I am fairly certain the answer to why Bernanke isn’t increasing inflation when his former self and former colleagues say he should be is actually nothing to do with domestic politics, and everything to do with international politics. Most of the pro-Fed blogosphere seems to live in denial of the fact that America is massively in debt to external creditors — all of whom are frustrated at getting near-zero yields (they can’t just flip bonds to the Fed balance sheet like the hedge funds) — and their views matter, very simply because the reality of China and other creditors ceasing to buy debt would be untenable. Why else would the Treasury have thrown a carrot by upgrading the Chinese government to primary dealer status (the first such deal in history), cutting Wall Street’s bond flippers out of the deal?
The following two charts show just why any hopes that corporate earnings can mask the US economic deterioration this year, as they did in 2011 (probably the first and only way in which 2012 is not a carbon copy of 2011 so far), should be promptly dashed.
Corporations may or may not be people, but money has always talked, and the wealthy certainly do have a lot of excess cash lying around which they would rather prefer spending in hopes of generating the highest IRR possible by influencing the outcome of the presidential race. Below is a look of the uber-rich who have contributed at least $1 million to the major PACs as disclosed to the Federal Election Commission.
Falling interest rates are a feature of our current monetary regime, so central that any look at a graph of 10-year Treasury yields shows that it is a ratchet (and a racket, but that is a topic for another day!). There are corrections, but over 31 years the rate of interest has been falling too steadily and for too long to be the product of random chance. It is a salient, if not the central fact, of life in the irredeemable US dollar system. Irving Fisher, writing about falling prices (I shall address the connection between falling prices and falling interest rates in a forthcoming paper) proposed a paradox: “The more the debtors pay, the more they owe.” Debtors slowly pay down their debts and reduce the principle owed. This would reduce the NPV of their debts in a normal environment. But in a falling-interest-rate environment, the NPV of outstanding debt is rising due to the falling interest rate at a pace much faster than it is falling due to debtors’ payments. The debtors are on a treadmill and they are going backwards at an accelerating rate. How apropos is Fisher’s eloquent sentence summarizing the problem!
In part three of our five-part series tying the Olympics to economics (previously here and here), we note that in a rather surprising coincidence, the Olympics' host nation has been a rather simple tool to pick long-term 'winners' in the FX market. As Goldman points out, while we doubt that the Olympics directly affects the FX market, it has provided excellent long-term appreciation potential. We assume this means that the BoE will stop QE or we really don't see cable extending this performance record, though the findings suggest that systematically picking the 'next' host tends to pick winners more than losers.
It’s tough to do just about anything today without experiencing the far-reaching hand of the growing regulatory state. Virtually everything the average shopper see on the store shelf is stamped with government approval. With the increasing use of red light safety cameras and even domestic surveillance drones, the dystopian world which George Orwell painted so brilliantly in 1984 is sounding more prophetic by the day. The result is a new generation that is coming of age amongst a pervasive and all-inclusive nanny state. With a federal register that grows by tens of thousands of pages each year, tyranny is spewing forth across America from Leviathan’s home of Washington D.C. every single day. In a free society, it would be unjust to force some into paying for the constant supervision of those less cautious of life’s risks. Just as a child learns to avoid a hot stove by painfully touching it, we all learn through misfortune. The Jersey Shore drownings, tragic as they are, should serve as a lesson all beach visitors. Common sense isn’t something to be legislated. It can only form when the right incentives are involved for people to make smart decisions without relying on a central source of authority. And just like the free market, common sense is also a product of spontaneous order.
Oh the exuberance. CRAAPL led the NASDAQ down heavily today as its high-beta ebullience reverted back to 'normal' and the S&P 500 and NASDAQ are closing practically unchanged for the month of July. The Dow Industrials are down 0.4% but the Dow Transports are down 2.65% - near their lows of the month. Financials have been monkey-hammered as today's offer-a-thon dragged them dramatically lower (MS/BAC -13% for the month). A late-day OPEX-inspired activity burst dragged volume up from near year lows and likely inspired the surge lower in VIX into the close (even as stocks went sideways to lower) - but still ended up 0.75vols back above 16%. Treasuries end the week down 2-3bps at the long-end and 4-5bps at the short-end with a decent rally today. The USD is up a modest 0.25% on the week - thanks to notable weakness today in EURUSD (which broke its pattern of reverting today) though dispersion was broad with AUD stronger by 1.5% and EUR weaker by 0.75% on the week. Gold and Silver are practically unchanged on the week, Copper down around 1.5% and WTI up over 5% - but only WTI is up for the month. Cross asset class correlation picked up towards the end of the day as ES caught-down to broad risk asset's less sanguine view of the world. ES ended the week up around 7pts, VIX down around 0.5 vols with financials -2.25% and Energy +3%.
