IF IT GETS ANY ODDER...

I was just getting on the outside of my first see-through last night when all hell broke loose in Asia.  Three minutes after New York had effectively shut down, Sterling fell nealy10% in a blink of an eye in Hong Kong, settling at 1.1830  but with reported prints of 1.15.  Why?  no clue but the uncertain consensus was that was a glitch in certain algorithms or a "fat finger trade' (Chinese are notorious for having fat fingers) or just a computer malfunction.  After the initial shock and throughout the morning, the currency clawed its way back to the 1.23-1.24 range but never quite got back to the point from which it started its fall...in fact it was down nearly 4% and the London close.

The reason were explained as mechanicalbut the fundamentals behind the fall were reported to be the so called "Hard BREXIT" policy line of the May government which has the world all a-twitter that a British government would be so silly as to put politics before commerce irrespective of the fact that is was the politics of the Union that was the subject of the referendum not commerce.  The British people voted "out"and it is what their government is probably duty-bound to give them, but of course for any government to follow the will of its people is frowned upon in smart circles these days.  I mean, after all, how do the people know what's good for them?

Now all this is rather interesting and quite amusing if one thinks about it but today's events convey certain dark images which are worth exploring.

FX trading these days is roughly 70% by machine; the days of ringing up a broker or a trader directly are pretty much gone, which means you can trade from any place on the globe at any time...BUT, if you're going to get a move like today's in Sterling I find it hard to believe that it would not initiate in a major center for the currency...not in Hong Kong.  Then again, the timing was exquisite.  It occurred just minutes after "the book" was "passed" from New York to Hong Kong when there were no other major Asian Markets trading and therefore, by definition, liquidity was at its lowest which would of course magnify any large move in either direction.  Then, too NOTHING that happens in Hong Kong of this magnitude is to be taken as a random event but at the same time how the hell does one get apparently every trading program around to move in the same direction at almost the exact same time?  Beats me.  But folks are trying to find out and in the forefront is the Bank of England.  Stay tuned, because this wasn't random.


As for the jobs number, well of all things I got it wrong.  156,000 new buns and bedpan jobs.  A lousy number if the truth be known but one which certainly takes the pressure off the Fed but surprisingly, the equities dipped slightly and bonds did nothing except firm-up yields slightly.  While the former was viewed as a bit of a surprise, the latter might explain it.  Could it be that the bond market is simply not going to wait for central banks to reach the point of firming but is going to push them there?  There is this feeling of tension highlighted by these strange random events, seemingly unconnected but leaving the impression that something is afoot.  Then there is debate #2 this weekend.  Speaking of things getting odder...

A VERY BAD POLL

In the Daily Mail this morning.  55-45 in favor of BREXIT.  Mind you it was only a sampling of 2000 people but the effect was immediate: equities all over crashed as did fixed income sovereign yields with the Bund falling to 0.01 amid heavy selling I am told  by the Bundesbank to no avail unless you consider keeping it out of negative territory a success.  Come to think of it maybe it is.

Euro bank stocks were murdered.  It's pretty clear that there is simply no appetite for bank shares in this declining yield environment and we are at the stage now where the viability of certain institutions must begin to be questioned.  With no sustainable earning power one wonders how the continuation of bank restructuring can continue for unlike U.S. institutions, the Euro have hardly washed all of their dirty linen and given the dreadful state of the European economy their credit exposure has hardly improved.  This is a weekend of little joy anywhere Over There with hard questions being asked that have very few answers.

As to the poll itself, a number of my Brit  mates have questioned it's accuracy but the over all view that if it isn't 10 points there is certainly a larger percentage in favor of a pull-out than previously thought and at this stage there well may be a "working majority" as the Brits like to say.  If that is the case with all that has been said and done. Mr. Cameron has a hell of a problem.  Having not convinced a majority by this time, picking off public opinion at this late stage is going to be very difficult.  Further, there is nothing remotely on the horizon that can turn this thing around; indeed, the chances are that an external event will only make things worse for the "stay in" mob.  A terrorist incident would be absolutely devastating and with the European Championships being staged in Paris, the venue is supplied...other than English hooligans getting into punch-ups with anybody in a different strip which has already occurred.  A very difficult weekend indeed.

Over Here, equities crashed, yields crashed and confidence clearly took a hit, but right now this place may be the safe haven.  I can't see yields doing anything but continuing to decline and perversely, equities to rise.  I mean, like, where else?  The next few days up to June 23 are going to be very dicey ones.  This is not looking good...not good at all.

LAID AN EGG

Which is what Janet did in her testimony before the House this morning.  Of course she had very little to say so she stuck to the script outlined here yesterday which seemed to please no one and frustrate a few.  Having seen how poorly this went, she may revise her approach tomorrow before the Senate who will probably be out for bear in some cases which is really too bad inasmuch the current situation is certainly not all her fault.  So I'm going to reserve overall comment until she finishes up tomorrow except for one point which took up a good deal of time in her testimony.

She received a number of questions as to whether the Fed would consider negative interest rate if the economic picture did not improve and as to whether the Fed had the legal authority to institute the same.  She didn't say yes but she didn't say no either which is indicative as to how bad things really are when a really bright lady like her could consider something so stupid.  She also stated she wasn't sure that there was legal authority for such a move but that it had been explored and continues to be explored.  That is a really bad sign because when anyone in D.C. starts looking for legal cover it means things are getting serious.  If this begins to sink in, we could be in for a really bad time given the manner in which I am sure the markets will react.

