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Amazing how much things change in such little time. Remember, “it’s different this time.”
July 21st
Investors shrug off EVERYTHING http://ift.tt/1w9gTql
— Stalingrad & Poorski (@Stalingrad_Poor) July 21, 2014
August 27th
— Stalingrad & Poorski (@Stalingrad_Poor) August 27, 2014
September 15th
Front page of today’s Money & Investing http://ift.tt/1sT2Vet
— Stalingrad & Poorski (@Stalingrad_Poor) September 15, 2014
via Zero Hedge http://ift.tt/1w7AMPK StalingradandPoorski
As market prognosticators search for something to pin the recent weakness on (Ebola panic, macro data weakness, global growth scare, M&A boom over, fund liquidations, oil crash.. and so on), there is one much larger driver of hysteria that is missing from this list… The Moon and the madness of crowds.
While perhaps a little ‘out there’ the coincidence of full moon’s major gravitational impacts and turning points in stock market volatility is remarkable…
Of course, the surge in volatility also coincides with the end of QE (in seasonally-painful October no less) as the gap between reality and market perception finally becomes clear…
Charts: Bloomberg and @Not_Jim_Cramer
via Zero Hedge http://ift.tt/1yFkrVT Tyler Durden
Once upon a time banks made money in one of two ways: either by borrowing short and lending long, a/k/a the conventional banking way, or through investment banking, which includes advisory, underwriting and trading with the backstop of billions in deposits, aka the proto-hedge fund way.
Then things changed.
For a profoundly philosophical, if comically metaphysical essay, that uses several thousand excess words and footnotes to come at the miraculous conclusion that bank accounting is, get this, fickle, the following Bloomberg take should be an amusing way to kill a few extra hours. Philosophical ramblings aside, it is, of course, very easy to determine if a bank made or lost money, and that does not even involve looking at the cash flow statement. One looks at the Non-GAAP bottom line and excludes the “excluded”, or added back items.
As a reminder, the reason non-GAAP exists in the first place, is to goalseek an already meaningless number to just a cent or two above Wall Street consensus, so as to kickstart the buying of the stock by headline scanning algos. Because EPS may be meaningless but stock-tied compensation/incentive awards are quite meaningful, and lucrative, to executives.
Still, even when it comes to the wizardry of non-GAAP, for a number to be somewhat credible, it has to follow a few basic guidelines, namely that in order for an expense or charge to be “excluded” from the bottom line, it has to fall within the “one-time“, “non-recurring” category. Add it back too many times and the magic falls apart as even the mutually-accepted fabulation by circle-jerking ostriches that is non-GAAP. promptly evaporates.
Which is why we ask: why do Wall Street “analysts” continue to add back Bank of America’s legal and litigation charges and settlements from its bottom line when calculating its non-GAAP EPS?
As the chart below clearly show, any myth that Bank of America’s legal fees are “one-time” or “non-recurring” is by now long dead and buried. In fact, in 2014 they have never been greater!
How does this nearly $30 billion in legal “addbacks” over the past three years compared to the so-called Net Income Bank of America generated over the same time period? Here is the answer:
In short: between Q4 2011 and Q3 2014 Bank of America produced “Net Income” of $15.9 billion. However, the amount of added back “one-time, non-recurring” legal expenses is a stunning $28.9 billion: two of every three dollars, non-GAAP as they may be, comes from Bank of America engaging in criminal activity… and getting caught for it!
So perhaps an even more relevant question than how long will the EPS “addback” bullshit continue, is how long will the regulators and enforcers allow Bank of America to exist as an organization for which two-thirds of its “ordinary course business” is, for lack of a better word, crime?
via Zero Hedge http://ift.tt/1yFgdxj Tyler Durden
Istanbul’s Marmar University Training and Research Hospital is not accepting new patients after, as Daily Sabah reports, a person suspected of being infected with Ebola has been quarantined. The patient, who arrived by plane from Ivory Coast, is suffering high fever and nausea. While Lagos, Nigeria was CDC Director Frieden’s worst nightmare with regard Ebola contagion, we suspect Istanbul is a close second with over 14 million people living there. This news comes as US politicians begin to call for visa restrictions and travel bans from infected nations.
A man arriving from Ivory Coast infected with the Ebola virus has been hospitalized in Istanbul on Wednesday.
The patient was brought to the Marmara University Education and Research Hospital. He was diagnosed with Ebola after landing in Istanbul’s Sabiha Gökçen Airport. The hospital was briefly quarantined and current patients immediately were transferred to other hospitals.
The patient will be transferred to Süreyyapa?a Breast Diseases Education and Research Hospital on Thursday morning.