Scandal At The IMF: Senior Economist Resigns, Says "Ashamed To Have Had Any Association With Fund At All"Submitted by Tyler Durden on 07/20/2012 - 13:58
The rats everywhere are now jumping furiously off the titanic, but few had taken the time to write a letter explaining in detail just how cracked and broken the hull really was. This has now changed, with the departure of Peter Doyle, formerly a division chief in the IMF’s European Department responsible for non-crisis countries and currently an adviser to the Fund. Not content with quietly slinking off the scandal ridden organization which has become the butt of all jokes in the international community, where humor about Lagarde's Louis Vuitton panhandling bag is as pervasive as punchlines about just how incompetent the organization is at actually doing its duty, Doyle has penned the following scathing letter which tears down every myth about the IMF: from its impartiality, to the selection process of its head, to its effectiveness. The letter also contains the following gem: "After twenty years of service, I am ashamed to have had any association with the Fund at all." Pretty much says it all. This is a scandal in the making, and one which may shake to the core the credibility of the IMF in the context of international organization.
Tour operators in China do their best to arrange excursions, but it pales in comparison to what could be done. Someone could create tremendous value by facilitating transactions between these potentially buyers and sellers… essentially helping to create a marketplace. This type of business is scalable; it could be done on a small, local level in individual cities and tourist hotspots, or on a much larger, international level. The demand is there, the door is open. This is just one example… but it goes to show that regardless of how much money they print or how many freedoms they try to take away, there are always great opportunities out there.
Despite all the chatter about negative sentiment, and its all priced in, we couldn't help but notice three little signals of concern with regard the real state of people's perceptions of risk. The implied volatility of the S&P 500 is at or near its lowest in the last two years; the difference between the implied volatility of the S&P 500 (forward-looking) and the realized volatility (backward-looking) is its lowest in almost nine months - and at or near the peak complacency levels of last summer; and lastly the size of debt balances in margin accounts at broker-dealers indicates that leverage is at or near its 2008 and 2011 peak levels. Seems like this will not end well, but then again - Ben's got your back and it's all priced in.
Two days ago we made the "missing link" connection between traders in Libor manipulating banks (all of which curiously had a hub in Singapore: something else for the media that has been about 4 years too late on this topic to focus on) and hedge funds (most of which curiously centering on the otherwise sleepy bastion of banking: Geneva, Switzerland). The immediate aftermath was the loss of trading privileges of one Michael Zrihen. We are fairly certain this is just the beginning of the hedge fund bust: when all is said and done, many more funds will have terminated traders they hired for reasons (and kickbacks) unknown over the past 2 years as Lie-bor manipulators sought to put a clean firewalled break between their old employer and current one. Because apparently sometimes the regulators are that stupid and can be confused by a simple job change. And while many have assumed (and even calculated based on completely groundless assumptions) that only BBA member banks have benefited from Libor manipulation, the reality is that hedge funds were just as complicit and benefited just as much if not more. What is worse, they took advantage of their whale client status with manipulating banks, and courtesy of Total Return Swap and other leveraged gimmicks, made far more money when they co-opted two or more banks to do their bidding. Impossible you say: hedge funds would never be so stupid. Oh very possible: we present exhibit A - Brevan Howard, a "fund, with assets of $20.8 billion as of Dec. 31, has never had a losing year and returned 14.4 percent annualized from its April 2003 inception through the end of 2008" as Bloomberg said in a made to order profile of the funds recently. Perhaps there is a very simple reason for this trading perfection: "Brevan Howard telephoned on 20 Aug 2007 to ask the defendant to change the Libor rate," according to a paper filed with the Singapore High Court cited by Bloomberg."
The decoupling between revenues and earnings (that we discussed here) continues and while we have seen analyst reduce estimates, Nic Colas of ConvergEX notes that the estimates for the upcoming quarters of 2012 and into next year have taken a disturbing turn for the worse. On average, the Street expects the 30 companies of the Dow to post only 1.0-1.5% year-over-year top line growth for Q3 2012, down from the 3.0-3.7% expectations it had baked into its financial models just 60 days ago. Also, these analysts now peg Q4 2012 at 3.9% growth, but those numbers are falling quickly as companies report their earnings this month. Also worrisome: analysts are reducing their revenue expectations across the board – only 3 of the Dow 30 companies saw increased expectations for Q3 2012 revenues in the past 30 days, with a similarly dismal count for Q4 2012 expectations. If this is the best these large, well-capitalized companies can muster in terms of sales growth, can a U.S. recession be far behind? And expectations for further monetary policy easing as the last-and-best explanation for the recent rally in U.S. stocks.