BOND SCARE - A LONG Supply and Demand Problem BUT Heavy SHORT Demand

Is This The Chart That Scared Bernanke Straight? 06-21-13 NY Fed via ZH

With the confusion over Bernanke's comments - "have no fear as the economy is bad enough that the Taper will never come" confused with "the economy is picking-up and that's great so we don't need the Fed anymore" - one has to ask, as we have numerous times, is there another reason for the Fed to start the ball rolling on the Taper talk? In the last few weeks, the Treasury market's yields have risen notably but much more critically, the fails-to-deliver has surged.

This critical indicator of both collateral shortages and technical carry trade unwinds is a little-discussed indicator of just how broken the market is thanks to the overwhelming ownership of the Fed. It's getting worse - as Barclays warns the weakness in bonds is feeding on itself as more people want to short and so the need to borrow from the Fed (as dealer inventory is so low) increases and raises the cost (special-ness) of that short.

Simply put, the main reason the Fed is tapering has nothing to do with the economy and everything to do with the TBAC presentation (rehypothecation and collateral shortages) and that the US is now running smaller deficits!!!

Source: NY Fed

BOND SCARE - Long Term Support Trendline Achieved

The Illustrated History Of High Yield 06-21-13 Zero Hedge

Buybacks, dividends, and M&A all depend on firms' abilities to borrow cheap. With leverage ratios rising (and micro fundamentals weakening) as we noted here, macro fundamentals deteriorating, and the visible hand of the Fed now lifting off the repressed neck of risk managers, we have a simple question - What Happens Next? Simply put, your glowing stocks cannot rally in a world of surging debt finance costs.

Remember - and it's important - there is no rotation that drives high-yield credit spreads wider without punishing equities. They are liabilities on the same capital structure and rise and fall in a highly correlated (well non-linear co-dependence) manner as the underlying business risk rises and falls. Do not, repeat do not, see high yield credit weakness as a sign of rotation to stocks - if the credit cycle has turned then stocks are set to fall. And bear in mind that while HY yields are at all-time lows, spreads are not and in fact being short stocks relative to credit makes more sense if you are you are a bear on the credit cycle here. The only problem being that the epic flows that sustained a credit market at non-economic levels for so long will exit in a hurry.

gordongtlong.com mark-up

BONDS - Retail Investors Running for the Exit

Mom-And-Pop Investors Are Dumping Bond Funds Like Crazy 06-21-13 Dr Ed's Blog via BI

In his press conference, Bernanke also specified, for the first time, that 7% is the jobless rate threshold that would mark a substantial improvement in the labor market. The Fed will start reducing its bond purchases later this year if this rate continues to fall toward 7% by the middle of next year, as anticipated by most of the members of the FOMC, according to Bernanke.

So the good news is that the economic outlook looks a bit better, with fewer downside risks, according to the FOMC. The bad news is that the 10-year Treasury yield is now up 69bps from a low of 1.66% on May 2 to 2.35% yesterday. The 30-year mortgage yield is up 62bps over this period to 4.18%. The most immediate impact has been a sharp drop in mortgage refinancing activity.

Another immediate impact is that retail bond investors are running for the exit doors as the Fed publicly lays out its exit strategy from ultra-easy monetary policy. The ICI reported huge estimated weekly net cash outflows from bond mutual funds of $13.5 billion during the week of June 12, following a $10.9 billion outflow the prior week. Unfortunately, those funds weren’t rotated into equity mutual funds, which had small net outflows totaling $2.0 billion those same two weeks.

EMERGING MARKETS - Bond Outflows Accelerating

Is This The Emerging Market Debt Blowup? The Race For The Exits Accelerates Again 06-20-13 BI

Emerging markets assets have had a rough go of it for several weeks now as U.S. Treasury bond yields have shot higher, but the past week especially was not kind to funds invested in EM.

In the week ended June 19, EM funds recorded a massive $2.6 billion in outflows, or 1.0% of assets under management.

That marks an acceleration of outflows from the previous week, when investors redeemed $2.5 billion from EM funds.

The big question is whether this is the start of a big blow-up in EM debt markets, which have seen massive inflows over the past several years as depressed bond yields in developed markets have sent investment capital into riskier credits in the emerging world in search of higher yields.

Deutsche Bank macro strategist Alan Ruskin reflects on this in a note to clients this morning:

The post-2008 cumulative $1 trillion+ private portfolio flows from the developed world to the EM world have a decision to make: Can they ride out the Fed’s very slow, well mapped out retreat from the easy money policies that have encouraged extreme yielding seeking? For those who wait, the additional yield accrued by waiting for any exit has the potential to be modest relative to the potential capital lost, unless there is a belief that the asset itself is already cheap relative to long-term value. Unfortunately, in a number of cases (the BRL would be a good example) even the long-term value is being reassessed lower, because independent of the Fed, growth in almost all major EMG countries has looked weak.

The Fed has only shaken half of the tree, because in the initial instance, developed private capital may exit EM assets, but EM central banks are loath to sell their reserves and exit developed markets. Initially, only one half of this major cumulative capital flow between developed country assets in the developing world, and, developing country reserves held in developed currencies unwinds. EM exchange rate then take the brunt of the adjustment, until EM central banks say enough is enough. So far EM central banks are only moderately smoothing exchange rate adjustments. When and if central banks become more active this may help EM exchange rates, but the price will presumably be paid in developed country assets notably the developed world fixed income instruments that developing central banks like. The private sector capital retreating from the EM world back to the developed world will likely have a very different risk propensity to the more passive investing style of central banks. Anything that roils developed bond markets will in turn surely feed back negatively on the appetite for EM assets.

This is one example where even in a world with considerable Fed guidance policy certainty can set in train forces that are hugely destabilizing, if they are perceived as a fundamental reversal of what has preceded it. The drawing out of the Fed exit plan by extending QE tapering could in theory smooth the above adjustment, but just as likely it will bring much of the adjustment forward, before creating additional volatility as the market tries to assess when developing market assets are genuinely cheap.

The chart below from Morgan Stanley shows the damage from fund outflows this week.

TAPER - The Fed is Unlikely to Taper

Don’t Fear the Taper 06-16-13 Read the full newsletter here. Featured articles include: My Deere, Market Shadows added agricultural machinery manufacturer Deere (DE) to our Virtual Value Portfolio. And When Tear-Gas Flies, It’s Time to Buy (buying EMF). Chart by Lee Adler of the Wall Street Examiner.

Quantitative easing (QE) programs, courtesy of the Federal Reserve, have pushed cash into Primary Dealer accounts at the fastest rate in history. This has been massively bullish for equities over the past four years, as the Primary Dealers used some of that cash to bid up equity prices. This will likely continue until the Fed significantly curtails or discontinues its QE operations. 

US stock indices have been marking time during the past four weeks gauging “talk” about whether Chairman Ben Bernanke will slow down his printing presses. Notwithstanding the rumors, we doubt that QE tapering is on the horizon.

In our view, unless the Fed stops funneling money to the Primary Dealers, which we deem doubtful, pullbacks in stock prices are likely temporary pauses along an upward path. Therefore, in both of our Virtual Portfolios (Value and Put Selling), we are remaining long and unhedged.

The Fed is Unlikely to Taper

America’s national debt now runs approximately $16.5 trillion. President Obama use his power to hold rates down because the cost of higher debt service would devastate his political agenda. 

Bernanke does Washington’s bidding so he is probably just ‘talking down’ market enthusiasm by leaking news of a coming ‘taper.’ In this fashion, he uses fear of reduced QE to contain equity prices without actually changing the Fed’s policy.

During the fiscal cliff debate in December 2012, people assumed tax rates would be much higher in following years. That precipitated an enormous amount of accelerated income and dividend payments that would have been made in 2013. Because of the higher income booked in Q4 2012, estimated tax payments due January 15, 2013, soared. This reduced the size of the expected Q1 deficit. 

