Category: zerohedge

On this day, 273 year ago, one of America’s most visionary founding fathers – Thomas Jefferson – was born. To celebrate his birthday, we are sharing a small sample of some of his most prophetic quotes which are perhaps more relevant today than they have ever been in the history of the United States.

On liberty – Thomas Jefferson letter to Isaac Tiffany, April 4, 1819

Rightful liberty is unobstructed action according to our will, within the limits drawn around us by the equal rights of others. I do not add ‘within the limits of the law’; because law is often but the tyrant’s will, and always so when it violates the right of an individual.

On banks as the biggest threat to liberty – Thomas Jefferson letter to John Taylor, May 28, 1816

If the American People ever allow the banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers occupied. The issuing power of money should be taken from the bankers and restored to Congress and the people to whom it belongs. I sincerely believe the banking institutions having the issuing power of money are more dangerous to liberty than standing armies.

On the dominion of banks – Thomas Jefferson letter to James Monroe, January 1, 1815

The dominion which the banking institutions have obtained over the minds of our citizens…must be broken, or it will break us.

On central banks – Thomas Jefferson letter to Albert Gallatin, June 22, 1803

This institution (Bank of the U.S.) is one of the most deadly hostility existing against the principles and form of our Constitution… an institution like this, penetrating by its branches every part of the Union, acting by command and in phalanx, may, in a  critical moment, upset the government.”

More on central banks – Thomas Jefferson letter to Albert Gallatin, June 19, 1802

The monopoly of a single bank is certainly an evil.

On printing money – Thomas Jefferson letter to John Taylor, May 28, 1816

The principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.

On the threat of banks – Thomas Jefferson letter to John Taylor, May 28, 1816

The system of banks which we have both equally and ever reprobated, I contemplate as a blot in all our (state) constitutions, which, if not corrected, will end in their destruction.”

On member of Congress owning stocks – Thomas Jefferson letter to Gallatin, June 22, 1803

My wish was to see both Houses of Congress cleansed of all persons interested in the bank or public stocks; and that a pure legislature being given us, I should always be ready to acquiesce under their deliberations, even if contrary to my own opinions; for I subscribe to the principle, that the will of the majority, honestly expressed, should give law.”

On the “bank mania” and “moneyed aristocracy” – Thomas Jefferson letter to J.B. Stuart, May 10, 1817

The bank mania is one of the most threatening of these imitations. It is raising on a monied aristocracy in our country which has already set the government at defiance, and although forced at length to yield a little on this first essay of their strength, their principles are unyielded and unyielding.

On the threat from moneyed corporations – Thomas Jefferson letter to George Logan, November 12, 1816.

I hope we shall take warning from the example and crush in its birth the aristocracy of our monied corporations, which dare already to challenge our government to a trial of strength and bid defiance to the laws of our country.”

On paper money and precious metals- Thomas Jefferson letter to John Eppes, 1813

The trifling economy of paper, as a cheaper medium, or its convenience for transmission, weighs nothing in opposition to the advantages of the precious metals… it is liable to be abused, has been, is, and forever will be abused, in every country in which it  is permitted.

And, a just as critical recpirocal letter by John Adams to Thomas Jefferson, August 25, 1878

All the perplexities, confusion and distress in America arise, not from defects in their Constitution or Confederation, not from want of honor or virtue, so much as from the downright ignorance of the nature of coin, credit and circulation. ”

On the need for a “little rebellion now and then” – Thomas Jefferson to James Madison, Paris, January 30, 1787

I hold it that a little rebellion now and then is a good thing, and as necessary in the political world as storms in the physical. Unsuccesful rebellions indeed generally establish the incroachments on the rights of the people which have produced them. An observation of this truth should render honest republican governors so mild in their punishment of rebellions, as not to discourage them too much. It is a medecine necessary for the sound health of government.

* * *

And while it may not be his birthday, here are two  bonus quote from James Madison, from June 28, 1787:

A standing military force, with an overgrown Executive will not long be safe companions to liberty. The means of defence agst. foreign danger, have been always the instruments of tyranny at home. Among the Romans it was a standing maxim to excite a war, whenever a revolt was apprehended. Throughout all Europe, the armies kept up under the pretext of defending, have enslaved the people.

