Month: September 2014

It appears today's weakness in stocks (most notably high-beta momo) and bonds (HY credit weakness) was triggered by two "ma"s – grandma Yellen and grand-poohbah BABA's Ma. Hawkish FOMC concerns took the shine off HY credit (and stocks) but Treasury bonds rallied modestly (5Y -3bps, 10Y -2bps). However, high-beta momo stocks dragged Nasdaq and Russell lower as 'smart money' proclaimed this was making room for the Alibaba IPO (which raises the question – if there is so much pent-up demand money on the sidelines just dying to be lost in the stock market, then why were so many high-beta, high-growth, momo names being sold today, theoretically in order to make room for the BABA IPO?) The USDollar ended marginally higher (GBP weakness, EUR strength) but most commodities gained on the day (Copper down on China) with WTI back to $93. Stocks did have a mini-melt-up on absolutely no news whatsoever into the last hour but gave most back. The Russell 2000 is -0.5% in 2014.
 

A look at the futures market reaction to the good news (Empire Fed) and bad news (Industrial Production) shows neither had any impact on stocks.

High-beta stocks led the Nasdaq and Russell lower on the day (and Dow 'safety' higher)…right from the US open… The Energy sector was the leader on the day (as oil rose) and Chevron added 12 points to The Dow alone…

As is clear here…

 

Notably The Russell 2000 once again broke its major technical support and bounced (50-, 100-, and 200-DMA)

And "Most Shorted" was weak but squeezed late on…NOTE – the buying panic that occurred around 1400ET…

HY Credit broke early – squeezed with everything else – then reverted wider again…

FX markets were relatively calm – modest weakness in GBP (after 38.2% retracement bounce of Scottish poll weakness) and EUR strength

 

AUDJPY seemed in some control over stocks – but correlations to JPY carry are breaking down in general…

Treasury yields fell on the day (short-end outperformed) after weak industrial production data

Commodities rose despite small gains in the dollar, WTI over $93 and Gold $1235, Copper slipped further after China weakness

Charts: Bloomberg

Bonus Chart: Happy Birthday Lehman Bankruptcy: Silver +71%, Gold +61%, S&P +58% (from the close before Lehman BK)

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

Submitted by Simon Black via Sovereign Man blog,

Today is a rather peculiar public holiday in Japan: “Respect Old People Day”.

And judging by the official demographics, an increasing proportion of the population should be revered today.

One in eight Japanese is aged 75 or older. People over 65 will reach 33 million, the largest ever, roughly 25.9% of the population.

The thing about demographic trends is that they’re like a huge oil tanker – once they’re on their course it’s very hard to steer them around in another direction.

These are monumental, generational changes that are very hard and slow to reverse.

By today’s trend, Japan’s population will dwindle from 127 million today to around 100 million by 2050. It’s the worst possible demographic nightmare.

People stopped having as many babies decades ago. It was too damned expensive.

Then the big collapse came in the late 80s, and the economy has been dragging it heels ever since.

When prosperity is low, people consequently delay having children. They have fewer children. Or they don’t have them at all.

This has enormous long-term implications for the country and its fundamentals. Fewer people of working age means fewer jobs, less productivity, less consumption and less government tax revenue.

On the other hand, a bulging group of older people means more spending for medical care and pensions.

In the recently proposed budget for fiscal year 2015, the Japanese government earmarked 31.7 trillion yen for social security, welfare and health spending.

This is the largest item in the budget, consuming 31.2% of all planned government spending.

And it’s only getting larger.

It doesn’t help that Japan is essentially already bankrupt.

The second largest item in Japanese government’s budget is interest.

While social security, welfare and health spending has increased by 3% from the current budget, debt servicing is up by 11% and now amounts to 25.8 trillion yen, or an incredible 25% of Japan’s budget.

So just between pensions and interest, they’re spending 57.5 trillion yen. Last year they only collected 50 trillion in tax revenue.

So before they spend a single yen on anything else in government… anything at all… they’re already 7 trillion yen (about $70 billion) in the hole. They have to borrow the rest.

Bear in mind, this is coming at a time when interest rates for 10-year Japanese bonds are 0.5%, and even closer to zero on shorter notes.

If interest rates rise to just 1%, which is historically still very low, Japan will spend almost all of its tax revenue just to service the debt!