?stanbul'da Ebola karantinas? http://t.co/AMP42gcIba http://ift.tt/11p7gdK
— NTV (@ntv) October 15, 2014
Just before this news broke, US politicians started raising the rhetoric on travel bans…
House Homeland Security Chairman Mike McCaul says a temporary travel ban targeting Liberia, Sierra Leone and Guinea is needed until the outbreak of Ebola “is under control.”
McCaul, R-Texas, called on the Departments of State, Homeland Security to temporarily suspend visas of individuals from those countries
Travel ban would impact 13,500 visas, McCaul says
McCaul’s letter to Secretary of State John Kerry, Homeland Security Secretary Jeh Johnson co-signed by subcmte chairmen Reps. Peter King, Candice Miller, Jeff Duncan, Richard Hudson, Susan Brooks, all Republicans
And then:
House Speaker John Boehner (R-OH) today issued the following statement on the growing Ebola crisis:
“Our hearts go out to the health care workers who have contracted the Ebola virus here in the United States, as well as those who have been impacted by it around the globe. We pray for their speedy recovery, and we pray for those who are helping to treat and care for these individuals, including our medical experts and military personnel who are in West Africa to help stem this deadly disease. Concerns about the possibility of an outbreak of this sort prompted the House to provide more funding for the CDC than requested, and the tragic developments seen in recent weeks demonstrate that decision was a prudent one.
“In a September 16 speech in Atlanta, President Obama said the ‘chances of an Ebola outbreak here in the United States are extremely low.’ Since that time, several Americans have been diagnosed with the virus and untold more potentially exposed to it. Today we learned that one individual who has contracted the virus flew to Ohio through the Cleveland airport in the last few days. A temporary ban on travel to the United States from countries afflicted with the virus is something that the president should absolutely consider along with any other appropriate actions as doubts about the security of our air travel systems grow.
“It is also imperative we ensure that federal, state and local agencies, along with our public health infrastructure, are prepared, remain vigilant, and follow proper protocols to identify the virus and take appropriate measures for those who have been exposed to it.
“Numerous committees – including the House Armed Services Committee and the Committees on Appropriations, Homeland Security, Energy & Commerce, and Transportation & Infrastructure – are actively assessing the administration’s response, and hearings have already begun. The Homeland Security Committee held a hearing in Dallas to examine the federal, state, and local response thus far. Tomorrow, the Energy & Commerce Committee will hear from the CDC and NIH to look into their response to the crisis. These oversight efforts will continue, and the House stands ready to act if it becomes clear legislation is needed to ensure the threat is countered aggressively and effectively.
“The administration must be able to assure Americans that we will stop the spread here at home. We will continue to press the administration for better information about what steps will be taken to protect the American people, including our troops, from this deadly virus. And we will work with the administration on appropriate policy options that will help stop the spread of this horrific disease both here in the United States and around the globe.”
* * *
And so it begins…
via Zero Hedge http://ift.tt/1yFaAPY Tyler Durden
What got me really interested in Bitcoin back in the summer of 2012 when it was worth a mere $10, was the realization that Wikileaks was able to avoid a banking system and PayPal blockade by accepting donations in BTC. Upon this realization, I published my first public thoughts on Bitcoin in the post: Bitcoin: A Way to Fight Back Against the Financial Terrorists?
For those of you who still think Bitcoin is merely a currency, or merely a payment system, take 8 minutes and listen to hologram Assange:
For more posts focused on Assange’s thoughts see:
Highlights from the Incredible 2011 Interview of Wikileaks’ Julian Assange by Google’s Eric Schmidt
Julian Assange Discusses Mainstream Media, the “Wikileaks Party” and our Global Awakening
In Liberty,
Michael Krieger
Protect your wealth – Buy Gold and Silver Bullion with Goldbroker.com
Follow me on Twitter.
Video of the Day – Hologram Julian Assange Talks George Orwell, Bitcoin and Preserving Human History originally appeared on Liberty Blitzkrieg on October 15, 2014.
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By EconMatters
San Francisco Fed’s John Williams is part of the Problem at the Federal Reserve
Sure enough the S&P 500 drops 6% from its all-time highs, and all the idiots start talking about another round of QE when we haven`t even finished with the latest one (still buying bonds through October). The latest lemming who this time isn`t some dumb analyst on CNBC needing to pump his firm`s lagging stock, but no less than a voting member of the Federal Reserve in the form of the San Francisco Fed’s John Williams, where do they get these clowns? Really QE again with a 5.9% unemployment rate and more JOLTS jobopenings than the US available workforce can possibly fill? Enough of this QE Forever crap, when are these clowns going to realize that low rates are actually incentivizing poor and inefficient uses of capital allocation.
San Francisco Innovation an Argument against European Weakness Having Any Direct Correlation with ZIRP or QE Infinity – Structural Issues Cannot Be Fixed with QE!
