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"Macro" Musings

giofranchi

By giofranchi
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dcollon Enthusiast

dcollon

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Gio,

 

I'm glad you were able to watch it.  He was a lot funnier than I thought he would be.  It was the first time I had seen him present in person. 

 

I hope you had a chance to watch some of the other presentations as well.

 

Take care,

David

 

 

giofranchi Newbie

giofranchi

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Gio,

 

I'm glad you were able to watch it.  He was a lot funnier than I thought he would be.  It was the first time I had seen him present in person. 

 

I hope you had a chance to watch some of the other presentations as well.

 

Take care,

David

 

Yes! Of course, I also watched Mr. Lacy Hunt's presentation: a great scholar in the history of finance, teacher, and money manager! Fantastic speech! :)

 

giofranchi

dcollon Enthusiast

dcollon

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From Mark Grant at Southwest Securities:

 

I have long held the opinion that the markets, all of them, have been buoyed by what the Fed and the other central banks have done which was to pump a massive amount of money into the system. There are various ways to count this but about $16 trillion is my estimation. The economy in America has been flat-lining while the economies in Europe have been red-lining and while China has claimed growth their numbers did not add up and could not be believed.

 

In other words, the economic fundamentals were not supporting the lofty levels of the markets which had rested upon one thing and one thing alone which was liquidity. I have also stated often enough that the long awaited reversal would take place either due to an "event" or due to a change in the Fed's position where the liquidity was going to be stopped. In one of the clearest and most open meetings ever conducted by the Fed, in my opinion, they said quite clearly that the end to its liquidity operations was coming and while the postulated this and that if the markets did this and that the message was quite clear; we are going to unwind what we have we have done.

 

Yesterday was the first day of the reversal. There will be more days to come.

 

What you are seeing, in the first instance, is leverage coming off the table. With short term interest rates right off of Kelvin's absolute Zero there was been massive leverage utilized in both the bond and equity markets. While it cannot be quantified I can tell you, dealing with so many institutional investors, that the amount of leverage on the books is giant and is now going to get covered. It will not be pretty and it will be a rush through the exit doors as the fire alarm has been pulled by the Fed and the alarms are ringing. There is also an additional problem here.

 

The Street is not what it was. There is not enough liquidity in the major Wall Street banks, any longer, to deal with the amount of securities that will be thrown at them and I expect the down cycle to get exacerbated by this very real issue. Bernanke is no longer at the gate and the Barbarians are going to be out in force.

 

Yesterday was not pretty but today is likely to be worse. Gold is getting smashed, equity futures are down significantly, bonds are taking it on the chin and the only thing that is up is the Dollar. Then besides the Fed's announcement; China is a rose dying on the vine. Their overnight repo rate hit 25% as the fear is palpable in Asia between the collapse of the Everbright Bank and the antics in Japan. The yield on China's three year government bonds rose 12.5% last night while their flash PMI plunged to 48.2 which is the worst number in nine months.

 

Now you may be wondering what to do next. You will hear a lot of people in the media today saying that this is just a normal part of the market's cycle.

 

This is not the case.

 

The Fed has signaled its intentions very clearly. You should be taking profits, taking money off the table and building up your cash positions. Your supplier of opiates has just informed you that your drugs are going to get cut off and preparations need to be made because there is no other supplier of this opiated cash. You can accurately think of the world's central banks as a "cash cartel" and the distribution is being ended.

 

How bad it is going to be is uncertain but BAD, with capital letters, in my estimation. For four years we have lived on drug money supplied by the Fed and their colleagues and what the emperors' can give; they can take away.

 

Eventually Treasury yields will go back down because the Fed will be buying more bonds than the Treasury needs to issue but for now the "leverage issue" will overcome that reality. Mortgage rates will be heading higher, the Real Estate market is going to correct and the days of wine and roses are now behind us.

giofranchi Newbie

giofranchi

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I think that we should all agree that the first central banker in history was probably Christopher Columbus. Because when he left he didn’t know where he was going; when he arrived he didn’t know where he was; and he did that with somebody else’s money.

--Charles Gave

 

;D ;D

 

giofranchi

 

Phaceliacapital Newbie

Phaceliacapital

Posted
Posted

According to sell side brokers this is why the past few days have been bloody, MBS duration jumped from 3 to 7.

 

Anyone care to shed some details?

 

We heard the following:

 

Interest rates expected to rise ==> prepayments slow down ==> duration goes up ==> people that hold MBS pfs want low duration ==> they hedge by going short treasuries ==> rates go up

 

Too macro :D?

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giofranchi Newbie

giofranchi

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"Call My Bluff" by Mr. Grant Williams.

 

So, naturally, in the topsy-turvy world that exists through the looking glass of quantitative easing, the declaration by the Fed Chairman that the economy is gaining sufficient strength to be allowed to stand on its own two feet sent the market into a tailspin.

 

As you can see from the chart below, all was well until the Chairman began speaking to the press; and then, after a few gyrations as the market struggled to decipher Bernanke's words, it dawned upon the collective conscious that the free-money party might just be coming to an end.

 

And there, in a nutshell, is the corner into which the Fed and the other central banks of the world have backed themselves.

There is one reason and one reason only why the world's major equity markets are, for the most part, floating around their all-time highs: QE.

 

Period.

 

It has absolutely nothing to do with the strength of the underlying economy and everything to do with the corruption of traditional price signals that central banks have, in their desperation wisdom felt happy to allow in pursuit of rainbows and unicorns for everybody.

 

giofranchi

Hmmm_Jun_24_2013.pdf

Aberhound Newbie

Aberhound

Posted
Posted

http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ecofin/137627.pdf

 

Bail in preference. Management causing the failure gets priority over depositors. I note that it does not set out the preference between the non bail in creditors. Why would there be enough for even non bail in creditors? The wealth evaporates when the lending ends and asset prices drop. How will there be lending as depositors flee?

 

With 7 day interbank bank lending amongst the non bail in it looks like most interbank lending will change to overnight lending. I thought that in 2008 it was concluded that overnight lending caused the instability? The prevalence and vast amounts of overnight lending made it impossible to know in advance who was solvent or not.

 

Senior bank debt and cash are likely to get more popular as people sell the bail in classes like equity, preference shares, junior debt, unsecured debt and deposits.

giofranchi Newbie

giofranchi

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Albert Edwards: Is the Ice Age Over?

 

"Tapering is going to happen. It will be gentle, it will be well telegraphed, and the key will be to avoid a major shock to the real economy. But the Fed is NOT going to taper because the economy is too strong or because we have sustained core (wage) inflation, or because we have full employment - none of these conditions will be seen for some years to come.Rather, I feel that the Fed is going to taper because it is getting very fearful that it is creating a number of significant and dangerous leverage driven speculative bubbles that could threaten the financial stability of the US. In central bank speak, the Fed has likely come to the point where it feels the costs now outweigh the benefits of more policy."

 

David, thank you for posting this one! :)

 

giofranchi

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