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First, it was The BoJ's utter collapse from omnipotence to impotence. Then came the collapse of The Fed's credibility in the short-term…. and the longer-term. And now it is the turn of Mario Draghi's ECB to face total failure, as the European banking system – the prime beneficiary of "whatever it takes" – has crashed back to pre-Draghi levels.

 

 

As former Morgan Stanley guru Gerard Minack explains, the most corrosive factor for markets currently is the downgrading of perceived central bank potency.

There are several recent hints of this decline.

 

Mario Draghi’s ‘whatever it takes’ comment in 2012 was, in my view, the single most important central bank action of the past 5 years.  However, European bank stocks – a principal beneficiary of ‘whatever it takes’ – have now almost given up all their ‘whatever it takes’ gains, despite recent ‘whatever it takes with steroids’ comments from Mr. Draghi.

 

Likewise, the Bank of Japan’s bazooka now seems to be firing blanks.  The yen strengthened and equities fell after the cash rate was cut below zero – the opposite of what was presumably expected.

 

Second, the central bank bubble seems to be deflating.   Central banks have long been over-rated in my view; markets seem to be starting to agree.

The equity sell-down is changing: it had been led by economically-sensitive sectors but is now shifting to financial risk ….financial stress is not good for growth.

Some further clarifications from Bloomberg:

Financial markets are signaling that investors have lost faith in central banks’ ability to support the global economy.

And some more:

"The markets are wondering, well, we’ve had these non-conventional monetary policy experiments for the last six or seven years and they haven’t caused a sustainable boost to global growth, so what will the latest moves do,” said Shane Oliver, head of investment strategy at Sydney-based AMP Capital Investors Ltd. “It’s a reasonable question to ask given the events of the last few weeks.”

 

“The notion that central banks and regulators could not act if the financial panic were to turn into a serious threat to the real economy and hence to jobs looks wrong,” said Holger Schmieding, chief economist at Berenberg Bank in London. “Central banks can bolster confidence if they really have to in order to support the real economy.”

 

"The period of central bank ‘shock and awe’ operations is likely to be behind us," Stephen Jen, co-founder of SLJ Macro Partners LLP in London and a former International Monetary Fund economist, wrote in a note on Friday. "This will be the year that ‘gravity’ will overwhelm the central bank policies," he said, recommending selling equities during rallies.

via Zero Hedge http://ift.tt/1TbWrm9 Tyler Durden

By now all of our readers should be familiar with JPM’s head quant Marko Kolanovic whose unblemished track record of accurate market calls is not only second to none, but is the equivalent in absolute value terms of Dennis Gartman’s consistently wrong calls, which is why we won’t spend time introducing him.

Instead we cut right to the chase with the highlights of his latest note released moments before the market close today, in which he lays out the biggest risks to the market, which are as follows:

• deterioration of sentiment and fundamental selling (hedge funds, pensions, wealth funds, retail, etc.).
• deleveraging of Equity Long-Short hedge funds is an overhang
• quant funds may pare gross leverage.
• increased volatility, deleveraging, rotation out of momentum, and weak sentiment will continue to be a headwind

Kolanovic then explains how to hedge against this ongoing storm (“increased allocation to gold, cash and VIX”), with the section on gold particularly delightful for his crucifixion of the strawman created by the most famous Obama tax advisor and crony capitalist from Omaha:

The arguments against gold that we have heard were along two lines: The first is what can be loosely called “Warren Buffet’s” argument: “Gold is a relic of past; aliens visiting earth would be puzzled why people hold it at all.” As the argument is non-quantitative in nature, one can only address it as such. If indeed aliens could overcome space-time barriers, they would also know that the metal was used as a store of value longer than any other real asset. Since the beginning of written history, countless currencies and governments emerged and failed while gold kept approximately the same purchasing power (albeit with some volatility, and positive correlation to levels of risk).

All we can say here is that when JPM employees viciously attack Buffett for his position on gold, hold on tight.

Kolanovic also crushes Wall Street’s penguin momentum train:

The second argument was that of Momentum: “if an asset was going down, it will keep on going down,” We have concluded that many of our competitors rely on momentum in their commodity forecasts (e.g., when oil is $150, they forecast $200; when it is $30, they forecast teens). This type of trend following can always be rationalized (e.g., oil will go down because it is very difficult to store it – so it has to be sold; and Metals will go down because it is very easy to store them – so production will not slow down). While a simple momentum prescription does work most of the time, the key is to assess the likelihood of market turning points during which one can lose years of profits in a matter of days (less painful for a sell-side analyst and more for an investor).

