformation. No longer do schools aim at producing brave patriots ready to serve their country. Parents and students alike seek the educational qualifications which will command the highest salaries."

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Anonymous
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November 10, 2013 at 2:47 PM ×

Polemic

How much can we stand. JPMorgan as an example...
(1) Manipulating the market in the London Whale trading debacle
(2) Rigging energy prices in California and the Midwest
(3) Improperly foreclosing on homeowners
(4) Bilking credit card holders by fixing prices and interest rates The bank said it will pay about $1.2 billion to settle charges that it conspired with MasterCard and Visa to rig credit-card swipe fees.
(5) Rigging municipal bond operations in 31 states
(6) Gouging some 6,000 active-duty service members on their mortgages
(7) Mis-selling interest-rate swaps to the city of Milan, Italy in 2005
(8) Enron - The bank and some of its executives are still being sued over the bank's relationship with the fraud-based energy giant, more than a decade after its failure
(9) Aiding and abetting Bernie Madoff's Ponzi ; the Madoff bankruptcy trustee and others have also sued the bank to get back some Madoff clients' money
(10) Its relationship with failed brokerage firm MF Global ; it is also being sued for allegedly aiding and abetting MF Global misuse of customer money.
(11) Involvement in $215 million worth of missing clients' money in the collapse of Iowa brokerage firm Peregrine Financial Group
(12) Allegations that it knowingly sold faulty US mortgage securities ; after [direct discussions between the bank’s chief executive, Jamie Dimon, and Attorney General Eric H. Holder Jr.], JPMorgan reached a tentative agreement with the Justice Department to pay a record $13 billion
(13) Manipulating EURIBOR (and yen Libor) rates , in a case in which the EU's Competition Commission is set to impose up to €5 billion in fines to a group of at least 6 banks
(14) Manipulating WM/Reuters rates ; JPMorgan is one of 7 banks that have confirmed investigators in the U.S. and Europe are investigating their foreign exchange trading and manipulating of WM/Reuters rates (an industry-wide standard used in determining closing prices in the $5.3 trillion-a-day foreign exchange market, published hourly for 160 currencies and half-hourly for the 21 most-traded. )
(15) Manipulating Libor rates In the bank's own words in 2012: "JPMorgan Chase has received subpoenas and requests for documents and, in some cases, interviews, from the DOJ, CFTC, SEC, European Commission, UK Financial Services Authority, Canadian Competition Bureau, Swiss Competition Commission and other regulatory authorities and banking associations around the world."
(16) In a separate case: Colluding to artificially lower the Libor rate ; between 2007 and 2010, in legal action brought by US mortgage provider Fannie Mae, which alleges that the collusion led it to lose money on interest rate swaps, mortgages and mortgage-backed securities, with a $332 million loss just from interest rate swaps. Fannie seeks to recoup $800 million.

The above list was taken from here:
(http://theautomaticearth.com/Finance/why-does-jpmorgan-still-have-a-banking-license.html

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Nico G
admin
November 11, 2013 at 5:32 AM ×

sheesh i was looking for the irony all along your post and there was not. You are really getting long now and THAT comfortable of doing so? your stance is duly noted and quite another quite surreal experience same as seeing Roubini going bullish too. Well he is making money innit, enough to clean the party spills in his loft. Is there anyone who will be the last buyer of US stocks, or demographics will provide with fresh ones always hear hear the irony here. I am stop buy at 2000 i only trade round levels.

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rossco
admin
November 11, 2013 at 5:46 AM ×

#bagholders

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Leftback
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November 11, 2013 at 3:56 PM ×

Ray Dalio was discussing the concept of diminishing returns for the QE policy this week, and once again wondering whether the Fed has anything left in the tank. As we have discussed here with many others, the key issue for QE tapering is always going to be whether there is demand for US Treasuries and MBS. Without any demand for these assets, the Fed is in a box.

