Every Bond Bear’s Worst Nightmare In 1 Simple Chart

“Everyone” knows that yields have to rise when the Fed tightens, right? With yields so low, “everyone” knows that bonds are the worst investment if The Fed begins to hike rates, right? Wrong! As the following chart from Goldman Sachs shows – over the last 32 rate-hike cycles, 10Y bond yields have compressed after the rate-hike cycle begins… So be careful what you wish for on Fed tightening!

Post-hike, 10Y yields have dropped notably in the next few years of the cycle…


We know it’s annoying when ‘facts’ and ‘data’ get in the way of a narrative that everyone would love to come true… but history simply tells us that mainstream is simply misled and then squeezed on their short bond positions. Simply put, if rates haven’t lifted by the time the Fed raises rates (if that ever happens) then they never will and the ‘turning Japanese’ meme will be proven correct once again.


Chart: Goldman Sachs

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Goldman Cuts 2015, 2016 EPS Forecasts On “Diminished Global GDP Growth” Just As Fed Surprises With Hawkish Outlook

It is perhaps the definition of irony that just two hours after the Fed issued a surprising statement that was so bullish on US growth it is as if the past month never happened, as if Williams and Bullard never threatened with QE4 just because the market almost entered a correction, and that made Goldman’s chief economist Jan Hatzius to a express “modest hawkish surprise” that the very same bank, Goldman, whose alum is in charge of the NY Fed (leading to hours of secret tapes exposing the white glove treatment Goldman gets at the Fed), just announced it was cutting its 2015 and 2016 EPS forecasts “diminished global GDP growth and lower crude prices.”

Here is how Goldman’s David Kostin puts it:

We trim our S&P 500 earnings forecasts to incorporate diminished global GDP growth and lower crude prices. Our revised EPS estimates equal $122 in 2015 and $131 in 2016, reflecting growth of 5% and 8%. Every 100 bp shift in US GDP growth translates into $6 per share, while a similar shift in world ex-US GDP growth is $3 per share. A $10 drop in next year’s Brent oil price from our $84 assumption would lift 2015 EPS by just $1 but raise 2016 EPS by $4. We forecast 2015 sales growth of 4% and net margins of 9.1%, both below consensus. A 50 bp shift in margins equals $5 in EPS.


We forecast S&P 500 EPS will rise from $116 in 2014 to $122 in 2015 and to $131 in 2016, implying annual growth of 5% in 2015 and 8% in 2016. Our estimates are below current bottom-up consensus EPS estimates of $129 in 2015 and $144 in 2016. Looking ahead, we expect S&P 500 EPS will rise by 8% to $141 in 2017 and by 6% to $150 in 2018. We revise down our near-term earnings forecasts to incorporate diminished global GDP growth and lower crude prices. We now expect S&P 500 EPS of $122 for 2015 and $131 for 2016, down from $125 and $132, respectively.


The largest gaps between our top-down sector earnings forecasts and bottom-up consensus occur in Energy, Health Care, and Information Technology. Exhibit 16 compares our sector earnings forecasts with the bottom-up consensus estimates.


We forecast S&P 500 sales excluding Financials and Utilities will grow by 4% in 2015 and 6% in 2016. Our sales estimates are roughly in line with consensus, 4% in both 2015 and 2016, but differ by sector composition (see Exhibit 17). Looking further ahead, we expect S&P 500 sales growth of 7% in 2017 and 6% in 2018.


We forecast trailing four quarter net margins will remain at the current historical high of 9.1% through 2015 before rising slightly to a new peak of 9.2% in 2016. The forces that influence margins are equally balanced between upside and downside. Firms remain focused on efficiency gains and cost controls, and commodity prices will remain controlled. Labor costs are a potential headwind for margins in the medium-term.


Margin expectations are the key difference between our forecast and consensus. Bottom-up consensus forecasts S&P 500 margins will reach a new peak level of 9.2% by the end of 2014. Consensus also expects aggressive margin expansion to 9.8% in 2015 and to 10.5% in 2016.


Our forecasts do not incorporate an explicit buyback assumption because the impact of buybacks on S&P 500 EPS is low. The index EPS calculation aggregates company earnings rather than EPS, so company share counts have less impact on the index.


What is the main driver of Goldman’s bout of gloom?

We assume Global GDP grows at an average annualized rate of 3.3% in 2015 and 3.8% in 2016. Our assumptions imply the world excluding the United States grows at 3.3% in 2015 and 4.0% in 2016. Both Global GDP growth assumptions are slightly below our economists’ current forecasts of 3.5% and 3.9%, respectively. Exhibit 6 shows the sensitivity of our EPS model to various US GDP growth rate and Global ex-US GDP growth rate assumptions.


