U.S. Public Transfixed by Day-to-Day Market Gains but Blind to Future Losses

Another perfectly normal day in the market yesterday, marked by the totally logical run up in stocks, bonds, commodities... and the USD.

Why is the USD stronger? Some of the commentary suggests this is due to risk aversion trades – but US equities are higher, oil is higher and many point to this week’s economic data as suggestive of economic stability. So in the search of more satisfying explanations:

1) The month-end flows. While we think most of the flows should be EUR positive there is a natural mismatch to the week. Many of those that need March 31 as their closing date may be trading now rather than waiting for the exact fix next week. The US passive hedgers seem to have been dominating yesterday rather than Europeans – making the USD bid.

2) The ECB. Worry is high that the ECB is behind the deflation curve – witness the series of really ugly confidence numbers from Europe today. The ECB catch-up to QE is a risk and its being priced into the EUR.

3) Positions. Its really quite simple – anyone that is bearish USD is being punished right now as US assets do better.

4) FED QE concerns were overblown – this is a key and very worrying risk for the market – as the FED buying of $7.5 bn US Treasuries Wednesday didn’t lower US rates. In fact the US Treasury issued $34 bn in 5Y notes overwhelming the effect of the FED action. Market has sold bonds this week as economic data turned and as the FED actions are proving insufficient to turn the market around. Until and unless we get negative CPI prints the market won’t believe that US bonds aren’t rich. Also the market suffers from asset allocation where bonds are being sold to buy equities to reweight battered portfolios. All of this supports the USD, as it's an indication of tighter conditions. Eventually this will hurt growth outlooks and stocks but not just yet, as stock buyers are tempting fate under the soothing chants of CNBC and the Geithner siren brigade, who seem to practice their Jedi mind tricks oh so successfully on the investing public every single day.

5) Technicals. On the technicals we are far from any level where the EUR is going to be in trouble for another shot at 1.3750 or 1.39. Yet all the momentum players are watching a sagging market and giving up. The 1.3250 or 1.3120 support seems far, far away. The interest in USD buying in EUR has put pressure on JPY as well and the technical line to watch there is 98.70 which we saw tested briefly late yesterday.

6) Fundamentals. If you read the stories – more regulation from SEC and US Treasury; more doubts about the US banking system as the Senate pushes back on more bank bailout funds and Lacker highlights the need for stress tests. The mix of data hasn’t been positive or negative – so arguing that anything new has hit the tapes about economy or policy misses the point.

In other news, what is the SEC seeing about money market accounts that others aren't? It is no secret that the SEC will not react to a vicious dog attack until the fido has planted its mollars deep in the commission's gluteus maximus.

Thus one is left to wonder what Mary Schapiro knows when she told Congress that U.S. securities regulators will bolster the regulation of money market funds and the protection of investors who entrust their funds to broker-dealers and investment advisers. In testimony prepared for a Senate Banking Committee hearing, SEC Chairman Mary Schapiro said the agency is considering ways to improve the credit quality, maturity, and liquidity standards applicable to the money market funds. Schapiro also said SEC lawyers are working on a plan to require investment advisers with custody of client assets to undergo an annual third-party audit, on an unannounced basis, to confirm the safekeeping of those assets. We smell smoke...

Lastly, Senator Kent Conrad had some amusing quips about Obama's recent spending rampage, reminiscent of a valley girl's first trip to soon-to-be-bankrupt-unless-inevitably-bailed-out-as-systematically-important Nordstrom's with daddy's gas card, better known as the taxpayer's printing press. As is widely known, Obama has requested $250 billion in his budget, to add to the $700 billion widely-criticized financial bailout fund. But the chairmen of both the House of Representatives and Senate Budget Committees refused to include it in their budget plans.

Senate Budget Committee Chairman Kent Conrad told National Public Radio that he would not include it "when there is no plan as to how to use the money and no assertion by the administration that they're even certain it would be needed." The bailout fund was originally designed to prevent a complete meltdown of the financial system by taking bad real estate investments off institutions' balance sheets to get credit flowing again. But lawmakers have panned it for not doing the job sufficiently.

Obama's request for more money came in his budget proposal for fiscal 2010, which begins on Oct. 1. But it was described as a "placeholder" and White House officials said that they may not seek the extra funds from Congress, where lawmakers are now drawing up their own budget plans. Both congressional budget committees quickly jettisoned it, giving them an easy way to cut massive red ink from their budget plans for the few years. The Congressional Budget Office last week forecast that Obama's budget would make the deficit balloon by $9.3 trillion through 2019, $2.3 trillion more than forecast by the White House. "You know, when you lose $2.3 trillion in a revenue forecast, we simply can't budget money for things that are theoretical," Conrad told NPR.

