I am he as you are he as you are me and we are all together
See how they run like pigs from a gun,see how they fly
I’ m Crying
Fear not purveyors of nonsense, a Fed tapering will not be the be all end all of the global financial markets. IF THE FED TAPERS IN DECEMBER, then it will be done with announcement of the Fed’s intentions to keep rates at the ZERO RANGE for an “extended period” based on a lowering of the unemployment threshold to 5.5 or 6 percent. The market action since the unemployment number on Friday has befuddled many as the BONDS and NOTES have rallied, stocks have rallied, the DOLLAR HAS WEAKENED and the PRECIOUS METALS HAVE RALLIED, a contradiction of conventional wisdom. Equity strength is the only anticipated outcome as “good news” finally convinces equity buyers that the rise in the S&Ps, NASDAQ and DOW are genuine as the economy is gaining some traction. But for the other asset classes confusion reigns. If interest rates are expected to rise with better data, the dollar OUGHT to be strengthening but yet the selloff continues with the EURO approaching 52-week highs and the British pound making two-year highs. Even the emerging market currencies have stabilized in the face of a projected tapering.
Either the market has been LONG DOLLARS in anticipation of the FED‘s move to shrink its QE program and is covering its positions before year-end, or the market understands that the PUNDITS are wrong about the outcomes from possible Fed actions. Compounding the confusion is the way the U.S. yield curves have reacted to Friday’s unemployment data.
The favored trade of Pimco’s Bill Gross has been the 5/30 spread (below), which the BOND KING has opined on buying 5 years and selling 30 years in anticipation of the Fed’s tapering moves, thus removing a large buyer from the long end while it asserts its power to keep SHORT RATES very low. The 5/30 steepener made highs on November 20 at 253.5 basis points but the surge in better economic data has seen the CURVE flatten to 237.5 today. The 2/10 CURVE (above) made its 52-week high on December 5 at 256.6 basis points and has since flattened to 250.7 as of today.
There has been a great deal of money made in the steepening of the curve and we may merely be seeing profit taking before year-end. Credit markets are always difficult in December because of the need for pension funds and insurance companies to adjust their positions. As always, I advise checking support levels on the yield curves to see where any type of correction OUGHT to hold. The same applies to resistance levels in the precious metals as year-end short covering may be the factor driving the buying in of profitable short positions. But, the weakness in the DOLLAR is a problem for that has been a momentum trade and its price action flies in the face of perceived wisdom, especially with the continuing problems in Europe.
There is much talk about the ECB and Brussels coming to a compromise, prompted by Berlin and Paris, on an EU-wide bank regulator and a single mechanism for resolving the problem of insolvent banks. I warn my readers to be cautious because the Eurocrats are trying to portray a positive spin to a very difficult problem. The Germans still do not want to absorb the legacy costs and desire for any resolution be for all credits beginning at a designated start date. Anything prior to the start date will be the responsibility of each sovereign regulator and central bank. And yet with continued uncertainty and a lack of growth in Europe the DOLLAR CANNOT RALLY VERSUS THE EURO. Things are getting curiouser and curiouser.
***Tonight’s title is a tribute to Richard Koo, who identified the depths of the 2008 as a BALANCE SHEET RECESSION, which would take many years to resolve. As banks and consumers both retrenched simultaneously it was incumbent upon the Fed and the government to do “whatever it takes” to counteract the contraction in demand and asset prices. While Bernanke was famously predicting no real concern about housing, Richard Koo and others were warning about the growth in credit to record levels, which would require a massive repair to the balance sheets of corporates and households. So, where does the Fed say we have done enough and now it is time to retreat and declare victory? Is there an end point to liquidity providing? I salute Mr. Richard Koo but I am at the same time waiting for PIGS TO FLY in anticipation of the Fed freeing itself from enslavement to its models. As Zerohedge reminded us today in its 10 worst economic predictions, on January 10, 2008 Ben Bernanke said: “The Federal Reserve is currently not forecasting a recession.” I’m Crying.