If the Fed is to unwind its balance sheet at any point, there would have to be eager buyers of those assets at that time. The last time we had an avalanche of buyers for US Treasuries it was caused not by the Fed's QE policy per se, but was initially stoked by flight from European markets, and hence secondarily from US equity markets. The panic buying of USTs and bunds was only stemmed in the end by the (non)appearance of the mythical OMT bazooka, the legality of which still seems to be being debated in Karlsruhe.

If you follow this line of argument, then we should all be watching European credit markets closely again, and keeping an eye on EURUSD and EURJPY for signs of serious breakdown. The BoJ and the Fed are really in the same boat now, and both will depend on periodic panics in other markets (Europe, China) to sustain their bond markets.

Remember that in macro terms, the undulations of the equity markets are rather unimportant relative to the much larger FX and credit markets. Equities can blow up any time and the Fed will be fine, as will a significant part of the US economy. At this point there is almost no macroeconomic advantage in allowing equity prices to rise further, as the transmission mechanism between equity prices and the real economy is almost non-existent.

So we all know what the Fed would like to have happen, namely, equity prices to fall and bond yields stay low. But since the "taper" talk didn't achieve this objective, on wonders what is the mechanism by which the Fed will try to achieve this aim? At the moment they seem to be trying to let it deflate by itself, and it isn't working. Perhaps the Europeans will oblige......?

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Anonymous
admin
November 11, 2013 at 7:22 PM ×

C Says
LB
That's a very good summary of our current situation.

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Corey
admin
November 11, 2013 at 9:22 PM ×

I don't understand why anyone thinks the fed will ever actually unwind their balance sheet? Looking for analysts to value market PEs based on the avg during the Tmt bubble before I get worried.

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Leftback
admin
November 11, 2013 at 9:34 PM ×

Not disagreeing with you at all on unwinding the Fed balance sheet, but merely following the conventional arguments to their logical conclusion. We are not sure those conventional arguments about the US recovery hold water.

Indeed, if Japan is the model (and we think that it is) then they will not unwind significantly. However, if Japan is the model (and we think it is) then it's about time to call time on the Faux Reflation and Housing Recovery of 2013. If Japan is the model (and we think it is) then the US will fail to reach escape velocity, remain in ZIRP, and will experience continued disinflation, with another downturn in the price of homes and other inflated assets. If Japan is indeed the model (and we think it is) then employment markets will remain soft, growth will be muted or non-existent, inflation will remain tame, and the Death of Treasuries has been greatly exaggerated.

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Corey
admin
November 12, 2013 at 4:56 AM ×

Well Japan may have been the most likely template prior to the advent of QE. Now it seems more of a loose analogy in that one shouldnt underestimate the undercurrent of disinflation amidst the rising liquidity tide. If Japan is really the model then following that line of thought with current CB policies the Fed will have to either double down on QE in an attempt to re-reflate asset prices or give it up as ineffectual. And if the Fed gave it up as ineffectual what would that mean for the ECB and BOJ?

We've all grown over reliant on QE anyway. What good is all that extra liquidity if its sitting dead as reserves. Sure it lowered long rates giving those that could get it access to cheap credit. But credit will still be cheap since ff will probably stay 0-25bps out to 2016. The sooner they rip the bandaid off the better. Of course whether and when they do this can mean another 100bps in longer rates and while certainly not dead, being on the wrong side of that trade will make you wish you were.

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Anonymous
admin
November 12, 2013 at 11:21 AM ×

C Says
I would best summarise my current view of 'risk on' in the immortal words of Cilla Black. Substituting "Aside" for "Inside".

Step inside, love
Let me find you a place where the curse of the day
Will be carried away by the smile on your face
We are together now and forever, come my way

Step inside, love, and stay
Step inside, love, step inside, love
Step inside, love, I want you to stay

You (risk) look tired, love
Let me turn down the light, come in out of the cold
Rest your head on my shoulder and love me tonight
I'll always be here if you should need me night and day

Step inside, love, and stay
Step inside, love, step inside, love
Step inside, love, I want you to stay

When you leave me (risk)
Say you'll see me again for I know in my heart
We will not be apart and I'll miss you
'Til then we'll be together now and forever, come my way

Step inside, love, and stay
Step inside, love, I want you to step inside, love
You know I do, step inside, love

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Jamel Bland
admin
November 12, 2013 at 11:55 AM ×

Hello long time reader here. Kinda curious about what are your must reads (of course I mean the community) in the morning?