So with global growth slowing, which is to be expected with the Chinese housing bubble rapidly deflating and Europe in a triple-dip recession, hooker and blow addbacks to pro-forma GDP aside, Goldman is basically expecting that the US will decouple from the entire world, and grow at the highest rate since before the Lehman collapse?

Exhibits 2 and 3 show the sensitivity of our EPS model to various US GDP growth rate assumptions. A 100 bp shift in 2015 US GDP growth translates into a $6 per share shift in 2015 EPS. The sensitivity of our 2016 EPS estimate to 2016 US GDP growth rates is similar. Our US GDP sensitivities incorporate both the change in US GDP and the consequential adjustment in Global GDP growth.


Even with a US economy expected to grow at 3% in the next few years, investors are concerned about a slowing world economy and the impact on S&P 500 EPS growth. Foreign sales accounted for 33% of aggregate revenue for the S&P 500 in 2013. However, that means 67% of revenues are earned domestically.


Our EPS model is more sensitive to US GDP growth assumptions than Global ex-US GDP growth. While a 100 bp adjustment in US GDP growth moves S&P 500 EPS by 5%, or $6 per share, the equivalent 100 bp adjustment to Global ex-US GDP growth changes EPS by less than 3%, or $3 a share. Sector sensitivities differ as some areas are more globally exposed than others.


Oh, and we forgot to mention: the US is expected to grow 3.1% as the Fed not only no longer injects the much needed flow to keep the market rising, but is also, supposedly, about to start hiking rates making the US economy encounter something it hasn’t seen in over 6 years?

Good luck.

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Martin Armstrong Rages “Government Is Corrupt & Rotten To The Core”

Submitted by Martin Armstrong via Armstrong Economics blog,

QUESTION: What is the best form of government? Will anything ever work?


ANSWER: There is no single form of government that will ever be perfect. Whatever its form, government will self-corrupt and both sides will fight eternally between the people and government perhaps eternally. The best form of government for brief periods of time are benevolent dictators, monarchs, or emperors, such as Julian II, who even decreed that whatever laws he passed must also apply to himself. Such individuals are rare indeed and once they are gone, the system will revert back to its corrupt state.

Another system that actually worked very well was Genoa. There the “Doge” (head of state) was selected each year from the head of a prominent family. The rich families ruled on a rotating basis annually. What made it work well was the short-term period. No family would ever pass something Draconian because it would apply to themselves the next year. The system was not one of rich v poor, but Genoa v Venice and Florence. The interests were furthered collectively rather than this philosophy of party politics. Therefore, each class benefited. It also lasted longer without corruption than Florence or Venice.

The best we can hope for is a hybrid between Democracy and a Republic that is restrained by a Positive Constitution rather than a Negative one as we have in the United States. In other words, if we have an everyday bureaucracy to run things that is subject to review by the people who rotate annually, there is some hope that it might last longer before it collapses. Much of the bureaucracy should be privatized where management will be proper and employee pensions will actually have to be there. When government is in charge, those in power just exempt themselves from the laws that apply to others – the first step in the corruption process.

With technology, each and every measure must be voted on by the people. There should be no Clean Water Act that has hidden some study on traffic flow in a city nobody ever heard of to line the pockets of someone’s family member. Voting can be done via your laptop and if each and every bill must be presented individually, that will stop the nonsense.

Judges CANNOT be appointed by anyone in government. They must be as Ben Franklin argued, nominated by the guild of lawyers. That way the best will rise to the top – not the most corrupt. Prosecution must also be independent and the people MUST actually indict meaning that they hear both sides in a grand jury. Plea bargaining must end and CONSPIRACY must end. Only those who are involved in a crime may be charged – no one else. No one charged with a crime may testify against another. Self-interest in prosecution must end.

While legal scholars tend to look at Article III of the US Constitution as based upon the English legal system modeled on Blackstone’s famous Commentaries on the Laws of England, Franklin argued for the Scottish System that was far superior. Indeed, the Scottish judicial system provided an important, but overlooked, model for the framing of Article III. Unlike the English system of overlapping original jurisdiction, the Scottish judiciary featured a hierarchical, appellate-style judiciary, with one supreme court sitting at the top and an array of inferior courts of original jurisdiction down below. What’s more, the Scottish judiciary operated within a constitutional framework — the so-called Acts of Union that combined England and Scotland into Great Britain in 1707 retained the independent legal structure of Scotland and prohibited the English courts from interfering with those of Scotland. The influence of the Scottish judiciary on the language and structure of the US Article III legal framework is clear where there is a Supreme Court with multiple inferior courts that are subordinate to, and subject to the supervisory oversight of, the sole supreme court. The Scottish model thus provides important historical support for the supremacy of the Supreme Court, however, the blending of this with the English system rendered the inferiority in Article III to operate as textual and structural limits on Congress’s jurisdiction-stripping authority from the courts. But the most dangerous flaw appears to be intentional – Congress appoints judges not lawyers. This allowed the English legal system to be politically manipulated whereas the Scottish System was really independent. This MUST be corrected to restore the rule of law.

