Tag: news

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Though the Fed is doing its best to mask its abject failure and lack of choices with public relations, the reality is it has no choice but to taper and eventually end its endless spew of credit and its unprecedented and destabilizing purchases of assets.

Many smart observers assume the Federal Reserve (and other central banks) can print money and buy assets like bonds, mortgages and stocks unconstrained by any limit. Indeed, at first glance, it seems like a closed circle: print the money and use it to buy bonds, mortgages and equities, which are booked as assets.

The more the Fed buys (or enables proxies and financiers to buy), the greater the assets value, as buying pushes prices higher.

After all, look what quantitative easing (i.e. buying assets like Treasury bonds and home mortgages) and zero-interest rates have done for the stock market: to the moon, baby!

And to housing: thanks to the printing press and buying mortgages, the Fed inflated an echo-bubble to soften the inevitable crash of the previous bubble:

On the surface, there are no intrinsic limits to QE and central bank money-printing:in other words, there appears to be nothing stopping the Fed from printing essentially limitless money and buying up the majority of Treasury bonds, mortgages and stocks.

But we must be mindful that the economy is not linear. Pushing asset prices higher via unlimited credit at zero-interest rates has not trickled down to wages or consumer spending. That is, the wealth effect is missing in action despite a $20 trillion increase in household net worth. (Most of this increase flowed to the top 10%, and within that, most flowed to the top 1/10 of 1%.)

Meanwhile, risky credit bets are soaring: subprime auto loans are now common, margin debt has skyrocketed and purchases of junk bonds have gone through the roof.

The Fed's printing and asset purchases do not occur in a vacuum. Fed printing and asset purchases affect the reserve currency, the U.S. dollar, and the Treasury market, which the Fed now dominates via its purchases.

Keeping interest rates near zero has removed any financial incentive to buying Treasury bonds other than flight to safety. As Stephanie Pomboy observed in her excellent Wine Country Conference 2014 presentation, (and I paraphrase here): "every day they continued QE, they chased away more and more of our foreign creditors."

The Treasury must sell bonds to fund the Federal deficit, which is running about $500 billion a year. The Treasury must also sell new bonds to replace the immense amounts of T-Bills that are maturing.

The more T-bills the Fed buys to keep interest rates at zero, the more it drives foreign and domestic buyers out of the Treasury market.

This is also true of the U.S. dollar. This sets up the Fed's Hobson's Choice, which is the term for an illusory choice, i.e. a choice in which only one option is offered.

If the Fed continues QE, it destabilizes the Treasury market that funds U.S. government deficits, and the hegemony of the U.S. dollar. If it ceases QE, interest rates will rise as non-central bank buyers will demand an actual return on their capital.

Rising rates will crush the echo bubbles in housing and the stock market, which has been propped up by dividend-paying stocks and speculative issues purchased with Fed-supplied "free money."

For the Deep State, there is no choice: dollar hegemony is paramount. Rising interest rates and the fate of financiers who have over-leveraged the Fed's free money are not even secondary.

Who Gets Thrown Under the Bus in the Next Financial Crisis? (March 3, 2014)

The Dollar and the Deep State (February 24, 2014)

Is the Deep State Fracturing into Disunity? (March 14, 2014)

The Fed believed that five years of free money and incentivizing risk would heal the economy. They were wrong. The real economy is more fragile and dysfunctional than ever due to the distortions created by Fed policies, while the top 1/10th of 1% have feasted on the asset bubbles inflated by these same policies.

Meanwhile, beneath the crony-capitalist celebration of new asset bubbles, the foundations of the nation's fiscal security–the Treasury market and the U.S. dollar–have been undermined and destabilized by these same Fed policies.

Those who focus solely on the Fed assume the ruling Elite is monolithic: unified in worldview, strategy and goals. I believe this is overly linear and overly simplistic: there are competing elites, and nations fall when their elites experience profound disunity.

Though the Fed is doing its best to mask its abject failure and lack of choices with public relations ("Pay no attention to what's behind the curtain!"), the reality is it has no choice to tapering and eventually ending its gargantuan spew of credit and its unprecedented and destabilizing purchases of assets.

via Zero Hedge http://ift.tt/1v2kGnE Tyler Durden

As we noted moments ago, the “old” VIX just hit record lows (and with the “new” one is just shy of single digits, it is hardly an indicator of imminent panic). Surely complacency rules, sentiment which is confirmed by looking at such indicators as intraday trading ranges and (even more) evaporating volumes, not to mention a Fed which explicitly is now involved in market “valuation” exercises following Yellen’s statement that the market appears fairly valued (she will surely advise when it is no longer fairly valued).

So is it smooth sailing ahead, with the market firmly under the control of the Fed?

For one possible answer we refer to the latest note by FBN’s JC O’Hara who looks at a different “fear” index, namely the Credit Suisse Fear Barometer. He finds that, at 37%, it has never been higher.

For a succinct explanation of what this far less popular indicator captures we use a handy definition by SentimentTrader:

EXPLANATION:

 

The CSFB is an indicator specifically designed to measure investor sentiment, and the number represented by the index prices zero-premium collars that expire in three months.