And on the encroaching power of unchecked government – June 7, 1788

Since the general civilization of mankind, I believe there are more instances of the abridgment of the freedom of the people by gradual and silent encroachments of those in power, than by violent and sudden usurpations.

h/t @RudyHavenstin

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A different kind of fiction-peddling…

 

 

Source: Investors.com

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Submitted by Bill Bonner of Bonner & Partners (annotated by Acting-Man.com's Pater Tenebrarum),

A Return to Gold

“What if you were appointed to head the Fed? In your first week on the job, what would you do?”

The question was not exactly serious. Neither was the answer.

“We’d call in sick.”

 

Sorry boys and girls, you’ll have to start without us…

 

Drought, old age, traffic congestion, meanness, purple drink, bad taste, rap, suburbs, cancer, government, Hillary Clinton, restaurant music, shorts, Facebook, obesity – there are a lot of things wrong in the world. And most of them are not easily put right.

But there are some problems that could be solved overnight. Economic and financial problems, for example, solve themselves… if you let them. Almost all the macro-money wounds suffered by the modern world are self-inflicted.

Central banks and treasury departments around the world keep shooting themselves in the foot. But rather than stop manipulating the system… they buy another pair of shoes.

 

If we were miraculously appointed by President Trump to run the Fed, our first act would be to put the gun down. We would announce that, henceforth, anyone waiting for the next rate hike would have to wait a long time.

Because we wouldn’t be making any rate hikes… or rate cuts either. Instead, interest rates would have to take care of themselves. Lenders and borrowers would set their own rates.

But what about if banks got into trouble? Ah… we’d take care of that too. We’d point out that the Fed would no longer lend to them in an emergency. Our announcement: “To any bank that runs out of money: Drop dead.”

 

Advice to insolvent banks from the hypothetical Bonner Fed

 

Then, we would put the entire Fed balance sheet – the more than $4 trillion in dodgy bonds it bought over the last eight years – up for sale. And we would send layoff notices to the entire staff…telling them to clean out their desks, admonishing them that henceforth they would have to seek honest employment or try to land a job on Wall Street.

Had we the power, we would take one further step: We would declare that Americans could use whatever currency they wanted, that the dollar would once again be exchangeable for a fixed quantity of gold, and that the U.S. Treasury would accept any major currency – including bitcoin – in payment of taxes.

See how easy it would be? All of the heavy lifting could be accomplished before lunchtime on our first Monday on the job. Then we would slip out the back of the Eccles Building… with luck, just before posse caught up to us.

 

The posse (John Law chapter)

 

Solid Dollar

And yet, those simple changes would eliminate most of the money troubles facing the U.S. With no further gas coming in, the debt bubble would deflate. Bad investments, bad business, and overpriced assets would all lose air… and disappear.

The dollar would be solid again. It would represent real value, not counterfeit wealth. Borrowing would be based on real savings, not just more hollow credits. And – with only scarce capital to work with (rather than an unlimited supply of phony-baloney credit) – investors and entrepreneurs would be careful about what they did with their investments.

They would put capital to work only in projects that increased the real value of America’s assets, rather than those that merely shifted wealth from Main Street to Wall Street.

 

Honest money: an 1882 gold quarter

 

Admittedly, this would be a lot for the American people to take in. Most people have no idea how the money system works. The credit dollar is all they know. And they still have faith that the big heads at the Fed know what they are doing.

The newspapers and pundits would howl in alarm. Respectable economists would choke on their indignation. Lynch mobs would form. They would call our program “radical” and “irresponsible,” unaware that today’s system is the most radical, experimental, and irresponsible in history.

Our proposals would take the country back to a traditional and sensible money system. People would decide for themselves what kind of money they wanted to use… whether to save it… or spend it… and what price to put on it if they wanted to lend it out. Would it work?

We don’t know, but we’d like to see someone give it a try.

 

A certificate for sound money, and quite a bit of it too. Our benevolent modern-day social engineers would be appalled: not only is this a certificate for gold, it is one for 10,000 smackers worth of the stuff! Only über-turrsts could possibly have use for such a thing…it clearly embodies way too much freedom and responsibility for the average tax serf. If you’re not convinced, ask Larry Summers, and if that doesn’t help, think about the children!