If ZIRP and QE Infinity hasn`t brought the economy back to normal operations after 7 years, then maybe these geniuses will figure this out that their policies are actually part of the problem, and have been proven not to be the solution. Every time I have heard San Francisco Fed’s John Williams talk it reminds me of the Peter Principle, and how incompetent people rise within organizations and society because even more incompetent people feel comfortable and not threatened by their presence. In a sense this says a hell of a lot about the competence of Janet Yellen to have this intellectual lightweight as her wingman at the Federal Reserve. This guy is an embarrassment to the economics community, the Fed really stooped to all-time low levels with this hire, he literally is just there to insulate Janet Yellen from competent economists like James Bullard who should be head of the Federal Reserve, and actually can make sound objective judgments regarding the state of the US economy apart from his ideological disposition.
US Economic Data Should be Focus of Fed & Nothing Else
The US Fed is responsible for basing monetary policy on the economic data here in the United States, and not based upon an Ebola outbreak in the third world, how many times has that happened over the last 40 years? Many parts of Africa have been a shithole, and probably always will be because their values are shortsighted, yes cultural values matter, you do stupid things and you as a country are going to get stupid results, starvation, civil wars, Ebola, other diseases, etc. We seriously have not withered to a new low level of monetary policy where we are waiting for Africa to get its act together before normalizing rates and getting out of the business of manipulating market prices with QE Infinity creating more continued and unsustainable asset bubbles? Why do you think these markets freak out every time QE ends, because the asset prices were not created through a natural price discovery process – again the Fed is part of the problem with these insane bubble creating monetary policies!
Read More >>> The Fed Cannot Wait For Wage Inflation to Raise Rates
US is a Capitalist Country (at least used to be) European Union is a Socialist Entity – and their Socialist Economy reflects this reality: US Fed has no control over Structural Issues in Europe
Does US monetary policy really revolve around whether Germany deficit spends to boost their sluggish economy, or diversifies from their current narrow engineering and manufacturing based economy? If the US really wants to help the German and European economy then just take back all the Sanctions against Russia one of the region’s most dominant trading and business partners. But since when does US Monetary policy depend on structural issues that they have no control of in the European Union? Where is that in the Fed mandate? The US cannot raise rates because Europe is a socialist mess, and until they adopt more market based capitalistic economies that can compete on a global basis, the US must continue on with recession era interest rates. How did we ever survive World War II without ZIRP & QE Infinity?
ZIRP & QE Poorly Incentivize Capital Allocation at the Zero Bound
However the biggest reason to discontinue ZIRP, never entertain QE again, and normalize interest rates is because of all the wasted capital around the globe chasing Yield Delta trades based upon 10 to 15 basis point borrowing costs, think about all this capital that could be better served actually creating economic growth in the form of project development, cap ex spending, bank lending for infrastructure projects, research and innovation, and small business loans. Literally low interest rates are actually self-fulfilling and deflationary, they are not good for any economy, and this is the Fed fallacy.
ZIRP is Deflationary at the Zero Bound Level
If financial capital is so cheap that normal investments decisions are put on hold because investors can borrow at 10-15 basis points and without taking any project risk at all, just electronically Delta or pocket the difference between ZIRP borrowings and US Treasuries, Global Debt, Utilities, and anything else with an Electronic Yield of course this is an overall deflationary effect on the economy. The entire chase yield trade which is in the Trillions is a counterproductive, inefficient and poor use of capital allocation which only stunts long-term economic growth. What the Fed doesn`t get is that once you normalize interest rates you get healthy capital allocation strategies which boost economic growth because they are not strictly Electronic Transactions, but transactions that actually have knock on effects that add to other parts of economic growth, and thus they are growth driving and inflationary in nature. If the Fed truly wants inflation like they always make an excuse for why they need to print more money, just raise interest rates and that is the fastest way to get real inflation once you hit the zero-bound level, see Japan for the best example of the self-fulfilling policy of lower interest rates actually being deflationary, and not inflationary.
If the Fed Really Cares about Raising Inflation Expectations, then they need to Raise Rates
The Federal Reserve has this all backwards! If they want to create inflation they need to raise interest rates off the zero-bound level period! What does the Fed have to lose [besides their whole Reason for Existence I know], but try normalizing rates and then examine the results, because we know low interest rates and QE hasn`t worked, or they wouldn`t have to be re-initiated in the form of additional QE Programs, and we wouldn`t still be having this entire conversation 7 years after ZIRP began. So enough of the excuses from these dovish Fed members, End QE, Never bring back QE Programs, and normalize interest rates ASAP, and stay the hell out of financial markets forever! Your only job is show up at economic conferences and raise and lower the Fed Funds Rate between 3.5 and 5.5%, and that is it! San Francisco Fed’s John Williams is an absolute idiot, and representative of why so many market participants have lost all deference for the Federal Reserve and their incompetent monetary policies.
