Requiem For A Meme: 3 Charts

Remember "Goldilocks"?
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Remember the "Goldilocks" meme?

Well it might be time for a requiem.

For the past several months, the market has been prone to questioning the viability of the "Goldilocks" combination of synchronous global growth and well-anchored inflation that served to underpin and perpetuate the low vol. regime.

Both pillars are now at risk. The inflation narrative is gathering steam, especially in the U.S., where the combination of fiscal stimulus and late-cycle dynamics have made market participants hyper-sensitive to nascent signs of price pressures. Rising crude prices aren't helping.

Meanwhile, incoming data continues to suggest the European economy may have peaked in Q1, with Wednesday's PMI prints being just the latest in a series of disappointments.

Trump's "America first" policy is contributing to worries about the sustainability of the global recovery. The threat of a trade war - even if it's been put "on hold" - hangs over the market and there are signs the EM growth story is faltering.

The combination of moving parts in Trump's agenda has fueled a rally in the dollar and a rise in U.S. yields, which are conspiring to pile pressure on an EM complex that many contend is more vulnerable now than it's been in quite some time.

The overarching question is whether DM policymakers will have the capacity to combat a downturn in light of the fact that with the exception of the Fed, rates are still glued to the lower bound and central bank balance sheets are still bloated/growing.

At the same time, political risk has resurfaced in Italy, where a populist government threatens to put the country on an even more unsustainable fiscal path.

With all of that in mind, consider the following three charts.

The first is one-month implied volatility on the lira, which has surged to 28%, the highest since the immediate aftermath of the crisis:

LiraVol

This is the unwind of the carry trade in real-time. "Potential carry trade in Turkey’s currency, based on interest-rate differential adjusted for volatility and dollar-funding costs, [has] plummeted to the lowest since January 2017," Bloomberg noted early Wednesday morning.

The second visual is European bank credit risk:

iTraxxSNRFin

That speaks for itself, but just in case: that's a one-year wide and it's indicative of market jitters about spillover from Italy.

Finally, the euro is on pace for its worst month since 2016:

EURUSD

That's effectively the market fading the European growth story and questioning the viability of the ECB's exit strategy.

Take all of that for what it's worth.

Meme

Related

TARP Charts!

The Federal Reserve has this new paper out about TARP that does a bit of highly suggestive eyebrow raising about some banks that shall remain nameless. They start from the awkward fact that TARP wanted everything in one bag but didn't want the bag to be heavy, or as they put it: The conflicted nature of the TARP objectives reflects the tension between different approaches to the financial crisis. While recapitalization was directed at returning banks to a position of financial stability, these banks were also expected to provide macro-stabilization by converting their new cash into risky loans. TARP was a use of public tax-payer funds and some public opinion argued that the funds should be used to make loans, so that the benefit of the funds would be passed through directly to consumers and businesses. So you might reasonably ask: were TARP funds locked in the vault to return the recipient banks to financial health, or blown on loans to risky ventures, or other? Well, here is Figure 1 (aggregate commercial and industrial loans from commercial banks in the U.S.): So ... not loaned then. But that's not important! The authors are actually looking not primarily at aggregate amounts of loans but at riskiness of loans and here's what they get: