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The dollar spiked higher and the yield curve spiked lower following The Fed's hawkish statement. 2Y yields hit their highest since Dec 2008…

 

As December rate hike odds jumped to 63%.. so still not completely buying The Fed's plan…

 

The dollar spiked…

 

But the yield curve cracked notably flatter… as the long-end was unimpressed.

 

This is not what The Fed, or the banks, were hoping for. How long before bank stocks wake up?

 

For now, gold is down, the dollar is up…

via http://ift.tt/2xS6uKK Tyler Durden

Today's the day. On Nov 25, 2008 The Fed announced it would begin buying assets for its own account to save the world. In Oct 2014, The Fed ended its QE3 buying program but continued to reinvest the proceeds to maintain its $4.4 trillion balance sheet. Today, Janet Yellen announced the balance sheet will be allowed to normalize, with reinvestments slowed/stopped starting in October.

Headlines:

• *FED: HURRICANES UNLIKELY TO ALTER ECONOMY'S COURSE MEDIUM TERM
• *FED: JOB MKT STRENGTHENED, ECONOMIC ACTIVITY RISING MODERATELY
• *FED KEEPS RATES UNCHANGED, PLANS BALANCE-SHEET RUNOFF IN OCT.
• *FED FORECASTS STILL SIGNAL ANOTHER 2017 HIKE, 3 MORE IN 2018
• *FED REPEATS RISKS TO OUTLOOK APPEAR ROUGHLY BALANCED
• *FED SAYS FOMC VOTE WAS UNANIMOUS
• *FOUR FED OFFICIALS SEE NO MORE 2017 HIKES, UNCHANGED FROM JUNE ( Eleven Fed officials now see one more hike in 2017 versus just eight in June.
  – market odds only 50%)

The Fed cut long-term rates:

• *FED ESTIMATE OF LONGER-RUN FUNDS RATE 2.8% VS 3% IN JUNE

Here are the maturing assets that will not be reinvested over the coming months…

So, up to $50bn per month reductions.

Many market participants appears to believe that The Fed has given investors plenty of notice that they would begin to unwind their balance sheet and so the actual event will be like "watching paint dry." This seems more than a little disingenuous given the great levels of confidence embued into the actual QE process to save the world.

As one wit on Twitter noted, "If I tell you everyday for 6 months that I am going to cut off your head on 9/20… you are prepared, but how will you react on 9/21?"

We shall see.

Since the July FOMC Meeting, gold is the biggest gainer as the dollar loses ground…

*  *  *

Notably the Taylor Rule (and the balance sheet-adjusted version) is implying The Fed should be about as tight as its been in decades…

 

And of course, here is what The Fed is really worrying about – they've lost control…

 

December Rate Hike Odds were at 53% heading into the statement…

 

Market liquidity flatlined heading into the FOMC statement…

This might help explains the three-card-monty game The Fed is playing, courtesy of ING, is the definitive "cheat sheat" matrix laying out all possible permutations of what can happen tomorrow, as well as the most likely market reaction.

 

Full Statement redline below:

via http://ift.tt/2xRLMdT Tyler Durden

Authored by Kevin Muir via The Macro Tourist blog,

In July I wrote a piece titled, “Is the real US Dollar Pain Trade Lower?”. At the time the US dollar was sucking wind, but many traders were still playing for a bounce. The prevailing wisdom was that the Fed’s tighter monetary policy, combined with Trump’s business acumen, along with a tax reform bill, and topped off with a massive short covering surge from emerging market US dollar denominated issuers, would ensure the two-year US dollar rally would continue.

In the article, I quoted Luke Gromen, who said, regarding a move down to 80 in the DXY, “…while COT (committment of traders) [data] shows more are cautious on the USD, as best I can tell, there isn’t a soul that thinks this kind of move is even possible.”

Yup, Luke was bang on correct, during the summer, precious few believed the US dollar would go down, forget about plunging more than 10%.

