We are going to begin this week’s letter with an observation by JP Morgan’s master quant researcher Marko Kolanovic. Most of you should know him by now, we often quote his work, any way last week he said this,
As usual we comb the globe in search of pertinent information that you may otherwise, never have been exposed to. Information that we can read and decipher in order to bring you the type of research you have come to expect from us, out of the box and certainly out of the ordinary. Anyway this first batch is from a recent piece from Amundi Asset Mgmt, a subsidiary created by Credit Agricole and Soc Gen. This recent piece they put out highlights, how important the ECB has been in soaking up European government debt and thus artificially keeping rates extremely low. This mechanism has become the defacto methodology of choice by our QE frenzied central banks. We have talked at length in prior letters how this drives down long term interest rates, drives up the nominal price of assets and in turn allows for otherwise defunct and broke corporations and governments themselves to refinance their way back to solvency. You see we didn't use the term health, because the solutions the central banks have used is anything but a cure, but rather a placebo to mask the true and inherent problem, DEBT. As many have stated before, only Keynesians think you can solve a debt problem with more debt and obviously since all fiat money is also nothing more than debt, well, you really aren't fixing anything then are you?
As we count down the remaining weeks of summer, we hope you enjoyed a bit of a reprieve from these markets. We hope you found some time to break away and enjoy the weather, enjoy an outdoor activity and found that there is life outside of our digital screens and everyday ups and downs of our markets. We have the luxury of beautiful Lake Michigan here in Chicago and for those looking for some nice day trips, SW Michigan offers many an amenity as does Wisconsin to our north. We like to take a break during summer and head up to Lake Geneva and enjoy one of the hidden, well not so hidden anymore gems of the Midwest. This weekend was the annual Driehaus customer appreciation party which always offers some of the best fireworks of the season, sorry Richard, I let the cat out of the bag, but you do put on a nice display. Richard is founder and manager of Driehaus Capital Mgmt here in Chicago for those wondering. Hats off to his annual fireworks display as we enjoyed some never before seen pyrotechnics, great work. It's always tough driving back to the concrete jungle but as our favorite fictional character Gordon Gekko (Wall Street 1987) always said, "Money never sleeps, pal!" So despite the FOMC week, which presented nothing out of the ordinary, the markets seem to be stuck in an ever decreasing VIX and ever increasing deterioration of the global economic indicators. As we have said time and time again, this market is centrally bank driven and thus, truly nothing else matters. The only things that seem to matter are charts like this:
As we labor along these summer trading days, awash in great anticipation of the next FED policy move, we can't help but bring to light some of the driving facets behind the equity, bond and currency moves. We believe that our readers must understand the simple fact that central banks are the biggest driver, not only as to the daily direction of bets placed, but as to the overall trends in general. We heard for years how the plunge protection team didn't exist. We heard for years that dope Steve Liesman, that FED butt kissing media spinning journalist tell us that the central banks don't directly affect the markets. Now after 9 long years of ZIRP and $15 Trillion dollar major central banks balance sheets (not including PBOC), the markets are as frothy as ever. We hear bubble talk after bubble talk, bonds are in a bubble, equities are in a bubble, Bitcoin is in a bubble.
Well one thing is certain summer is definitely upon us! With summer in full effect and especially coming off of a midweek 4th of July where it seems those that can, take the entire week off, we wouldn't expect anything less than subpar volume trading. Heck, can we blame them? Sometimes and even if by sheer luck even the shortest hiatus from trading and the market in general can clear ones head and perhaps shed some light on the ever increasing data deluge which we are seemingly inundated with each and every day.