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Submitted by Helen Thomas via Blonde Money blog,
So far, volatility has moved from FX markets into equities, as Blondemoney warned in mid-September, but the bond markets had been relatively well behaved. The white line in our cross-asset vol chart is only just starting to tick up, while the equity measures veer off into panic territory:
That equity market panic is feeding into lower bond yields in a classic “flight to safety” way. This price action might feel reassuring to investors. After all, when bonds and equities were rallying at the same time, something didn’t feel right. Now they’re moving in opposite directions, there’s a sense that it makes more sense. However the comfort is likely to be short lived. We might miss the greater dangers if we’re looking at the wrong measures, as discussed in what happens when vol eats itself.
It’s generally considered that higher volatility in bond markets would accompany higher rates. Thus, if rates are falling, volatility will remain subdued. Certainly if you look at the correlation between the US 10 year yield, and the MOVE index (the measure of US Tsys 1month implied option volatilities), there’s usually a positive relationship. i.e. when yields go up, vol goes up. Here’s a chart of the correlation over the past 4 years:
But of course, the past 4 years may not be the best representative sample. As we know from the financial crisis, at times of stress, ‘unusual’ things can happen. As the CFO of Goldman Sachs said in 2009, what happened to financial markets then was a ’6 sigma event’ – it looked like something almost impossible in terms of standard deviations (or sigma for those who fell asleep during the greek bit of their statistics class). Yet it still happened. Here’s the same chart for the financial crisis period:
Now the line is downward sloping – there was indeed a negative correlation, where lower yields led to higher volatility.
Even if you don’t like statistics (and even Blondemoney was forced to write her A Level Stats project on Manchester Utd results to make it palatable), the intuition is clear. If you’re in a more stressed or panicked environment, the flight to safety is so strong that bonds are bid, their yields fall, but volatility goes up.
Now, Blondemoney is an optimist, and doesn’t for one second think we’re in a Lehman redux. In fact, once the dust has settled on the current panic, the market will realise that these kinds of corrections are normal, that volatility is back, and that that’s OK. But we’re not there yet. We’ve all been worried about a bond market blow up for some time. Even the RBA Assistant Governor Debelle warned last night with specific reference to the fixed income market that “The lower liquidity is not evident in a rising market when assets are being bought, but will quickly become apparent in a down market as investors try to exit their positions”. But what if, as Albert Edwards said, the poor liquidity manifests itself in falling yields?
As the PIMCO Eurodollars liquidation showed, the market was already short. So the position liquidation is coming in a rally, rather than a sell-off. On top of that, inflation is falling and with oil under pressure should remain low. Meanwhile the Fed hawks evidently lost the argument to the doves in September, and their hand has been strengthened by the dollar rally. So the conditions are set for higher vol to accompany the fall in rates.
via Zero Hedge http://ift.tt/1yF2KWr Tyler Durden
4 weeks ago this is what President Obama said “the chances of an Ebola outbreak here in the United States are extremely low.”
Today, having reassured Americans that “Ebola is not like the flu, it’s not airborne,” (despite experts’ concerns that Ebola could indeed be aerogenically transmitted) Obama stated that a “widespread outbreak of Ebola in the US is ‘unlikely’“
From “Extremely Low” to “Unlikely”… in a month.
Additional points:
via Zero Hedge http://ift.tt/1wJU1Of Tyler Durden
Via Scotiabank's Guy Haselmann,
Several times today, I was asked if or when I thought the Fed would begin QE4. The answer is ‘never’ (pending a disaster); although I guess the more prudent answer is to say the chances are ‘infinitesimal’. It is counterfactual to know with any certainty what would have happened if the Fed had not done QE3; however, it is easy to make a few observations that suggest QE is a failed policy, or at least a policy that has reached its saturation point. Let’s review a few of them.
As I mentioned in my note yesterday, QE was intended to spur aggregate demand to deal with over-indebtedness. This implies that, under this metric, successful QE should have decreased debt-to-GDP levels. In fact, sovereign and corporate debt-to-GDP levels have risen substantially. (To be fair, household debt has fallen quite a bit, but that is likely due to demographics. Yet, household debt-to-GDP remains well above the average of the 20th century.) Large increases in debt will borrow from future growth and act as an economic headwind.
QE intentionally encouraged asset price inflation with the intent of having ‘the wealth effect’ spill into the broader economy. The plan was to eventually hand off the support for QE-fueled lofty asset prices (and sinking risk premiums) to strong fundamentals backed by robust economic activity. The trouble with markets today is that the latter never materialized and QE is now ending at the same time that perceptions for growth and inflation are ratcheting lower.