Earlier this year, according to most market participants, US dollar strength was inevitable due to all the reasons I suggested. Although Luke had been arguing his US-dollar-loss-of-reserve-currency-status theory for quite some time, apart from Grant Williams and some other hard money guys, Luke’s theories were not gaining traction. Hedge funds were much more enamoured with the soothing sounds emanating from the USD bullish investing crowd. The idea of the US dollar losing its reserve status was laughable. I remember suggesting something to that effect to a colleague and he chuckled, “what will possibly replace the US dollar? The Euro? The Yuan?”

Yet today, Luke is a rock star whose theories about the loss of US dollar reserve status are all the rage. Hedge funds and other traders are positioning their portfolios to take advantage of the coming US de-dollarization.

Now, don’t misconstrue this next part of my argument. Luke is a unique, big picture thinker that everyone should take the time to understand. No sense rehashing his arguments. Instead, if you haven’t listened to it, head over to MacroVoices to hear Luke’s interview. Although I agree with Luke’s long term conclusions, my quibbles have all to do with the timing of this inevitability.

Too many traders are expecting this to happen tomorrow. I have learned never to say never, but I don’t think this sort of accelerated timing to be a high probability move. The de-dollarization of the financial system will not be an overnight event. It will be a long drawn out process. And in the meantime, the US dollar will go down, but more importantly, it will also go up. Let’s not forget that there will be plenty of cyclical moves within a secular bear market.

Although I want to be bearish on the US dollar along with everyone else, I have learned the hard way that in today’s market, this is not the correct bet. Over the past decade, trading has transformed into a zillion hedge funds arranged in a circle shooting at the tiny piece of alpha in the middle. Often the best trade is to fade the hedgies, regardless of how compelling their reasoning sounds.

Taking the other side of this latest de-dollarization fad feels scary. It is not comfortable by any means. As I write this piece, I want to erase it and start over with another topic. Yet the hard trades are often the right trades… (either that, or you make a complete fool of yourself)

I am not sure what the catalyst will be for a US dollar move to the upside. Maybe it is a Fed that returns to their relatively hawkish ways. Maybe it will be an ECB that somehow manages to get the Euro to stop rising (as an aside, today the Euro poked its head above 1.20, and mysteriously, “sources” hit the financial news tape to jawbone it lower. It sure feels like the ECB doesn’t want the EUR above 1.20) Maybe China or Japan, or whoever is the hot money these days, returns to buy US fixed income – after all, the US dollar is as cheap as it has been in quite some time. Regardless of the reason, the next surprise will not be a US dollar bear move, but instead a rally that catches everyone off guard.

Maybe I am early. Could be. Actually, it’s most probable. There is also a chance that I am outright wrong, and that Luke’s de-dollarization theory plays out much quicker than I expect. But I think the higher probability bet is that hedgies and the rest of the investing community got way too bullish on the US dollar over the past year. They got hurt, unwound it, and are now trying to make it back with a downside bet.

We have now hit the point where practically no one is recommending long positions in the US dollar. Well, lonely trades are my favourite kinds. I am buying US dollars, with the idea that I will leg into the position – half now, and half if it breaks to new lows. In yet another one of my painful lessons, I have learned that stepping in front of trending crowded trades is not easy. There is no rush. And most importantly, be careful! Volatility increases at turning points. Remember, the bottom is always lower than you expect.

If the trade doesn’t work, then you can blame me. I am happy to be your Fall Guy.

via http://ift.tt/2xheMsn Tyler Durden

With the Fed set to unveil its first balance sheet reduction in modern history – an event that is largely priced in – what traders are far more interested in, is what will happen to the Fed’s “dots”, where consensus anticipates no move for the 2017 dot, while the 2018 and 2019 dots could shift lower as the FOMC language turns slightly more dovish.

How could this dot “migration” take place?

First, as Adnan Chian observes, at least 4 Fed members need to move their 2017 dots lower to shift the median from 1 more hike in 2017 to no more hikes, i.e. December is “dead.”

Another observation is that the market is only pricing in 1 full hike in 2018…

… whereas the Fed’s “dots” still expect at least three rate increases in the coming year. A concerted effort will be needed by quite a few FOMC members to admit that the market was right all along…

Finally, the most vulnerable to change is the long-run median dot, where only 2
Fed members moving their dots lower is all that’s needed to shift the
median.