You can’t make this stuff up. It’s a screaming indicator that this system can’t possibly last.

Europe, the US and Japan, three of the biggest economies in the world, are all on a similar inevitable trend—they’re in debt up to their eyeballs, with absolutely no arithmetic possibility of ever getting out of the hole unscathed.

Japan is just worst of them all.

And history is so full of examples of what governments do when countries get into this position: as reality beckons, they become even more careless and destructive.

The question of when will it happen is irrelevant. What difference does it make if Japan collapses tomorrow or two years from now?

This is not a credible and sustainable system that is worth tying up all your livelihood and life savings with.

Nobody is going to send you an advanced notice that the banks will remain closed tomorrow and all deposits will be frozen.

That’s why we always say to buckle up and put your seatbelt on ahead of time.

Just like William Shakespeare said in The Merry Wives of Windsor: “Better three hours too soon, than a minute too late.”

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

Submitted by Simon Black via Sovereign Man blog,

Today is a rather peculiar public holiday in Japan: “Respect Old People Day”.

And judging by the official demographics, an increasing proportion of the population should be revered today.

One in eight Japanese is aged 75 or older. People over 65 will reach 33 million, the largest ever, roughly 25.9% of the population.

The thing about demographic trends is that they’re like a huge oil tanker – once they’re on their course it’s very hard to steer them around in another direction.

These are monumental, generational changes that are very hard and slow to reverse.

By today’s trend, Japan’s population will dwindle from 127 million today to around 100 million by 2050. It’s the worst possible demographic nightmare.

People stopped having as many babies decades ago. It was too damned expensive.

Then the big collapse came in the late 80s, and the economy has been dragging it heels ever since.

When prosperity is low, people consequently delay having children. They have fewer children. Or they don’t have them at all.

This has enormous long-term implications for the country and its fundamentals. Fewer people of working age means fewer jobs, less productivity, less consumption and less government tax revenue.

On the other hand, a bulging group of older people means more spending for medical care and pensions.

In the recently proposed budget for fiscal year 2015, the Japanese government earmarked 31.7 trillion yen for social security, welfare and health spending.

This is the largest item in the budget, consuming 31.2% of all planned government spending.

And it’s only getting larger.

It doesn’t help that Japan is essentially already bankrupt.

The second largest item in Japanese government’s budget is interest.

While social security, welfare and health spending has increased by 3% from the current budget, debt servicing is up by 11% and now amounts to 25.8 trillion yen, or an incredible 25% of Japan’s budget.

So just between pensions and interest, they’re spending 57.5 trillion yen. Last year they only collected 50 trillion in tax revenue.

So before they spend a single yen on anything else in government… anything at all… they’re already 7 trillion yen (about $70 billion) in the hole. They have to borrow the rest.

Bear in mind, this is coming at a time when interest rates for 10-year Japanese bonds are 0.5%, and even closer to zero on shorter notes.

If interest rates rise to just 1%, which is historically still very low, Japan will spend almost all of its tax revenue just to service the debt!

You can’t make this stuff up. It’s a screaming indicator that this system can’t possibly last.

Europe, the US and Japan, three of the biggest economies in the world, are all on a similar inevitable trend—they’re in debt up to their eyeballs, with absolutely no arithmetic possibility of ever getting out of the hole unscathed.

Japan is just worst of them all.

And history is so full of examples of what governments do when countries get into this position: as reality beckons, they become even more careless and destructive.

The question of when will it happen is irrelevant. What difference does it make if Japan collapses tomorrow or two years from now?

This is not a credible and sustainable system that is worth tying up all your livelihood and life savings with.

Nobody is going to send you an advanced notice that the banks will remain closed tomorrow and all deposits will be frozen.

That’s why we always say to buckle up and put your seatbelt on ahead of time.

Just like William Shakespeare said in The Merry Wives of Windsor: “Better three hours too soon, than a minute too late.”