More apropos to the current global bear market and economic slowdown, is Kolanovic’ warning that a recession as a result of the market’s loss of trillions in market cap now seems inevitable:

Global markets are now facing a significant ‘negative wealth effect’ that has a potential to result in a recession. This negative wealth effect of low commodity prices and a strong USD combined with the slowdown in China could be comparable to that of the 2008/2009 crisis (it involves diverse effects ranging from layoffs in the Global Energy sector to a lack of EM Sovereign wealth flowing into developed market equity hedge funds). While the economists were debating if the low-priced oil is good or bad for the economy, the equity markets never had any doubts – Oil and Equities were moving down together.

Finally, to our applause, Kolanovic concludes by slamming ole’ crony uncle Warren one final time (no point in wasting too much time on the senile billionaire).

Finally, we think the aliens from the previous section would likely be surprised: not with the gold price, but with markets and an economy that are driven by a handful of central bankers taking active market views.

The aliens would quickly understand, however, when they realize they are dealing with a banana planet in which the central bankers only serve a handful of billionaire oligarchs, while leaving billions of people to fend for themselves.

* * *

Kolanovic’s full note:

EQUITIES: Exposure of systematic strategies (CTA, Risk Parity, Vol Targeting) to equities is relative low, which reduces some downside tail risk for the S&P 500. Currently, the main risk comes from deterioration of sentiment and fundamental selling (hedge funds, pensions, wealth funds, retail, etc.). Deleveraging of Equity Long-Short hedge funds is an overhang as well, given the poor performance YTD (see, for example, HFRXEH index). Quant funds took a significant hit with the momentum sell-off during the first week of February (see HFRXEMN index) and may pare gross leverage. A market-neutral portfolio of Momentum stocks declined ~6% in the first week of February and has been recovering slightly over the last two days. Increased volatility, deleveraging, rotation out of momentum, and weak sentiment will continue to be a headwind for the S&P 500 in coming days.
 
GOLD: Since the end of last year, we have been advocating increased allocation to gold, cash and VIX. Specifically on gold, we have argued that it would benefit from the main market concern, which is the rising risk of a global recession, as well as potential mitigation of these risks: the Fed turning more dovish and a weaker dollar removing pressure from emerging markets and the commodities sector. In an unlikely tail scenario that we see as a temporary loss of confidence in central banks, gold would likely benefit as well. The arguments against gold that we have heard were along two lines: The first is what can be loosely called “Warren Buffet’s” argument: “Gold is a relic of past; aliens visiting earth would be puzzled why people hold it at all.” As the argument is non-quantitative in nature, one can only address it as such. If indeed aliens could overcome space-time barriers, they would also know that the metal was used as a store of value longer than any other real asset. Since the beginning of written history, countless currencies and governments emerged and failed while gold kept approximately the same purchasing power (albeit with some volatility, and positive correlation to levels of risk).

The second argument was that of Momentum: “if an asset was going down, it will keep on going down,” We have concluded that many of our competitors rely on momentum in their commodity forecasts (e.g., when oil is $150, they forecast $200; when it is $30, they forecast teens). This type of trend following can always be rationalized (e.g., oil will go down because it is very difficult to store it – so it has to be sold; and Metals will go down because it is very easy to store them – so production will not slow down). While a simple momentum prescription does work most of the time, the key is to assess the likelihood of market turning points during which one can lose years of profits in a matter of days (less painful for a sell-side analyst and more for an investor). We have written on market turning points from a theoretical perspective, as well as in the context of recent market moves, specifically in terms of positioning, gold CTA signal turning positive, etc. For a further rationale behind the gold thesis, see notes from our Metals strategist (here and here). 
 
CENTRAL BANKS AND OIL: Central banks outside of the US have been trying to push on a string recently with negative rates. It has not produced desired results (e.g., a sell-off in the banking sector). Our view is that over the past 18 months, the Fed has been too concerned with the risk of inflation, and perhaps too little with global deflationary pressures and a crisis outside of the US. This has contributed to a rapid strengthening of the USD and put additional pressure on Emerging Markets and certain segments of the US economy. As a result global markets are now facing a significant ‘negative wealth effect’ that has a potential to result in a recession. This negative wealth effect of low commodity prices and a strong USD combined with the slowdown in China could be comparable to that of the 2008/2009 crisis (it involves diverse effects ranging from layoffs in the Global Energy sector to a lack of EM Sovereign wealth flowing into developed market equity hedge funds). While the economists were debating if the low-priced oil is good or bad for the economy, the equity markets never had any doubts – Oil and Equities were moving down together.
 
So, if the negative rates and more bond purchases are losing effectiveness, what else could central banks do at this point? Could they buy commodities (other than gold)? Should they urge for a fiscal stimulus (they are governments’ biggest bondholders)? Perhaps as a start, a hold could be placed on all planned rate hikes. Finally, we think the aliens from the previous section would likely be surprised: not with the gold price, but with markets and an economy that are driven by a handful of central bankers taking active market views (on inflation, oil, etc.). Last but not least, they may wonder how the current levels of oil production outside of the US make any economic sense.
 

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Day after day we are told that the plunge in oil prices (just like the collapse in The Baltic Dry freight index) is a “supply” issue… it’s transitory and global demand is doing fine thank you very much. Sadly, as everyone really knows deep down inside their Keynesian hearts, this is utter crap and as Barclays shows the shocking 18% YoY crash in distillates “demand” – something that has never happened outside of a recession – blows the one-sided argument of the energy complex out of the water.

 

 

Still gonna claim “it’s a supply issue?”

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Neither USDJPY nor Japanese stocks can hold a bid in the early going in Asia markets which has dragged both into the red post-QQE2. Since Kuroda took over from The Fed by doubling down on his cunning plan in October 2014, Japanese stocks are down 11.4%, USDJPY is unchanged, and only Japanese bonds have made any gains (up 3.7%).

 

So what we want to know is – how will Abe et al. explain to the Japanese people how they lost so much of their retirement funds by forcing GPIF to allocate so much to stocks?

Worst still – Japanese real household earnings have tumbled!

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Late last month, HSBC Holdings CEO Stuart Gulliver announced a global freeze on hiring and compensation in a move designed to help the bank cut some $5 billion in costs by the end of next year.

To be sure, HSBC isn’t alone in seeking to roll back costs amid bouts of global market turmoil. As Bloomberg notes, “UBS froze investment bank salaries this week and Barclays Plc extended a freeze on hiring new staff indefinitely in December, while Credit Suisse Group AG and Deutsche Bank AG are cutting thousands of jobs.”

“It would be inappropriate vis-à-vis society to post €5.2bn in legal provisions in one year and not reflect that in compensation, particularly when the share price has fallen, and shareholders have suffered,” Deutsche’s John Cryan said, on the heels of what analysts described as “horrible,” “grim” annual and quarterly results. “By and large, I think we are underpaying against our international peer group this year and I hope that many staff understand why.”

In short, this isn’t the best time to work at a systemically important bank if job security is your thing.

The likes of Credit Suisse, Deutsche Bank, and SocGen have reported horrendous results over the last several weeks and there’s every reason to believe things are about to get a whole lot worse, which is why the “DB is fixed” enthusiasm (triggered by a supposed plan by the bank to repurchase its debt) was immediately faded.

But while cutting compensation may indeed be the right move for many of the world’s largest and most nefarious financial institutions, it turns out employees aren’t really big on getting paid less – even if it’s “appropriate vis-à-vis society,” to quote Cryan.

That’s why after a veritable insurrection, HSBC has decided to cancel the global pay freeze.

“HSBC staff have been complaining to managers since the pay freeze was announced, which would have cancelled increases already recommended as part of the bank’s 2015 pay review,” Bloomberg reports, citing unnamed sources.

“We have listened to feedback and as a result decided to change the way these cost savings are to be achieved,” Gulliver said in a memo sent to staff on Thursday, which was confirmed by an HSBC spokeswoman. “We will proceed with the pay rises as originally proposed by managers as part of the 2015 pay review, noting that, consistent with prior years, not all staff will receive a pay rise.” And why shouldn’t they “proceed with the pay rises?” Things are going so well:

One wonders why Gulliver even bothered with the pay freeze in the first place.