QE policy has also amplified inequality which is a factor that should not be dismissed too quickly. Inequality is an economic headwind. Historically, when it becomes too extreme, very bad things can result. A QE policy that makes the rich richer could not happen at a worse time, given popular dialogue; and combined with the effects of globalization and technological advancements.
The Fed’s policy of financial repression sends the wrong signal. It punishes savers, such as pensions and retirees, while rewarding speculators and debtors. It is like giving my son ice cream after he yells at his mother and punches his brother.
Forward guidance has reached its ‘sell by’ date. It was initially used as tool to encourage risk-taking by collapsing the risk premium, and in turn, to provide a ‘put’ to risk seekers. However, after a prolonged period of time, investors have become callused. Prices have diverged too far from economic fundamentals. Investor and corporate confidence has become negatively impacted.
After all, if the Fed is so worried about the economy that they have to keep rates low for a very long time, then how can a corporation have enough confidence to want to begin a capital investment project? Shouldn’t a potential borrower (or consumer) wait to borrow until there is more visibility, knowing that rates will remain low for an ‘extended period’?
Conclusion: Many Fed policies have been, or have become, counter-productive. Events may certainly force the Fed to be ‘lower for longer’, but expecting some type of new stimulus measure is an exceptionally long way off. Should the Fed resort to ‘new’ measures, based on the comments above, the Fed might wish to veer in an entirely new and creative direction. (see ‘Macro-Prudential’ note from yesterday mentioning direct targeting of subsidized loans to select areas of the economy)
Market Comment
Fed policies and financial asset prices have recently reached their practical limits.
Until recently, many risky assets were perceived to be ‘safe’; because volatilities were low, prices seemingly ascended each day, and markets were overly-confident that the Fed would always do whatever was necessary.
Today, the end of QE, occurring simultaneously with a deteriorating view of the geo-political and economic landscapes, has conspired to call this perspective into question. Valuation and expectation recalibrations must occur accordingly.
“Insanity: doing the same thing over and over again and expecting a different result” – Albert Einstein
via Zero Hedge http://ift.tt/1sTDsRf Tyler Durden
Submitted by David Stockman via Contra Corner blog,
The last time the stock market reached a fevered peak and began to wobble unexpectedly was August 2007. The proximate catalyst back then was the sudden recognition that the subprime mortgage problem was not contained at all, as Bernanke had proclaimed six months earlier. The evidence was the surprise announcement by the monster of the mortgage midway – Countrywide Financial – that it would be taking huge write-downs on its $200 billion balance sheet.
At the time, it had not quite invented the term “fortress balance sheet” per JPMorgan’s later hyperbole, but the market overwhelmingly believed that the orange man—–Angelo Mozillo—-ran a tight ship; that the proponderant share of its business was in “safe” Freddie/Fannie originations and guaranteed paper; and that any losses from the sketchier subprime mortgage business that it had recently entered would be covered by its loan loss reserves and the massive earnings on its GSE book of business. Only now do we know that Countrywide was a house of cards that has cost(so far) its reluctant suitor, Bank of America, upwards of $50 billion in write-offs, losses and settlements.
It is in the nature of bubble finance that markets do not recognize disasters lurking in plain sight. Prior to the August 2007 swoon, Countrywide still had a market cap of $15 billion. Indeed, at that point the combined market cap of Bear Stearns, Freddie Mac and Fannie Mae, Lehman Brothers, AIG and GM, just to name the obvious, was upwards of one quarter trillion dollars!
Markets were most definitely not in the classic “price discovery” business. That is, they were not discovering information about the speculative rot under housing prices or the dealer lots bulging with unsold cars or freshly minted subdivisions where subprime residents were delinquent on both their mortgage and car loans or the adjacent strip malls that had no tenants and no customers.
Instead, the stock market had discovered the “goldilocks economy” – a pleasant place of subdued inflation, measured growth and perpetually rising stock and real estate prices. The most notable point was the belief that the Fed had delivered this salutary state of affairs owing to its enlightened management of the macro-economy, and that this condition could be sustained indefinitely.
Bernanke had somewhat immodestly called this the Great Moderation, and it was reflected in the stock market averages and the capitalization rates they allegedly embodied. Not incidentally, the market had risen nearly continuously for 55 months, and the “buy the dip” brigade of the dotcom era had come back from the dead. So dips got shallower and the setbacks less frequent.
That may sound like the recent past, and it was. The forward consensus of sell-side analysts was that S&P 500 earnings (ex-items) for 2008 would come in around $110 per share or at about 14X based on the July interim high of $1550 per share. Likewise, the NASDAQ had recovered from its thundering crash of 2000-2001 and had climbed by nearly 100% in the four and one-half years through early August 2007.