Career politicians get bored and pass laws just to have something to do like in Utah you cannot drink before ordering dinner or in Europe regulating cow farting. This is why a representative form of government with career representatives is doomed to always fail. They can be bribed to enact particular laws to benefit some party. The only check and balance would be to rotate, as in Genoa, and to allow the people to vote online.

A raw unrestrained Democracy would devolve into mob rule. That we cannot tolerate either. There should be something that rotates as a Constitutional court as in France where each law passed MUST firs be ruled on as being Constitutional by a body of lawyers that rotates and MUST be trained in constitutional law which is significantly different from following statutory law. The former is structural design while the latter is following the letter of the law. This is a Positive Constitution that restrains government and is a real Bill of Rights. We have the negative form where government gets to do whatever it likes and we must prove we have any rights – very bad.

Debtor Prison


Prison should be outlawed for non-violent crimes. The ONLY reason a government has the right to restrain the liberty of an individual is to protect others from bodily harm – that is it. Every law passed by Congress states – “fine or imprisonment or both”. That must stop. Debtor’s Prison must end. The USA imprisons more people than the rest of the civilized world combined. Why are we so imprison happy when only about 4% of the people in prison are there for a violent crime? A woman was arrested and taken to jail for violating some statute that did not allow for imprisonment. A woman with children was taken to jail for not wearing a seat belt and the Supreme Court, being pro-government appointed by politicians, voted 5-4 that the police can imprison you for anything even if the crime does not call for jail time. We have a virtual 99% conviction rate because there is no way to win against pro-government judges.


Learning from the Past

There seems to be the potential to at least learn from the various political types of governments, how they functioned, how long did they last, and what was the impact upon the people. The advantages of Genoa was that the short terms restrained the Doge compared to Venice where the Doge was for life. Venice froze the estate upon the Doge’s death and only THEN reviewed all his actions to see if anything was gained illegally. Then the state would reclaim the “illegal” gains. That was closing the barn door after the horse ran away.



Government is corrupt and rotten to the core – it is honorable only for brief shinning moments when the dark clouds leave a crack. One Pope Formosus (c. 816 – 4 April 896)  ruled against a Lord so the Lord rigged the game to become Pope and then put Formosus’ dead corpse on trial, had a friend answer for the dead Pope. Naturally, Formosus incriminated himself, who wouldn’t in such circumstances, and he was promptly found guilty, nullified all his decrees, and then claimed his property back. They will do anything – absolutely anything.



Julius Caesar (100-44BC) had to assume the role of high priest to create a calendar because the politicians were bribing the high priests to add days into the calendar to avoid elections. There is absolutely NOTHING those in power will not do to society for their own self-interest. Finding someone ethical who really cares is one in a billion.



The key is to review each form of government and take what worked and avoid what did not. We have to understand that no system will ever last forever. So the best we can do is design a system that has the best features and some internal mechanism of checks and balances. Nevertheless, whatever we can think of, will merely create the challenge for others to figure ways around. If we eliminate taxation and restrain government expenditure to what is required for natural expansion of the money supply to facilitate economic growth, then the majority of the lobbying will cease and therein lies the deepest cracks for corruption.

via Zero Hedge http://ift.tt/1p2WogD Tyler Durden

Buyers Focus On Dollars, 30 Year After Fed, Stocks Shrug

Stocks slid slowly lower into the FOMC statement, then tumbled as no matter how hard talking heads tried they could not find a silver lining in the hawkish tone reflected across near universal sell-side confirmation. Stocks tumbled, commodities tumbled, and the USDollar surged but the Treasury curve flattened dramatially as 30Y was well bid and the rest of the curve offered (2Y surged higher in yield). The last few minutes saw the ubiquitous levitation to VWAP which lifted Small Caps briefly into the green briefly and stocks all ended higheer from the FOMC statement. By the close, the USDollar was up notably, stocks lower, gold down 1.5%, oil up over $82, and the Treasury curve flattened dramatically (5Y +8bps, 30Y -2bps).