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

“There’s nothing to be optimistic about,” warns the professor who developed the Global Epidemic and Mobility Model to assess outbreaks, “if the number of cases increases and we are not able to start taming the epidemic, then it will be too late. And then it requires an effort that will be impossible to bring on the ground.” As FredHutch reports, the deadly Ebola epidemic raging across West Africa will likely get far worse before it gets better, more than doubling the number of known cases by the end of this month, predicting as many as 10,000 cases of Ebola virus disease could be detected by Sept. 24 – and thousands more after that. “The cat’s already out of the box – way, way out,” as the analysis of global mobility and epidemic patterns shows a rougly 25% chance of Ebola detection in the UK by the end of September and 18% it will turn up in the USA. “I hope to be wrong, he concludes, but “the data points are still aligned with the worst-case scenario.”

 

Via FredHutch,

The next three weeks will be crucial to determining whether the Ebola outbreak is tamed or rages out of control, the experts agreed.

 

…

 

WHO officials have predicted as many as 20,000 cases of Ebola and laid out a “road map” for the outbreak response that calls for stopping the outbreak within six to nine months. But that’s only if a “massive” global response is implemented.

 

The scenario modeled in the new paper suggests that the actual number of cases could far exceed the WHO estimate – and far sooner. Vespignani said he and his colleagues are calibrating the model every couple of weeks to see whether there’s any change. So far, the answer is no.

 

“The data points are still aligned with the worst-case scenario,” Vespignani said. “It’s a bad feeling. I hope to be wrong.”

 

That’s a sentiment echoed by Longini, who said that he and other disease modelers are dismayed by what they see.

 

“There’s nothing to be optimistic about,” he said. “It’s frustrating. It feels like there should be a more concentrated international effort to help these countries.”

The latest counts Monday from the Centers for Disease Control and Prevention, which include WHO and Ministry of Health reports, put the total at 4,061 cases and 2,107 deaths.

The deadly Ebola epidemic raging across West Africa will likely get far worse before it gets better, more than doubling the number of known cases by the end of this month.

 

That’s the word from disease modelers at Northeastern University and the Fred Hutchinson Cancer Research Center, who predict as many as 10,000 cases of Ebola virus disease could be detected by Sept. 24 – and thousands more after that.

 

“The epidemic just continues to spread without any end in sight,” said Dr. Ira Longini, a biostatistician at the the University of Florida and an affiliated member of Fred Hutch’s Vaccine and Infectious Disease and Public Health Sciences divisions. “The cat’s already out of the box – way, way out.”

 

It’s only a matter of time, they add, before the virus could start spreading to other places, including previously unaffected countries in Africa and developed nations like the United Kingdom — and the U.S., according to a paper published Sept. 2 in the journal PLOS Currents Outbreaks.

 

There’s a roughly 25 percent chance Ebola will be detected in the United Kingdom– and as much as an 18 percent chance it will turn up in the U.S. – by the end of September, the analysis of global mobility and epidemic patterns shows. The new paper includes the top 16 countries where Ebola is most likely to spread.

 

Though concerning, a spread to Western nations is not the biggest threat. At most, there would be a cluster of a few cases imported to the U.S., probably through air travel.

 

…

 

“We are at a crucial point,” Vespiginani said. “If the number of cases increases and we are not able to start taming the epidemic, then it will be too late. And then it requires an effort that will be impossible to bring on the ground.”

*  *  *
As we noted previously, this is anything but “contained”

*  *  *

As another epidemiolgist (and federal advisor) – Dr. Michael T. Osterholm of the University of Minnesotta – warns:

I’ve spent enough time around public health people, in the US and in the field, to understand that they prefer to express themselves conservatively. So when they indulge in apocalyptic language, it is unusual, and notable.

 

When one of the most senior disease detectives in the US begins talking about “plague,” knowing how emotive that word can be, and another suggests calling out the military, it is time to start paying attention.

There are two possible future chapters to this story that should keep us up at night.

The first possibility is that the Ebola virus spreads from West Africa to megacities in other regions of the developing world. This outbreak is very different from the 19 that have occurred in Africa over the past 40 years. It is much easier to control Ebola infections in isolated villages. But there has been a 300 percent increase in Africa’s population over the last four decades, much of it in large city slums…

 

The second possibility is one that virologists are loath to discuss openly but are definitely considering in private: that an Ebola virus could mutate to become transmissible through the air… viruses like Ebola are notoriously sloppy in replicating, meaning the virus entering one person may be genetically different from the virus entering the next. The current Ebola virus’s hyper-evolution is unprecedented; there has been more human-to-human transmission in the past four months than most likely occurred in the last 500 to 1,000 years. Each new infection represents trillions of throws of the genetic dice.