The schizophrenia-cum-amnesia in U.S. capital markets has reached an unprecedented stage. From utter despair a mere 3 weeks ago to irrational exuberance currently, the conviction in the infallibility of the financial system is hindering all administration attempts to extract nickels and dimes from the taxpayer for the financial armageddon boogeyman. And as most traders will confirm, there are many more invisible hands in the current market than even the most vetted conspiracy theorist will attest.

The last time macroeconomic second derivatives indicating existing home sales, or signs that economic spending are "slowing", despite all primary indications still showing much more pain is in store, last caused a 20% rally occurred was, well, never... Anyway, long story short, in order to demonstrate the weakness of the financial system, and to get a quick signature for any bailout placeholders, we would not be at all surprised to see stock borrow of Citi (C) (and other financial) shares mysteriously come back with a vengeance.

Bottom line is that the administration has realized it can effectively fly even the most egregious hedge fund enriching, and treasury debt multiplying proposal past the US public which is only transfixed by day-to-day market gyrations and the occasional flare out of populist anger against 10-20 Salem witches who are singled out by the WSJ and NYT for collecting bonuses.

In the meantime, that great sucking noise you hear is the greatest wealth transfer in decades, transferring some marginal peace of mind to the current generation at the expense of the great unknown of the future. But when we are talking $9.3 trillion deficit increases in 10 years, who really gives a damn. After all, it is Nordstrom's, and the valley girl will not have to worry about a 3rd term (and very likely a 2nd one either).

Also thanks to reader Michael for his donation and kind words.

Comments

[prudentinve...:]

Tyler, thanks for a dose of reality.

Regarding your question: "....In other news, what is the SEC seeing about money market accounts that others aren't?...."

My view is that money market funds have become entrenched, in the eyes of most investors and members of the public, as safe and equivalent to banks. However, the entire business model of these funds has been jeopardized by artificially low interest rates, which makes it very hard for them to guarantee not breaking the buck. After all, they do have expenses, and some risk, no matter how small, that some commercial paper borrowers may default. In the past, they had enough interest rate cushion to absorb minor losses and pay lower returns, but that cushion is now razor-thin due to ZIRP.

Mar 27 07:43 AM

[abetterplace:]

Let us look at the absolutes of these six points.
1."We think"
2."Worry"
3."bearish"
4."worrying"
5."seems far,far away"
6."more doubts"

My absolute fact. "The Earth could totally disintegrate tomorrow, leaving us with nothing to worry, doubt or speculate about."

Don't forget that there are a few hundred million of us out here still working and making money. Everyone knows how bad the market is. Despite all the doomers, it will be back.
I hope sooner than later, but just like everyone else, I don't know which. I choose to think sooner.

Mar 27 08:00 AM

[Dave Wrixon:]

Didn't Goldilocks wake up to find three bears peering down at her?

I not sure I want to be in a Goldilocks economy!


On Mar 27 05:22 AM Cetin Hakimoglu wrote:

> Do keep in mind that tax payers technically don;t pay a penny of
> the stimulus, bailouts, or tax cuts. Federal income taxes have not
> increased a penny since George W. Bush's original tax cuts. And it
> will remain that way.
>
> What bears repeating is that we're in a new bull market, and once
> a bull market gains momentum it's hard to stop. This is because we're
> still in the Goldilocks economic phase of low inflation, modest growth,
> low rates, easy money, and globalization. Nothing really changed
> between June 2007 and now. A slight dip in GP and other econ data,
> a small rise in unemployment, but as long as consumers keeps spending
> away the recessions will be brief as has been the case since the
> the Great Depression.

Mar 27 09:05 AM

[31October:]

On Mar 27 05:22 AM Cetin Hakimoglu wrote:
> Do keep in mind that tax payers technically don;t pay a penny of
> the stimulus, ... What bears repeating is.... This is because we're still in the Goldilocks economic phase...

1. The first point is correct. You won't pay: Your children will.
2. Goldilocks got laid off from her job. She can longer run up credit card debt. Goldilocks has defaulted on her debt, and she has a bumpersticker that reads "Honk if you're paying my mortgage."

