When the noisy-as-you-like-prone-to-epic-revisions non-farm-payrolls figure hit on May 3rd, it seems we crossed the streams. From a regime where Fed liquidity was expected to be large for long, discussions started to turn to good-is-bad and Fed 'Tapering' conversations began. Across every asset class, prices began to shift in the direction one would assume based on a less expansive monetization scheme by the Fed. But there is one market; a market incapable of believing reality; that remains in its own world of hope and unicorns. The US equity market has seen one of its best runs ever during this post-NFP period in the face of the rest of the world's pricing in a tapering.
Back in September 2010, following David Tepper's first "balls to the wall" appearance on CNBC, we were not very surprised to learn that the seemingly permabullish hedge fund manager had taken the opportunity to follow up on the brief euphoria his speech generated then to cut 20% of his positions in assorted financial stocks - just the stocks he was praising loud and clear to the financial station with the plunging viewership. Moments ago, Tepper's Appaloosa filed its 13F for the quarter ended March 31, so yes, before his most recent appearance yesterday. Yet we were somewhat confused by why the manager, once again so bullish he could see no scenario that could send stocks lower, and who estimated a war in the middle east could lead to a mindblowing 5% drop in the market, decided to trim his core holdings.
There have been a litany of articles written recently discussing how the stock market is set for a continued bull rally. There are some primary points that are common threads among each of these articles which are that interest rates are low, corporate profitability is high and the Fed's monetary programs continue to put a floor under stocks. The problem is that while we do not disagree with any of those points - they are all artificially influenced by outside factors. Interest rates are low because of the Federal Reserve's actions, corporate profitability is high due to accounting rule changes following the financial crisis and the Fed is pumping money directly into the stock market. Being bullish on the market in the short term is fine. The expansion of the Fed's balance sheet will continue to push stocks higher as long as no other crisis presents itself. However, the problem is that a crisis, which is always unexpected, inevitably will trigger a reversion back to the fundamentals.
Today at 1pm the real circus starts. From the House Committee on the Judiciary: "On Wednesday, May 15 at 1:00 p.m., Attorney General Eric Holder will testify before the House Judiciary Committee for an oversight hearing on the U.S. Department of Justice. The hearing will focus on the Justice Department obtaining two months of telephone records of reporters and editors for The Associated Press, the unwarranted targeting of conservative groups by the IRS, the recent bombings in Boston, wasteful spending at the Justice Department, and troubling allegations of the politicization of the Justice Department under Attorney General Holder’s leadership."
It seems the S&P 500's recent strength is somehow comforted by the fact that the USD is riding high on its cleanest dirty shirt meme at 34 month highs but unfortunately for the Chinese (and their practical peg to the USD), things are a little less fun than in the old mercantilist manipulation days. The implicit benefit that dollar flows appear to be getting (via the wealth effect in the US stock market) is not there in China (lower equity ownership); in fact, the rising Yuan is drastically hurting them as despite export orders remaining in growth mode, the China Daily reports that "most exporters in the delta region have told us that the rising yuan value has led to a big profit decline." Of course, the exporters are calling for a weaker Yuan but as the nation struggles with an exploding shadow banking system, bubbles in real estate and credit, and inflation concerns it knows that any implicit effort to weaken the CNY will create a surge in capital inflows and fuel further imbalances. China remains in the middle of the 'currency war'-driven inflation rock and 'sagging growth' hard place; and with two 91-day bill issues in the last week (in addition to repo) the clear signal (masked by export data fudges) is that China is much more worried about inflation than it is letting on (and has little ability to manage hot money inflows).
After retracing 61.8% of the gold crash, spot gold prices have fallen back and are now trading back under $1400 for the first time in four weeks. It would seem more time is perhaps needed to enable the gathering of physical gold to fufill Germany's demands... (and cue, the death of gold headlines) So, in summary, we have had a notable increase in tapering discussions - Treasury yields have surged, the USD has surged, Gold has dropped, and credit has widened - all reflecting lower liquidity flow expectations; but stocks just keep going...
With the shadow (or blue) market for Argentina Pesos already devalued by an incredible 50%, it is little surprise that the population is bidding for any store of value. Demand for luxury cars is soaring (BMW sales up 30% in the last 20 months) and Bitcoin activity is often discussed as the population transfer increasingly worthless Pesos into a fungible "currency" or domestic CPI protection; but it is USD that are the most-cherished item (despite a ban on buying USD) as hyperinflation hedges. But as Bloomberg Businessweek reports, a lot of US Dollar bills are tucked away somewhere in Argentina (in stacks of $100 bills since the number in circulation has risen from 58% of the total to 62% since 2008). One table is a 2012 Fed paper on demand abroad for US currency shows net inflows to Russia and Argentina has increased by 500% since 2006 (compared to US demand up around 10%). In fact, demand for large dollar transfers to Argentina since 2006 has outstripped demand for dollar cash overall in the world. It is safe to surmise from the data (that is relatively well guarded by the government) that over $50bn is being hoarded in Argentina (or well over one in every fifteen dollars). It is little wonder that the government is furiously digging at the country's undeclared (stashed under the mattress) wealth.
In the aftermath of the Cyprus deposit confiscation template, the first thing we did is to present not only the countries that are the biggest offshore tax havens in context, but more importantly, the ratio of total financial assets to GDP of these same countries, because when the hunt for wealth goes global, and when the untaxed money of evil [insert nationality] tax evaders becomes the political topic du jour it is these locales that will become the source of "rescue bank" capital. And since as we explained, Cyprus is nothing more or less than the template for how to "collect" about $32 trillion in "offshore wealth" it would be a handy feature to keep track of which financial sectors may experience unexpected glitches in the coming months and years in order to reallign this untaxed, and thus ill-gotten in the eyes of the broader society, wealth. It is a "fairness doctrine" world after all, where how much wealth one is allowed to have is now determined by politicians. Courtesy of Bloomberg we have just a primer. Cyprus is gone from the list for obvious reasons. But many others remain...
The greatest disconnect in the world today is the underlying economies of the world and the markets; all of the markets. This river is wide and getting wider given the money that the central banks are pushing downstream. The flood has reached all of the markets, Real Estate, the banks, many corporations, any and all borrowers with our incredibly low interest rates, but it has had little impact on the Main Streets of the planet. There is, in fact, a bubble of epic proportion.
And the hits just keep on coming.
Following today's misses in PPI and Empire Fed, it was up to the Fed's April report of Industrial Production and Capacity Utilization to provide at least some validity to Tepper's latest CNBC preachings. Alas, that did not come and moments ago we got the latest disappointments as IP dropped -0.5% on expectations of a -0.2% drop, driven by a drop in Manufacturing Production which dropped 0.4%, despite expectations of a +0.1% increase. Utilities sliding -3.7% did not help the headline print but at least it allowed the Fed to, you got it, blame the weather, only this time there is a twist: the Fed actually blamed the weather for not being as bad as it was in March for the slack in Utility production. One really can't make this up. And confirming that the slack in the economy is structural and not cyclical as the Fed would wants us to believe was the Capacity Utilization print which tumbled from 78.3% to 77.8%, the lowest since January, and resulting from a decline in both Manufacturing and Utilities utilization.
It would appear that the credit markets both anticipated and began to price in what is now the worst recessionary period for the European Union on record a few days ago. However, their exuberant, ever-hungry colleagues over in equity land remain in the bad is good mode and can't get enough of these higher prices. Where ever we look around the developed world, equity prices are lifting as credit deteriorates. The masses ignored these lessons in 2007; are they ignoring it again? Or is this just another short-term divergence? If so, it is bond-buying time... if not, take your equity profits now because these divergences are unsustainable.
One of these days we might just get a positive economic print, of the kind that the meandering Tepper was saying is visible everywhere now. Just not yet. Moments ago we got the releases of the May PPI and the Empire Fed, the first of which dropped -0.7%, on expectations of a -0.6% drop, the lowest MoM PPI since July 2009. Technically, this is bullish for the E-Trade baby as it gives the Fed carte blanche to continue QEternity as long as needed. But it was the Empire Fed index that was even more disappointing, as it crushed hopes for an increase from 3.05 to 4.00 in May, instead posting the first contractionary print since January, printing at -1.43. It gets worse when one digs through the data: New Orders dropped from 2.20 to -1.17, Shipments also slid into negative from 0.75 to -0.02, Unfilled Orders deteriorated even more from -3.41 to -6.82, Inventories contracted from -4.55 to -7.95, Prices Paid and Received both contracted, but worst of all, the Average Employee Workweek dropped from 5.68 to -1.14, meaning the collapse in the average workweek persists, and even if the BLS reports a positive print for May, the report will once again mask the declining aggregate end demand for labor.
Take a good look at the chart of the Nikkei below. Supposedly this is the same chart that the new BOJ head, Haruhiko Kuroda, was looking at when he was responding to Japanese lawmakers during a session of the upper-house budget committee, where he flatly rejected an opposition-party member's argument that the recent rapid rise in the Tokyo stock market is out of line with Japan's real economy. "At this moment I do not think they are in a bubble," Kuroda said. And everyone believes him, just Because central bankers are so good at objectively observing how contained subrpime is big the asset bubbles their ruinous policies create.
Confirming that in a world in which either commercial or central banks have to be constantly be churning out debt, and in a world in which Europe is doing neither (with European commercial loan growth posting sequential declines across the board, and the ECB's balance sheet still declining although likely not for long), "growth" as defined by conventional standards, is impossible, we got today's European Q1 GDP data. Not only was it bad, but it was even worse than most had expected.
- Once a beacon, Obama under fire over civil liberties (Reuters)
- Eurozone in longest recession since birth of currency bloc (FT)
- EU Oil Manipulation Probe Shines Light on Platts Pricing Window (BBG)
- BMWs Cheaper Than Hyundais in Korea as Tariffs Crumble (BBG)
- Stock Boom Isn't a Bubble, Says BOJ's Kuroda (WSJ)
- Struggling France strives to shake off economic gloom (FT)
- JPMorgan investors take heat off Dimon (FT)
- Private-Equity Firms Build Instead of Buy (WSJ)
- Bloomberg Saga Highlights Clash Between Two Worlds (WSJ)
- Bank documents portray Cyprus as Russia's favorite haven (Reuters)
- HSBC Signals 14,000 Jobs Cuts in $3 Billion Savings Plan (BBG)
- Argentines Hold More Than $50 Billion in U.S. Currency (BBG)