And finally, as Wired reports, the professor extrapolates:

In a worst-case hypothetical scenario, should the outbreak continue with recent trends, the case burden could gain an additional 77,181 to 277,124 cases by the end of 2014.

via Zero Hedge http://ift.tt/1uP8GHi Tyler Durden

Sometimes you just have to laugh… S&P green, check; catch up with AUDJPY, check; squeeze "most shorted", check… It appears the algos got the 330RAMP timing a little off. FX markets – no change; TSY markets – very small reaction, credit reacted but roundtripped.

 

Up – just because…

 

With the S&P going vertical

 

to catch up to AUDJPY

 

As Shorts are squeezed

 

 

And credit gives up its blip gains

 

Charts: Bloomberg

via Zero Hedge http://ift.tt/1sZL2Jw Tyler Durden

Over the weekend, JPM addressed the question of whether “asset price inflation, produced by 7 years of zero interest rates, has to morph into asset price deflation when the Fed starts hiking rates.” It further adds: “We have for years argued that the driving force pushing up all asset prices has been falling uncertainty in the presence of no return on cash. Does this logic then not imply that the coming end of easy money must turn asset price inflation into price deflation, or a generalized bear market?” Unlike Goldman, which is so terrified of the rate hike it takes every opportunity to assure its few remaining flow clients that the only thing more bullish of ZIRP are rising rates, JPM covers every base: “the answer is Yes, No, and Depends.”

Here is the breakdown:

On the No side, we see improved US growth (a 3% pace instead of the 2% of the first five years of the recovery), no real pick up in inflation and only a relatively slow pace of tightening by historic standards — 250bp over the first 18 months. This is not 1994 when the Fed did 300bp in less than one year. In addition, the Fed will likely only be joined by the BoE in hiking while the ECB and BoJ look set to remain in easing mode. This means that global liquidity will likely remain plenty and that the resulting dollar appreciation can substitute for higher rates in tightening monetary policy.

All of this, of course, assumes it doesn’t snow in 2015, or 2016, or 2017, etc. It also assumes that the “improved growth”, which right now is tracking at the lowest annualized GDP for 2014 since Lehman, doesn’t flip on the back of Europe’s triple-dip, or China’s suddenly crashing economy, which over the weekend posted the weakest metrics since Lehman. So yeah, two of the three biggest economies in the world grinding to a halt, while Japan just posted an nightmarish -7.1% GDP print. What can possibly go wrong for the US “improved growth” thesis?

Which brings us to…

On the Yes side, raising the return on cash creates an alternative to other assets. In addition, raising rates after seven years of zero-return-on-cash increases uncertainty, as we all assume that some asset classes and investors could have become overly dependent on easy money. The evidence we have on past tightening cycles, reviewed last week, cannot be directly extrapolated to this one as the Fed has never held rates at zero or for such a long time. On average, there were only 15 months between the last cut and the first hike since the 1960s, with the longest lasting 37 months (early 1960s). This week shows that investors intuitively pull back from all assets into cash when pricing in earlier rate hikes.

Or, to summarize, since the Fed’s central planning has never lasted longer, JPM has no clue what will happen. Moving on…

On the Depends side, we mentioned last week that higher growth as a reason for higher rates is much less disturbing to markets than higher inflation. In addition, there remains the open question of whether the market can organize an orderly transfer of OTC risk assets, primarily credit, in the absence of easy-to-expand bank balance sheets, when shorter-term oriented investors try to exit. The hope of many is that yield-oriented insurers and pension funds will effortlessly scoop up any better-yielding bonds discarded by retail and hedge funds. The risk is, though, that the former will take their time when they see the falling knife of falling bond prices and will only enter at rock-bottom prices.

Which brings us to JPM’s conclusion: “we anticipate that the start of US rate hikes will do damage to markets in the short term” although only early on, because obviously that’s when the PPT will kick in, or as JPM puts it “there will be greater differentiation over a more medium term between liquid and less liquid assets.”

That’s the good cop. 

Here is bad cop again: “In the short term, investors sell what they can, making liquid assets more vulnerable.”