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JPMorgan Trading Desk activity was on the slow side today as the equity rally extended for another day as the SPX hit fresh YTD highs. Since hitting a low at 1810 on 2/11 the SPX has since rallied ~270 points or ~15% and is now up ~1.8% YTD.

Earnings Tues night/Wed morning were either better-than-feared (CSX) or outright strong (JPM and to a lesser extent ADTN) and that, combined w/the solid China trade numbers, helped power another day of gains (the US retail sales numbers fell short but that didn’t influence trading a whole lot). The Beige Book (out at 2pmET) didn’t really change the narrative (and actually contained some possible headwinds in the form of upside wage pressures).

But as JPM notes, investors remain reluctant about chasing a tape so far off its lows (the inexorable nature of the rally has provided few entry points and it still feels like people are being grudgingly forced in from the sidelines to participate in a rally that remains decidedly unloved).

The bigger picture remains unchanged w/the multi-week advance a function of misplaced sentiment and positioning matching up w/a set of global fundamentals that proved much more stable than investors feared at the Feb nadir.

 

The Fed-induced USD sell-off, oil rally (helped by the USD, anticipation of a production freeze, and a sig. cutback in US output), and (mild) economic green shoots (esp. China’s Mar data) all helped but the velocity of the move (15% in two months) wouldn’t have occurred absent the abject despondency and deafening recession calls from Jan and Feb.

Investors continue to try to numerically justify the price action.

In Jan and Feb the consensus thinking was assuming a shallow US recession, ~$115 in EPS, and a 15x multiple in order defend pressing the SPX below 1850 (15x $115 would have placed the SPX around 1725-1750).

 

With the index now threatening 2100 growth is seen staying within its post-crisis average (~2%-ish GDP) w/~$122-123 in EPS and a 17-18x multiple (18x $123 would get the SPX north of 2200).

 

Some are even beginning to look to ’17 where the (admittedly inchoate) consensus is calling for ~$130-132 in EPS (on that number the PE looks reasonable at ~16x).

 

However, just as investors had to stretch reality to explain a sub-1850/1800 SPX in Feb, the same is true up at 2075-2100 (although $122-123 and 17-18x is more plausible than $115 and 15x).

 

Even assuming the USD weakness, oil strength, and better-than-feared Q1 reports, it’s hard to get the ’16 EPS number more than few dollars above $120 and investors should be careful about estimates looking out more than 1.5 years (at this time in ’15 investors were penciling in EPS north of $130 for ’16).

The macro landscape remains a lot more boring than investors give it credit for and just as psychology proved excessively bearish in early Q1, the same may now be occurring on the upside.

 

The USD is something to keep an eye on – its weeks-long plunge on back of a trio of dovish Fed messages (3/16 FOMC meeting, 3/29 Yellen speech, and 4/6 FOMC minutes) has underwritten a lot of the recent SPX rally (by relieving pressure on China’s CNY and spurring a commodity lift) but it is showing signs of firming now (the DXY rose ~85-90bp Wed) and if this persists it could become a headwind.

Source: JPMorgan

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As The National Federation of Independent Business explains, the Small Business Economic Trends report shows that in March, small business owners felt less optimistic about the economy. The index declined by 0.3 points to 92.6, its lowest monthly reading in two years.

 

The index has turned “decidedly south”, NFIB points out, since December 2014, when it was at a high of 100 points. Four of the 10 components of the monthly index posted gains, however the numbers were still cause for concern. For instance, despite a 4% increase in the number of business owners expecting the economy to improve, the net percentage for March was still negative, at -17%.

Small business owners surveyed in March cited “weak sales and a poor economy” as the top reason they believe “the current period is a bad time to expand.” However, the second-most frequent reason cited was “the political climate,” as this election season continues to create regulatory uncertainty for small businesses.

Additionally, the NFIB found that “owners remain very pessimistic about the economy” in part because this view is “unfortunately reinforced by Fed Chair Yellen’s back peddling on the timing of the next rate hike.”

 

Commenting on the results, NFIB Chief Economist Bill Dunkelberg cautioned that the small business sector is currently “underperforming, doing little more than operating in maintenance mode.” Although there has been “slow economic growth,” he warned that “there is no exuberance, no optimism and not much hope, the numbers make it clear.”

Dunkelberg concluded of the March index results, “Small business owners remain extremely pessimistic about the economy, and rightfully so. Cost-increasing regulations seem to multiply overnight and there is no clear end in sight.”