S&P ramped to VWAP…


"Off the highs" to start, dump'n'pump on FOMC, sellers resumed on hawkish tone then rescue bid lifted stocks back to unch…


Post-FOMC, stocks dumped and pumped…


Financials were the big winners post FOMC… homebuilders not so much…


Credit markets were not playing along with the equity exuberance in the last few minutes and financial stocks remains wildly optimistic compared to credit…


HY credit didnt bounce and is not buying it…


The USD surged on the FOMC statement…


The long-bond also rallied notably (30Y yields dropped 6bps on the FOMC) and flattened…


Quite a divergence post-FOMC in the Treasury Complex…


5s30s collapsed back to catch up with stocks in the oddest decoupling we have seen in a while…


Commodities all slumped after the FOMC, led by Gold…


Silver was the biggest loser post FOMC but all fell…


Charts: Bloomberg

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Life Lessons To Derive From QE And Stress Tests

Submitted by Raul Ilargi Meijer via The Automatic Earth,

Arthur Rothstein Texas Panhandle Dust Bowl Mar 1936

I already proposed a few days ago that the recent ECB stress test exercise was such a shambles, it may well have been designed to fail on purpose. In order for Mario Draghi and his Goldman made men to be freed from that pesky German resistance against full blown QE, i.e. large scale purchases of government bonds from the 18 countries that make up the eurozone.

And perhaps the other 10 that are part of the EU without using the common currency. The sky’s the limit. Just how bad that would be is hinted by Tracy Alloway for the FT as she describes how QE tempts investors into asset classes with far more risk than they should have on their hands, simply because they feel the Fed – or some other central bank – has their back.

Sounds like the perfect way to separate a whole lot of people from their money. Which is why Draghi is so tempted to try it on. QE destroys societies, economies and financial systems, it doesn’t heal them. So maybe it’s a touch of genius that the great powers of global finance have first pushed Keynes into the academic world and then academics like Bernanke and Yellen into positions such as head of the Fed, making everyone blind to the fact that what they think is beneficial, including many who think they’re real smart, actually hurts them most.

When you looked at it in that light, you would be forgiven for thinking Draghi had better hurry, because higher rates and a higher dollar will give away much of that game. And not just in America.

But Stupor Mario has one great excuse left: his hands are tied. Not for long anymore, perhaps, since the ECB is set to become the sole EU banking supervisor, but that is not the same as having a full banking union, the prize the real big banking boys have their eyes on. Control over all EU banks from one central point, with the power to shut them down, squeeze them dry, and make them beg for mercy. Athens, Greece based economics professor Yanis Varoufakis has some words on how Mario’s hands are tied:

The ECB’s Stress Tests And Our Banking Dis-Union: A Case Of Gross Institutional Failure

What gives the Fed-FDIC power over banks is the common knowledge that, when it assesses that a bank is insolvent, it has no serious qualms saying so. The reason, of course, is that it not only has powers of supervision (i.e. access to their books) but, crucially, powers of resolution and, if it so judges, the power to force mergers or to recapitalise the failing bank.


Suppose that, instead, the Fed-FDIC had, as the ECB does, only the power to scrutinise the banks’ books. Imagine now that, with only this power, the Fed-FDIC were to discover that some bank in Nevada or Missouri is in trouble. If the Fed-FDIC’s charter precluded it from doing anything else other than to announce the bank’s insolvency, its supervisory power would mean little.


For if it were common knowledge that the fiscally stressed State of Nevada or Missouri would have to borrow from money-markets to pay for the depositors’ guaranteed deposits, as well as for any new capital the banks needed to be salvaged, the rest of the state’s banks would face a run, the states would see their borrowing costs skyrocket and, soon, a combined banking and fiscal crisis could be rummaging throughout the ‘dollar zone’.


To put this crudely, the good people at the Fed would have no alternative than to keep their mouths shut, to conceal the bad news, to cover up for the bank’s problems and try to find some hush-hush way of bolstering its capitalisation.


This is precisely the sad state our so-called Banking Union has pushed the ECB’s supervisors into. As long as the ECB is not the sole authority on bank resolution, and as long as funds for dealing with insolvent banks are to come (in the final analysis) from the fiscally stressed states, the death embrace between weak states and fragile banks will continue.

If the ECB guys have too narrow a mandate for their own taste, or they don’t like their salaries or perks, they should speak out about that. Not behind closed doors, but in public. And not only in general terms, but in specifics, if it leads to situations like this where an entire year and millions of euros are spent on an audit that they know beforehand will be way less than truthful, let alone useful. These people receive generous salaries provided by European taxpayers, and the least they should do is be honest. I know, who am I kidding, right?

