If one looked at the EURUSD exchange rate or US equity futures one could be forgiven for thinking things did not go so well in Italy's election. The former is fading quite rapidly from its overnight exuberance and the latter is stable at pre-FOMC levels. However, a glance at the initial exuberant, nothing can stop us now, Italian (and Spanish) bond and stock markets and it appears the problems of the world have been solved. Spain's 10Y yield is back below 5%, Italian 10Y spreads have collapse 30bps to near multi-year lows, and Italy's equity market is up 3.5%. However, if you pause, take a breath, and look around, the liquidity is plain to see and the initial knee-jerk is beginning to retrace as investors realize that everything they knew was there before - is still there...
The ongoing debacle of Europe's food-chain continues with news from the BBC that IKEA, the venerable do-it-yourself furniture (and food apparently) maker has pulled 1675lbs of Swedish Meatballs off shelves. Horse was found in "beef and pork" meatballs in the Czech Republic and then in 13 other nations including the UK, Holland, and Portugal. Since the first horsemeat was found last month, traces have been found in many places (table below) with UK's FSA having 35 positive tests and Germany's equivalent 67 positives. IKEA's discovery, noted on their facebook page, adds further fuel to the complex food-chain fire but we can only wonder just how many extra pieces of horsemeat were included in the package (and what was missing).
Who says necessity is not the mother of invention in the New Normal. While a tiny fraction of the Japanese population is enjoying the transitory effects of Abe's latest reflating "wealth effect" policy (even as China has made it clear said policy will end quite soon), the bigger problem for Japan is that even sooner, more and more of it will be reliant on hamster wheels to generate electricity, as LNG prices have just hit a record high and are rising at a breakneck pace, and as local nuclear power generation has collapsed to virtually zero. Which means one thing: electricity will soon become so unaffordable only those who are invested in the daily 2% Nikkei surges will be able to electrify their immediate surroundings. So what is Japan's solution? A quite ingenious one: as Geek.com and ASR both report, Japan's Fujifilm has created organic printed sheet that harvests energy from body heat, or in other words, converts body heat to electricity. Finally, at least one key part of the Matrix "reality" is now fully operational - the use of human beings as batteries.
Next week’s calendar is packed with important events and releases, aside of course from the biggest event of the week which are the Italian elections. In fact we already got the first one in the form of China's disappointing HSBC flash PMI which consensus expectations would print stable yet which dropped to a 4 month low. On Friday, the ISM is expected to come out mildly softer vs last month’s strong 53.1 print and consensus at 52.5. Chicago PMI will also be followed by markets on Thursday. On the central bank front markets will be primarily looking for further news on the BOJ leadership succession front. From the perspective of Fed speakers, Chairman Bernanke’s testimony ahead of the Senate Banking Committee will also be followed as markets continue to track the Fed’s assessment of the economic recovery. In the global currency warfare front, the Bank of Israel is expected to cut policy rates by 25bps on Monday, as well as the National Bank of Hungary on Tuesday.
- Risk of instability hangs over Italy poll (FT), Protest votes add to uncertainty in close Italy election (Reuters), and... Risk On
- Czech inspectors find horsemeat in IKEA meatballs (Reuters)
- China’s Slower Manufacturing Casts Shadow Over Recovery (Bloomberg)
- So much for reform: China Prepares for Government Shuffle as Zhou Stays at PBOC (Bloomberg)
- France to pause austerity, cut spending next year instead: Hollande (Reuters)
- Sinopec to buy stake in Chesapeake assets for $1.02 billion (Reuters)
- White House warns states of looming pain from March 1 budget cuts (Reuters)
- China Quietly Invests Reserves in U.K. Properties (WSJ)
- Osborne Keeps Austerity as Investors See Downgrade as Late (BBG)
- South Korea's new president demands North drop nuclear ambitions (Reuters)
- Russia accuses U.S. of double standards over Syria (Reuters)
Following last night's very disappointing China HSBC PMI numbers, one would think that the traditional EURUSD, and thus ES, overnight ramp would be missing or at least delayed, especially ahead of a very possible risk off day such as Italian election day. One would be wrong. Because some time after midnight eastern, in what can only be seen as a celebration of Argo's choice as a best picture, the EURUSD resumed its upward ramp on absolutely no news, pushing the pair higher by nearly 100 pips in a smooth diagonal line, and dragging US futures up with it as usual. The catalyst apparently is that with Italian exit polls mere hours away (due out at 2pm GMT), market talk is that Berlusconi's resurgent chances have been hobbled due to a low turnout in the pro-Berlusconi northern states (recall that Lombardia is the key state for the elections) following a quick read of a Reuters recap article. What is ignored is that the referenced Reuters article also notes the "surge in protests votes being cast" in the first day of voting, which means less votes on an absolute and relative basis for Bersani and Monti, even if Berlusconi ends up getting less of the Northern vote. Of course, nobody actually has any clue what the exit polls look like. In fact, with a hung parliament a distinct possibility even assuming a Bersani-Monti coalition, both Goldman and JPM have said a 50-100 pip widening across the Italian curve is possible should a Hung Parliament develop (for more read here). But for now hope dominates and is both squeezing the shorts and causing yet another algorithmic stop hunt in FX, and thus every other asset class. Don't be surprised all of overnight's gains, and much more to be wiped out minutes after 9 am eastern when the first Italian exit polls emerge.