Bernanke’s primary mission is to monetize the debt created by federal budgets that far exceed revenues. We see no way for the Fed to reverse course on QE regardless of the whispers to the contrary. 

The Fed has painted itself into a corner and there is no way to unwind the QE trade without debt service costs eating everyone alive. Unwinding would cause interest rates on U.S. sovereign debt to soar, because no one would buy debt at interest rates the government could manage. For every one percent rise in interest rates, there would be an estimated $80Bn in increased annual debt service costs at the federal level. The payment of interest would overwhelm all other spending.

In Love with TINA explains why stocks are attractive. There are no viable competing investments if you seek to protect your life saving’s long-term buying power. Absent a major change in policy, a full allocation to equities seems reasonable, as does avoiding fixed income. Bonds today are in a bubble, and a pop of the fixed income bubble is apt to be louder and more astonishing than anything we will see in the equity markets.

TAPER - Fed Trapped in a Box

Why the Fed Cannot "Exit" Successfully... Without a Market Crash 06-15-13 www.gainspainscapital.com Graham SummersBernanke claims the Fed can successfully exit its current strategy. He’s lying. Or he’s adhering too strongly to economics and ignoring human nature.

One of the easiest trades for financial institutions over the last four years has been to simply front-run the Fed during its QE programs.

After all, the Fed was literally broadcasting its intentions to the markets. So traders did what they do best and took advantage of this.

In this context, the second rumors begin that the Fed would taper its bond buying you should see bonds collapse as traders realize the game is up.

And if the Fed actually did taper or begin to implement a strategy that even resembled taking its foot off the gas… or God forbid exit, then we’d see a very rapid adjustment to reveal the “real” risk in the system and the “real” level at which rates should be.

Take a look at what happened to the 10-Year Treasury when rumors of “tapering” appeared:

The Fed cannot exit. It will claim that it can, but market reactions to any real exit will be disastrous. We’ve passed the point of no return. Bernanke’s best home is to retire before the music stops.

CHINA - Housing Bubble Restricting PBOC Actions

Is This Why The PBOC Is Not Coming To The Rescue? 06-20-13 BofAML via ZH

We have warned a number of times that China is a ticking time-bomb (and the PBoC finds itself between a housing-bubble rock and reflationary liquidity injection hard place) but the collapse of trust in the interbank funding markets suggests things are coming to a head quickly. The problem the administration has is re-surging house prices and a clear bubble in credit (as BofAML notes that they suspect that May housing numbers might have under-reported the true momentum in the market since local governments are pressured to control local prices) that they would like to control (as opposed to exaggerate with stimulus).

Via BofAML:

MoM price momentum holds the key

Looking at past few rounds of tightening since 2010, it appears to us that the primary consideration of the government is MoM price momentum, not YoY growth in price.

70-city average primary housing price growth MoM and volume growth YoY

70-city average home price growth YoY

This makes sense because potential buyers tend to be enticed to rush into the market if they feel persistent upward price pressure. Table 1 lists the timing and measures of the tightening policies since 2007.

Why we think prices may soon jump again

We suspect that May numbers might have under-reported the true momentum in the market. Local governments are pressured to control local housing prices so some of them have resorted to short-term administrative measures, e.g., Beijing might have suspended the launch of any new projects priced above Rmb40k/sqm (China Securities Journal, June 13). More important, monetary policy remains fairly accommodating, real business returns remain unattractive, while shadow banking products appear increasingly risky. As a result, we believe that it’s a matter of time till liquidity will return to flood the housing market.

The new administration should be tougher on property

The new administration has a five-year horizon.

In our opinion, it has two options with regard to the housing market:

1) to continue to handle it with kid gloves and run the risk of a property bubble bursting just when senior officials fight for positions in the next administration; or

2) to kitchen sink it, live with pain upfront and try to implement structural reforms – hopefully by year four or five, the economy will be on the mend.

Option 2 sounds more plausible to us.

and from Credit Suisse:

This ... has heightened systemic risk in the financial system, creating policy uncertainty and has further induced market volatility. By allowing the overnight SHIBOR to spike again, the market has a legitimate reason to ask whether the central bank has the will and ability to calm the interbank market which for us brings back the memory of the US government allowing Lehman Brothers to fail.

We have a few observations to offer:

1. SHIBOR hikes, or even bank failure in settling within the interbank market, happened before, with the latest events in 2011 and 2012;
2. There appears to be no bank run at the retail level as depositors seem calm, at least for now;
3. The liquidity crunch has occurred at the interbank market due to duration mismatch and the lack of policy response, but so far, neither have affected the real economy - large SOEs still remain cash rich while SMEs are struggling with liquidity;
4. How soon the turbulence can be resolved rests on the will of the central bank;
5. We believe that the State Council has the authority to stop this brinksmanship and probably has the political will to do so, should the situation go too far, but whether they can make a sound judgment on when is “too far,” only time can tell.

The length matters a lot more than the height of the rate spikes in the interbank market. We believe the elevated SHIBOR has not reached its end. The longer this lasts, the more likely that some banks may face serious liquidity issues and that would further undermine the creditability between banks, creating a chain reaction. It is our view that draining interbank liquidity at the interbank market could cause unintended consequences, at a time at which duration and risk mismatch among the banks are severe, account receivables in the corporate sector are surging, and the inflow of FX reserves is decelerating sharply.

As we noted here, while the PBOC may prefer to be more selective (option 1 above) with their liquidity injections (read bank 'saves' like ICBC last night) due to the preference to control the housing bubble, when they finally fold (which we suspect they will) and enter the liquidity market wholesale, the wave of reflation will rapidly follow (and so will the prices of precious metals and commodities).

CHINA - PBOC Squeezing Banks towards Reducing Speculative Risk

The Mechanism That Holds Chinese Banks Together Is Falling Apart 06-19-13 BI

China's seven day repo rose to a record high of 10.77% in Shanghai, the highest since March 2003, according to Bloomberg*.

Meanwhile, the one-day rate hit a record 12.85%. And Zerohedge reported that overnight repo hit 25%.

The liquidity squeeze in China first began ahead of the Dragon Boat festival earlier this month. Spikes in interbank rates are common right before holidays. But Diana Choyleva at Lombard Street Research said this is symptomatic of a bigger problem. She said

"Capital flows had become a more important driver of domestic liquidity conditions in China's managed exchange rate system."

In a new note to clients Bank of America's Ting Lu wrote:

"There are many factors behind the interbank liquidity squeeze that might be cited, but we believe that the ultimate reason is the central bank’s tough stance as the PBOC can practically provide unlimited liquidity to ease every squeeze if it wishes to."

Banks have been clamoring for a reserve requirement ratio cut. So why isn't the Chinese central bank stepping in? As we previously explained the People's Bank of China seems to be in no mood to support banks' constant demand for liquidity.

"It seems that the PBoC and some other regulators could be taking the opportunity of the tight funding conditions to ‘punish’ some small banks which had previously taken advantage of the stable interbank rates to finance their purchase of higher-yield bonds," wrote Lu.

Lu expects tight interbank liquidity conditions to last till July.

This also comes at a time when banks are required to meet their loan-to-deposit ratio requirement in filings to both the central bank and the China Banking Regulatory Commission (CBRC).

Earlier this week Fitch's Charlene Chu warned that China's credit bubble is unlike anything in modern history.

CHINA - Overnight Repo at 25%

China Interbank Market Freezes As Overnight Repo Explodes To 25% 06-19-13 Zero Hedge

It seems liquidity (or counterparty mistrust) is beginning to reach extreme levels in China as the nation's banking system is now quoting overnight repo transactions at 25%. The explosion in funding costs echoes the collapse in trust (and surge in TED spread) among US banks in the run-up to the Lehman bankruptcy. MSCI Asia-Pac stocks are down over 3% with China's Shanghai Composite -2.5% at seven-month lows.