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Polemic
admin
November 12, 2013 at 1:38 PM ×

Sry folks . I'm out of communication for a while as currently travelling to northern England and there is only so much you can do from a phone.. perhaps others can answer Jamel s question.

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Anonymous
admin
November 12, 2013 at 1:49 PM ×

suns out in the North West for you Polemic :) enjoy while the gettings good
MC

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Anonymous
admin
November 12, 2013 at 1:51 PM ×


"I can only say: I'm sorry, America. As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed's first plunge into the bond-buying experiment known as quantitative easing. The central bank continues to spin QE as a tool for helping Main Street. But I've come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time."

http://tinyurl.com/lk5dfn3

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amplitudeinthehouse
admin
November 12, 2013 at 2:14 PM ×

I don't think we'll see this bloke at a grass track anytime soon!

http://online.wsj.com/news/articles/SB10001424052702303763804579183680751473884

Maybe he should have nobbled trainer.

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Anonymous
admin
November 12, 2013 at 4:21 PM ×

Good article about household incomes, corporate profits of GDP and disparency between expectations and the more probable outcome of earnings growth next year.

http://www.financialsense.com/contributors/brian-pretti/estimated-prophets

The focus has been so fixated on QE and its timing that weakening earnings growth to a near stalling point has gone relatively unnoticed this year. Of course the weakening itself shouldn't be any surprise considering the declining household income. The effects also on lowering interest expenses in P/L statements and debt fueled share buy backs are evident.

But the big question is: just how sustainable is this ATH spike of profit/GDP? Of course large cap exporters are doing very well but still...

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Leftback
admin
November 12, 2013 at 4:41 PM ×

Corey, I think you (and many of us) are a bit confused here about the whole QE issue. First of all, we agree that they are definitely not going to SHRINK the balance sheet for a very long time. Most of those bonds will be held to maturity. What they are going to do is slow the pace of purchases in order to "taper" the growth of the balance sheet. This is the mildest possible form of monetary tightening. In my view this is now very unlikely to trigger a rip of 100 bps higher in rates. In fact, that move has already occurred, from May to August, and a modest degree of tapering is now priced in to the bond market.

Let us also recall that the result (and indeed the intent) of beginning (QE1) and maintaining (QE2/Twist) or accelerating the balance sheet expansion (QE3/4) was to push investors out along the risk curve. By buying Treasuries and MBS for its balance sheet, the Fed aimed to push investors into high yield corporate credit and equities. The lower yields in the Spring were in part a result of fast money front-running the Fed, and that trade has largely been unwound. What you seem to be suggesting is that there will now be flight from Treasuries into equities. In fact, I would suggest we will see the opposite.

When QE1 and QE2 ended, we saw a move back down the risk curve, out of equities and high yield credit into safer asset classes. Tapering, when it occurs, will most likely have the same effect of dampening down enthusiasm for risky assets, and as we all know once the price of zero yield assets (whether it be gold, or shares of TSLA or TWTR) begins to fall, the desire to own such items evaporates as fast as it inflated, with investors fleeing to the safety of higher quality assets and cash. It is unlikely, once this reversal in risk perception begins, that equities will remain "at a permanently high plateau".

Since the proposed tapering is intended to be very gradual, the Fed hopes to achieve a slow descent of equities rather than an abrupt fall. Whether they will be successful in this remains to be seen. It is our expectation that they will be successful in maintaining low rates, perhaps very low, as low as in Japan. The very survival of the Fed itself depends on it. I realize that the proposed Japanese scenario is a boring one, and still hard to contemplate for most US observers, but it ensures a degree of social stability and means that life goes on in the face of extremely strong demographic headwinds. Get used to a low growth, slow growth, faux growth future.

