Big Blue?

by: The Nattering Naybob


Discussion of the potential impacts on equity, bond, commodity, capital and asset markets regarding the following:

China's Dollar Forward's; JPY/USD Carry Trade; Market Liquidity.

Bank Stock Losses; Indices Gains; Intermodal and Rail Carloads.

Labor Market Conditions; Unemployment; 15M Missing Americans.

Last Time Out

In our June 9th missive The Force Awakens?, with a modified and humorous 90 second Star Wars theme intro crawl video, we provided a glimpse at the MSM's dubious twist on macro news. On June 16th, in The Last Metro, we followed up on several popular memes where things may not be as they seem.

This time, we touch upon things which are buoyant, taking dives, reaching new depths and perhaps finding what's at the bottom of everything? Free diving competitions are all about how long, far, or deep a person can go on one breath of air.

Le Grand Bleu

One of the most stunningly beautiful films ever made, featuring gorgeous underwater photography and spectacular location shooting in the French Antibes, the Greek islands, Peru, and Taormina, Sicily. The film charts the competition and friendship of real-life free diving champions Jacques Mayol (Barr) and Enzo Maiorca (Reno). Mayol's search for love, family, "wholeness" and the meaning of life and death is a strong undercurrent. Director Luc Besson (Subway) is famous for his breathtaking action sequences and imaginative visual technique. The emotional intensity of the "Big Blue" experience and its mystical themes have made it a diving cult classic and phenomenon. Le Grand Bleu was the most financially successful French film of the 80's gaining 9.2M admissions in France alone and played in French theaters for a year. If you enjoyed Sea Hunt (Lloyd Bridges, the Dude's Dad), The Deep, Thunderball or The Abyss, a must see, or for diving or aquatic enthusiasts and those who enjoy stunning cinematography with a sometimes whimsical story about life.

The Demographics and Depths of Ignorance?

Our friend Enfilade asks - "Naybob do you see any particular trigger for a Chinese dump? Perhaps some dirty flows?"

Last Friday, a conservative reminded us of William F. Buckley:

"Liberals claim to want to give a hearing to other views, but then are shocked and offended to discover that there are other views."

Buckley was "right" pun intended, excepting that had his bias filter been properly trimmed, he would have inserted - the Ignorant - rather than Liberals.

Fear of what we do not understand is the path leading to that ignorance, which one would be gravely mistaken to assume for lack of education or intelligence. For quite cunning and deceitful that ignorance is in its ability to deceive us into thinking that its interests are our best interests. Fooling one into thinking that their view, is the correct or only true view. Ignorance, appealing to the ego, making man's wisdom walk hand in hand with his idiocy for millennia.

Nice to see our friend Enfilade is still on the path of enlightenment as ignorance is the root of all our problems. An especially heinous variant which runs extremely deep these days is "conscious ignorance", practiced by those who are educated and intelligent. Oft exemplified by ignoramuses choosing to remain blind to other points of view by utilizing an ignore button. Enough waxing philosophic or wasting time on those who have arrested their own learning process, diving deep to answer the question...

Buoyant Yen vs. Dollar

Seeing through a turbid bowl of bilge water is difficult, especially when most of what they let you see is the BS that they want you to see. The only timing issue would be when the Chinese need dollars to maintain market liquidity, they must roll over Chinese forward dollar swaps and engage in spot intervention.

The PBOC and their proxies (Chinese and Japanese banks) need dollars to kick that huge and growing can forward. Symptoms: the JPY/USD would spike as dollars get released (sold on the short leg) and the yen borrowed negative to buy those dollars, get buried and disappear in JGB (back end or long leg) on the carry.

Above note the long term relationship (weaker yen = stronger SP500) here. Note the acceleration of the divergence since Feb. 11th.

Above note, the latest bout of yen/dollar carry was June 23 to July 8th going from 106 to 100. See the divergence close up (stronger yen = stronger SP500) since Feb 1st here as the yen dollar carry trade went from 121 to 100.

Other symptoms, look for upticks is RMB borrowing costs, quarter end spikes occur in offshore hibor 10 day, hibor and onshore shibor, shibor curves, shibor 10 day. Potentially the next "reset" would be Q-end Sept. 30. However last year, liquidity crunches necessitated huge RMB devalue which forced the issue in early to mid Aug.

An advance copy of the Fed or BOJ minutes? Other than the feeble minded and ignorant, those soap opera contrivances of disinformation and misdirection actually control little. As the RMB and yen flows vis. eurodollar (wholesale) market currently control "dollar" arbitrage, an advance copy of PBOC schedule for devaluation and dollar forward swap rollovers would be preferred. Refer back to the turbidity of the water.

Deep Dives, Big Gains and resulting Narcosis or Madness?

"Our top 20 banks have lost $500,000,000,000 in market cap so far this year but please, whatever you do, don't be concerned. These are the same analysts that told us not to be concerned about the same thing in 2008 - how quickly we forget! In local-currency terms, share prices for all 20 banks are down year to date, except Standard Chartered, which is flat." - Philip Davis

With global indices regaining their Brexit losses, and the SP500 making an all time high, our friend Mr. Davis added...

