The market has selling off substantially for over 24 hours now, with no visible signs of stopping.
The real story is in the FX markets which are
utterly going apeshit, along with the Treasury Curve which is blowing wildly
higher (rates); the TNX is now +5.9% on the day (10 year). The odd part
of this is that the 30 year is only up 2.4% -- but the FVX (5 year) is up
a stunning 15% -- straight up. Mortgage backed securities have fallen over 200 basis points in the last 36 hours. Gold is plummeting as well.
Reduce risk folks—the FX moves alone are going to
generate some very interesting margin activity over the next couple of days,
and coming right into the maw of a Quad Expiration along with the bond market
moves..... oh boy.
What we have here is a massive clusterfuck.
"QE" has been a disaster, irrespective of what you think
about Bernanke's "crisis management." The fact of the matter is
that the "crisis" was in 2007 and 2008, The Fed caused it
with its policies back in 2001-2004 and through willful and
intentional failures in supervision of the banks and non-banks through
2007 and Bernanke was both there and then running the show during
that time; in point of fact he was one of the chief cheerleaders for
Greenspan's policies during that time period!
You can always trust the guy who blew it to blow
it again and that's exactly what has happened. Not necessarily
hyperinflation; what we've done is grossly inflate fast-money asset
prices while the rest of the economy does not merit those prices.
Any sort of dispassionate analysis must arrive at the
same end-point--the gross and outrageous distortion
of borrowing costs and "easy money" have massively diluted
the currency while at the same time has led corporations to make radically
uneconomic decisions that only work due to those distortions, but during
the time they're in place they are the only reasonable way to satisfy
investors.
That is a recipe for a massive reversion back
to value and what's worse is that the costs, particularly the rollover risks
that have now become embedded through the economy, are going to screw people
up, down and sideways.
You and I don't see these risks because rollover risk is
something that most consumers never deal with (except for those who
were in Option ARMs during the bubble, of course—they got a lesson in it
first-hand and most of them went ka-boom because they were stupid.) But
for corporations and governments this risk is a daily issue
that never goes away. Schools, roads, capital equipment in
business and even operating expenses are often rolled up into various financing
packages none of which are typically amortized to completion and
retired--they are instead rolled over continually because this makes
your operating results look much better than they otherwise would.
The problem is that this "picture" of the
health of your enterprise is dangerously distorted. The fact of the
matter is that debt, when taken to increase production, can be
beneficial provided you can and do retire it at a rate that exceeds the
economic service life of whatever it buys. When it is rolled over on a
continual basis it is not beneficial; it simply adds leverage to
your enterprise, whether a company or a government.
The reality of leverage is that it amplifies results, both on the upside and the downside. It's a math thing, and since we
refused to learn this in 2007 we will get taught the lesson again—soon.
Brace.