The answer will be revealed in just a few minutes.

via http://ift.tt/2xRkSCW Tyler Durden

“Community is not something you have, like pizza. Nor is it something you can buy. It’s a living organism based on a web of interdependencies- which is to say, a local economy. It expresses itself physically as connectedness, as buildings actively relating to each other, and to whatever public space exists, be it the street, or the courthouse or the village green.”  

-James Howard Kunstler
The Geography of Nowhere: The Rise and Decline of America’s Man-Made Landscape

 

I have mentioned before that my favorite book by ZH contributor, James Howard Kunstler, is his non-fiction work, The Geography of Nowhere.  He does a great job of describing many of the problems of our current living arrangements, and how they came about.  The solutions to these problem, however, are much more difficult to come by.  

Let’s imagine that I have identified a small town in Texas, with a population of less than 2,000 people.  It is on a waterway and railway, has fertile soil, receives plenty of rain, and has a long growing season.  It rarely ever snows.  This little town is located at least 100 miles from the big cities, and not on a major interstate.  It was once a vibrant farming and ranching town, with mills, canneries, and meat packing.  There are several large and beautiful old homes and the remains of a central business district.  The area’s natural gas fields provide plenty of cheap electricity, and the location also allows for more than 5 kWh/m²/day of solar energy.  The surrounding land is pastoral and very beautiful.  

Ten acres of land, part pasture and part woods, with electric service but no other utilities, costs about $50,000.  A nice home in town with 3 bedrooms, 3 baths, 2 car garage, on a 1/4 acre lot costs about $150,000.  

Sure, most of the area’s farmers and ranchers are doing fine.  However, the townsfolk have seen better days.  Most of the people living there are just barely hanging on to life with their social security retirement and government pensions.  On the plus side, there is no Wal-Mart, so the few local businesses are still able to make a go of it.

What if some like-minded people on ZeroHedge decided to create a new community in this town?   Farmville…but not virtual…real!  One of the ZeroHedge Symposium attendees in Marfa referred to this crazy idea as, “Libertyville,”…having the libertarian priorities of maximum freedom…and minimum government.  

Using the very basic process of ADDIE: Assess, Design, Develop, Implement, and Evaluate, I propose we use the comments section of this article to begin to assess the viability of this idea.  What would be our goal?  What would be the big hurdles?  If the discussion goes well, then we could follow it up with some design articles, more discussion, and so forth.   Some obvious topics are politics, commerce, technology, security, education, etc.  

 Because it is possible that we may decide to keep the town’s identity secret, I will keep it to myself, for the time being.  This is not a real estate investment deal.  It would have zero chance of working if it was. I do not live or own property there, nor have I revealed the town’s location to anyone.  You have my word on it.

If the hippies could have communes in the 60’s, and the second coming of Jesus has his amazing place in Siberia, today…

…then why can’t we have Libertyville?

Now, let’s all play for a bit in the comments section!  

Peace, prosperity, love, and liberty,

h_h

via http://ift.tt/2fzZeIv hedgeless_horseman

More than 30 students have been confirmed dead, and 30 more are missing, as rescuers sift through the rubble of the Enrique Rebsamen primary and secondary school, a private school that was one of 44 buildings in Mexico City that collapsed during Tuesday's historic earthquake. According to the Associated Press, a wing of the three-story school pancaked into a pile of concrete slabs during the quake, killing dozens and leaving dozens more trapped in the wreckage.

Soldiers and volunteers toiled through the night to try and free the trapped schoolchildren and staff. At least and five teachers, and 32 students, have been confirmed dead. The 7.1 magnitude quake shook Central Mexico, leaving at least 250 people dead in the deadliest earthquake since a 1985 quake that left 5,000 dead. Bizarrely, Tuesday's quake occurred on the 32nd anniversary of the 1985 quake. Two children were rescued from the rubble, but 30 more people are still missing, local media reported.

The hundreds of soldiers and volunteer rescue workers who were frantically digging through the debris said they could hear noises in the rubble, but have been unable to discern whether sounds emanating from the ruined wing were survivors pounding for help, or simply the noises of shifting wreckage, according to NBC.