The Nikkei had a sharp rally of 40-50% from the Spring of 1999 into April 2000, when the bubble popped abruptly. What followed was a 40% drop in a year and a sickening three year bear market. Worth remembering that these things can happen, especially when it is all happy-clappy complacency out there.

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Leftback
admin
November 12, 2013 at 6:20 PM ×

LB is more and more reminded of the April 2011 "recovery", when the 10y threatened to break out above 4% and the US economy was going to reach "escape velocity". It was a time of maximal hatred of Treasuries and scorn was poured on anyone who liked fixed income (LB). Within a few months the bloom was off the rose, the 10y was back at 3% and then after that all Europe broke loose.

On bonds, you can now take your choice:

Gartman, that well known oracle and authority on the credit markets, now says "SELL, yields going to the moon".

Gartman on Bonds

Dalio, now thinks none of us can achieve alpha, and says "MEDITATE. Yields are staying low".

Dalio on Alpha, Rates and Meditation

Fink, an actual bond market participant, now says the Fed "risks bubble-like conditions" and they should "kiss Bernanke's ass goodbye and taper in December".

Fink on December Taper

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Corey
admin
November 12, 2013 at 8:32 PM ×

Yes we are all a bit confused by QE and poor policy signaling only continues to lead to more confusion. I dont honestly think that equities will permanently re rate higher in some sort of liquidity driven paradigm shift. However, I try to see both sides and I would put that as one of many possible scenarios that while having a small probability isnt nil where previously it was. After all while we've already had a 25-30% yoy rally that is still aways from 40-50%.

Other than that we are probably in agreement in more than a few major points minus some important details. QE impacted everything at the expense of cash and therefore a reversal will prove the opposite. And do to everyones including my poor understanding of how QE works* I expect treasuries to overreact before realizing that the economy aint so hot.

On the "survival of the Fed" sounds to me like you mean high rates would blow them up, which to me cant bc they will never sell any assets or mark their portfolio to market. Why would they if we remain mired in slow growth? I would go as far to say that QE has become a permanent tool in the arsenal which is a very bad thing bc after QE1 and maybe 2, the costs surely outweigh the bene's.

Personally I would like to see the Fed taper in dec and I dont think the mkt is properly discounting the fact that a) the ECB has picked up the baton making a fed taper easier to digest and b) they need to get some creditability back. And yes I've always wanted to learn how to meditate but unfortunately cant seem to find the time as I spend it thinking about this stuff.

Finally the fact that some of the darlings you mention are having such trouble is well, troubling.

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Corey
admin
November 13, 2013 at 2:01 AM ×

And I would add one more thing in regards to the post (and perhaps this is part of the point pol is trying to make) but, you didnt start with an apple and buy it for two, you started w/ 700k in the apple watched its value get cut in half in 08' and now you have maybe 850k in the apple. So while you have finally broke even and then some you have a lot less than you realize and are still reluctant to part with those profits and spend because of the recent painful memory of loss. If that theory is to play out the market is going to have to go high enough where you have something like 1.4m in the apple and unless the fed continues to QE, or another CB picks up where they left off, I have a hard time seeing how the apple can be worth that much.

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Leftback
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November 13, 2013 at 3:00 PM ×

European markets looking ugly and US following it down this morning. German-peripheral spreads are wider and the "beta" markets are the worst performers today.

Corey, just to round out the discussion on the Fed and rates, I want to add a third player to the argument about the Fed and Mr Market. Although we might like to think that the Fed can hold the bonds to maturity and ignore what Mr Market does to rates, we all know that isn't true. Treasury, of course, is the third player in the eternal love triangle.

At some point higher rates mean two things happen that are unpalatable to Treasury: first, the phone starts ringing because everyone in Beijing and Newport Beach is unhappy that the bonds they bought are losing value in the market, and second, higher rates mean higher coupons on new issuance, and hence a higher cost of servicing the ever-growing US debt.