Slamming everyone…

There is no cheerleader for the economy who convincingly promises improvement. There is little hope that government will constructively address the problems that concern consumers and small businesses.

 

The most likely prospects to assume the presidency don’t appear to be connected to reality. There is no prospect that the avalanche of resource-wasting regulations will abate much less be reversed.

 

The “experts” at the Federal Reserve only raise uncertainty with their pronouncements and seem detached from the real economy, focused instead on financial markets.

Simply put he notes,

"The Fed continues to confuse and confound."

Clearly, small business owners are either:

1. "Peddling Fiction", or

 

2. Struggling with economic and political uncertainty that appears unlikely to ease in the short-term.

As a reminder (from The NFIB's website):

NFIB is America’s leading small business association, promoting and protecting the right of our members to own, operate and grow their businesses. If you’re an independent business owner, join NFIB today to enjoy exclusive member discounts, business networking opportunities in your local area, free HR support for your business and much more!

Basically the representative of every small business in the US.

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Submitted by Nick Bernabe via TheAntiMedia.org,

“Now it’s just an oligarchy, with unlimited political bribery being the essence of getting the nominations for president or to elect the president. And the same thing applies to governors, and U.S. senators and congress members.”

– Former President Jimmy Carter

The 2016 election has been a wild ride, with two insurgent grassroots campaigns literally giving the political establishment a run for its money. But as the events of this presidential primary season play out, it’s becoming clear the U.S. election — and even more so, the presidential race — is a big scam being perpetrated on the American people.

Events from the last week have exposed the system as an illusion of choice and a farce. They have reinforced at least one study showing the U.S. is an oligarchy rather than a democratic republic.

The Wyoming democratic caucus took place on Saturday, purportedly to allow voters to have their voices heard in the race between Bernie Sanders and Hillary Clinton. Sanders lost the Wyoming caucus by winning it with a 12 percent margin.

Wait, what?

How does one lose by winning 56 percent of the votes? This happens when the political process is, according to the New York Post, “rigged” by superdelegates. The Post summed up this “strange” phenomenon:

“[U]nder the Democratic Party’s oddball delegate system, Sanders’ winning streak — he has won seven out of the past eight contests — counts for little.

 

“In fact, despite his win, he splits Wyoming’s 14 pledged delegates 7 to 7 under the caucus calculus.

 

“Clinton, meanwhile, also gets the state’s four superdelegates — who had already pledged their allegiance to her in January. So despite ‘losing,’ she triumphs 11-7 in the delegate tally.”

Even media pundits on MSNBC openly called the process rigged:

 

.@BernieSanders wins WY but @HillaryClinton nets more delegates… @JoeNBC: It is a system rigged against voters https://t.co/C15I9inLAH

— Morning Joe (@Morning_Joe) April 11, 2016

 

The superdelegate process is complicated, as we’ve noted before, but they have one essential function: to prevent candidates like Bernie Sanders from winning the Democratic nomination.

Don’t believe me? Here’s a video of Democratic National Committee chairwoman Debbie Wasserman Schultz explaining superdelegates:

Adding insult to injury, even when Sanders does win states (despite Hillary’s advantage in superdelegates), the media can be reliably counted on to discount Sanders’s wins as nothing more than prolonging the electoral process, which will inevitably elect the presumptive nominee, Hillary Clinton. This pervasive commentary continues despite the fact Sanders only trails her by several hundred pledged delegates.

Meanwhile, according to the same media, the non-establishment Trump campaign is threatened every time Ted Cruz beats him — even though Trump leads by a larger percentage of pledged delegates than Clinton does. When Clinton loses, it doesn’t matter because she already has the nomination locked up. When Trump loses, his campaign is in big trouble. Starting to see the problem with the media coverage?

When you examine these media narratives, a troubling pattern emerges that goes beyond the political establishment’s self-interest. You begin to see that American corporate media also functions as an arm of the political machine, protecting establishment candidates while attacking — or dismissing — candidates who seem non-establishment.

This brings us to the events that transpired during the Republican nomination process in Colorado on Saturday. The Republican Party of Colorado didn’t even bother letting people vote before using arcane rules to strip the democratic process of its democracy. According to the Denver Post:

“Colorado GOP leaders canceled the party’s presidential straw poll in August to avoid binding its delegates to a candidate who may not survive until the Republican National Convention in July.