So what’s the solution for Europe, handing over the whole shebang to Draghi and his ilk? No, it isn’t, but they’re getting real close to achieving just that. And once the banking union is a fact, it will be that much harder – and expensive – for Greece and Italy and Cyprus and Spain and Portugal to wrestle themselves out of the straightjacket the EU has become.

It’s no coincidence that it was Greek and Italian banks who got hit hardest by the tests, flawed and fake as these were. The EU has become a power game more than anything, a ploy to induce so much fear into the financially weakest they’ll lose the belief that they can stand their own legs. And then they can be subordinated slaves forever.

As I said Sunday in Europe Redefines ‘Stress’, the stress tests were little more than a joke. They were designed that way.

In that article, I referred to Bloomberg’s Mark Whitehouse writing about a different, more or less parallel stress test, performed by the Center for Risk Management in Lausanne, inTesting Europe’s Stress Tests. My comment then:

The ECB’s Comprehensive Assessment says $203 billion was raised since 2013, leaving ‘only’ €25 billion yet to be gathered. The Swiss report says €487 billion is needed just for 37 of the 130 banks the ECB stress-tested. Of the banks the Swiss identify as having the greatest capital shortfalls, most passed the EU tests. Judging from the graph, the 7 banks in need of most capital have an aggregate shortfall of some €300 billion alone.


Among them the 3 main, and TBTF, French banks, who all passed with flying colors and got complimented for it by French central bank governor Christian Noyer today, but according to the Center for Risk Management are about €200 billion short between them. Which means France as a nation has a stressed capital shortfall of over 10% of its GDP, more than twice as much as the next patient.

Turns out, the Swiss were not the only ones doing an alternative stress test. Sachsa Steffen at the European School of Management (ESMT) in Berlin, and Viral Acharya at the Stern School of Business in New York did one as well. And the similarities between the two alternative ones, as well as the differences between both their results and the ‘official test’ are so big it’s ludicrous. Tom Braithwaite in an excellent piece for FT:

Alternative Stress Tests Find French Banks Are Weakest In Europe

On Sunday, Christian Noyer, governor of the Banque de France, was crowing about the “excellent” performance of French banks on the European stress tests Many of their Italian and Greek counterparts might have flunked but France could be proud of its banking sector. “The French banks are in the best positions in the eurozone,” said Mr Noyer.


Not so fast.


Two days earlier, a different test found that the French financial sector was the weakest in Europe. The team with the temerity to deliver this bucket of cold water to Paris works at the wonderfully named Volatility Institute at New York University’s Stern school and presented its findings from a safe distance – a financial conference at the University of Michigan. The chief architect, Viral Acharya, has worked on systemic risk ever since the last crisis, attempting to design a bank safety test that can be run all the time – not at the whim of regulators.


Using his methodology, which he calls SRISK, Mr Acharya found that in a crisis French financial institutions would have a capital shortfall of almost $400bn, worse than the US and UK despite their much bigger financial sectors. Looking just at the French banks tested in the ECB stress tests, which found zero capital shortfall, SRISK came up with €189bn. Mr Acharya did not have access to the 6,000 officials who scoured balance sheets across Europe to gauge the health of the continent’s banks. But his results, which have implications for other countries, including China, should not be ignored. How big is the crisis hole?

Take Société Générale. France’s second-biggest bank by market value did fine on the ECB’s stress test. But on Mr Acharya’s measure, the bank has a large capital shortfall in a crisis. There are a couple of big reasons for the difference. First, SRISK takes into account the banks’ total balance sheet without regard for risk: unlike the ECB, it does not attempt to distinguish between €1m of German Bunds and a €1m loan to a dipsomaniac farmer with a rusty tractor. Second, it does not care what banks’ book value of equity is; it uses what the stock market says it is.

Under the ECB’s methodology, SocGen has €36.6bn of equity today and, in a crisis, would have €30.7bn of equity against €377bn of risk-weighted assets. That equates to a passable 8.1% capital ratio even in a deep recession. According to Mr Acharya’s methodology, the bank has only €30bn of market equity today against €1,322bn of assets for a much weaker capital ratio of 2.3%. In a crisis, when market values would plunge further, SocGen would be left with a shortfall of more than €60bn.


Using the stock market to compute a bank’s equity makes SRISK vulnerable to irrational optimism or irrational pessimism of investors. But Mr Acharya finds three good reasons to use it. “Markets told us that subprime MBS [mortgage-backed securities] had become poor in quality and liquidity; book values and regulatory risk weights did not ..”


Market values are also harder to manipulate by management through understatement of losses or provisions. Finally, banking crises are caused by drying up of credit by financiers. Financiers are not interested in book values or regulatory capital per se, but whether the firm can raise capital if needed to repay them. This is best captured by market value.”