After all, it’s a bit difficult to imagine what the counterfactual would have been here: did someone actually think employees were going to be happy about getting less money?

Meanwhile, the families of multiple US citizens murdered by Mexican drug cartels are suing the bank for providing drug lords with “material support.” “Without the ability to place, layer and integrate their illicit proceeds into the global financial network, the cartels’ ability to corrupt law enforcement and public officials, and acquire personnel, weapons and ammunition, vehicles, planes, communication devices, raw materials for drug production and all other instrumentalities essential to their operations would be substantially impeded,” a complaint filed in a federal court in Texas reads.

In short, plaintiffs say the bank’s employees are largely responsible for financing a multi-billion dollar global “terrorist” drug organzation. That, we suppose, is why Gulliver pays them the big bucks.

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From Phil Davis’s Monday article at Phil’s Stock World

via Zero Hedge http://ift.tt/1SkIMKO ilene

Submitted by Paul Rosenberg via Free-Man's Perspective blog,

Over the last few months a stream of articles have crossed my screen, all proclaiming the need of governments and banks to eliminate cash. I’m sure you’ve noticed them too.

It is terrorists and other assorted madmen, we are told, who use cash. And so, to protect us from being blown up and dismembered on our very own street corners, governments will have to ban it.

It would actually take some effort to imagine a more obvious, naked attempt at fearmongering. Cash – in daily use for centuries if not millennia – is now, suddenly, the agent of spring-loaded, instant death? And we’re supposed to just accept that line?

But there are good reasons why the insiders are promoting these stories now. The first of them, perhaps, is simply that they can: After 9/11, a massive wave of compliance surged through the West. It may not last forever, but it’s still rolling, and if the entertainment corporations can pump enough fear into minds that want to believe, they may just get them to buy it.

The second reason, however, is the real driver:

Negative Interest Rates

The urgency of their move to ban one of the longest-lasting pillars of daily life means that the backroom elites think it will be necessary soon. It would appear that the central banks, the IMF, the World Bank, the BIS, and all their backers, see the elimination of cash as a central survival strategy.

The reason is simple: cash would allow people to escape from the one thing that could save their larcenous currency system: negative interest rates.

To make this clear, I like to paraphrase a famous (and good) quote from Alan Greenspan, back from 1966, during his Ayn Randian days: The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

That was a true statement, and with a slight modification, it succinctly explains the new war on cash:

The preservation of an insolvent currency system requires that the owners of currency have no way to protect it.

Cash is currency that you hold in your own hands, that stands more or less alone. It is primarily external to bank control. Electronic money – bank balances, credit, etc. – remains inside the banking system and fully subject to bank control.

A combination of no cash and negative interest rates would be a quiet, permanent version of what was done in Cyprus, where the government simply shut down everything, allowed only the smallest deductions via ATMs, and then stole money from thousands of bank accounts at once.

The Cypriot spectacle was fairly large, however, and that tends to undermine the legitimacy of rulership. So, it is much better to have no ATMs and no cash at all. There would be no lines of angry people talking to each other, only isolated losers with no recourse, licking their wounds while the talking heads on television tell them to stay calm and watch the flashing images.

Negative interest rates would give the banks 100% control over your purchases. They could, even in the worst pinch, allow you to purchase food while freezing the rest of your money. The average person would have no recourse and would simply be robbed… but very smoothly and with no human face to blame on.

Negative interest rates mean that your bank account shrinks day by day, automatically. Your $1000 in January becomes $950 by December. And where does that money go? To the banks, of course, and to the government. They syphon your money away, drip by drip, and there’s nothing you can do about it. This accomplishes several things for them at once:

• It finances government, limitlessly and automatically. Forget tax filings; they can just take as they please.

• It pays off the bad debt of the big banks. (And there are oceans of debt.)

• It forces you to spend everything you’ve got, as soon as you get it. (Otherwise it will shrink.)

• It gives the system full control over your financial life. Everything is monitored, everything is tracked, and every single transaction must be approved by them (or not). If they decide they don’t like you, you’re instantly reduced to begging.

In short, this is a direct return to serfdom.

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Since The Fed stopped its money-printing extravaganza things have changed a little for the status-quo “believers”…

 

 

So, after all this time, we were right – “It’s The Fed, Stupid”

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