Needless to say, goldilocks turned out not to be all that. When the macro-economy buckled under the weight of crashing housing and real estate prices, a plunge in home and commercial real estate construction, a severe liquidation of auto and durable goods inventories and the evaporation of phony financial sector profits, the dips became a deathly plunge, and the “attractively valued” 14X market ended up something else altogether.
As it happened, S&P 500 earnings ex-items came in at about $55 per share for 2008, or half of Wall Street’s hockey-stick projections as of August 2007. And if honest accounting, as embodied in GAAP earnings reported to the SEC is considered, the outcome was only $15 per share.
Self-evidently, the stock market was no longer a discounting mechanism by the end of the second Greenspan Bubble in late 2007 when the Great Recession officially commenced. It had essentially become a casino where the hedge funds and day traders made short term bets in a rigged market. In effect, the Greenspan Put had become institutionalized by the liquidity flood that had accompanied the Fed’s slashing of interest rates from 6% to 1% during the 30 month period after the dotcom crash of 2000. There could no longer be any doubt, at least by the lights of Wall Street, that the central bank had a “put” under the market.
By now it seems indisputable that central banks “puts” are a magnificent elixir for stock market gamblers—so long as confidence is maintained and our monetary central planners have the tools and wits to short-circuit the “dips” before they become runaway crashes. In the section from the Great Deformation below, I described how the Fed reacted aggressively to thwart the correction that commenced in August 2007 when the subprime crisis began to manifest its ugly fangs.
As it turned out, the stock market rallied by another 10% before hitting a final peak in October 2007. Moreover, the Fed continued its campaign to put a floor under the market for another 11 months after the peak—even as the credit and stock market bubbles festered and the underlying macro-economy steadily deteriorated. During this interregnum, the Fed capitulated to Wall Street as symbolized by its panicked response to Jim Cramer’s famous rant described below.
But it was ultimately for naught. The market suffered a devastating 55% collapse in the 18 months after the unavoidable correction of the Greenspan Housing Bubble commenced in August 2007. Stated differently, central bank bubbles can be fueled and coddled for an extended period, but ultimately reality sets in.
So here we are once again, and it is once again claimed that this time is different. The 65 month rise of the S&P 500 bears all the hallmarks of a central bank fueled casino—- even more completely than the 2003-2007 run. Also once again, the market is said to be “attractively valued” and that next years earnings(ex-items) at $125 per share represent only a 15X PE multiple. So after the “healthy correction” of the past week or so, it is purportedly time once again to buy the dip.
Except this time is indeed different, but not in a good way. When Bernanke & Co. stalled off the August 2007 correction for nearly a year, they still had plenty of dry powder. The federal funds rate was 5.25% and the Fed’s balance sheet was only $850 billion.
But now, however, we are on the far side of the great monetary experiment known as ZIRP and QE. The money market rate is at the zero bound and has been pinned there for 69 months running—a stretch never before experienced even during the Great Depression. Likewise, the Fed’s balance sheet has grown by 5X to nearly $4.5 trillion—again a previously unimaginable eruption.
These conditions undoubtedly explain the “buy the dips” joy ride pictured above. And they also probably explain why actual LTM GAAP earning at about $102 per share on the S&P 500 are exactly where they were in the fall of 2007—-at the tippy top of the historic range at 19X. But no one cared then— nor apparently do they now.
But what is profoundly different this time is that the Fed is out of dry powder. Its can’t slash the discount rate as Bernanke did in August 2007 or continuously reduce it federal funds target on a trip from 6% all the way down to zero. Nor can it resort to massive balance sheet expansion. That card has been played and a replay would only spook the market even more.
So this time is different. The gamblers are scampering around the casino fixing to buy the dip as soon as white smoke wafts from the Eccles Building. But none is coming. For the first time in 25- years, the Wall Street gamblers are home alone.
CHAPTER 23
THE RANT THAT SHOOK THE ECCLES BUILDING
How the Fed Got Cramer’d
After climbing steadily for four and a half years, the stock market weakened during August 2007 under the growing weight of the housing and mortgage debacle. Yet in response to what was an exceedingly mild initial sell-off, the Fed folded faster than a lawn chair in a desperate attempt to prop up the stock averages. The “Bernanke Put” was thus born with a bang.
The frenetic rate cutting cycle which ensued in the fall of 2007 was a vir- tual reenactment of the Fed’s easing panics of 2001, 1998, and 1987. As in those episodes, the stock market had again become drastically overvalued relative to the economic and profit fundamentals. But rather than permit a long overdue market correction, the monetary central planners began once more to use all the firepower at their disposal to block it.