 

“Instead, Republicans selected national delegates through the caucus process, a move that put the election of national delegates in the hands of party insiders and activists — leaving roughly 90 percent of the more than 1 million Republican voters on the sidelines.”

Unsurprisingly, Trump’s non-establishment campaign walked away with zero delegates. They were all “awarded” to Ted Cruz.

“How is it possible that the people of the great State of Colorado never got to vote in the Republican Primary? Great anger — totally unfair!” Trump said on Twitter. “The people of Colorado had their vote taken away from them by the phony politicians. Biggest story in politics. This will not be allowed!”

 

In an interview on Monday, Trump was even more frank. “The system is rigged, it’s crooked,” he said.

The Colorado GOP didn’t even bother hiding its intentions, tweeting — then quickly removing — what was possibly the most honest insight into the back-door dealing so far this election season:

The Republican party chooses the nominee, not the voting public. Still in disbelief? Watch a Republican National Committee member explain it better than I can:

What we are witnessing — for the first time on a large scale — is the political establishment’s true role in selecting the president of the United States. The illusion of choice has become apparent. The establishment anoints their two picks for president, and the country proceeds to argue vehemently over the two candidates they are spoon-fed. This dynamic is reminiscent of a prophetic 1998 quote from philosopher Noam Chomsky:

“The smart way to keep people passive and obedient is to strictly limit the spectrum of acceptable opinion, but allow very lively debate within that spectrum.”

Ahh, the illusion of choice. Sure, in reality there are third party candidates who should be given a fair shake, but in our mainstream media-augmented reality, third parties do not exist. They aren’t mentioned. They aren’t even included in presidential debates. This is another way the media stifles healthy debate, stamps out dissenting opinions, and preserves the status-quo.

“We The People” don’t choose our presidents; they are hand-picked by a powerful group of political party insiders — parties that have long since sold out to the highest bidders. What we have on our hands in America is a rigged oligarchy, and that’s not a conspiracy theory — it’s fact. Now, however, millions of Americans are becoming aware of it thanks to the populist campaigns of Bernie Sanders and Donald Trump. America’s elections are controlled by a big club, but unfortunately, “you ain’t in it!”

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Remember, the stock market is not the economy… Collaping retail sales, soaring inventory-to-sales ratiosm and entirely fictitious China trade data…

 

Can mean only one thing…

 

The biggest 2-day short squeeze in 6 months…

 

Which has sent Trannies and Small Caps up most this week…

 

Nasdaq and Small Caps remain red for the year… but are at their highest close for 2016…

 

With Trannies roaring today… but everythiong slowed after Europe closed…

 

The late day pump was as AdParlor walked back its earlier comments on ad spend reduction in Facebook)…

 

Bonds & Stocks decoupled after the macro data…

 

Oil & Stocks decoupled today…

 

Treasury yields rolled over today after the dismal economic data…

 

The US Dollar Index surged today on EUR, JPY weakness…

 

The strong dollar sent gold lower but silver surged; copper also popped (because China is awesome) and crude slipped because Doha deal is a farce…

 

Silver pushed closer to taking out that 6-month high…

 

What Happens Next?

 

Charts: Bloomberg

Bonus Chart: 5 of the last 6 times that shorts have been squeezed this much this fast, stocks have stalled dramatically.

 

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Submitted by Mike Krieger via Liberty Blitzkrieg blog,

The increased use of eminent domain to transfer property to powerful political interests, the ramifications of the wars on terrorism and drugs, and the violation of the property rights of bondholders in the auto-bailout case have weakened the tradition of strong adherence to the rule of law in United States. We believe these factors have contributed to the sharp decline in the rating for the legal-system area.

 

To a large degree, the United States has experienced a significant move away from rule of law and toward a highly regulated, politicized, and heavily policed state.

 

– From the 2014 post: New Report – The United States’ Sharp Drop in Economic Freedom Since 2000 Driven by “Decline in Rule of Law”

The American public should be out in the streets by the hundreds of thousands demanding the resignation of President Barack Obama in response to the total sham settlement just announced by the U.S. government with Goldman Sachs. This farce should be seen for what it really is; a gigantic establishment middle finger waving contemptuously in the face of the reliably neutered and long-suffering American public.

