1 Year Later

We are hitting the 1 year anniversary of the Napa earthquake. The quake wrecked quite a few old buildings, made a mess of homes and hurt the tourism economy. Elsewhere, nothing much changed.

The carnage in capital markets has been widespread, not isolated. Strangely, there is no big event to point to as a catalyst. The usual suspects are in the line up but most have alibis. Credit spreads had moved out and HY stuff had weakened. EM growth sputtered, some currency shenanigans developed and money wandering in exotic places headed home. Europe.... well Europe continued to flog itself and Greece became a ward of the State. The Koreas pushed each other around on the playground.

None of these things, taken alone, would garner an arrest warrant. The evidence leans toward "They all did it." Then, there's the central bank. I couldn't wait to get the WSJ Weekend yesterday and rip to the Op-Ed page. They did not disappoint. There in the prominent, upper left, the obligatory "Blame the Fed" tombstone. The policies are wrong, the growth is too slow, yada yada, the markets crashed. Meet Roger "Verbal" Kint, usual suspect numero uno.

The truth is expansions rarely, if ever, roll over by attrition. Exogenous events and/or the Fed twisting up the term structure tend to be around. The rentier class storming back from exotica to Treasuries has kept the yield curve tight. As we pointed out before the rout, spreads between color coded Eurodollars are too narrow for actual FF adjustments. They are narrower now. There was a time, long ago, when CB's were domestic organizations. (The PBOC showing some of that) Now, the globe has synched-up closer than before. (Sorry Europe, you may have missed the party)

This was a legit shake up, just like last years quake here. I don't think its The Big One. A few after shocks and the clean up starts. The US remains the magnet.


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