Speaking of reaction, after floating round for a bit, equities sold off hard at the end of the session.  Of greater interest was the fact that there was a $23 billion auction of a new ten year note that went off easily at a yield of 1.73% which must have seen like a gift to the entire world, hence bids from non-U.S. sources were heavily in the majority or so I am told.  So there we are 1.73% on-the-run at issue and by the end of the day the damn thing was yielding 1.67%!  I think it sunk in:  if she thinks the kind of conversations had up on the hill today are going steepen this curve she had best think again.  People are not interested in yield; they are interested in preservation and that ain't good.  Let's see how she does tomorrow.

IS THAT ALL THERE IS?

With apologies to Miss Peggy Lee, writing about the Yuan's entry into the SDR world of the IMF is about as exciting as the jump in 10 year yield to 2.21% at the close today signaling a "repricing of the bond market" which reflects a resurgence of belief in the Fed going for 0-25b.p. to 25 b.p. in December based on the rise of the equities markets which is based on nothing at all.  But that's all I got, Peggy, so we go with it.

Fortunately, My Really Smart Friend, Larry, came out with a great piece on the Yuan just the other day, which can be found only if you are a subscriber to his publication.  (I never asked him if I could name it but I will).  As you know he and I differ as to whether the Fund is going to let the Yuan in as a result of its year-end review and while I still  have my doubts, he has added a very persuasive argument that I had mentioned but to which I had given little weight.  Added to every other thing on the world stage that Il Duce and his mob continue to ignore is the Fund; this is not good for the thousands employed by the palace on 19th Street (tax free for many) known lovingly as, "Headquarters 1" by its adoring staff...especially when most people are beginning to realize that its functionality is somewhat in question.  The Fund needs a friend and China needs acceptance; a match made in heaven the implications of which are yet to be fully understood.  MRSF,L, does point out one thing that most of the watchers and commentators have not.  A good part of the implications have a great deal to do with China alone--or at least for the time being.  The move towards SDR status for the Yuan may have little practical effect for the world at large but will indubitably have a great deal of effect domestically, for in order for China to reach the point of acceptance of it currency, certain bridges had to be crossed which were navigated by what one might refer to as the reformist element in the economic leadership of the country.  The political leadership moved grudgingly to comply but make no mistake, the "market driven considerations" have never been welcomed, and if the IMF grants Yuan SDR status we may well have seen the high water mark of the reformists for some time.  Nothing more of value from the standpoint of President Xi can be gained and a consolidation of power on all fronts will resume.  The implications stemming from that reality are yet to be considered.

We might also ponder another effect mentioned in this space not too long ago.  Il Duce loves to speak about "smart power" in regard to foreign affairs...like sanctions.  With the loss of influence within global organizations such as the IMF and the emergence of new "reserve currencies," bye bye "smart power."  The dollar and its friends, the Euro, the Yen and Sterling held sway.  We are about to enter a new era with new realities and, surprisingly...or not..less options.  Leading from behind.  It's kinda like the two dog on a dog team; the view never changes.  Anyway, my two-bit bet is looking a bit more problematic.

As for bonds, I find more amusement in George Soros pulling half a billion that he put in just a year ago out of Janus, his buddy Bill Gross' new amusement since his departure from PIMCO.  Gee, it's harder and harder to make an honest buck these days although as some would tell it, Georgie never cared what kind of buck it was as long as it was made.  If things go on like this Billy is going to be left with managing just his own money, $700 million of which was supposedly the seed money for Janus.  Oh, the humanity!  Having said that, a decision if there is to be one will be more important for it having simply been made than for any economic effect it will have.  Further, if the discount rate is increased it's is going to be interesting to see the rationalization presented vis-s-vis the opposite direction in which the Euros are heading.  Thought there was this cooperation among central banks thingy. It will certainly provide copy which is desperately needed in these times.  I will also be interested on the discussion of with China slowing, the Euros going nowhere and Asia more or less dead how the United States is making it happen all alone.  We can call it the John Donne Rejection; you know, "No man is an island..."  Or maybe you don't know.

WELL?

Well what?  What am I supposed to do make things up out of thin air?  I told you nothing was going to happen and nothing did.  I've been putting stuff together out of whole cloth and it wasn't until today that anything interesting bubbled up.

You might have noticed that there has been some talk about the ECB essentially guaranteeing a cap on Euroland interest yields...a verious curious thought indeed.  I guess for it to occur the ECB would have to announce that they are a buyer whenever the Spanish 10 year approaches..........and there's the problem.  What is the "right" yield for the Spanish 10 year, who decides it and if there is a difference between the 10 year of Italy--up or below--you know there is going to be hell to pay somewhere.  I kind of dismissed the notion as did the Bundesbank yesterday but lo and behold the German politicians began making cooing sounds today at the prospect.  I still don't think this has legs but in such a crazy time as this who really knows.  Rather, I think it is just another way to keep the can moving and not much else.  Of far more importance is the Greek PM, Samaras, meeting with Junker in Athens tomorrow.  Problem is, nothing will come of it.  The economy is awful, the numbers are worse, but there is aenough cash for the nextpayment to be made.  "We are encouraged by the efforts of the Greece Goverment to deal with the crisis, work with the financial authorities of the Eurozone...blah, blah, blah."  Or some variation on that theme.  Meanwhile, Spanish and Italian yields have indeed come out of boredom if nothing else aided by the fact that there are few traders at desks anywhere.  It's still August.

On this side there has been a remarkable rally in the stock market.  I know nothing about the stock market so I will not hazzard a guess as to why for as it seems to me the economic situation has hardly changed, but I have taken notice of the fact that right at the forefront have been the banks which is equally puzzling given that they were considered toxic 4 months ago.

The Yankees are in first place, The Giants look good in pre-season, football has begun in Europe, God's in his Heaven and the world seems all right to just about everone.  The again, August ends in 10 days.  Write if you have news.