• China’s 1-day Repo Rate Climbs to Highest Since at Least 2006
• MNI - CHINA OVERNIGHT REPO FIXING AT RECORD HIGH

China's bond market is also collapsing:

Yield on 3.1% govt bonds due January 2016 jumps 39 bps to 3.749%, biggest rise since notes were issued in January

China this week...

US in the run-up to Lehman...

Charts: Bloomberg

CHINA - Red Flags

China's Red Flags 06-19-13 Zero Hedge

China Flash PMI 48.2 (49.1 exp) - lowest in 9 months; worst 3-month plunge since Feb 2011.

Via Market News International:

HSBC chief China economist Qu Hongbin on June flash PMI (48.3 vs 49.2): "The HSBC China Flash Manufacturing PMI dropped to a nine-month low of 48.3 in June, following on the sequential reduction in both production and demand.
Manufacturing sectors are weighed down by deteriorating external demand, moderating domestic demand and rising destocking pressures. Beijing prefers to use reforms rather than stimulus to sustain growth. While reforms can boost long-term growth prospects, they will have a limited impact in the short term. As such we expect slightly weaker growth in 2Q."

The Macro data is almost as bad as it has ever been...

CHINA - Credit Fueled Growth

The Chinese Credit Bubble In Four Charts 06-17-13 BI

China's credit bubble is unlike anything in modern history, according to Fitch. Ambrose Evans-Pritchard of The Daily Telegraph reported that Fitch thinks the scale of Chinese credit is so massive that it can no longer grow out of its excesses. And the statistics are scary:

• "Overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis. 'They have replicated the entire US commercial banking system in five years,' she said."
• "The ratio of credit to GDP has jumped by 75 percentage points to 200pc of GDP, compared to roughly 40 points in the US over five years leading up to the subprime bubble, or in Japan before the Nikkei bubble burst in 1990."

In light of this, we put together four charts on China's credit bubble that you need to see.

FIRST up, the main bear argument on China: It is taking more and more credit growth to deliver less economic growth.

SECOND, the estimated outstanding Wealth Management Products. In China, wealth management products are popular, interest-bearing retail products that are backed by a hodge-podge of risky assets. They function as a replacement for normal investment/savings accounts, but are not guaranteed.

A crackdown on Wealth Management Products (WMPs) has seen WMP issuance slow in 2013. But Charlene Chu at Fitch writes that this continues to pose a risk to the banking sector because it accounts for a "sizable amount of funding."

"In Fitch's view, the primary risk centers on:

1. Cash payout pressure posed by WMPs' short-term nature,
2. Poor liquidity of underlying assets,
3. High mobility of WMP investors, and
4. Banks' mismatched assets and liabilities."

THIRD the rise in gross issuance which is close to 115 products a day.

FOURTH, the recent spike in SHIBOR, or the Shanghai interbank offered rate, which is an interest rate used among banks showed signs of liquidity stress in China.

SHIBOR is considered a useful proxy for liquidity in the Chinese credit markets, more specifically, the recent spike in Shibor showed a liquidity squeeze. In a new note, Morgan Stanley's Richard Xu writes that "SHIBOR and repo two-week rates did not ease significantly after the three-day holiday, and one-month rates even spiked by ~80bps, implying that the recent liquidity tightness is likely more associated with recent intense regulatory actions than holiday effect."

These four charts show the rise in China's credit bubble and the recent liquidity squeeze.

CHINA - Shadow Banking System Showing Signs of Implosion

Fitch says China credit bubble unprecedented in modern world history 06-16-13 Ambrose Evans-Pritchard, The Telegraph

China's shadow banking system is out of control and under mounting stress as borrowers struggle to roll over short-term debts, Fitch Ratings has warned.

CHINA - PBOC Wants to Hold the Line on Explosive Credit Expansion through A Liquidity Squeeze

China Banks Request Cash-Crunch Relief 06-17-13 WSJ

BEIJING—China's big banks are pressuring the central bank to free up funds to ease an unusual cash squeeze in the world's No. 2 economy, according to people familiar with the matter, illustrating a stark choice facing Beijing as it grapples with weaknesses in its financial system: add money to its system to help its lenders, or stay the course to rein in a rapid expansion of credit.

The Chinese interbank funding market has seen rates soar since early this month amid slowing foreign-capital inflows and banks' needs to fulfill investor obligations, among other factors. The squeeze is pushing up banks' funding costs and could impede a key source of funds for growth even as the economy slows.

In a further sign of tighter conditions, Agricultural Development Bank of China, a state-controlled policy bank, on Monday reduced by a third the size of its planned 26 billion yuan ($4.2 billion) bond offering. The Ministry of Finance, in a rare failure on Friday, was unable to sell all of the debt it offered at an auction.

The tight liquidity situation is leading to some calls from Chinese banks for the People's Bank of China to inject more cash into the market by lowering the share of deposits banks are required to set aside against financial trouble. The measure is known as the reserve-requirement ratio, or RRR. "Internally, we're hoping for an RRR cut by the end of Wednesday," said a senior executive at one of China's top four state-owned banks. The central bank didn't respond to a request for comment.

Some analysts, including Xu Gao at Everbright Securities Co. in Beijing, expect the PBOC to take measures to ease the liquidity crunch in the coming weeks. The central bank last cut its reserve-requirement ratio in May 2012.

The concern about a credit crunch comes at a time when Chinese officials are also trying to combat the opposite: a credit binge that dates from the stimulus spending of 2009. The two are linked, analysts say.

By trying to rein in the long-term credit surge, the PBOC may have produced a short-term credit crunch.

But any big intervention by the PBOC—which, unlike the central banks in the West, isn't independent of the nation's political leaders—would risk sending a signal that China's top leaders would rather sacrifice their goal of keeping on credit growth in favor of pumping up domestic economic growth. That would run counter to the remarks made by Chinese leaders in recent months. Premier Li Keqiang, for instance, has indicated that Beijing is reluctant to change its monetary- and fiscal-policy stance to counter a slowdown while pledging to press ahead with changes that could make the country's growth more sustainable.

"Right now, an RRR cut would be very controversial because that would signal a change in macroeconomic policy," said Li Wei, an economist with Standard Chartered in Shanghai.

Traders and economists cite a sudden reduction in foreign capital inflows— the result of China's recent crackdown on speculative money flows and of a slowing economy—as one of the main reasons for the ongoing cash squeeze.

That is because

• Companies aren't converting as much foreign currency into China's currency, the yuan, resulting in less yuan funds flowing into the economy.
• Adding to the shortage of funds is additional demand for cash so that banks can meet the obligations of repaying investors who hold some high-yielding investment products sold by banks, known as wealth-management products.

On Monday, China's benchmark seven-day bond repurchase rate reached 6.85% on a weighted-average basis, near its highest level since China started compiling the rate in 2006. The highest level, at 6.9%, was reached Friday. So far, China's central bank has appeared to be more willing to keep what it calls a "prudent" monetary-policy stance than to carry out operations aimed at easing banks' funding constraints. As part of the prudent monetary stance, the PBOC has been trying to stem a surge in credit that could produce a wave of bad debts and financial failures.

Total social financing, China's widest measure of credit that includes both bank loans and credit created outside formal banking channels, fell by about one-third to 1.19 trillion yuan in May from April, the second month of substantial decline. But the central bank still has a way to go to curb overall lending: In the first five months of 2013, total social financing was up 52% from 2012.

A commentary published on Monday by China's Financial Times, a newspaper backed by the PBOC, dismissed the prospect of a liquidity crisis in China's money market but said some individual banks suffered funding problems because they had relied heavily on borrowing short-term funds in the interbank market and exceeded regulatory limits on lending. The article also said banks should sort out the funding problems on their own and shouldn't count on the PBOC to step in to provide liquidity.