It is not just France’s regulators and banks that might be well-advised to stop patting themselves on the back and consider other measures of systemic risk. Europe’s aggregate SRISK has fallen since 2011, with the deleveraging of balance sheets following the eurozone crisis. Systemic risk in the US has also fallen by half since 2008. But risk in China has picked up significantly and now surpasses the US. If anything, Mr Acharya notes, the problem is likely to be understated because of the amounts of off-balance sheet debt in China.


In the US, JPMorgan Chase’s leverage might be much better than its French counterparts, but its SRISK is bigger: a $98.4bn shortfall in a crisis. MetLife, which is considering suing the US government over its designation as a systemically important company, is found to pose a bigger systemic risk than Goldman Sachs.


If you believe that financial companies always appropriately value their assets and never try to massage the value of their equity and if you believe that officials are always diligent in examining banks’ accounting then SRISK is a waste of time. But if you believe this you haven’t been paying attention for the last decade.

I’m tempted to say someone should save the Greeks and Italians from the power game that’s being played with them, but in reality they should save themselves. That French banks come out of the ECB test with flying colors, while in two separate other tests they look absolutely abysmal, should tell us all enough about what the game is here.

There are two major countries in the eurozone, and they have all the political power there is to go around. As they are sinking, the poorer nations will be forced to make up the difference. Just like the Romans squeezed their peripheral territories so much they caused the end of their empire, and were conquered and flattened by the peoples living there.

I know I’ve said it many times already, but I’m not going to give up: the EU should be broken up, and its delusional leadership structure torn to bits, as soon as possible, or Europe is once going to be a theater of war.

The very thing the EU was supposed to prevent, it will be the source of. In exactly the same way that QE tears apart economies and societies. Presented as the sole solution to the debt crisis, but in reality the driving force behind increased inequality, ever lower wages and ever fewer benefits, and perhaps most of all the nigh complete suffocation of the younger generations, so the older – and therefore richer – can enjoy their so-called well-deserved retirement.

This whole thing is so broken and perverted it’s getting hard to understand why anybody would want to continue clinging on to it. But then, what does anybody know? 95%+ of people have been reduced to pawns in someone else’s game, and they have no idea whatsoever.

And maybe that’s genius. If you see people’s ignorance as a sufficient reason to prey upon them, that is, as many of our ‘leaders’ do. It’s what gives them power, exploiting other people’s weaknesses. And that is then seen as everyone ‘obeying’ some sort of natural law.

That’s what QE and stress tests tell me. That Greeks and Italians are no longer just being preyed upon by their own people, but by others too, with different cultures and languages and entirely different goals and ideals. And that cannot end well. You might as well put them all to work in a chaingang right this moment.

via Zero Hedge http://ift.tt/1tjqL0K Tyler Durden

In Memoriam: Abenomics

Japanese Flag

It’s now really starting to look like Prime Minister Shinzo Abe of Japan has lost his magical touch. Even though he was widely praised for the ‘Abenomics’ principle which was built on the three pillars of fiscal policy, monetary policy and economic growth and actually secured his re-election (he was already prime minister in 2005) into office on this strategy, it looks like his theoretical model is no longer working. Even though the Nikkel index enjoyed a huge run since the elections in December 2012 until the end of 2013, the index has continuously moved in a certain trading range over the past 18 months.

Nikkei Index

As you can see, the Nikkei index was trading at around 9,000 points in November 2012 when Shinzo Abe unveiled his economic program but immediately shot up to 16,000 points just seven months later. That’s an incredibly impressive 78% run in less than a year and without a doubt the Nikkei index was one of the best performing indices in 2013. Of course, when the stock markets in in some kind of jubilant atmosphere it’s always a difficult task to live up to the extremely high expectations.

So let’s have a look at some data to see if Abenomics really worked. One of Japan’s main issues was its unemployment rate which was 4.2% at the time Abe was voted back into the office. This is low by European and American standards, and to get it down to 4.2% after peaking at 5.5% in 2009 was already a huge achievement. But, Abe proved he could do even better, and indeed, the unemployment rate went down from 4.2% to 3.6%.

Japan Unemployment Rate

This achievement gets even more impressive if you know that people have to work longer. The retirement age has increased to 61 (and will reach 65 by 2025), which means that there will be less available spots on the labor market available for new entrants. One would think this would have a negative impact on the youth unemployment rate as well, but no, the next chart clearly shows the youth unemployment rate was also decreasing until it recently shot back up.