Before inflation and defacto tax increases, Americans thrived on one income. Now it is two. Your kids will need two spouses to pay their mortgage... lucky them?

Mar 27 11:44 AM

[AndrewBaker:]

It is so true that the cost of the bail-outs will be borne by our children, and grandchildren, but today's politicians know that they won't have a vote until after they have retired!

Mar 27 02:32 PM

[CJJ:]

Maybe someone needs to explain that people don't need money as an enticement to do work or to do great things.
The people who created this mess and the pundits and bloggers who talk about it are overwhelming all part of the same ilk. They are slaves to money/assets and that drives every idea they have.
Once they realize their human capital is what really matters maybe then they'll get to some solutions.
This what is the crisis, solution, scandal of the moment, what can I complain about, whine about right now crap is the true crisis.

Mar 27 02:32 PM

[monday1929:]

Thank you for a great piece of humor. For a second I thought you were serious! Amazingly,most of America probably agrees with what you wrote.


On Mar 27 05:22 AM Cetin Hakimoglu wrote:

> Do keep in mind that tax payers technically don;t pay a penny of
> the stimulus, bailouts, or tax cuts. Federal income taxes have not
> increased a penny since George W. Bush's original tax cuts. And it
> will remain that way.
>
> What bears repeating is that we're in a new bull market, and once
> a bull market gains momentum it's hard to stop. This is because we're
> still in the Goldilocks economic phase of low inflation, modest growth,
> low rates, easy money, and globalization. Nothing really changed
> between June 2007 and now. A slight dip in GP and other econ data,
> a small rise in unemployment, but as long as consumers keeps spending
> away the recessions will be brief as has been the case since the
> the Great Depression.

Mar 27 02:54 PM

[monday1929:]

Yes, that 1966-1982 was nice and quick. And that is in nominal Dow. Inflation adjusted we went nowhere for 25+ years.
America's Delusions are unbreakable. So far.


On Mar 27 05:22 AM Cetin Hakimoglu wrote:

> Do keep in mind that tax payers technically don;t pay a penny of
> the stimulus, bailouts, or tax cuts. Federal income taxes have not
> increased a penny since George W. Bush's original tax cuts. And it
> will remain that way.
>
> What bears repeating is that we're in a new bull market, and once
> a bull market gains momentum it's hard to stop. This is because we're
> still in the Goldilocks economic phase of low inflation, modest growth,
> low rates, easy money, and globalization. Nothing really changed
> between June 2007 and now. A slight dip in GP and other econ data,
> a small rise in unemployment, but as long as consumers keeps spending
> away the recessions will be brief as has been the case since the
> the Great Depression.

Mar 27 02:58 PM

[DRBRUCE:]

"TAXPAYERS DONT PAY A PENNY OF THE STIMULUS, BAILOUT, OR TAX CUTS" PLESE SPARE ME! THESE PROGRAMS, SINCE 1913, THE BEGINNING OF THE FEDERAL RESERVE BANK, HAVE INFLATED AWAY THE VALUE OF THE US DOLLAR AT THE RATE OF 1% PER YEAR. SO, NO, WE WILL NOT PAY HIGHER TAXES, WE WILL JUST NOT BE ABLE TO BUY A DOLLARS WORTH OF GOODS UNLESS WE HAVE $96. DO YOU REALLY BELIEVE THE GOVERNMENT CARES ABOUT ITS DEFICIT, IT CAN NEVER BE PAID, THE PRINTING OF FIAT MONEY IS JUST TO EASY A SOLUTION TO FUND THE BUDGET, "DONT STRESS THE TAXPAYERS" JUST PRINT THE MONEY NEEDED OR SELL DEBT TO FOREIGNERS TO "BALANCE" OUR BUDGET. THE PEOPLE ACCEPT INFLATION, THE REAL TAX ON OUR MONEY

Mar 27 10:33 PM

[Nik Kondrat...:]

Tyler,

people cannot get mad about what they cannot comprehend. The average American can identify with the stock market going up or down. They cannot fathom what $1 trillion dollars is. I'd bet if you asked 100 people to tell you how much the government has committed since October (through TARP, Bailouts, TALF, PPIP, etc) you would get 99 people who couldn't answer.

The answer is about $3.77 trillion. But if you can barely comprehend hundreds of millions, let alone a billion, how can you comprehend a MILLION MILLION?

That's why Americans are focused on the present day stock market and can't think about the long term implications of multi-trillion dollar deficits.

Nik

Mar 28 12:03 PM