A criminal financial organization that engaged in billions upon billions in fraud against the “muppet” public is once again getting off with barely a slap on the wrist and nobody’s going to do a thing about it. As I’ve said for years and years, until the public says enough is enough nothing is going to change. I suppose that’s simply not going to happen until the next economic downturn, which could emerge in earnest any day now.

David Dayan knows as much about this issue as anyone, and he just penned a scathing assessment of this perversion of justice at the New Republic. Here are a few excerpts from his piece, Why the Goldman Sachs Settlement Is a $5 Billion Sham:

This lack of accountability for Wall Street and the perception of a two-tiered justice system gnaws away at Americans’ trust. But now that the Goldman Sachs settlement Sanders referred to has been finalized, I’m sorry to say that he was wrong. If you are an executive on Wall Street who destroys the American economy, you don’t pay a $5 billion fine. You pay much, much less. In fact, you can make a credible case that Goldman won’t pay a fine at all. They will merely send a cut of profits from long-ago fraudulent activity to a shakedown artist, also known as U.S. law enforcement.

 

Goldman Sachs made far more than $2 billion on the sale of mortgage-backed securities, by the way. Check out this list from the settlement documents of all the securitizations they issued that are covered by the settlement; it comes to roughly 530 securitizations, each of which typically held $1 billion in loans. I wouldn’t insult Goldman’s money-earning prowess by suggesting it only made $2 billion in profit on $530 billion in mortgage-backed securities. So even if you think Goldman is paying some kind of penalty, at best it’s a cut of the profits.

 

And who benefits from Goldman’s payments? Not the investors who were the actual victims of the misconduct; as I noted before they end up paying more money by seeing principal cut on the loans they own. Some homeowners get affordable loans or reduced mortgage debt, even though Goldman Sachs specifically harmed investors. But the biggest beneficiaries in this transaction are the Justice Department, the New York Attorney General’s office, and the other state and federal agencies who receive cash awards, from the civil penalty and the resolution of other claims.

 

The upshot: Law enforcement settled a case on behalf of investors and then walked away with the proceeds, while investors got nothing. Goldman Sachs and the Justice Department get to divvy up the profits of a fraud scheme perpetrated on the public.

 

The Goldman Sachs settlement is the last of a series of enforcement actions hammered out by a state/federal task force on financial fraud, co-chaired by New York Attorney General Eric Schneiderman. Four other banks—JPMorgan Chase, Bank of America, Citigroup, and Morgan Stanley—paid similarly dubious fines over the packaging and sale of fraudulent mortgage-backed securities. The origins of this task force represent a failed choice by Schneiderman that let even more damaging misconduct on the part of banks go relatively unpunished.

 

Instead of a vigorous investigation, the Justice Department and 50 state attorneys general moved directly to negotiating a settlement. Schneiderman initially opposed that, but reversed himself. He theorized that the real money wasn’t in foreclosure fraud, but in this criminal packaging and selling of securitizations, this defrauding of investors. So he made a deal to create a task force with enough resources to examine and prosecute that misconduct.

 

All that evidence of fraudulent foreclosures, the largest consumer fraud in American history, turned into the National Mortgage Settlement, a “$25 billion penalty” against five mortgage companies, where only $5 billion was in the form of cash. Despite promises that 1 million homeowners would see principal reductions from that settlement, only 83,000 ever did. But no matter; Schneiderman promised that the task force would result in outcomes “an order of magnitude” bigger. 

That simply didn’t happen.

Of course it didn’t.

So the most wide-ranging financial crisis misconduct was quickly settled without investigation. And despite Schneiderman swearing that the task force would explore all options for accountability, none of its members ever issued a single criminal subpoena. The banks bought their way out of the problem on the cheap, no executive saw a jail cell or had to return a penny of personal compensation, and the law enforcement agencies, not the victims, reaped the majority of the rewards.

As we all know, this is just the latest example of how Wall Street gets away with pretty much anything it wants because it owns the government.

A  Hillary Clinton presidency will guarantee that this stuff will not only carry on, but will get exponentially worse. After all, we all know that…

The fact that “we the people” put up with this is a national embarrassment.

