All Over The Place

Futures are all over the place in the pre-market.  I think it could be because Mario Draghi, the ECB president, has done it again: he's proven that Europe's new big plan is really no plan at all.  This time, it only took one word to put the freak on: sterilized.  Now it seems that all that money that was supposed to be pumped into the system will be siphoned right off. No net inflows.

I'm watching the cash market as ever.  The prices I'll be eyeing today are 1413.09 and 1396.56. Above the former breaks the series of lower lows and lower highs.  Below the latter risks extending the correction lower.

1391.74 would then be the next key level.  A break of that would call into question whether the S&P is ready for another new near-term high.

Pimco's Bill Gross is out with another investment letter. I realize the ridiculousness of a lowly trader disagreeing with a billionaire who also manages trillions, but after writing an excellent piece Gross says "The age of inflation is upon us."

Actually, he says this:

"The age of credit expansion which led to double-digit portfolio returns is over. The age of inflation is upon us, which typically provides a headwind, not a tailwind, to securities price – both stocks and bonds."

If he substituted the word deflation, I'd agree with every word.

Gross makes great points throughout his letter. I simply feel that he's looking back to his early days in the inflationary 70s and drawing on that outcome.  There was not a credit overhang then as there is now.

If the dancing has slowed down, then the reason is not just an overweight partner. It’s that the price of money (be it in the form of a real interest rate, a quality risk spread, or both) is too low.

When credit is priced such that carry is no longer as profitable at a customary amount of leverage/risk, then the system will stall, list, or perhaps even tip over.

For the current shipwreck perhaps we have the Fed and other central banks to blame. Zero bound interest rates according to their historical models should inevitably and inexorably lead to dynamic real economic recovery.

Central banks are agog in disbelief that the endless stream of QEs and LTROs have not produced the desired result.

The disbelief vanishes the moment deflation is understood. In an environment where credit is essentially free, investors and creditworthy households reach a point where they don't want to service new debt.  Without a rise in net new credit, the tide reverses. The liquidation of debt begins.  Prices fall.