Japan Youth Unemployment Rate

So how exactly did Abe stimulate the Japanese economy? First of all, in the beginning of this year the corporate tax rate was reduced once again, from 38.01% to 35.64%. This reduces the tax bill for the companies but the effect on the unemployment rate was relatively minimal. A second part of Abe’s plan was to increase the money supply and if we look at the M2 Money supply rate, there’s indeed a clear shift. Since November 2012 the M2 Money supply increased from 820 trillion Yen to 876 trillion Yen in July of this year, and that’s a 6.8% increase in just 20 months.

Japan Money Supply M2

However, even though Abe did everything right in the first 18 months of his second tenure in office but then he decided to raise the sales tax again, from 5% to 8%. This was a bold move as the previous time Japan increased the sales tax from 3 to 5% (back in 1997) the crisis worsened and the recession became extremely severe. Back in the nineties the government was hoping this sales tax increase would also increase the government revenues, but they couldn’t have been further from the truth. This 2% sales tax increase had a much worse effect on the consumer confidence than expected and the government revenues actually decreased by 4.5 trillion yen.

So in light of those events, it was a really bold move by Abe to increase the sales tax even further to 8% earlier this year. And unfortunately the reaction of the consumers was the same. Japan’s GDP has contracted by more than 7% in the quarter wherein the sales tax was increased. Even though there were plans to increase the tax even further to 10%, these plans now seem to have been shelved as it would very likely be disastrous for the Japanese economy.

What’s the main takeaway of this situation? In just six months time, the purchasing power of the Japanese Yen versus the Dollar decreased by 6% as the bad macro-economic numbers were released. However, the next chart shows you that if the average Japanese citizen would have bought gold, its purchasing power would have remained stable. This once again emphasizes that gold still is one of the most important assets to protect your wealth and purchasing power.

Gold in JPY vs Gold in USD

Even though Abe’s master-plan initially seemed to work, the Japanese recovery basedon the Abenomics has stalled and it now even looks like the country will miss its inflation target even though the central bank has pledged to double (!) the monetary base to 270 trillion yen. This will be necessary as with the current falling oil pice, the deflation risk is increasing as it will become cheaper to produce goods. According to several analysts the risk of a stagnating economy is now a very realistic scenario, and it looks like Wonderboy Abe’s plans are running out of steam and the temporary revival of the Japanese economy has come to a screeching halt.

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And The Biggest Beneficiary Of QE3 Is…

Aside from the S&P 500 of course, which made billionaires out of millionaires (even if it failed to make billionaires into trillionaires this time around –  we will have to wait for QE4 or QE5 for that), some may wonder: who was the biggest beneficiary of QE3? It certainly wasn’t the US middle class, which has seen its real wages decline in 6 of the past 7 months, and its disposable income is back at levels not seen since the mid-1990s. No, the biggest winner of QE3 is the same entity that we noted benefited the most from QE over the past 6 years, and which even the WSJ realized was the primary beneficiary of the trillions in cash created out of thin air by the Fed, when in late September Hilsenrath wrote “Fed Rate Policies Aid Foreign Banks“…  something we first said back in 2011 with “Exclusive: The Fed’s $600 Billion Stealth Bailout Of Foreign Banks Continues At The Expense Of The Domestic Economy, Or Explaining Where All The QE2 Money Went.”

So when it comes to the Fed’s QE3 generosity to foreign banks, what was the real number?

Here is the answer.

The first chart below shows that since starting in December 2012, when QE3 was formally launched, and continuing through today, the Fed injected some $1.3 trillion reserves with banks, which has manifested as extra cash held by various banks operating in the US, both domestic, but most importantly, foreign.


So how does this increase in bank cash assets look like when broken down by banking group? The answer is shown below:


And the bottom line:

  • Small domestic banks, such as your mom and pop regional bank which is anything but Too Big To Fail: change in cash: zero.
  • Large domestic banks, think JPM’s CIO group, i.e., its London Whale division which used precisely this “excess” Fed cash to try to corner the IG market and blow up in the process: call it just under $600 billion in cash as a result of QE3.
  • And the winner, with over $700 billion in extra cash added thanks to QE3, is: foreign (mostly insolvent European) banks,

So yes, European banks: feel free to send your thank you cards to the Fed: without its $1.3 trillion cash injection who knows how many of you would have passed the ECB’s “no deflation to model” most recent Stress Test.

A word of warning: let’s all hope that now, with some $1.5 trillion in Fed cash on foreign bank balance sheet, or just about half of all QE liquidity injections since the start of QE1, European banks are finally solvent. Or else, deflation, inflation, or whatever, the Fed will be storming right back in to bail out Europe’s insolvent banks the US middle class all over again.

via Zero Hedge http://ift.tt/1tOpd1o Tyler Durden

Treasury Curve Flattens Despite Yesterday’s Record-Setting Steepener Trade

The spread between 30Y Treasury yields and 10Y yields tumbled 4-5bps today post-FOMC back to its flattest in 4 weeks as hawkish sentiment sparked bond-selling out to 10Y and buying at the long-end. The reason this is notable is that yesterday, as Nanex details, there were two "monster" sized trades in 10Y and 30Y Treasury Futures putting on a significant steepening bet.