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By EconMatters

 

Strong Gasoline Demand and another drop in U.S. Oil Production were both positives in the EIA Summary Report. Overall, for this time of year, a pretty healthy Inventory Report as we are still technically in the building season. If imports came in similar to last week`s report and refineries pushed more Gasoline through the system, we would have had a drawdown in Oil Stocks.

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Markets have stopped focusing on what central banks are doing and are "positioning for what they believe central banks may or may not do," according to BofA's Athanasios Vamvakidis as he tells FX traders to "prepare to fight the central banks," as the market reaction to central bank policies this year reflects transition to a new regime, in which investors start speculating which central bank will have to give up easing policies first.

The market has started testing the central banks

In recent years, FX investors had to focus primarily on getting three key market drivers right: global risk sentiment, commodity prices, and which central bank will ease more and deeper into unconventional policy territory. Interaction between these three made life difficult for FX investors. However, looking back, these three can explain the biggest moves in the FX markets in the post-crisis years: the JPY weakening when Abe and Kuroda pushed with Abenomics; the EUR weakening when the ECB introduced QE after a long delay; the weakening of commodity currencies when oil prices collapsed; the strong CHF during the Eurozone crisis and when the SNB removed the EUR floor; and the EM rally during Fed QE and the sell-off when the Fed started QE tapering, to mention some of the most notable examples.

However, something fundamental has changed in the FX markets this year. Risk sentiment and commodity prices remain key market drivers, with China and oil prices in particular. But the market reaction to central bank policies has changed substantially.

Five G10 central banks have surprised markets with their policy easing this year, namely BoJ, ECB, RBNZ, Riksbank and Norges Bank, but their currencies are now stronger. With the exception of New Zealand, equities are also down for the year in these countries, which raises questions about the effectiveness of their monetary policies. In relative terms, the RBNZ was the most effective in weakening its currency, while the Norges Bank the least effective. A weaker currency may not be the main goal of monetary policy easing, but a stronger currency–and weaker equities–after having eased more than markets had expected is definitely a puzzle.

We have recently argued that markets have stopped focusing on what central banks are doing and are now focusing on what central banks may or may not do ahead.

• In the case of the BoJ, investors took the surprise of a rate cut to negative levels in January as a sign that QE had reached its limits. They are now challenging Abenomics directly, as JPY is strengthening despite the improved global risk sentiment and market expectations for more BoJ easing in the April meeting. Indeed, our tail risk scenario for USD/JPY at 100 in our year ahead report has now become our baseline risk scenario.
• In the case of the ECB, investors (wrongly) took Draghi’s statement that there would be no more deposit rate cuts as a sign that the ECB was reaching its limits, despite clear evidence that negative rates were counterproductive and the ECB commitment to do more QE instead—the ECB minutes actually suggest that the depo rate has not reached its floor and that more cuts are possible if the outlook worsens. Indeed, not only is the Euro stronger after the March ECB meeting, but inflation expectations and equities are almost back where they started. Looking at the market reaction, it is as if the ECB did nothing in March.
• In the case of the Scandies, improving data (Sweden) and rising inflation (Norway) have made monetary policy easing ineffective for FX markets, as investors see central bank easing as a buying opportunity.
• The RBNZ has been the most effective of the five central banks in our view, but this is because they have plenty of conventional policy room to use if necessary.
• The market reaction to the surprisingly dovish comments by Yellen in March, despite improving US data and rising inflation, provides further evidence, as she persuaded markets that the Fed had a third mandate, global market stability.

Every case is different, but the common characteristic is that policy actions and forward guidance move markets only by affecting expectations for policies ahead, with such expectations often moving to different direction than what central banks had intended.

Transition to a new regime and the next big FX trade

We believe that the FX reaction to central bank policies this year reflects a transition to a new regime, in which investors start speculating which central bank will have to give up easing policies first. It is unlikely, in our view, that the next big FX trade will be from a central bank that surprises markets by easing policies more; this was the case in recent years, but not anymore. We consider more likely that the next big trade will be from a central bank that gives up easing in response to strong data and, even more, rising inflation (see Inflation and FX: What if the dog starts barking?). The Scandies offer an example, as investors have already started fighting these central banks. Our US economists also expect rising inflation to force the hand of the Fed to hike rates twice this year. We are not saying that we are about to see high inflation in the global economy. We are only saying that central banks cannot keep a loose monetary policy stance forever and this is the year that some of them may be forced to stop.