After the market close on Monday, the PBOC announced that it would sell two billion yuan worth of 91-day bills the next day. The bill sale means that the central bank would drain two billion yuan of liquidity from the money market, a negligible amount that would hardly sway the market but a signal that China's policy makers aren't yet ready to loosen the grip on money supply. Last week, the PBOC injected a net 92 billion yuan into the market, a small amount relative to Chinese banks' funding needs. Only 32 billion yuan in central-bank bills and other notes are due to mature this week, meaning the PBOC would have to inject extra liquidity if it wants to improve the funding situation significantly. "Through the events over the past week, we think the PBOC has made it clear that overly rapid credit expansion would not be accommodated, and that the PBOC still focuses more on the quantity of credit and money supply rather than on short-term interest rates," said Wang Tao, an economist at UBS AG.

"In other words," Ms. Wang said, "if banks let credit growth go too fast, the PBOC doesn't mind the spike in interbank rates in order to rein them in." The recent cash crunch may lead to banks trimming their credit exposure and manage liquidity more prudently, she added, even though "there is a small risk that this could lead to a credit crunch in the short run."

HEADLINES - The Financial Times Headlines Tell An Interesting Story

THERE IS A GLOBAL CREDIT SHOCK OCCURRING

THE EU BANKS ARE ON THE PRECIPOUS!

• EU fails to agree on bank bailout rules
• Eurozone fund empowered to support banks
• EU struggles to unlink banks from states
• Brussels bank plans clash with Berlin
• Investors pull more money from EM funds
• Emerging markets feel effect of US Fed
• Global sell-off raises turbulence fears
• Bernanke sees 2014 end for QE3
• Fears grow over EM sovereign bond bubble

 

• Treasurys slide in worst week since 2009 MW
• CME raises initial margins for gold by 25% ~  Gold sheds nearly $100 on the week
• Ten-year Treasury yield of 2.5% is first since 2011 MW
• Time to sober up as America and China remove punch bowl Pritchard
  The authorities in the world's two biggest economies appear determined to strike a blow against moral hazard and clear the froth in asset markets, at least until this exhibition of virtue blows up in their faces.
• Bond market sell-off causes stress in $2tn ETF industry FT (Via Google)
  A wave of selling caused many exchange traded funds to tumble below the value of their underlying assets...
• Bond Auctions Fail From Russia to Korea as Brazil Protests Rage BL
  Developing nations around the world are scaling back or canceling billions of dollars of bond sales as borrowing costs climb the most since 2008, just as spending needs increase amid slowing economic growth
• Debt Sales Halted in U.S. as Companies Weigh Fed Taper Prospect BL
  Bernanke suddenly no friend to big bond fund The losses inflicted across all fixed-income assets since Bernanke signaled on May 22 that the Fed could soon dial back its $85 billion a month in bond purchases have been deep...

CREDIT CYCLE - HY Leading the Way

What A Correction Could Look Like 06-18-13 Morgan Stanley via ZH

While disappointment from the FOMC's comments tomorrow may not be enough to create 'the big one', it is perhaps worth a look at the more meaningful corrections over the last 10 years in equity and credit markets for some sense of context for what is possible. So far, it is clear, especially given today's equity rally (and ongoing credit weakness) that the consensus of the equity herd are not expecting disappointment tomorrow - while credit markets are preparing for the 'flow' to slow.

Credit markets are well on their way to a 'normal' correction...

But stocks remain notably confident relative to previous corrections...

and the divergence is becoming clearer...

and continues today...

Charts: Morgan Stanley

CREDIT CYCLE - Reversal Ahead

Is The Credit Cycle Over? 06-18-13 Zero Hedge

No matter how much pushing on the market- or economic-string a central planner tries, eventually the risk-based pricing of credit (as opposed to nominal price based stocks) turns the corner from accepting rising leverage as potentially good thing for growth to worrying that cash flows are at risk from an over-generous management transfer to shareholders. The four-year bullish period of this credit cycle is nearing its historical average and leverage is near its cycle highs with near record numbers of firms raising leverage YoY suggesting the credit cycle is over.

Leverage is rising...

and pretty much every other credit metric is deteriorating...

and the credit cycle is getting long in the tooth...

It seems the only factor driving credit from not being wider based on these leverage and cycle indications is the 'flow' from the Fed. We suspect that is what has created the weakness in bonds recently (even though we note that cash bond markets have not weakened as much as CDS since managers are preferring to hedge than cover for now - since, quite bluntly, they know that if they all collaborate and don't sell then everything is fine but once one manager decides to cover instead of hedge, the small doors and large crowds will see major liquidity gaps appear in HY credit).

GLOBAL ABENOMICS - A Reversing Wealth Effect May Force OPMF

The Wealth Effect Shifts Into Reverse 06-20-13 John Rubino Dollar Collapse blog

Stripped of all the acronyms and economist-speak, government policy of the past few years has been simple: lower interest rates to push people out of cash (which yields nothing) and into stocks and houses. And then, when those assets go up enough to make their owners feel rich, hope that this paper wealth translates into a willingness to max out credit cards and take out car loans.

This propensity to borrow and spend more when your investments are rising is called the wealth effect, and by early 2013 it seemed to many that America’s “normal” debt-driven consumer society was reviving and that we might, after all, be able to maintain our military empire, welfare state, big houses, SUVs, massive banker year-end bonuses, easy incumbent reelections, etc, etc, without any prioritization or hard choices.

Nope. It turns out that the laws of economics can be bent but not broken. You can’t have a vibrant, growing economy AND interest rates near zero AND a stable currency at the same time. One of these has to give. And in the past month interest rates have started moving back towards historically normal levels.

Rising interest rates are incompatible with housing and equity bubbles, and the air is now leaking from both. As this is written on the morning of June 20, global stock markets are down big. And US housing, which in some markets was approaching 2007-esque levels of speculation, has hit a wall, at least based on mortgage applications:

Mortgage applications tumble as rates rise further: MBA

(Reuters) – Interest rates on home mortgages rose last week to hit their highest level in over a year, sapping demand from potential homeowners, data from an industry group showed on Wednesday.

Rates climbed 2 basis points to average 4.17 in the week ended June 14, according to the Mortgage Bankers Association. It was the highest level since March of last year.

After hovering around record lows, rates have surged for six weeks in a row, pushed higher by worries that the Federal Reserve could slow its stimulus program sooner than had been expected. Rates have accelerated by 58 basis points since the start of May.

The Fed’s bond purchases have kept borrowing rates, including mortgages, low. Though mortgage rates remain low by historical standards, the ultra-cheap mortgages have helped lure buyers back into the market and worries have crept in that higher rates could disrupt the still-young housing recovery.

The rise in rates appeared to hold back homebuyers as MBA’s seasonally adjusted index of loan requests for home purchases – a leading indicator of home sales – fell 3 percent. The gauge of refinancing applications slipped 3.4 percent, though the refinance share of total mortgage activity held steady at 69 percent of applications. The overall index of mortgage application activity, which includes both refinancing and home purchase demand, declined 3.3 percent.

And so the wealth effect shifts into reverse. Fewer people can afford mortgages, so home prices stop rising, making homeowners feel less rich. Stock prices stop rising (or, like today, start going down) and the record number of people who have been buying on margin see their exciting gains melt away. They feel both less rich and suddenly very stupid. Most of them will spend less, and the recovery will stop in its tracks.

Which means it’s time to think about the next big government plan to save us. Will it be a massive public works program? Expanded  QE? Maybe a major war? Whatever, it will have to be commensurate with the size of the now-global crisis. So, just a guess, but this time around it won’t be surprising to see a coordinated attack on deflation from Europe, the US and China. In other words, global Abenomics.

