Mean reversion heaven today again. After having put the worst Thanks giving week since 1932 behind us, we put in the best day since 2009 today. Markets are manic,and investors are forced chasing their tail, still dominated by HFT Algos. Dynamic hedging is almost impossible for any big investor, as lack of liquidity drives prices both ways. Below from Bloomberg. Picture by Banksy.
The swings have taken a toll on professional investors. Less than 24 percent of 542 categories of funds tracked by Morningstar Inc. have topped their benchmark indexes this year, the fewest since at least 1999. A Hedge Fund Research Inc. index of industrywide performance has fallen 3.3 percent this year. It’s only the third annual loss since 1990 and the biggest decline since 2008, when it plunged 19 percent, according to data from the Chicago-based firm.
- Amid great economic stress, policymakers have missed many opportunities to improve the situation and better the lives of people.
- The leadership void in the U.S. was illustrated by the dismal display of policy dysfunction that led the country to lose its AAA credit rating. European leaders have fared no better.
- Ben Bernanke and the Fed, however, have demonstrated leadership. What is both remarkable and instructive for the outlook for monetary policy is how active the Fed remains even though it has reached the zero-bound for interest rates.
“Our greatest primary task is to put people to work. This is no unsolvable problem if we face it wisely and courageously. It can be accomplished in part by direct recruiting by the Government itself, treating the task as we would treat the emergency of a war…”
As we suggested yesterday, “Seriously, just let the FED do the job. The ECB is just the junior on the desk. Get the guy with the bazooka to pull the trigger and show the world how it is done. The Europeans can’t hardly agree on the size of the cucumber, how will they agree on what the ECB should be doing. Let central planning go Global”.
They lisyened, latest press release on the Bazooooka.
The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.
These central banks have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points. This pricing will be applied to all operations conducted from December 5, 2011. The authorization of these swap arrangements has been extended to February 1, 2013. In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice.
While the policymakers discuss the mighty EFSF, there are two charts worth presenting. The Chinese property boom is cooling, while the Italian misery index is soaring. The expanded version of the EFSF won’t be enough.They need the real bazooka. Time to call in the Fed Team. Charts below;
Jurgen Stark’s speech on Monetary Policy.
The road to virtue
The road to virtue between globalisation and monetary policy was built on two inter-related premises. First, that the process of globalisation itself was largely irreversible. And second, that the by-products of such a process complemented improvements in monetary policymaking such that the battles of yesteryear had been decisively won in a durable manner and the new challenges appeared to be manageable. The relationship between monetary policy and globalisation could thus be best described as one which was both symbiotic in nature and mutually beneficial. I will review these arguments in turn.
The perceived inevitability of globalisation
First, asserting the irreversibility of globalisation in the midst of a systemic crisis such as the one we are currently experiencing may seem far-fetched. However, if one were to look back at the enthusiasm which prevailed in both the economics and international relations fields during the early 1990s, this appeared as an inescapable conclusion. The growth of world merchandise export volumes had already consistently outpaced that of real GDP for decades , while the world stock of outward FDI had dramatically increased in the period from 1980-1990 . These favourable trends looked set to receive a further boost on account of the expected integration of central and eastern European economies as well as the states of the former Soviet Union and China into the mainstream of the world economy. Many observers therefore agreed with Francis Fukuyama that this marked ‘the end of history’ .
If risk-making were a value-adding activity, Russian roulette players would contribute disproportionately to global welfare. And if government subsidies were the route to improved well-being, today’s growth problems could be solved at a stroke. Typically, this is not the way societies keep score. But it was those very misconceptions which caused the measured contribution of the financial sector to be over-estimated ahead of the crisis.
Every move of the market is by now turning into a war between the rating agencies and the central planners. While the news of an modified EFSF reached the news yesterday evening, the S&P came out with some severe downgrades of the biggest banks. Yes, many have pointed out the under performance of the financials prior to the downgrade, and yes somebody will look into the information flow (but as we have learnt over the past days, what is insider trading, is not that clear cut), but where this conflict of interest between the central planners and reality will eventually take us is still to be seen. From Bloomberg;
Bank of America Corp. (BAC), Goldman Sachs Group Inc. (GS) and Citigroup Inc. (C) had long-term credit grades reduced to A- from A by Standard & Poor’s after the ratings firm revised criteria for dozens of the largest global lenders.
Standard & Poor’s made the same cut to Morgan Stanley (MS) and Bank of America’s Merrill Lynch unit. JPMorgan Chase & Co. (JPM) was reduced one level to A from A+. S&P upgraded Bank of China Ltd. (3988) and China Construction Bank Corp. (939) to A from A- and maintained the A rating on Industrial and Commercial Bank of China Ltd., giving all three lenders higher grades than most big U.S. banks.
The EUR/USD is 1.5% away from testing a six year support level at approximately 1.31 which has only failed during the June 2010 Greek driven market selloff. This support level has been tested multiple times since being formed in 2005 (summer of 2008, March 2009, summer 0f 2010 and January 2011). Needless to say the next test could occur as early as this week.
Should this pattern fail next major support does not come in until 1.18 but a much bigger target may be possible based on a head and shoulders pattern at 85 which coincidentally is also the location of another major support level.
Those are big moves to be discussing here but considering the very real threat of sovereign defaults, global asset liquidations out of euro based debt and the risk of some form of euro debasement it is also a high probability. Such a move would put a major bid into the USD.