Working through the night, the AP described how workers would ask for silence occasionally to listen for signs of life amid the wreckage.

Mexican President Enrique Peña Nieto said last night that rescue teams “are hauling out debris, material, trying to get through the rubble and rescue people.”

Foro TV reported that rescuers spotted the child and shouted to her to move her hand if she could hear them, and she did. A search dog subsequently entered the wreckage and confirmed she was alive. Several other children were rescued shortly after the quake.

One doctor recounted to the Associated Press how he crawled through the rubble

“Pedro Serrano, a 29-year-old doctor, was one of the ordinary Mexicans who had volunteered to join the rescue effort. He crawled into a crevice amid the tottering pile.

 

"We dug holes, then crawled in on our bellies," Serrano said.

 

With barely room to move, he wriggled deeper into the wrecked school.

 

"We managed to get into a collapsed classroom. We saw some chairs and wooden tables," Serrano said. "The next thing we saw was a leg, and then we started to move rubble and we found a girl and two adults — a woman and a man."

 

None of them was alive.”

Outside the school, rumors circulated that two families had received Whatsapp messages from girls trapped inside. Nobody could say for sure whether it was true.

Express reports that a post being widely shared on social media reads: "Friends who are the south of Mexico City your help is needed, please!”

"There are children beneath the rubble at the Enrique Rebsamen school."

Anxious parents traveled to the scene holding up signs with their child's names written on them.

A more powerful earthquake struck last month – what was then the strongest in 100 years. But the damage was less widespread and the number of deaths was 93. While weaker, Tuesday's earthquake was far deadlier and far more destructive, disrupting power grids across an entire region.

via http://ift.tt/2xfiViV Tyler Durden

What if the Fed surprised today, and instead of only announcing a reduction in its balance sheet, it also sent an uber-hawkish signal by hiking rates 25 bps, something which virtually nobody expected? While stocks would certainly suffer an adverse reaction, as the Fed confirmed that its intention was to burst one or more asset bubbles, it may be just what many in the market desire.

The reason for that is the active trader community has been growing increasingly bearish in recent weeks, and in anticipation of a potential downside shock as stocks trade at all time highs, it has been aggressively putting on hedges. One place where this is visible is in S&P 500 options where the put to call ratio has climbed to its highest level in more than two years according to Bloomberg.

A second place where bearish bets have been piling up is among the mega-cap tech leaders of this rally. As the Nasdaq soared above 6,000, demand for downside rose grew to the most in over a year on the most popular tech ETF, the QQQs.

A third place which as we demonstrated yesterday has seen a significant increase in “fat tail” insurance, is the VIX itself, where the term structure has steepened to the most since February as traders increasingly buy longer-protection.

And yet all these hedges may be overriden by one other disturbing observation made overnight by Bank of America, namely that the gross vega outstanding in levered and inverse VIX ETPs has reached $375mn vega, an all-time, and surging by 50% just in September alone! BofA’s Benjamin Bowler explains:

Levered long vol VIX ETP positioning up 50% MTD, short remains at record high Implied vol continues to remain near historic lows and investors have begun to enter the levered-long vol trade on the expectation that today’s quiet will not persist through the catalyst-rich fall. Open interest in levered-long VIX ETPs (TVIX and UVXY) has more than doubled since mid-August and now stands at $150mn vega (up 50% month-to-date). 

Since the beginning of September, unlevered long positioning has remained relatively stable, while inverse positioning picked up slightly MTD to $225mn vega and is at a fresh all-time high. Together, the outstanding vega of both levered and inverse VIX ETPs has climbed to a staggering $375mn vega, an all-time high as well.

As a reminder vega is simply a measure of the sensitivity to each percentage point change in vol, for the total universe of VIX related ETFs adjusted by their short interest. As vega has never been higher, it means that a sharp move higher in VIX would result in disproportionate move in underlying VIX-tracking ETFs, which in turn could roil a market which has shown a substantial correlation to vol indices as vol shorts scramble to cover.