This is when Treasury gets on the dog and bone to the Fed and says, "Can the QE, Janet, it's enough of the dog and pony show, already. It's time for Peter Punter and Johnny Retail to take it up the ass for a change. I've got China on the phone every five minutes, BlackRock and PIMCO are camped outside on the sidewalk texting me about the Bond Vigilantes, and I'm not going to issue 10s at 3%, let alone 4%, for fear of bankrupting the country. So Taper already, and send the hawks out on TV and the lecture circuit."

The immense size of the debt is the key dynamic that has kept a lid on rates in Japan for so long, and the same will be true of the US. At some point, Japan will reach the point of no return and there will be a currency collapse. We haven't reached that point yet. The US has miles to go before we sleep....

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Anonymous
admin
November 13, 2013 at 3:34 PM ×

Some people are getting filthy rich...

“Jeff Koons’ Balloon Dog Sculpture Sells for Record-Breaking $58.4 Million”
http://tinyurl.com/ng83bhm

And then...

“Between 2000 and 2008 the typical earnings of men with at least a bachelor’s degree fell by more than $2,000, after inflation, to $70,332 a year. Between 2008 and last year they fell a further $3,500.”

“We have no handle on what happened in the 2000s,” Professor Autor told me.
“That is a mystery that nobody I know understands, and I can’t point to a single policy lever or a single external force that would explain it.”
http://tinyurl.com/kxwqg42

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Leftback
admin
November 13, 2013 at 3:45 PM ×

We also should point out the following dynamic that is likely to be in play in the US bond market, let's say someone else has a stalling economy and a currency that is considered to be "too high" at the moment (cough:EUR), they are going to jawbone it downwards by whispering about QE. Punters who are long some old beta denominated in that currency (cough: ES10y, BTPs) are then going to start unloading that instrument, along with the shares of companies that are knee-deep in said instruments (cough: Italian and Spanish banks), and instead will probably plough that money into something highly liquid, especially if that is denominated in a currency likely to be stronger in the short run (cough: USTs, gilts or even JGBs). This, in a nutshell, is why a lower EUR is going to fuel risk-off.

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Anonymous
admin
November 13, 2013 at 10:52 PM ×

CSCO earnings call not good, talking about macro softness.

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Anonymous
admin
November 15, 2013 at 8:24 AM ×

C Says
You've probably got one the best intermediate trades available if you can get on the right side of the argument as to whether Yellen will keep her knickers looser than Abe's jocks. Which one can talk loudest and longest appears to be the flavour of the day.
I was amused to see on Bloomberg a caption "Do we have a currency war around the corner". I was amused because I think we have been in a currency war for quite some time already with no end in sight.

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Anonymous
admin
November 15, 2013 at 9:13 AM ×

It looked on Wednesday that the European indices were just about to start a landslide on some very stagnant looking CPI's and industrial production numbers (which have now been already somewhat a prolonged for atleast a couple of months IIRC). All of a sudden rumors about Yellens leaked dovish speech popped up and the whole thing was dragged back up along SP.

Ironic that she was asked whether she thinks that CB statements have volatility effects on the equity and bond markets. The reply was that "CB's continue to communicate as best as possible to diminish excess and unnecissary volatility in the market" :-)

Wonder how many months more of stagnant EZ data we will be permitted to see before the introduction of the alleged OMT "Dragzooga", or was it that the recent rate cut was another long term "let's wait and see what happens solution". Ofcourse we all know that the refi rate probably isn't the biggest problem.

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amplitudeinthehouse
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November 15, 2013 at 11:08 AM ×

Currency Wars?..you must be kidding!..who told you that?
It's become a little blase to TMM followers I imagine..Similar to the analogy the NSA cheif gave at a recent hearing..

Currency Wars you ask?
I find the situation similar to the movie Casablanca..when the police chief walks into the hotel as says to himself " oh!..we have drinking and gambling here" same kinda thing.