And since no bank can end on a dour tone, here, to conclude, is good cop: “But over a matter of months, we think liquid risk assets, such as equities, will fare better than less liquid credit, adjusted for their normal volatility.“

Translated: JPM will be selling “more liquid” stocks to “investors”, while buying less liquidity debt. After all, remember: the Fed’s definition of “high quality collateral” is, debt. Not equity.

And it is precisely debt that all the banks are desperately trying to load up on as they sell every last stock in their possession to what little is left of the retail investor as possible.

via Zero Hedge http://ift.tt/1uP8J61 Tyler Durden

Over the weekend, JPM addressed the question of whether “asset price inflation, produced by 7 years of zero interest rates, has to morph into asset price deflation when the Fed starts hiking rates.” It further adds: “We have for years argued that the driving force pushing up all asset prices has been falling uncertainty in the presence of no return on cash. Does this logic then not imply that the coming end of easy money must turn asset price inflation into price deflation, or a generalized bear market?” Unlike Goldman, which is so terrified of the rate hike it takes every opportunity to assure its few remaining flow clients that the only thing more bullish of ZIRP are rising rates, JPM covers every base: “the answer is Yes, No, and Depends.”

Here is the breakdown:

On the No side, we see improved US growth (a 3% pace instead of the 2% of the first five years of the recovery), no real pick up in inflation and only a relatively slow pace of tightening by historic standards — 250bp over the first 18 months. This is not 1994 when the Fed did 300bp in less than one year. In addition, the Fed will likely only be joined by the BoE in hiking while the ECB and BoJ look set to remain in easing mode. This means that global liquidity will likely remain plenty and that the resulting dollar appreciation can substitute for higher rates in tightening monetary policy.

All of this, of course, assumes it doesn’t snow in 2015, or 2016, or 2017, etc. It also assumes that the “improved growth”, which right now is tracking at the lowest annualized GDP for 2014 since Lehman, doesn’t flip on the back of Europe’s triple-dip, or China’s suddenly crashing economy, which over the weekend posted the weakest metrics since Lehman. So yeah, two of the three biggest economies in the world grinding to a halt, while Japan just posted an nightmarish -7.1% GDP print. What can possibly go wrong for the US “improved growth” thesis?

Which brings us to…

On the Yes side, raising the return on cash creates an alternative to other assets. In addition, raising rates after seven years of zero-return-on-cash increases uncertainty, as we all assume that some asset classes and investors could have become overly dependent on easy money. The evidence we have on past tightening cycles, reviewed last week, cannot be directly extrapolated to this one as the Fed has never held rates at zero or for such a long time. On average, there were only 15 months between the last cut and the first hike since the 1960s, with the longest lasting 37 months (early 1960s). This week shows that investors intuitively pull back from all assets into cash when pricing in earlier rate hikes.

Or, to summarize, since the Fed’s central planning has never lasted longer, JPM has no clue what will happen. Moving on…

On the Depends side, we mentioned last week that higher growth as a reason for higher rates is much less disturbing to markets than higher inflation. In addition, there remains the open question of whether the market can organize an orderly transfer of OTC risk assets, primarily credit, in the absence of easy-to-expand bank balance sheets, when shorter-term oriented investors try to exit. The hope of many is that yield-oriented insurers and pension funds will effortlessly scoop up any better-yielding bonds discarded by retail and hedge funds. The risk is, though, that the former will take their time when they see the falling knife of falling bond prices and will only enter at rock-bottom prices.

Which brings us to JPM’s conclusion: “we anticipate that the start of US rate hikes will do damage to markets in the short term” although only early on, because obviously that’s when the PPT will kick in, or as JPM puts it “there will be greater differentiation over a more medium term between liquid and less liquid assets.”

That’s the good cop. 

Here is bad cop again: “In the short term, investors sell what they can, making liquid assets more vulnerable.”

And since no bank can end on a dour tone, here, to conclude, is good cop: “But over a matter of months, we think liquid risk assets, such as equities, will fare better than less liquid credit, adjusted for their normal volatility.“

Translated: JPM will be selling “more liquid” stocks to “investors”, while buying less liquidity debt. After all, remember: the Fed’s definition of “high quality collateral” is, debt. Not equity.

And it is precisely debt that all the banks are desperately trying to load up on as they sell every last stock in their possession to what little is left of the retail investor as possible.

via Zero Hedge http://ift.tt/1uP8J61 Tyler Durden