EM CRISIS - Will make the 1997 Asian Crisis Seem Like an Early Warning

Emerging markets displace Europe as fulcrum of world risk 06-05-13 Telegrpah, Ambrose Evans-Pritchard

There is a wicked double edge to the emerging-market boom that has so enthralled us for the past decade. The economies of these rising powers are by now big enough to shake the entire world if they come off the rails.

GLOBAL DELEVERAGING ACCELERATION - Developing Nations Feeling the Pain

Developing Crisis In The Developing World 06-15-13 John Rubino via The Dollar Collapse blog, via ZH

Things have been a little erratic lately here in US, but not really headline-worthy. The economy continues to grow, sort of, houses continue to sell and stock and bond prices fluctuate but can’t seem to follow through in either direction. We are not, in short, engulfed in any kind of crisis.

But out in the world, especially in once-hot emerging markets like Brazil and China, the story is very different. As Prudent Bear’s Doug Noland explains in his most recent Credit Bubble Bulletin:

Meanwhile, the “developing” market Bubble continues to unwind. As leverage comes out of the commodities, currency “carry trades” and developing stocks and bonds. And as capital flight becomes a more serious issue, the marketplace must ponder the consequences not only of what a faltering Bubble means for scores of markets and economies, there is as well the issue of developing central banks having to sell from their trove of Treasuries and bunds and such to finance a surge in outflows (“hot” and otherwise). There’s even this new dynamic where Treasury yields rise on days of global currency and equity market tumult. It’s been awhile...

I suspect that the global jump in yields (and CDS and risk premiums) has more to do with de-leveraging than it does with tapering worries. This dynamic has caught many by surprise. The speculators anticipated cleverly exiting their leveraged MBS and other trades based on their expectations for Fed policy. Now, there’s a tremendous amount of unanticipated market uncertainty.

Japanese policymakers have really mucked things up. The Nikkei sank 6.5% Thursday and was down 1.5% for the week. Perhaps it’s a little early to pronounce the BOJ’s “shock and awe” monetary experiment a failure. The yen rallied 3.5% this week against the dollar. Against the Philippine peso it was up 4.5%, versus the South Korean won 4.1%, the Indian ruppee 4.3%, the Malaysian ringgit 4.0%, the Indonesian rupiah 3.2%, the Argentine peso 3.9% and the Brazilian real 4.2%. Indonesia raised rates to support its weak currency. The yen “carry trade” (sell yen and use proceeds to buy higher-yielding instruments globally) is doling out painful losses – forcing the unwind of leveraged trades across many markets. I wouldn’t be surprised if the yen short is the largest short position in modern history. The yen bears are now running for cover – causing all kinds of havoc in the currencies and securities markets.

“Emerging” Asian markets are in the middle of an unfolding financial storm. Friday’s 2.1% gain cut the Philippine equities loss for the week to 9.2%. Even with Friday’s 4.4% recovery, the Thailand stock exchange ended the week down 3.4%. South Korea’s Kospi dropped another 1.8%.

Latin America is as well caught in troubling dynamics. Brazil’s currency (real) traded to a four-year low against the dollar this week – despite currency interventions and the removal of taxes on financial flows and currency derivatives. Brazilian equities were hit for 4.4% this week, increasing y-t-d losses to 19.1%. Mexican stocks dropped 2.4%, boosting y-t-d losses to 10.2%.

The Shanghai composite dropped 2.2% in a holiday-shortened week. China pegs its currency to the U.S. dollar, so we can’t look to the performance of the renminbi for much of an indication of flows or mounting financial market stress.

I have posited that China is in the midst of an historic Credit Bubble. I have over the years tried to explain how interrelated their Bubble is to ours. Our mismanagement of the world’s reserve currency led to 20 years of huge Current Account Deficits. A significant portion of the Trillions of associated IOU’s have made it onto the balance sheet of the People’s Bank of China, especially over recent years. And no Credit system and economy has gone to greater excess during the post-2008 global reflation. It was the “fledgling” Credit Bubble spurred to “terminal phase” excess.

If the “developing” economy Bubble has passed an important inflection point, then China is vulnerable. If “hot money” is leaving EM [emerging markets] then China should be susceptible. And, let there be no doubt, when China finally succumbs global economic prospects really dim – and prospects for some fellow EM economies turn downright dismal. Recall how the tightening of subprime finance gravitated to “Alt-A” and then worked its way to the “conventional” core. And when housing in general began to falter the bottom fell out of subprime.

This week provided a bevy of notable China-related headlines: From the Financial Times: “China Debt Auction Failure Raises Liquidity Fears;” “Fresh Data Highlight China’s Sluggish Growth.” From Bloomberg: “China Debt Sale Fails for First Time in 23 Months on Cash Crunch;” “China Local Debt Audit ‘Credit Negative,’ Moody’s Says;” “China’s Leaders Face Test of Growth Resolve After May Slowdown;” “China Export Growth Plummets Amid Fake-Shipment Crackdown.” From Reuters: “Fitch Warns on Risks from Shadow Banking in China;” “China Estimates Fake Trade Invoicing at $75 billion in Jan-April;” “China State Auditor Warns Over Local Government Debt Levels.”

The price of Chinese sovereign Credit default swap (CDS) “insurance” jumped from 92 to 113 in three sessions, before dropping back down to 98 on Friday. Chinese interbank lending rates have recently spiked higher – and there were even reports of several borrowers forced to pay up for increasingly scarce liquidity. There were debt auctions that did not go smoothly. The currency forwards market is showing some atypical downward pressure on the renminbi.

Many believe this newfound tightness in Chinese money markets can be easily resolved by liquidity injections from the People’s Bank of China. And perhaps Chinese monetary and economic managers still have things under control. If so, the same clearly cannot be said for many of their fellow “developing” policymakers. Capital flight is always extremely difficult to manage.

I worry that the world has never faced the possibility for such destabilizing flows and speculative de-leveraging. To be sure, global markets have never been as dependent upon the power of central bankers. And in my mental tallies of risk and complacency, I never envisaged they could so elevate in tandem.

So can the US stay placid when the rest of the world turns chaotic? Highly doubtful. There’s a market phenomenon in which one investment play blows up and forces those on the wrong side of the trade to dump their liquid assets to raise cash. Which causes the high-quality assets to fall as much or more than the junk. As Noland notes, the world’s premier liquid asset is the Treasury bond.

If the developing world’s need to raise cash is a factor in the recent spike in US interest rates, this implies a feedback loop in which rising US rates further destabilize emerging markets, forcing the sale of more Treasuries, and so on. Can the Fed stop this? Not unless it wants to buy up not just the newly-issued Treasuries as it does now, but the trillions of dollars of bonds that might be dumped once things really get going.

It’s important to understand that we’re here because for years the developed world in general and the US in particular have been exporting their problems to the developing world via monetary policy. We fund our overspending by creating a bunch of new dollars,  many of which flow beyond our borders looking for higher yields. They land in, say, Brazil, pushing up both local asset prices and the exchange rate of the real. So individual Brazilians see their cost of living rise while Brazilian exporters are priced out of global markets. This is the currency war that Brazil’s government has been complaining about.

Then the hot money flows back out, causing a different set of problems for a country that has spent the past decade trying to adjust to excessive capital inflows.

The result: some seriously fragile banks and over-leveraged companies and investors, any of which could trigger a nationwide crisis.

The same general process is at work in other major emerging markets, with each in its own way now posing a threat to the global financial system — at the pinnacle of which sit the S&P 500 and the Treasury market, looking an awful lot like Southern California real estate circa 2007.