Police state tactics used against, among others, raw milk producers, alternative health providers, and gold coin dealers is justified by the paternalistic attitude common in Washington, D.C. A member of Congress actually once told me that, “The people need these types of laws because they do not know what is good for them.” This mindset fuels the growth of the nanny state and inevitably leads to what C.S. Lewis said may be the worst from of tyranny “…a tyranny exercised for the good of its victims.” All Americans, even if they do not believe it is a wise choice to drink raw milk or use gold coins, should be concerned about the use of force to limit our choices. This is because there is no limiting principle to the idea that the government force is justified if used “for our own good.” Today it is those who sell raw milk who are being victimized by government force, tomorrow it could be those who sell soda pop or Styrofoam cups. Therefore, all Americans should speak out against these injustices.
Continuing to look back at what once was. Following Part 1's emergence from the civil war and the age of enlightenment, In Part 2 of the 4 part History Channel series, America continues to recover from the Civil War, undertaking the largest building phase of the country s history. While much of the growth is driven by railroads and oil, it's built using steel. From the Civil War to the Great Depression and World War I, for better or worse; for richer or poorer, in ethical and societal sickness or health; these five men - John D. Rockefeller, Cornelius Vanderbilt, Andrew Carnegie, Henry Ford and J.P. Morgan - led the way.
While the rest of the world was blissfully enjoying its latest reflation experiment, one country that has hardly been quite as ecstatic about all the blistering free money entering its real estate market (if not so much the Shanghai Composite) still warm off the presses of the G-7 central banks, has been China. Because China knows very well that while in the rest of the world, free money enters the stock market first and lingers there, in China the line between the reflating house market and the price of hogs - that all critical commodity needed to preserve social stability - is very thin. As a result, last week China withdrew a record CNY900 billion out of the repo market - the first such liquidity pull in eight months. This move had one purpose only - to telegraph to the rest of the world that the nation, whose central bank has patiently stayed quiet during the recent balance sheet expansion euphoria, will no longer sit idly by as hot money lift every real estate offer in China. Moments ago we got the second sign that China is less than happy with the reflating status quo, when the HSBC Flash PMI index for February missed expectations of a 52.2 print by a big margin, instead dropping from the final January print of 52.3 to just barely above contraction territory, or 50.4. This was the lowest print in the past four months, or just when the PMI data turned from contracting to expanding in November of last year.
For most portfolio managers, investable assets can be thought of as sitting somewhere on the risk-return curve. If we look at the risk-return curve today it is obvious that 75% of global financial assets are now locking in real losses, unless of course, inflation collapses and deflation takes hold in the major economies. If we are spared a massive deflationary wave the assets at the bottom left of the curve will lose 1.5% real per year for the next five years. This means that, for global assets to stay roughly in the same place, equities will need to provide a real return of 4.5% per year for five years. However, it is important to note that such returns will only serve to compensate for the capital destruction taking place in the fixed income market. Real returns on equities of 4.5% will not leave us any richer compared to our starting level. This means that investors will have spent five years on a treadmill running to stand still. When you consider that no asset growth was registered in the previous five years, we are facing a whole decade devoid of capital accumulation. Given the world’s aging population, isn’t this bound to be problematic?
From the youngest to the oldest nominee for best actress (Quvenzhane Wallis - 9 and Emmanuelle Riva - 85) to the relative money gambled on the outcomes, we thought it only appropriate to provide some education and information as this evening's self-congratulatory mutual masturbation begins. With TED scoring well in social media, hopes of an Angelina Jolie thigh-show high, and enough communal drinking-game directions to sink Seth MacFarlane, we hope this provides a little levity as the seriousness of Daniel Day-Lewis' method overwhelms.
There is a simple reason why the real money (as opposed to fast money tweakers) has been far less excited about the domestic equity fund inflows than the financial media and their sponsoring commission-takers would suggest. The reason is - as Goldman shows empirically, not anecdotally - fund flows 'lag' performance, 'not lead'! As we have noted previously, the great rotation myth is simply that - a unicorn-like belief that the investing public will sell down their bond portfolios (high-yield, investment-grade, and sovereign) to stake their future on stocks - when the reality is the flows (which are not rotating to stocks 'net' anyway) simply reflect the sheep-like herding of performance-chasing index-huggers hoping to beat the greater fool. There always has to be someone left holding the bag...
The publication, earlier this week, of the FOMC minutes seemed to have a similar effect on equity markets as a call from room service to a Las Vegas hotel suite, informing the partying high-rollers that the hotel might be running out of Cristal Champagne. Around the world, stocks sold off, and so did gold. The whole idea that a bunch of bureaucrats in Washington scans lots of data plus some anecdotal ‘evidence’ every month (with the help of 200 or so economists) and then ‘sets’ interest rates, astutely manipulates bank refunding rates and cleverly guides various market prices so that the overall economy comes out creating more new jobs while the debasement of money unfolds at the officially sanctioned but allegedly harmless pace of 2 percent, must appear entirely preposterous to any student of capitalism. There should be no monetary policy in a free market just as there should be no policy of setting food prices, or wage rates, or of centrally adjusting the number of hours in a day. But the question here is not what we would like to happen but what is most likely to happen. There is no doubt that we should see an end to ‘quantitative easing’ but will we see it anytime soon? Has the Fed finally – after creating $1.9 trillion in new ‘reserves’ since Lehman went bust – seen the light? Do they finally get some sense? Maybe, but we still doubt it. In financial markets the press, the degrees of freedom that central bank officials enjoy are vastly overestimated. In the meantime, the debasement of paper money continues.