"Same with Italian Banks - they are not "fixed", they are only being allowed to fudge their books beyond the ECB rules. How does that spark a mega-rally that adds $1Tn to Global markets? This is MADNESS!"

Above note the SP500 resurrection from Feb. 17th on where the blue (SP500) and red lines go up in tandem while the brown line (JPY/USD) dives deeper (stronger yen).

Remember the red line (required reserves) has a 30 day lag, so from (Sept. 2nd) which is really 30 days earlier, Aug. 2nd through Oct. 25th, under normal conditions we should see a seasonal pull back.

Caveat, as one can see, the rebound since Feb 17th has been caused by massive yen-dollar carry liquidity injections. If that continues, JPY/USD would go under 100, and then all bets are off.

Despite the big gains, markets regaining their highs, in the current NIRP, QE and IOER environment, selling and buying only begets further speculation which dissipates any proceeds from those speculative transfers vis. the "wealth effect" does not add to real or nominal GDP, and only draws off funds which would have been invested in such beneficial activity under normal circumstances such as capex, durable economic activity and new hiring. Resulting in economic hypoxia.

How Low Can You Go?

"How much lower can long term interest rates go? the bond market was called a bubble many % higher than today. so the crowded traded will just get much more crowded, like the heard being pushed up against a cliff, with nowhere else to go/hide? if the outlook is deflationary as bond bulls at these levels would have to believe. even gold does bad in deflation. is the bond bull case based on expecting much more shifting assets from stocks to bonds? or what?" - Aricool

As long as yen has a low lending cost, carry traders will continue to utilize yen and the BOJ will sell negative JGB, while buying over half their own issuance. Many other central banks including the Fed are doing the same. This QE ZIRP NIRP is a form of monetizing (helicopter money for the banksters and Wall Street, not John Q. Public or Main Street) which runs unabated. Rates will not be raised and the market forces that would do so are being neutralized. Meanwhile due to the resulting bubbles, true asset price discovery is made impossible.

"Not only have the Government Pension Investment Funds (GPIF) and other pension funds become very large buyers of foreign bonds and equities, but Mrs Watanabe is as well a significant "carry" player through Uridashi funds, aka the famously known "Double-Deckers". This "Bondzilla" frenzy leading our "NIRP" monster to grow larger by the day is indeed more and more "made in Japan"." - Eternal Sunshine of The Spotless Mind

There is the bond bull case in a nutshell screaming more monetary tightening and contraction for the real economy and being confirmed by repo in spades. On the equity end, the question is, when do investors stop buying the cooked book numbers and bail? Looking at the returns on bonds, and the alternatives, maybe never? On the bond end, there is no way out as that is the last resort or stop on a competition dive line. Speaking of how low can you go???

An Inconvenient Truth Lies Below?

Above note, a demographic that isn't changing. Despite the MSM headline splash on 287K+ new jobs, change in labor market conditions still plumbing new negative depths. Regarding the MIA, not counted in our "low" unemployment number, Jeffrey Snider ignores Guy Horton who writes, the best way to deal with embarrassing, inconvenient facts is to ignore them.

Per BLS since Oct. 2008 (rounded): Non institutional population +19M; Labor force +4M; Employed +6M; Unemployed -2M; sounds great? Drum roll, of that non institutional population, counted as NOT in the labor force +15M.

Much like the +9M missing in the ongoing Burmese genocide, where did they all suddenly go? Nevermind those 15 million MIA Americans, the unemployment numbers are low and that's all that matters. Carry on, dive deeper and worry not...

"Recession or not recession doesn't matter. The economy is clearly malfunctioning and doing so in what appears to be a permanent fashion, or what some have called secular stagnation. However, even the term itself understates the severity of what we are facing." - The Costs of Beyond The Cycle

Intermodal rail taking a March swan dive with the largest negative % drop in a single month, ever. Tip-o-the hat to Aricool. Following up on that lead...

Confirming, rail freight carloads, since Dec. 2014 sliding off a cliff and going into negative territory last seen in the GR. A harbinger of recession and worse.

Confirming, new vehicle sales YoY growth, on a slow dive downward since Feb. 2011, and despite giving the cars away, no down, no interest to anyone that can fog a mirror, diving off a platform by going negative 3 of the last 4 months. Shhhh!! What's that sound???

What's at the bottom of it all?

If the "stimulus" is not in the public's hands, on hand (M1) as income to be spent and churn Vt (transaction velocity), QE, NIRP and "helicopter" and dance around like a gypsy, chanting merrily all the economic incantations you want, NOTHING else will matter and this is just the beginning of what could be a very deep dive... what's that bloody sound at this depth???

"Live a little, be a gypsy, get around,

Get your feet up off the ground,

Live a little, get around."