BofA concludes that “a volatility spike would cause both sets of ETPs to trade in the same direction in order to reset their leverage” and adds “that this is a historically large amount of vega to trade.”

In short, it means an eruption of market chaos.

Indicatively, a similar analysis conducted by Morgan Stanley just over a month ago, calculated that should the S&P fall 3.5%, “first, the VIX could rise as much as 12 points.  When volatility is low it tends to move a lot for a given change in the S&P 500.  That effect is likely to be exacerbated now because a) skew is steep (and VIX rolls up the skew in a selloff) and b) many players in the VIX market are short.  Taking these dynamics into account QDS estimates VIX could rise ~12 points for a 3.5% 1-day decline in SPX.”

With the vega even higher now, it would take an smaller move in the S&P to literally blow up the VIX.

We may very soon find out just how resilient to exogenous, Fed-created shocks this market truly is.

via http://ift.tt/2xwTQjp Tyler Durden

After being widely blamed by Hillary Clinton supporters – and even the candidate herself – for inadvertently prompting the FBI to reopen its investigation into whether the candidate mishandled classified information, it looks like Anthony Weiner, once believed to be a strong contender for Mayor of New York City, is going to prison.

The Associated Press reports that federal prosecutors are asking that the former Congressman be sentenced to about two years in prison for engaging in sexting with a 15-year-old girl. Prosecutors filed paper in Manhattan Federal Court on Wednesday in advance of Weiner’s sentencing, which is scheduled for Monday. In their paperwork, the prosecutors asked that the judge use the sentencing as an opportunity to send a message to other perverted pols.

The 53-year-old said in a submission last week that he's undergoing treatment and is profoundly sorry for subjecting the North Carolina high school student to what his lawyers described as his "deep sickness." Prosecutors say this isn’t the first time Weiner has promised to reform himself.

Weiner’s lawyers portrayed the girl as an aggressor, saying she wanted to generate material for a book and possibly influence the presidential election, according to the AP.

As part of his plea bargain, Weiner has agreed not to appeal any sentence between 21 and 27 months. His sentencing will take place almost exactly a year after the New York Post published a story about Weiner sexting with another woman who wasn’t his wife. Weiner said he would plead guilty in May after prosecutors brought charges following revelations that he also sexted with the 15-year-old, whom he met over Skype. Both the girl and her father told the Daily Mail that Weiner knew she was underaged when they were corresponding.

Weiner pled guilty to a single charge of transferring obscene material to a minor after turning himself in to the FBI.

The description of Weiner’s conduct that his victim provided to investigators was truly sickening.

“He had some rape fantasies. It would just be him showing up at my house when my dad was out of town,” the girl told the Mail. “And just start undressing me, being forceful, asking me if I want to be dominated, strange questions.”

Weiner reportedly once told the girl, “I would bust that tight p–y so hard and so often that you would leak and limp for a week,” and sent her bare-chested pictures of himself.

His Congressional career imploded back in 2011 when he accidentally tweeted a picture of his bulging erection. He had meant to direct message it to a woman who wasn’t his wife. Speaking of Weiner’s wife, top Clinton lieutenant Huma Abedin announced her separation from the Congressman a year ago.

via http://ift.tt/2w6RrZa Tyler Durden

Authored by Simon Black via SovereignMan.com,

Today’s the day.

After months of preparing financial markets for this news, the Federal Reserve is widely expected to announce that it will finally begin shrinking its $4.5 trillion balance sheet.

I know, that probably sound reeeeally boring. A bunch of central bankers talking about their balance sheet.

But it’s phenomenally important. And I’ll explain why-

When the Global Financial Crisis started in 2008, the Federal Reserve (along with just about every central bank in the world) took the unprecedented step of conjuring trillions of dollars out of thin air.

In the Fed’s case, it was roughly $3.5 trillion, about 25% of the size of the entire US economy at the time.

That’s a lot of money.

And after nearly a decade of this free money policy, there is more money in the financial system than ever before.

Economists have a measure for money supply called “M2”. And M2 is at a record high — nearly $9 trillion higher than at the start of the 2008 crisis.

Now, one might expect that, over time, as the population and economy grow, the amount of money in the system would increase.