 

The collar is implemented by the selling of a three-month, 10 percent out-of-the-money SPX call option and using the proceeds to buy a three-month out-of-the-money SPX put option.  The premium on both sides will be equal, resulting in a term commonly known as a zero cost collar.

 

The CSFB level represents how far out-of-the-money that SPX put option is, or in insurance terms it represents the deductible one would have to pay before the put kicks in.

 

So, for example, if the CSFB is at 20, then that means an investor would have to go 20% out of the money to be able to buy a put with the proceeds from selling a call that’s only 10% out of the money.  That means there is more demand for put protection – a sign of fear in the marketplace.

 

The index would rise when there is excess investor demand for portfolio insurance or lack of demand for call options.

 

It differs from the Chicago Board Options Exchange Volatility Index or VIX. The VIX, calculated from S&P 500 option prices, measures the market’s expectation of future volatility over the next 30-day period and often moves inversely to the S&P benchmark.

 

The VIX is a fear gauge by interpretation, not by definition. It was designed to quantify the expectations for market volatility — a property that is associated with, but not always correlated to fear.

 

GUIDELINES:

The Fear Barometer doesn’t work as most of us expect it to.  It doesn’t necessarily rise as the market drops, or fall as the market rises.  In fact, often it’s the exact opposite.

 

The reason is because traders in S&P 500 index options are mostly institutional, so the options activity is often a hedge against underlying portfolios.  So when stocks rise, we often see more demand for put protection, not less.

 

It turns out that these traders can be pretty savvy short-term market timers.  So when we see a sharp upward spike in the Fear Barometer, it means that traders are quickly bidding up put options, and the S&P 500 often sees a short-term decline soon afterward.

 

Conversely, when we see a sharp contraction in the Barometer (and the Rate Of Change drops to -10% or more), then we often see the S&P rebound shortly thereafter.

In brief: when it comes to the “here and now”, which in the Fed’s centrally-planned market is driven almost excusively by momentum ignition algos, complacency indeed rules. But even the nearest glimpse into the near future, or rather how the present environment may disconnect with what may happen tomorrow, or next week, or, as the case may be, in three months, institutional investors are more concerned than ever before. But is this a confirmation that the US stock market is about to have its own “Dubai” moment?

The answer is unclear. Recall that it is the same “institutional” smart money that has over the past 5 years been hedged by shorting a hedge fund hotel of most hated stocks: the same stocks which as we have shown time and again consistently outperform the market, due to one after another furious short squeeze. Perhaps hedge funds have gotten tired of “hedging” (and generating losses, with hedge fund alpha virtually zero since the Lehman collapse) using cash products, and are now simply rolling over collared protection with every passing month as the stock market rises to recorder highs, well above levels that in 2007 precipitated a crash that nearly wiped out the financial system?

As for whether they are right, well: the best person to ask is Janet Yellen of course. Because with the Fed now permanently broken the business cycle (as any prolonged downturn in the economy will merely bring the Fed back out of hiding and bidding up risk assets), virtually nobody knows just how to trade this centrally-planned construct that the Fed has unleashed on the world.

As for the retail investors, not only do they not know, but as it is quite clear by now, they don’t care either.

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Before there was VIX, there was VXO (or "old" VIX) based on OEX calls and puts and trading all the way back to 1985. Because it covers the 1987 crash period, traders often use it as a more consistent gauge. While attention is focused on VIX being 'near' record lows; VXO has just broken below the crucial 9% level that has only been breached once before and has hit a record low. As Citi warns, this suggests that we are very close to if not at the cycle low (for volatility) – though as we noted yesterday, it is unclear if this is a 'good' low (melt-up in stocks) or 'bad' low (crash).

For only the 3rd time in its history the VXOhas broken below 9%. The first time it did this was December 1993 (8.86%) and then Jan 2007 (8.99%). It came very close in July 2005 when it went to 9.12%.

 

 

But this week it it hit all-time record lows… or record highs in complacency.

*  *  *

NOTE:

VIX:

The Chicago Board Options Exchange Volatility Index reflects a market estimate of future volatility, based on the weighted average of the implied volatilities for a wide range of strikes. 1st & 2nd month expirations are used until 8 days from expiration, then the 2nd and 3rd are used.

VXO:

The CBOE OEX Volatility Index reflects a market estimate of future volatility, based on the weighted average of the implied volatilities of 8 OEX calls & puts. (The nearest in & out of the money call & put options from the 1st and 2nd month expirations)

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In a rather stunning step for the West’s propaganda machine, ‘devil-incarnate’ Putin has asked the Russian parliament to revoke the right of military intervention in Ukraine. As The BBC reports, Vladimir Putin’s move was aimed at “normalising the situation” in the conflict-torn eastern regions of Ukraine, his press-secretary said. Ukraine added that this move was a “first practical step” towards settling the crisis in the east. Presidential spokesman Peskov said the move was linked to Monday’s launch of talks between Kiev and separatist leaders in the east (with the case-fire deadline ending Friday). One can only wonder, why now? for Putin’s gesture of peace? Cold showers enough in Kiev? Or is it that oil prices are high enough to help thanks to the Iraq situation and his Syrian ‘aid’ is needed as Ukraine festers?