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Anonymous
admin
November 15, 2013 at 3:03 PM ×

Spain's banks forced to eat dirt...

via WSJ:
“It has puzzled Spanish bank analysts for years: Why did the country’s mortgage delinquency rate rise so slowly even as unemployment soared above 26%?
A big part of the answer—revealed by a spate of bank earnings reports in recent days—is that Spanish lenders had been making their loan books look healthier than they really were by refinancing big numbers of loans to struggling homeowners and businesses.
The lower interest rates and easier terms of refinancing helped hundreds of thousands of Spaniards like Juan Carlos Díaz, who stopped making mortgage payments more than a year ago, remain in their homes and keep their businesses afloat longer than otherwise would have been possible. It has also helped banks bury a growing risk in their credit portfolios and avoid recognizing losses on debts they are unlikely to recover.
Now, more stringent disclosure guidelines from Spanish banking authorities are bringing these risks into the open. Partly as a result, mortgage delinquency is rising fast—a trend that could damp recent investor enthusiasm for a bailed-out banking industry rebounding from a property-market crash.”

Back in 2012 Santander CEO stated…

“JPMorgan Chase & Co. (JPM), the world’s largest bond underwriter, predicts that Spanish mortgage arrears will surge as unemployment rises. That’s also the view from the international debt market, which has driven up yields on Spain’s bonds in a bet the country will have to bail out banks.
In Spain, Banco Santander SA (SAN) Chief Executive Officer Alfredo Saenz said yesterday that’s nonsense. “Mortgages get paid in good times and in bad,” he said in a news conference at the bank’s headquarters outside Madrid. “Anyone raising this problem as one of the issues for the Spanish financial system is saying something stupid.”

http://www.bloomberg.com/news/2012-04-26/santander-ceo-derides-surge-in-spain-defaults-mortgages.html

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Leftback
admin
November 15, 2013 at 4:26 PM ×

Personally I am shocked, shocked, to learn that bankers in Southern European countries have been refinancing bad loans by making more bad loans, and then telling porkies about it.

Spreads are presently far too narrow in a variety of credit markets (sovereign and corporate), as a result of real (QE) and imaginary (Draghi bazooka) central bank interventions, and leverage has been creeping higher as a result in order to squeeze out additional profits. Debt of European banks looks exceptionally rich at this point, as though none of them would ever be allowed to fail.

There will inevitably be an event (default or threat of default) before long that triggers a substantial repricing of risk in bond markets, with the usual consequences for other risky assets. At this point, the definition of risky assets would once again have to be extended to include euros and anything (other than German bonds) that is denominated in euros. A drop in the euro would obviously entail a somewhat stronger dollar, with all of the usual consequences for commodities and emerging market equities.

This is a market event, not talking about the EU economy tanking, it will just stay flat. All this isn't a Black Swan, of course, it's a goose strutting around the farmyard leaving goose turds all over the place. It's just a matter of time before someone notices that the goose is full of shit.

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Ahmed Qasim
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November 16, 2013 at 2:10 PM ×

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Skippy
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November 18, 2013 at 11:13 AM ×

Amusing day here in Asia today. HSCEI +5%, even though around two thirds of listed sector profits come from regulated pricing (monopoly profits) and "reform" ought to diminish these profits (if implemented). In contrast, "private sector" companies were only up about 0.9%.

I guess the market was oversold, somewhat undervalued and sentiment was low, but my take is that the reform is not bullish for most of the listed sector (if implemented).

As an aside, operating cash flow continues to deteriorate for the corporate sector and debt keeps rising.

Just saying.....

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Nico G
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November 18, 2013 at 11:15 AM ×

and that grey goose is French

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Leftback
admin
November 18, 2013 at 4:47 PM ×

Nico, nice one.

Skippy, can you say "squeeze"?

Equity markets showing a serious case of Big Figure-itis. S&P 1800, Dow 16k, Naz 4000 up next.

Here's the Big Figure on drums, circa 1975, for those who weren't there at the time:
eachPri
Keep It Out of Sight

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