A number of pieces of evidence suggests that price pressures may indeed force some central banks to give up easing this year, triggering large FX moves. Commodity prices have stabilized. Inflation surprises remain negative, but have been declining (Chart 1). The G10 monetary policy stance is the loosest it has been in recent decades (Chart2), with every single central bank except the SNB having a loose stance compared to its own history (Chart 3). As long as the global recovery continues, some central banks will have to stop easing and eventually start tightening. We also note that monetary policies affect the economy with a long lag, usually more than a year, suggesting that it is just a matter of time for some central banks to find themselves behind the curve. Giving up could trigger sharp market moves in our view, close to the USD move after the Fed announced QE tapering, or the CHF move when the SNB removed the EUR/CHF floor.

Which central bank is likely to give up first?

We look at a number of indicators to help us determine which central bank is likely to give up easing and eventually tighten policies first. Some are backward and some forward looking. They include: CPI inflation and its change, core inflation and its change, an index of inflation surprises, the cumulative CPI inflation gap from the 2 percent target since 2007, the spread from a Taylor rule, change in housing prices, credit growth, the output gap, and the change in the structural fiscal balance. We could include more, but we think that these indicators capture inflation pressures and risks of overheating well enough for our purpose.

Table 1 shows the results in a heatmap format, based on simple ranking of the above indicators. Our results point to inflation risks in Norway, Sweden and the US, particularly relatively to the Eurozone, Japan and Switzerland. This suggests that inflation pressures and overheating are more likely to force the hands of the Norges Bank, Riksbank and the Fed to stop easing/tighten, while the ECB, the BoJ and the SNB are likely to retain a loose monetary stance and even ease policies more.

 

What if we are wrong?

We can think of three scenarios in which we will be wrong.

First, it takes longer for inflation pressures to emerge and all central banks remain on hold or ease further this year.

 

Second, inflation pressures do emerge in some countries, but the respective central banks ignore them and are willing to accept higher inflation in the short term to support their economies.

 

And third, the world is in a Japan scenario and monetary policies will remain accommodative for years to come.

We believe that these three scenarios are unlikely. First, Inflation is already picking up in some cases and could intensify as commodity prices have now stabilized. Indeed, our US economists have argued that various measures of slack have narrowed, wage growth has begun to gradually but broadly improve and the evidence suggests a broad pick-up in growth (see Waking up to wage growth). Second, the case of Norway this year suggests that even if a central bank tries to ignore inflation pressures and continues easing policies, the currency could appreciate as markets do not expect such a monetary policy stance to be sustainable. And third, although the global recovery has been weak, it is already much stronger than in the experience of Japan in the last two decades; progress in deleveraging has also been much faster.

Market implications

Although divergence of monetary policies has not been a market driver this year, central banks still drive markets. We have argued in this report that markets have already started testing central banks and have been reacting counterintuitively to policy easing. Central banks can fight back, as the Fed has successfully done recently, but we do not believe that this is sustainable as long as the global recovery continues. At some point, we believe this year, central banks will have to stop easing policies and start preparing markets for tightening. The next big FX trade is likely to take place at that point.

We believe that positioning for a scenario in which some central banks give up easing is worth the cost. Our framework supports being long SEK and NOK against EUR and CHF, and being long USD/JPY and short EUR/USD. We believe that these trades will work in a risk-on market in the months ahead, particularly taking into account current levels. Our analysis suggests that although the market is now testing the ECB and the BoJ, EUR and JPY can still weaken in the months ahead if the data force the Fed to tighten. Moreover, the data also justifies more easing from both the ECB and the BoJ, which can be more effective in weakening their currencies if the Fed is hiking at the same time.

If markets remain fragile and risk sentiment volatile, we would be more cautious about shorting JPY and CHF. From this point of view, short EUR/USD and/or short EUR against the scandies could be good trades to hedge shifts in central bank policies. On other crosses, our analysis is bullish AUD/NZD and USD/CAD, and bearish EUR/GBP and cable.

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So in summary – the next big trade is to fight "The Feds" by betting on the first one to fold in the face of their increasingly impotent capabilities.

Source: BofAML

via http://ift.tt/1WsgTkO Tyler Durden