 

Via The BBC,

Russia’s president has asked parliament to revoke the right of military intervention in Ukraine, where rebels have been fighting government troops.

 

Vladimir Putin’s move was aimed at “normalising the situation” in the conflict-torn eastern regions of Ukraine, his press-secretary said.

 

The parliament authorised Mr Putin to use force in Ukraine on 1 March.

 

Ukraine said Mr Putin’s latest move was a “first practical step” towards settling the crisis in the east.

 

In a statement, Ukrainian President Petro Poroshenko stressed that this came after Mr Putin had officially supported Kiev’s peace plan, which involved a ceasefire.

 

…

 

On Tuesday, presidential spokesman Dmitry Peskov said Mr Putin had sent a letter to the upper house of parliament, the Federation Council, asking to revoke the right of military intervention in Ukraine.

 

Mr Peskov said the move was linked to Monday’s launch of talks between Kiev and separatist leaders in the east.

So we have until Friday (when the cease-fire ends) to see whether this liftinmg of military force will stay and to figure out Putin’s sudden ‘Mr. Nice Guy’ game plan.

However, it appears things are moving a little beyond his and Ukraine’s control:

• *UKRAINE MILITARY HELICOPTER DOWNED NEAR SLAVYANSK, SKY SAYS
• *UKRAINE REBELS DOWN ARMY COPTER, KILLING ALL ON BOARD: AFP

One can’t help but wonder at the timing and theater of it all… Who stands to benefit from ending the cease-fire in such a gratuitous manner?

via Zero Hedge http://ift.tt/1wsHEH5 Tyler Durden

Moments ago, in what would be a clear escalation in the Iraq war, and confirmation that the US has finally gone “kinetic” as it warned on several occasions in the past it would, Iraq state-sponsored Iraqiya TV reported that US drones had struck ISIS targets near the Iraq-Syria border attack without giving details or saying how it obtained the information.

BBC Arabic has more:

U.S. planes bombed targets in the drone region based on the Iraqi-Syrian border, according to sources close to Iraqi Prime Minister Nuri al-Maliki.

 

U.S. President Barack Obama announced last week that Washington will be “specific strikes” of the armed militants, who control some Iraqi cities, if “this is required

 

On the other hand, there were conflicting reports from Iraq on the end of the battle for control of a major oil refinery in Baiji, Iraq, amid reports unconfirmed reports that Sunni insurgents have controlled it in the end.

 

An official in northern Iraq told the BBC that 160 soldiers defending the Baiji refinery and agreed to lay down their arms and leave their positions after mediation by tribal leaders in the region.

 

But an officer in the Iraqi army, located inside the refinery opposed these reports and said that the militants did not dominate, but the towers near the fence.

 

The Iraqi military spokesman has said – earlier – that the rebels were forced to leave the place. The refinery has been under siege ten days, with rebels repel attack more than once.

 

He says BBC correspondent in northern Iraq, said the control of the Baiji refinery is necessary that the rebels wanted to maintain control of the areas where they entered, and provide energy for the connector.

From the Pentagon’s Press Secretary John Kirby:

No truth to rumors in media today that US drones struck ISIL targets in Iraq.

— Rear Adm. John Kirby (@PentagonPresSec) June 24, 2014

Clearly someone is lying.

via Zero Hedge http://ift.tt/Ts64lx Tyler Durden

When it comes to critical housing markets in the US, none is more important than San Francisco.

Courtesy of its location, not only does it reflect the general Fed-driven liquidity bubble which is the tide rising all housing boats across the US, but due to its proximity to both Silicon Valley and China, it also benefits from two other liquidity bubbles: that of tech, and of course, the Chinese $25 trillion financial debt monster, where since the local housing bubble has burst, local oligarchs have no choice but to dump their cash abroad.

It is no surprise that during ever single previous bubble peak, San Francisco home prices managed to post a 20% annual increase, starting with the dot com bubble in the year 2000, and certainly the first (not to be confused with the current) housing bubble peaking around 2005.

Which is why, while today’s Case Shiller data was widely disappointing across the board, indicating a significant slowdown in price gains (and on a sequential seasonally adjusted basis, practically a decline), the one market we paid particular attention to was San Francisco. What we found is a red flag for everyone waiting to time the bursting of the latest housing bubble. Because after an unlucky 13 months of posting consecutive 20% Y/Y price gains, the San Francisco bubble appears to have finally burst, posting “just” an 18.2% price increase, the lowest since January of 2013.

So, has the global coordinated credit bubble burst? Judging by stocks, which just traded at their all time highs, ironically based on housing data from the West (as we just reported) not yet. As for the wealthiest buyers of homes, usually the best leading indicator of easy financial conditions: they appear to be quietly putting up for sales signs in front of their bay area mansions.

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