But even on a per-capita basis, and relative to the size of US GDP, there is more money in the system than there has ever been, at least in the history of modern central banking.

And that has consequences.

One of those consequences is that asset prices have exploded.

Stocks are at all-time highs. Bonds are at all-time highs. Many property markets are at all-time highs. Even the prices of alternative assets like private equity and artwork are at all-time highs.

But isn’t that a good thing?

Well, let’s look at stocks as an example.

As investors, we trade our hard-earned savings for shares of a [hopefully] successful, well-managed business.

That’s what stocks represent– ownership interests in businesses. So investors are ultimately buying a share of a company’s net assets, profits, and free cash flow.

Here’s where it gets interesting.

Let’s look at Exxon Mobil…

In 2006, the last full year before the Federal Reserve started any monetary shenanigans, Exxon reported $365 billion in revenue, profit (net income) of nearly $40 billion and free cash flow (i.e. the money that’s available to pay out to shareholders) of $33.8 billion.

At the time, the company had $6.6 billion in debt.

Ten years later, Exxon’s full-year 2016 revenue was $226 billion, net income was $7.8 billion, free cash flow was $5.9 billion and the company had an unbelievable debt level of $28.9 billion.

In other words, compared to its performance in 2006, Exxon’s 2016 revenue dropped nearly 40%, due to the decline in oil prices.

Plus its profits and free cash flow collapsed by more than 80%. And debt skyrocketed by over 4x.

So what do you think happened to the stock price over this period?

It must have gone down, right? I mean… if investors are essentially paying for a share of the business’ profits, and those profits are 80% less, then the share of the business should also decline.

Except — that’s not what happened. Exxon’s stock price at the end of 2006 was around $75. By the end of 2016 it was around $90, 20% higher.

And it’s not just Exxon. This same curiosity fits to many of the largest companies in the world.

General Electric reported $13.9 billion in free cash flow in 2006. Last year’s free cash flow was NEGATIVE.

Plus, the company’s book value, i.e. its ‘net worth’, plummeted from $122 billion in 2006 to $77 billion in 2016.

So investors’ share of the free cash flow is essentially worthless, while their share of the net assets has also fallen dramatically.

GE’s stock was actually down slightly in 2016 compared to 2006. But the minor stock decline is nothing compared to the train wreck in the company’s financial statements.

Between 2006 and 2016, McDonalds reported only a tiny increase in revenue. And in terms of bottom line, McDonalds 2016’s profit was about 30% higher than it was in 2006.

McDonalds’ debt soared from $8.4 billion to $25.8. And the company’s book value, according to its own financial statements, dropped from $15.8 billion to NEGATIVE $2 billion.

So over ten years, McDonald’s saw a 30% increase in profits, but took on so much debt that they wiped out shareholders’ book value.

And yet the company’s stock price has TRIPLED.

Coca Cola. IBM. Johnson & Johnson.

Company after company, we can see businesses that are performing marginally better (or in some cases WORSE). They’ve taken on FAR more debt than ever before.

Yet their stock prices are insanely higher.

How is that even possible? Why are investors paying more money for shares of a business that isn’t much better than before?

There’s really only one explanation: there’s way too much money in the system.

All that money the Fed printed over the years has created an enormous bubble, pushing up the prices of assets to record highs even though their fundamental values haven’t really improved.

As the Wall Street Journal reported yesterday, “Financial assets across developed economies are more overvalued than at any other time in recent centuries,” i.e. at least since 1800.

Investors are paying far more than ever for their investments, but receiving only marginally more value in return. And they’re actually excited about it.

This doesn’t make sense. We don’t get excited to pay more and receive less at the grocery store.

But when underperforming assets fetch top dollar, people feel like they’re wealthier. Crazy.

Today the Fed should formally announce that after nearly a decade, it’s going to start vacuuming up a lot of that money it printed in 2008.

Bottom line: they’re going to start cutting the lights and turning off the music.

And given the enormous impact that this policy had on asset prices, it would be foolish to think its reversal will be consequence-free.

Do you have a Plan B?

via http://ift.tt/2ypVZv8 Tyler Durden