Overall market reaction so far…


Curve flattening post FOMC…


This is interesting though…


Meaning the following trade is hurting… (via Nanex)

Record Treasury Futures Trades

Monster buy in the 10-Year and sale in the 30-Year a day before FOMC

On October 28, 2014, there were two monster sized trades in Treasury Futures, a 26000+ contract trade (sale) in the 30-Year T-Bond (ZB) at  12:08:23 and a 29000+ contract trade (buy) in the 10-Year T-Notes (ZN) at 12:17:42. We know the 10-Year trade set a record for most contracts traded in 1 second for that contract since at least 2005 (the 30-Year may have as well, but we haven't completed a thorough check of the data).

What made this event even more interesting, was that an equivalent huge order in the opposite direction first appeared 3 minutes before the trade in the 30-Year and exactly 2 minutes before the trade in the 10-Year. That is, buy orders totaling about 27000 contracts started appearing in 9000 contract lots at 12:05:21 in the 30-Year – which were executed against by a large 26000+ contract sell order just over 3 minutes later, at 12:08:23. In the 10-Year, sell orders in lots of 9500 contracts started appearing at 12:15:42 and were executed against exactly 2 minutes later at 12:17:42. The two charts below show this sequence of events.

1. Depth of book for the 30-Year (ZB, left) and the 10-Year (ZN, right). (how to read these charts).
The white vertical lines in the middle of the top section are trades. There are 10 levels of bids and 10 levels of offers – each color coded by how many contracts are available to instantly buy or sell. The red indicates the highest relative to other levels. Most of the levels are deep blue because they are practically empty, relatively speaking, when compared to those huge orders in the top few levels.

2. Chart of the most contracts offered for sale in the top 3 depth of book levels for every second since 2008 in the 10-Year Treasury Contract (ZN).
Each day is drawn as one line from left (starting at midnight or 0:00) to right (and ending at midnight 24:00). Days are color coded by age – with red being the most recent and violet the oldest – with the exception of October 28, 2014 which is a thick purple line for contrast. Since at least 2008, there has never been as many contracts for sale in the top 3 levels of CME's depth of book for the 10-Year Treasury Contract.

3. Chart showing the most contracts traded in any one second for the 10-Year Treasury Contract (ZN) since 2005.

via Zero Hedge http://ift.tt/13e0nNx Tyler Durden

First Sell-Side Responses To FOMC Trickle In: “This Should Be A Risk Off Trade”

The initial reactions from the sell-side are arriving and while CNBC’s Bob Pisani believes “this is very bullish” the sell-side appears to disagree…


Deutsche’s Lavorgna can’t even find an excuse to push out liftoff…

Citi Warns:

Fed comes in with a bit of a Hawkish tilt as it rids of key policy line around labor market and keeps “considerable time.”  The buying program has ended. Hawks Fisher and Plosser voted for the action, while Kocherlakota  voted against it, which is a flip from recent votes.


“The dove dissenting says it all,” trader quips.

And Brean Capital’s Peter Tchir adds:

Hawkish statement:

1) QE gone.


2) The hawks were on board, and a dove took the time to dissent – in our Fed “U” shape pattern, we think the shift to hawkish overall Fed has commenced and the pure hawks are appeased and winning and the pure doves, losing.


3) Job highlighted and as Yellen said back at Jackson Hole – structural unemployment is higher than she thought, so less slack, and as San Fran Fed said recently, when a period occurs where wages were sticky, once they finally start to rise, it happens very quickly

Is March back on the table? If they are only fighting inflation now, they have less ability to enact more dovish policy.
I think this should be a “risk off” trade. 
Initial reaction might be “risk on” as they are touting the economy and growth and talk about a great GDP print tomorrow, but
Growth going forward is frought with risk, especially with a less helpful Fed, which will support the long end of treasuries – not the front end.
The market started its big reversal on Bullard’s comments and I find it hard to believe that having his comments not be reflected at all in the statement means we have to head back lower.
HY has been a bit heavy past few days, and since we never saw a true “clearing level” we should see that.

  • Short HYG/JNK or TRS.
  • Curve flatteners look great to me.
  • Strong dollar.
  • Weak commodities.
  • Short risk.

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via Zero Hedge http://ift.tt/1u8bZ0i Tyler Durden