CENTRAL BANKS - They are the Market

If Bernanke really shakes the tree, half the world may fall out 06-18-13 Ambrose Evans-Pritchard, The Telegraph

We no longer have a free market. The world’s financial asset prices have become a plaything of central banks and the sovereign wealth funds of a few emerging powers.

Julian Callow from Barclays says:

they are buying $1.8 trillion worth of AAA or safe-haven bonds each year from an available pool of $2 trillion.

Nothing like this has been seen before in modern times, if ever.

• The Fed, the ECB, the Bank of England, the Bank of Japan, et al, own $10 trillion in bonds.
• China, the petro-powers, et al, own another $10 trillion.
• Between them they have locked up $20 trillion, equal to roughly 25pc of global GDP.
• They are the market. That is why Fed taper talk has become so neuralgic, and why we all watch Chinese regulators for every clue on policy.

Investors seem to think Bernanke will indeed blink, or at least blink enough to put off the day of reckoning for another three month investment cycle, which is what hedge funds care about - DONE

• Fed would normally be cutting rates by 1.5pc under the Taylor Rule in these circumstances, not tightening,
• Fed comments seem to be suggesting a loss of nerve, or fear that QE has turned counterproductive,

  First we had a paper co-written by Frederic Mishkin – Bernanke’s close friend and a former board member – warning that is becoming ever harder for the Fed to extricate itself safely from QE, and the door my shut altogether from 2014.

  “Crunch Time: Fiscal Crises and the Role of Monetary Policy” said the Fed’s own capital base could be wiped out “several times” once borrowing costs spike. It said trouble could compound at an alarming pace, with yields spiking up to double-digit rates by the late 2020s. By then Fed will be forced to finance spending to avert the greater evil of default.

  Then we had the minutes of the Federal Advisor Council arguing that it is “not clear” whether QE is really boosting the economy, while the toxic side-effects are all too clear. It warned of “unsustainable bubbles” in asset prices. It said zero rates are pushing pension funds underwater on their liabilities, and even claimed that QE may be causing firms to defer investment.

  Since then the Bank for International Settlements has issued a full frontal attack on the credibility of QE, saying it “doesn’t work” and is doing more harm than good. Even the Boston Fed’s ultra-dove Eric Rosengren has talked of early tapering, a clear sign that the Fed’s centre of gravity has shifted.

Jan Loeys from JP Morgan in a note last week:

In Fed hiking cycles over the past half century, 10-year US Treasury yields on average bottomed some 6 months before the first rate hike. In the current cycle, where rate cuts have been complemented by large-scale asset purchases, the end of the easy money period is harder to define. It is surely well before the first rate hike.

The end of the current easy money regime is set to have a bigger impact than previous ones as the current one will have lasted much longer and was much more extreme.

We have learned from past regime changes that the longer they last, the more the market will have got used to them, and could even be said to become leveraged and addicted to the old regime.

In addition, after major regime changes, we find that the leverage to the old one was each time much larger and in different places than most of us had assumed. A regime change is like shaking a tree and having no idea who or what will fall out.

Brazil, South Africa, and Turkey, are already falling out. Any other candidates?

gordontlong.com article support addendum - reference

Rate Hikes being priced increasingly soon...

MINSKY TRAP - The longer QE persists, the greater the magnitude of the ‘left-tail’ event

"A Classic Minsky Trap Appears To Have Developed" 06-19-13 Guy Haselmann of ScotiaBank via ZH

Data show quantitative easing (QE) is having ever-diminishing economic benefits while the risks to financial stability accumulate the longer the program endures. Inevitably, there is a point in time when the costs outweigh the benefits.

Determining that point is critical, and some believe it may have already passed.

When the Federal Reserve’s current asset purchase program was initiated, both the necessity and scope of it were questionable. Inflation was stable and near the Fed’s target. The unemployment rate had already fallen steadily to 8.1 percent in the second half of 2012 from a high of more than 10 percent in 2009.

The program’s $1 trillion per year in asset purchases equates to the annual GDP of Belgium and Norway combined. The FOMC justified the  open-ended program by pointing to the unacceptably slow pace of the recovery, thereby tying its lifespan and magnitude to making “sufficient progress” toward economic targets.

Focus was purposely directed toward economic benefits, rather than risks, because benefits are easier to explain and ‘guesstimate’ using econometric models. However, large errors can occur in those models, due to the vast complexities of interconnected markets and economies.

Unfortunately, unquantifiable and unintended consequences from the enormous ballooning of the Fed balance sheet may be on the horizon.

Recent market volatility might be a warning sign to the FOMC about the extent of risk-taking (which QE policies encourage), and how the market will react when its exit strategy finally materializes.

Even with the present sub-optimal economic growth, the Federal Reserve may decide to announce tapering of asset purchases as soon as today. After all, the FOMC can claim success at having ‘made progress’ toward their stated goals. At last September’s FOMC meeting, their central forecast for the unemployment rate for the end of 2013 was 7.75 percent. The May rate has already fallen to 7.6 percent.

For the past several years, a firmly entrenched psyche of ‘win-win’ for risk-taking behavior has dominated. The thinking has been that the Fed would either help achieve a sustained recovery (allowing distorted prices to be validated by economic fundamentals), or the FOMC would provide more price-boosting liquidity. Now, faith in this proposition is slowly being eroded.

Global central banks have collectively provided $11 trillion in liquidity over the past several years.

The initial moves were taken to spark domestic demand, but some recent external actions have been retaliatory in nature, implemented as a means to influence currency levels. These new forms of hostilities are indications that the external ramifications of QE policies may no longer be passively tolerated.

While offsetting actions by non-U.S. entities may not influence the FOMC, they are aware that currency disputes lead to trade disputes, and that protectionist pressures are a great risk to a highly globalized economy.

Invoking the motto, “Don’t fight the Fed,” has rewarded investors. They have ‘reached for yield’ and ‘chased risk’ to take full advantage of the implicit ‘Fed put’. FOMC speeches have hinted at speculative excesses. It has not gone unnoticed that NYSE Margin Debt has risen to all-time high levels. The problem is that as asset prices have veered far from economic fundamentals investors, enjoying ‘right-tail’ benefits, have been lulled into complacency.

A classic Minsky Trap appears to have developed. When market participants sense the Fed’s unwind is beginning, they (and the central bank) may be surprised by the extent of the reversal.

Regulatory constraints may compromise market liquidity during ‘fed-piggybacking trade’ unwinds, leading to a harsh ‘left-tail’ overshoot.

‘Tapering’ earlier might be better for markets in the long run. An early ‘taper’ would allow officials to regain a unified voice and control the market message. They could then emphasize the extraordinary amount of accommodation that they are still providing in an effort to calm markets.

Moreover, a slower pace of asset purchases of, say, $60 billion would allow the FOMC to increase it back to $85 billion should the economy slow over the next few months. Without a slower pace now, the FOMC may run into credibility issues about the program’s efficacy at the same time an increase in purchases might be expected. This would further exacerbate funding stresses and fears of financial instability.

The longer QE persists, the greater the magnitude of the ‘left-tail’ event that is growing in probability. Continuing to provide massive stimulus for a growing economy will turbo-charge the ‘reach for yield’ and ‘chasing of risk’, leading to financial instability.

RISK - We May Have Reached a Risk-Off Leverage Pivot

More To Come Mark J. Grant, author of Out of the Box via ZH

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.
 
The party is over!
 
"It's my party, and I'll cry if I want to

Cry if I want to, cry if I want to

You would cry too if it happened to you"
 
             -Lesley Gore

TAPER - Why is the Fed Talking TAPER?

What The Fed Is Looking At 06-17-13 Bloomberg via ZH

A sense among investors that the global economy is unraveling has injected tremendous volatility into the markets.

Bloomberg's Rich Yamarone: "if the global equity market decline is not a “Sell in May” event, but the beginning of a great unwinding, then the economy, skating on thin ice, may be even more susceptible to recession."

