Congratulations- you’re now on your own. You are the first class to have spent your time here in constant communication with family, friends and strangers. You are the Alone Together Class. Unlike the Graduates of 30 years ago the inflation rate is minimal and equity markets are on the highs. Employment opportunities, however, were slim for us and are for you. Under-employment was a career step for us, its a limbo for you. You are 10 times more indebted for your Chicano Women’s Studies degree than we were for our Economics place mat.
We designed the financial atomic bombs that the class a decade before you blew the world up with. Sorry about that. The world you are entering is the backside of the Credit Super Cycle. It’s your job to do for us what we did for the Greatest Generation. All you have to do is produce the longest running economic expansion of all time. Here’s a tip: Posting “selfies” on FB and playing Angry Birds ain’t gonna do it.
Here’s my advice: Get out of your phone. Engage as many working human beings directly as you can..everyday. Ask a ton of questions. Never pretend to understand an issue. Grow thick skin, fast. Fail. At all cost, smile and look people in the eye.
Since you entered school, the prevailing wisdom has been its better-and easier- to own the equity in the organizations you’ll be applying at than to work for them. All you have to do is convince HR that hiring you won’t constitute the top. Good Luck, we’re all counting on you.
We’ve heard a multitude of explanations for yesterday’s activity so here’s our twisted view. There is no actual functioning market for Gov securities. The “too much debt” myth has morphed into a paucity of collateral myth in a matter of months. We pose a simple question: Who is the alleged Treasury participant supporting market function? “The Banks”? Sorry folks, no longer in that business. Besides, they can get 25bps at the Fed.The truth is, there isn’t one (any).
Our sources tell us 1 (ONE-UNO) seller of mortgages appeared around the testimony and the bids disappeared. We documented a massive upsurge in speculative positioning last month. That positioning is also concentrating in a limited amount of ideas. Short the Yen, long the SP, long the 10 yr was a nearly universal speculative House of Worship. What happened yesterday? Someone had seen enough and the herd followed.
So don’t waste brain cells rationalizing market chaos. Ask yourself this question: In a casino capital market world, around what “table” will the crowd now congregate? The front running candidate is the Aussie Dollar but we are doubtful it can handle the capacity the Spec- Juggernaut demands. We’ve got more thinking to do here. One thing we know for sure, Macro Tourists travel in packs.
Everything important about the capital markets is happening in bonds.
The Bond market (and by that we mean treasury futures) has exhibited several weeks of significant action while the world focused on the Equity “Fall Up.” [The Upitulation in @Fearlicious speak]
Bonds had a Weekly Down (a higher than previous week high and settle lower on week) followed by a Negated Weekly Up (lower low, up on week, settle back below) and are now working right around the weekly again.
Above 132.02+ and 145 in Notes and Classics would constitute a weekly up and a sign to buy weakness Monday. However, Negated moves are MORE powerful (as last week showed) because the crossing takes participants out of positions prior to the actual settlement.
Today’s session is very important. Watch for activity to increase as/if those levels approach/breach.
IMF- Japanese banks hold 24% of JGBs (last Oct). According to BOJ a “1% yield increase” [we believe they mean a 100 bp parallel yield curve shift} would wipe out 20% of regional bank T1 capital.
The JGB is down 2.38% in the last 3 trading sessions.
What’s happening to the BOJ T1 capital?
Maybe TAPERING is just a euphemism for tempering future losses.
Granted, at a base level, we don’t care at the BOJ or the Fed (or the ECB for that matter). But, at an optics level, imagine the “insolvency” rants….
One of my early mentors was John Eckstein, he started Eckstein and Co. which became Discount Corp and then ran Dean Witter Governments from the WTC. John was a legend in the T Bill arbitrage space and “invented” the Year Bill contract. He passed away last year but left many grizzled Treasury Futures traders in his wake. I credit John with coining the phrase in markets, “falling up.”
As arbitrary levels of various equity indexes are crossed, we continually hear the “if not for the Fed, the market would not be here” caveat. To us, this is the most vapid and unenlightening comment of the quantitative regime. I do not recall an abundance of “The market’s only crawling sideways because of Volcker’s quantitative tightening” in the early 80′s. Our view, since 2008, has been a CB should embrace quantitative measures in inflationary/deflationary tails and rates targeting in the belly. And now, the difficult question: What metrics should alert policy makers that we have returned to the fat middle?
The ST Louis Fed (Dan Thornton white paper) explored this switch in 2004/2005. By close review of the minutes, the Fed deemphasized M1 and moved to a “borrowed reserve operating procedure” in Oct 1982. In the months that followed, with NO transparent and well advertised announcement, Fed Funds became the target metric. It was not until the Greenspan response to the 1987 crash that explicit targeting was universally accepted by market participants (nearly 5 years after the Fed’s official change).
So, as both Bulls and Bears tilt heads skyward and watch gap-jawed the equity fall up- How will the regime change? The CB infatuation with the policy myth of “Stability” and volatility repressing “transparency” are trapping the Fed in the QE Regime. Tapering is the “Let them eat cake” trial balloon of a regime that has over stayed its time. “Emergency measures” have morphed into common practice. Casual observers like to ask, “Where would the 10 year (or Bond) be if the Fed wasn’t buying it?” A much better question would be, “Where would the Funds Rate be if markets could set it?” We believe, for the first time in years, that rate is now “higher.”
Last year the US Gov. borrowed 173B in Q2. The estimate for this year was roughly 103B. Yesterday, thanks to increased taxes and sequestered spending, the Treasury said it would PAY DOWN 35B in debt from April to June. The first pay down since 2007,many in the game are unfamiliar with the activity. Several consequences jump out at us:
The present default position of the Fed’s LSAP has increased, or they need to TAPER a bit to maintain their present percentage of issuance take up. Market participants-some who vocally espoused the view-have not equated the rapidly falling deficit (and now slightly lower debt) with the robust index prices. We argued during the faux Deficit/Fiscal Cliff crisis that merely changing the direction of the trend and growing the economy (even at this slow pace) would be plenty for capital markets. It has been, but we now run the risk that private sector borrowing is not ready to make up the fall. On a practical level the paydown means TAXES are too high. What will be heralded as the fruits of a “balanced approach” is, in reality, the evidence of over-striding.
All of this plays into the debunking of Rein/Rog and the grass roots upheavals against austerity in other countries. As @groditi and I discussed yesterday the collateral shortage “story” will continue to bob around like Ben Gardner’s head. The good news remains essentially locked in the capital markets and very little leaks to the general economy. QE, as we have said before, is the Neutron Bomb of monetary policy-the assets are fine, the people are toast. We turn our calenders to May tomorrow.
Sidebar: Sallie Mae had to pull a 3.5% issue (225m) for lack of demand. That’s a failed auction in the largest public debt pool.
The 10 year future hit the upside objective at 133.11 (15+ high) and has retreated back below 1 number up. The settlement will be important for the new numbers tonight
1) River Monsters: Wade fishes the Chernobyl cooling pond.
2) Parts Unknown: Bourdain goes to Sizzler with David Choe, the artist who took FB stock for painting the office murals. (est value at IPO- 200m)