Despite all the happy daze econometrics based in falsity (CPI, GDP and unemployment), from one of our mentors, we know this to be axiomatic...

with little downward price latitude, lower aggregate demand results in lower sales, orders, production and eventual layoffs. Rinse and repeat. Speaking of one of our mentor's...

"The next seasonal inflection point is 7/20/2016. That will constitute a top in production (which, in some years, coincides with a top in stocks). Then there is a divergence from the seasonal factors at Nov. month-end. It represents a buying opportunity for bonds, a selling opportunity for commodities (e.g., oil), and perhaps another probable selling opportunity for stocks." - Salmo Trutta

Spaniard agrees with this sage advice from "Proximo". IMHO, we may be forming a double or triple top, where and when the end (5 up) of this EW 1-5 pattern starting at SP500 666 terminates depends on how much money or greater fools, it can suck in to its accretion disk. My magic 8 ball sees potential inflection around 07/20, 09/19 and 12/26.

"Because there is no fix even being considered for the eurodollar system, it seems quite reasonable to assume that the economy will only continue in this state - even if we have no idea what that really means." - Wholesale Zombie

It doesn't mean good times, because by any other name, it's called a classic bank run, as opposed to value creation, a value extraction policy and the resulting management by crisis. All the key indicators, that matter, industrial production, manufacturing, total imports and exports, off a cliff with negative YoY growth over the past several years with inventory building. A loud hissing sound, which is not good when one is ALREADY deep under water.

A closing note - "(fill in the blank, Country and Central Bank of Choice) might receive a temporary boost from it [helicopter money], but what good is that when the eurodollar supply of global money still further contracts?"

Above, what very few (in the know) seem to understand or grasp, yet eludes central bankers, economists, pundits and Phds. The dirty little secret at the bottom of it all, contractionary economic and monetary policies, and the ED system (wholesale mechanism) is broke. But why fix it if it isn't "broke", as in bankrupt. Shhhh! What's that hissing sound? The air going out of our line? Don't ask, don't tell until the next crisis du jour that is.

After this long dive we must now rise back up slowly, lest we too run out of air or worse yet, get the economic bends. Just about to resurface, we see distorted images peering down at us, and can faintly hear a cacophony of those Phds, pundits, economists and central bankers chanting from above... sounding much like Admiral Halsey???

We're so sorry if we caused you any pain....

But we haven't done a bloody thing all day

But there's no one left at home

But the kettle's on the boil and we're so easily called away

But if anything should happen we'll be sure to give a ring

(Wave of the) Hand across the water (water)

(Talking) Heads across the sky....

Would like to thank you folks fer kindly droppin' in. You're all invited back again to this locality. To have a heapin' helpin' of Nattering hospitality. Naybob that is. Set a spell, take your shoes off. Y'all come back now, y'hear!

This is our 105th in a series of thematically related missives which will attempt to identify the macroeconomic forces with potential to adversely affect capital, commodity, equity, bond and asset markets.

I wish to dedicate this missive to one of my mentors, Salmo Trutta, who is a prolific commenter on SA. Without Salmo's tutelage, and insistence on not masticating and spoon-feeding the baby ducks, as in learning the hard way by doing the leg work and earning it, this missive would not have been possible. To you "Proximo"... "win the crowd and win your freedom" - Spaniard.


Investing is an inherently risky activity, and investors must always be prepared to potentially lose some or all of an investment's value. Past performance is, of course, no guarantee of future results.

Before investing, investors should consider carefully the investment objectives, risks, charges and expenses of an investment vehicle. This and other important information is contained in the prospectus and summary prospectus, which can be obtained from the principal or a financial advisor. Prospective investors should read the prospectus carefully before investing.

Market Plays

As for how all of the above ties into the potential and partial list of market plays below... the market as a whole could be influenced, and this could tie into any list of investments or assets. Those listed below happen to influence the indices more than most.

There are many macroeconomic cross sector and market asset correlations involved that affect your investments. Economic conditions, the eurodollar, global dollar debt and monetary policy all influence the valuation of the above and market plays below, via King Dollar's value, credit spreads, swap spread pricing, market making, liquidity, monetary supply and velocity, just to name a few. For a complete missive series listing covering those subject and more, click here.

The potential global economic developments discussed in this missive could affect numerous capital and asset markets, sectors, indexes, commodities, forex, bonds, mutual funds, ETFs and stocks.

A List of 17 Potential Market Plays (Long or Short?): Apple Computer (NASDAQ:AAPL); Google (NASDAQ:GOOG) (NASDAQ:GOOGL); Facebook (NASDAQ:FB); Microsoft (NASDAQ:MSFT); Citigroup (NYSE:C); General Electric (NYSE:GE); Cisco (NASDAQ:CSCO); Bank of America (NYSE:BAC); Amazon (NASDAQ:AMZN); Tesla (NASDAQ:TSLA); SP 500 Trust ETF (NYSEARCA:SPY); Ford (NYSE:); Starbucks (NASDAQ:SBUX); Intel (NASDAQ:INTC); ATT (NYSE:T); IBM (NYSE:IBM); Exxon Mobil (NYSE:XOM).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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