Given all of this 'weakness' (or missing of Fed benchmarks - that the Fed is well aware of,) why would so many members have been out discussing 'Taper' if it were not due to their concerns of broken markets and bubble conditions.

Via Bloomberg,

• WORLD BANK reduced its global economic forecast to 2.2 percent in 2013 – from a previous 2.4 percent estimate, and lower than the 2.3 percent performance in 2012.
• COMMODITIES: The bifurcation between the CRB index and the S&P 500 first appeared in December 2012. The S&P 500 now looks as if it will rejoin the commodity benchmark.

• US GDP REDUCTION: Economists polled by Bloomberg forecast U.S. GDP to increase a lowly 1.9 percent in 2013, after a 2.2 percent gain in 2012.Detroit is on the brink of bankruptcy, and several top tier indicators are flashing warning signs.
• JOB OPENINGS declined in April
• INVENTORY-TO-SALES RATIO: The total business inventory-to-sales ratio increased to 1.31 months – the highest level since October 2009 (1.32) when the U.S. economy was in the initial stages of recovery from the Great Recession.
• FED INFLATION MEASURES: the inflation side of the dual-mandate is still missing massively... and going in the wrong direction. Prices just keep dropping, which has to be alarming for a Fed worried about fighting deflation.

• IMPORT PRICES: Fell 0.6 percent last month, and were 1.9 percent lower than in May 2012. All of the associated core measures (ex food, energy, etc.) were also contracting on a year-over-year basis.
• WHOLESALE CHANNEL: Core intermediate producer prices FELL 0.3 percent in May and was 0.2 percent lower than a year ago.
• INDUSTRIAL PRODUCTION: The second quarter is off to a very slow start as total production was unchanged in May and contracted 0.4 percent in April. Industrial production peaked in mid-2010 (8.5 percent versus 1.61 percent today

• REGIONAL FED INDEXES: Regional Fed manufacturing indexes are all in contractionary territory.

• POWER USAGE: Electricity output has fallen in each of the last five weeks (on a year-over-year basis)
• CAPITAL GOODS: Shipments of nondefense capital goods excluding aircraft plunged 1.5 percent in April.

So once again we ask - given all of this 'weakness' or missing of Fed benchmarks- that the Fed is well aware of, why would so many members have been out discussing 'Taper' if it were not due to their concerns of broken markets and bubble conditions. We fear an equity market positioned far too enthusiastically given the risks of a disappointing Fed.

PATTERNS - The Three Legged Stool

The Macro-Market Three-Legged Stool 06-21-13 Zero Hedge

Until the great-and-powerful Ben pronounced the Taper, US Treasury bonds had tracked the deteriorating macro fundamentals of this 'recovery' rather well. In the few weeks since, the squeeze has hit and yields have played catch up to equity's exuberance. However, now that the two asset classes have recoupled in the less-supported world, the question is, which of the three legs of reality - equities, bonds, or fundamentals - will move next?

Charts: Bloomberg

GOLD - Margins Significantly Increased - Coincidence??

CME raises initial margins on gold futures by 25% 06-20-13 MarketWatch

The CME Group Inc. on Thursday raised the initial margins on trading in gold futures by as much as 25%, according to reports. The initial margin required to trade Comex 100 gold futures now stands at $8,800 per contract, compared with $7,040 earlier, according to Reuters. The CME's decision came after August gold futures GCQ3 +0.89% plunged $87.80, or more than 6%, to end at $1,286.20 an ounce on Thursday, the futures' lowest closing level since September 2010.

Former US Treasury Official - Fed Orchestrated Gold Plunge 06-21-13 King World

A former US Treasury Official told King World News that the U.S. Federal Reserve orchestrated Thursday’s massive gold plunge which shocked market participants. Dr. Paul Craig Roberts also warned that we are on a path which will send the U.S. into “total chaos.” Below is what Dr. Roberts had to say in this powerful interview.

Eric King:  “We had the Fed out with two straight days of propaganda and that was followed up by a smash in gold and silver.”

Dr. Roberts:  “Yes, that’s true.  It shows how irrational markets are.  In fact, there was nothing new in the Fed’s statement.  The markets have known for a long time that at some point the Fed is to taper down its bond purchases and eventually stop them.

So the lack of any real information in the statement makes the market reaction seem puzzling.  And it actually suggests that the too-big-to-fail banks had inside information, the Fed’s statement, and used it to short the stock, bond and gold markets....

“They (banks with inside information) cleaned up on this Fed statement.  It’s entirely possible that’s what the Federal Reserve is doing is orchestrating events that make huge profits for the banks, and that this is the way it recapitalizes them.”

Eric King:  “What were your thoughts on the gold and silver smash?”

Dr. Roberts:  “Well, it’s clearly intended to drive down the price because they always pick the most unlikely time that anybody who wanted to unload a position for best price would never pick (to sell).  They pick a time when unloading a position like that is guaranteed to drive the price down the most.

That’s the giveaway that they are trying to drive it down.  The other giveaway is the amounts that are suddenly unloaded at one time.  No real investor would unload any position in that way.  So these are obviously orchestrations (by the Fed) and that is the intent (to manipulate gold and silver lower).

I suspect it is related to the concern about the dollar ... I think all of the attack on gold is part and parcel of the process of establishing that there is no safe haven from the dollar.  The Fed has to do that in order to protect its quantitative easing policy.

I myself don’t think there is any prospect of the Fed ceasing that policy because if it doesn’t print the money to support these (stock and bond) markets they are going to collapse.”

Eric King:  “How do you see this playing out going forward?”

Dr. Roberts:  “I think what we have to fear is that eventually all of the money that’s being printed actually finds its way past the banks, and past asset inflation, and gets into consumer inflation.

Once that happens the dollar will collapse and will add to the domestic consumer inflation and we’ll be faced with hyperinflation.  And yet there are no jobs.  So what does the population do when it’s got no income?  And of course by then we don’t know what else the Fed will have done to wreck the remaining wealth.

We know they’ve already wrecked savers dependent on interest income.  If the bond and stock markets go down, there is more wealth lost.  The manipulation of the gold market destroys more wealth.  So you may end up with a population, (where) their wealth has been largely exhausted, they’ve got rapidly rising prices, and no income, and no jobs.  So that’s total chaos.  That’s total political instability.  That’s what I call Armageddon without nukes.”

Eric King:  “What do you say to people who have tried to do the right thing?  They are saving money, trying to invest in hard assets such as gold and silver and they just feel like they’ve had their teeth kicked in?”

Dr Roberts:  “They should persevere ... Eventually the manipulators lose control.  And at that time what price could go up other than gold and silver?  I can’t think of one.  Certainly not bonds or stocks.  Certainly not the dollar’s exchange rate.

So in the end, if you can survive the stress, unless you believe a full-fledged recovery is on its way and will be here by June of next year (laughter ensues), unless you believe that, sticking with gold and silver is the only option you have.”

GOLD - Bottom Still Not In

Gold: Bottom-Pickers Beware 06-21-13 Decision Point, Carl Swenlin

CORPORATOCRAY - Global Internet Control Being Taken Over

First Congressman Allowed to Read Secret Treaty Says “This ... Hands The Sovereignty of Our Country Over to Corporate Interests” 06-19-13 Washingtonsblog via ZH

We reported last year:

Democratic Senator Wyden – the head of the committee which is supposed to oversee it – is so furious about the lack of access that he has introduced legislation to force disclosure.

Republican House Oversight Committee Chairman Darrell Issa is so upset by it that he has leaked a document on his website to show what’s going on.

What is everyone so furious about?

An international treaty being negotiated in secret which would not only crack down on Internet privacy much more than SOPA or ACTA, but would actually destroy the sovereignty of the U.S. and all other signatories.