The degree to which the Bernanke Fed had been taken hostage by Wall Street was evident in its response to Jim Cramer’s famous rant on CNBC on August 3, 2007, when he denounced the Fed as a den of fools: “They are nuts. They know nothing . . . the Fed is asleep. . . . My people have been in the game for 25 years . . . these firms are going out of business . . . open the darn [discount] window.”
In going postal, Cramer was not simply performing as a CNBC commentator, but functioning as the public avatar for legions of petulant day traders who had taken control of the stock market during the long years Greenspan coddled Wall Street. What the Fed utterly failed to realize was that these now-dominant Cramerites had nothing to do with free markets or price discovery among traded equities.
AUGUST 2007: WHEN THE FED CAPITULATED TO FINANCIAL HOODLUMS
The idea of price discovery in the stock market was now an ideological illusion. The market had been taken over by white-collar financial hoodlums who needed a trading fix every day. Through Cramer’s megaphone, these punters and speculators were asserting an entitlement to any and all gov- ernment policy actions which might be needed to keep the casino running at full tilt.
If that had not been clear before August 2007, the truth emerged on live TV. The nation’s central bank was in thrall to a hissy fit by day traders. In a post the next day, the astute fund manager Barry Ritholtz summarized the new reality perfectly: “I have two words for Jim: Moral Hazard. Contrary to everything we learned under Easy Alan Greenspan, it is not the Fed’s role to backstop speculators and guarantee a one way market.”
Yet that is exactly what it did. Within days of the rant which shook the Eccles Building, the Fed slashed its discount rate, abruptly ending its tepid campaign to normalize the money markets. By early November the funds rate had been reduced by 75 basis points, and by the end of January it was down another 150 basis points. As of early May 2008 a timorous central bank had redelivered the money market to the Wall Street Cramerites. Although the US economy was saturated with speculative excess, the Fed was once again shoveling out 2 percent money to put a floor under the stock market.
This stock-propping campaign was not only futile, but also an exercise in monetary cowardice; it only intensified Wall Street’s petulant bailout de- mands when the real crisis hit a few months later. Indeed, on the day of Cramer’s rant in early August 2007, the S&P 500 closed at 1,433. The broad market index thus stood only 7 percent below the all-time record high of 1,553, which had been reached just ten days earlier in late July.
Ten days of modest slippage from the tippy-top of the charts was hardly evidence of Wall Street distress. Even after it drifted slightly lower during the next two weeks, closing at 1,406 on August 15, the stock market was still comfortably above the trading levels which prevailed as recently as January 2007.
Still, the Fed threw in the towel the next day with a dramatic 50 basis point cut in the discount rate. Although no demonstration was really needed, the nation’s central bank had now confirmed, and abjectly so, that it was ready and willing to be bullied by Cramerite day traders and hedge fund speculators. The latter had suffered a “disappointing” four weeks at the casino; they wanted their juice and wanted it now.
Needless to say, the stock market cheered the Fed’s capitulation, with the Dow rising by 300 points at the open on August 17. The chief economist for Standard & Poor’s harbored no doubt that the Fed’s action was a deci- sive signal to Wall Street to resume the party: “It’s not just a symbolic ac- tion. The Fed is telling banks that the discount window is open. Take what you need.”
The banks did exactly that and so the party resumed for another few months. By the second week of October the market was up 10 percent, enabling the S&P 500 to reach its historic peak of 1,565, a level which has not been approached since then.
Pouring on the monetary juice and signaling to speculators that it once again had their backs, the Fed thus wasted its resources and authority for a silly and fleeting prize: it was able to pin the stock market index to the top rung of its historic charts for the grand duration of about six weeks in the fall of 2007. There was no more to it, and no possible excuse for its panic rate cutting.
HOW THE FED GOT CRAMER’D
The Fed’s abject surrender to the Cramerite tantrums in the fall of 2007 was rooted in ten years of Wall Street coddling. Mesmerized by its new “wealth effects” doctrine, the Fed viewed the stock market like the famous Las Vegas ad: it didn’t want to know what went on there, and was therefore oblivious to the deeply rooted deformations which had become institu- tionalized in the financial markets. The sections below are but a selective history of how the nation’s central bank finally reached the ignominy of being Cramer’d by financial TV’s number one clown.
The monetary central planners only cared that the broad stock averages kept rising so that the people, feeling wealthier, would borrow and spend more. It falsely assumed that what was going on inside the basket of 8,000 publicly traded stocks was just the comings and goings of the free market— and that this was a matter of tertiary concern, if any at all, to a mighty cen- tral bank in the business of managing prosperity and guiding the daily to-and-fro of a $14 trillion economy.