It is called the Trans-Pacific Partnership (TPP).

Wyden is the chairman of the trade committee in the Senate … the committee which is supposed to have jurisdiction over the TPP.

Wyden is also on the Senate Intelligence Committee, and so he and his staff have high security clearances and are normally able to look at classified documents.

And yet Wyden and his staff have been denied access to the TPP’s text.

Indeed, the decision to keep the text of TPP secret was itself classified as secret:

(I have also received a tip from a credible inside source that TPP contains provisions which would severely harm America’s national security. Specifically, like some previous, ill-conceived treaties, TPP would allow foreign companies to buy sensitive American assets which could subject us to terror attacks or economic blackmail.)

Yesterday, Congressman Alan Grayson (who knows how to read legislation … he was a successful lawyer before he was elected to Congress, and has written and co-sponsored numerous bills himself including the bill to audit the Federal Reserve and – most recently – the “Mind Your Own Business Act” to stop NSA spying) announced that he had been allowed to read the text of TPP – and that it is  an anti-American power grab by big corporations:

Last month, 10,000 of us submitted comments to the United States Trade Representative (USTR), in which we objected to new so-called free trade agreements. We asked that the government not sell out our democracy to corporate interests.

Because of this pressure, the USTR  finally let a member of Congress – little ole me, Alan Grayson [anyone who's seen Grayson in action knows that he is formidable] – actually see the text of the Trans-Pacific Partnership (TPP). The TPP is a large, secret trade agreement that is being negotiated with many countries in East Asia and South America.

The TPP is nicknamed “NAFTA on steroids.”  Now that I’ve read it, I can see why. I can’t tell you what’s in the agreement, because the U.S. Trade Representative calls it classified. But I can tell you two things about it.

1)    There is no national security purpose in keeping this text secret.

2)    This agreement hands the sovereignty of our country over to corporate interests.

3)    What they can’t afford to tell the American public is that [the rest of this sentence is classified].

***

I will be fighting this agreement with everything I’ve got. And I know you’ll be there every step of the way.

***

Courage,

Congressman Alan Grayson

Grayson also noted:

It is ironic in a way that the government thinks it's alright to have a record of every single call that an American makes, but not alright for an American citizen to know what sovereign powers the government is negotiating away.

***

Having seen what I’ve seen, I would characterize this as a gross abrogation of American sovereignty. And I would further characterize it as a punch in the face to the middle class of America. I think that’s fair to say from what I’ve seen so far. But I’m not allowed to tell you why!

Remember that one of the best definitions of fascism – the one used by Mussolini – is the “merger of state and corporate power”. Our nation has been moving in that direction for a number of years, where government and giant corporations are becoming more and more intertwined in a malignant, symbiotic relationship.   TPP would be the nail in the coffin for free market economics and democracy.

Note to progressives who support public banking: This is a key battle.

Note to those who oppose to what they call “one world government” or a “new world order”: This is the big fight.

MANIPULATED MARKETS - A Rigged System

Currency Markets Are Rigged

Bloomberg reports today:

Traders at some of the world’s biggest banks manipulated benchmark foreign-exchange rates used to set the value of trillions of dollars of investments, according to five dealers with knowledge of the practice.

Employees have been front-running client orders and rigging WM/Reuters rates by pushing through trades before and during the 60-second windows when the benchmarks are set, said the current and former traders, who requested anonymity because the practice is controversial. Dealers colluded with counterparts to boost chances of moving the rates, said two of the people, who worked in the industry for a total of more than 20 years.

The behavior occurred daily in the spot foreign-exchange market and has been going on for at least a decade, affecting the value of funds and derivatives, the two traders said.

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The $4.7-trillion-a-day currency market, the biggest in the financial system, is one of the least regulated. The inherent conflict banks face between executing client orders and profiting from their own trades is exacerbated because most currency trading takes place away from exchanges.

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While the rates aren’t followed by most investors, even small movements can affect the value of what Morningstar Inc. (MORN) estimates is $3.6 trillion in funds including pension and savings accounts that track global indexes.

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As market-makers, banks execute orders to buy and sell for clients as well as trade on their own accounts.

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By concentrating orders in the moments before and during the 60-second window, traders can push the rate up or down, a process known as “banging the close,” four dealers said.

Three said that when they received a large order they would adjust their own positions knowing that their client’s trade could move the market. If they didn’t do so, they said, they risked losing money for their banks.

One trader with more than a decade of experience said that if he received an order at 3:30 p.m. to sell 1 billion euros ($1.3 billion) in exchange for Swiss francs at the 4 p.m. fix, he would have two objectives: to sell his own euros at the highest price and also to move the rate lower so that at 4 p.m. he could buy the currency from his client at a lower price.

He would profit from the difference between the reference rate and the higher price at which he sold his own euros, he said. A move in the benchmark of 2 basis points, or 0.02 percent, would be worth 200,000 francs ($216,000), he said.

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To maximize profit, dealers would buy or sell client orders in installments during the 60-second window to exert the most pressure possible on the published rate, three traders said. Because the benchmark is based on the median of transactions during the period, placing a number of smaller trades could have a greater impact than one big deal, one dealer said.

Traders would share details of orders with brokers and counterparts at banks through instant messages to align their strategies, two of them said. They also would seek to glean information about impending trades to improve their chances of getting the desired move in the benchmark, they said.

Interest Rates Are Manipulated

Unless you live under a rock, you know about the Libor scandal.

For those just now emerging from a coma, here’s a recap:

• The big banks have conspired for years to rig interest rates … upon which $800 trillion in assets are pegged

• This was the largest insider trading scandal ever … and the largest financial scam in world history

• Local governments got ripped off bigtime by the Libor manipulation

• Libor is still being manipulated

Derivatives Are Manipulated

The big banks have long manipulated derivatives … a $1,200 Trillion Dollar market.

Indeed, many trillions of dollars of derivatives are being manipulated in the exact same same way that interest rates are fixed: through gamed self-reporting.

Commodities Are Manipulated

The big and and government agencies have been conspiring to manipulate commodities prices for decades.

Gold and Silver Are Manipulated

The Guardian and Telegraph report that gold and silver prices are “fixed” in the same way as interest rates and derivatives – in daily conference calls by the powers-that-be.

Oil Prices Are Manipulated

Oil prices are manipulated as well.

Everything Can Be Manipulated through High-Frequency Trading

Traders with high-tech computers can manipulate stocks, bonds, options, currencies and commodities. And see this.

Manipulating Numerous Markets In Myriad Ways

The big banks and other giants manipulate numerous markets in myriad ways, for example:

• Engaging in mafia-style big-rigging fraud against local governments. See this, this and this

• Shaving money off of virtually every pension transaction they handled over the course of decades, stealing collectively billions of dollars from pensions worldwide. Details here, here, here, here, here, here, here, here, here, here, here and here

• Charging “storage fees” to store gold bullion … without even buying or storing any gold . And raiding allocated gold accounts

• Committing massive and pervasive fraud both when they initiated mortgage loans and when they foreclosed on them (and see this)

• Pledging the same mortgage multiple times to different buyers. See this, this, this, this and this. This would be like selling your car, and collecting money from 10 different buyers for the same car

• Cheating homeowners by gaming laws meant to protect people from unfair foreclosure

• Pushing investments which they knew were terrible, and then betting against the same investments to make money for themselves. See this, this, this, this and this

• Engaging in unlawful “frontrunning” to manipulate markets. See this, this, this, this, this and this

• Engaging in unlawful “Wash Trades” to manipulate asset prices. See this, this and this

• Otherwise manipulating markets. And see this

• Participating in various Ponzi schemes. See this, this and this

• Charging veterans unlawful mortgage fees

• Cooking their books (and see this)

• Bribing and bullying ratings agencies to inflate ratings on their risky investments