But what was actually going on in the interior of the stock market was nightmarish. All of the checks and balances which ordinarily discipline the free market in money instruments and capital securities were being evis- cerated by the Fed’s actions; that is, the Greenspan Put, the severe repres- sion of interest rates, and the recurrent dousing of the primary dealers with large dollops of fresh cash owing to its huge government bond purchases.
This kind of central bank action has pernicious consequences, however. By pegging money market rates, it fosters carry trades that are a significant contributor to unbalanced markets. Carry trades create an artificially en- larged bid for risk assets. So prices trend asymmetrically upward.
The Greenspan Put also compounded the one-way bias. For hedge fund speculators, it amounted to ultra-cheap insurance against downside risk in the broad market. This, too, attracted money flows and an inordinate rise in speculative long positions.
The Fed’s constant telegraphing of intentions regarding its administered money market rates also exacerbated the stock market imbalance. By peg- ging the federal funds rate, it eliminated the risk of surprise on the front end of the yield curve. Consequently, massive amounts of new credit were created in the wholesale money markets as traders hypothecated and re- hypothecated existing securities; that is, pledged the same collateral for multiple loans.
The Fed’s peg on short-term rates thus fostered robust expansion of the shadow banking system, which as indicated previously, had exploded from $2 trillion to $21 trillion during Greenspan’s years at the helm. This vast multiplication of non-bank credit further fueled the “bid” for stocks and other risk assets.
Fear of capital loss, fear of surprise, fear of insufficient liquidity—these are the natural “shorts” on the free market. The paternalistic Dr. Green- span, trying to help the cause of prosperity, thus took away the market’s natural short. In so doing, he brought central banking full circle. William McChesney Martin said the opposite; that is, he counseled taking away the punch bowl, thereby adding to the short. Now the punch bowl was over- flowing and the short was gone.
Speculators were emboldened to bid, leverage their bid, and then to bid again for assets in what were increasingly one-way markets. As time passed, more and more speculations and manipulations emerged to capi- talize on these imbalances.
“Growth stocks” were always a favored venue because they could be bid- up on short-term company news, quarterly performance, and rumors of performance (i.e., “channel checks”). During these ramp jobs, which ordinarily spanned only weeks, months, or quarters, traders could be highly confident that the Fed had interest rates pegged and the broad market propped.
Financial engineering plays such as M&A and buybacks came to be es- pecially favored venues because these trades tended to be event triggered. Upon rumors and announcements, these trades could generate rapid replication and money flows. Again, speculators were confident that the Fed had their back, while leveraged punters were pleased that it had seconded to them its wallet in the form of cheap wholesale funding.
At length, the stock market was transformed into a place to gamble and chase, not an institution in which to save and invest. Since this gambling hall had been fostered by the central bank rather than the free market, it was not on the level. That means that most of the time most of the players won and, as shown below, the big hedge funds which traded on Wall Street’s inside track with its inside information won especially big and un- usually often.
Needless to say, frequent wins and hefty windfalls created expectations for more and more, and still more winning hands. As the Greenspan bub- bles steadily inflated—both in 1997–2000 and 2003–2007—these expecta- tions morphed into virtual Wall Street demands that the Fed keep the party going. Wall Street demands for a permanent party, at length, congealed into the presumption of an entitlement to an ever rising market, or at least one the Fed would never let falter or slump.
Finally, this entitlement-minded stock market became a blooming, buzzing madhouse of petulance, impatience, and greed. Cramer embodied it and spoke for it. By the time of his rant, the Fed had become captive of the monster it had created. Now, fearing to say no, it became indentured to juicing the beast. After August 17, 2007, there was no longer even the pretense of reasoning or deliberation about policy options in the Eccles Building. The only options were the ones that had gotten it there: print, peg, and prop.
One of the great ironies of the Greenspan bubbles was that the free market convictions of the maestro enabled the Fed to drift steadily and irreversibly into its eventual submission to the Cramerite intimidation. It did so by turning a blind eye to lunatic speculations in the stock market, dismissing them, apparently, as the exuberances of capitalist boys and girls playing too hard. By the final years of the first Greenspan bubble, however, there were plenty of warning signals that there was more than exuberance going on. Hit-and-run momentum trading and vast money flows into the stocks of serial M&A operations were signs that normal market disciplines were not working. Indeed, the M&A mania was a powerful indictment of the Fed’s prosperity management model.
These hyperactive deal companies with booming share prices were be- ing afflicted ever more frequently with sudden stock price implosions that couldn’t have been merely random failures on the free market. Yet, as in the case of the subprime mania, the central planners undoubtedly read the headlines about these recurring corporate blowups and never bothered to connect the dots.
via Zero Hedge http://ift.tt/1EZqFkZ Tyler Durden