The Real China Threat: Credit Chaos

Chinese borrowers are facing rising pressures for loan repayments in an environment of overcapacity and unprofitable investments. Unable to generate cash to service their loans, they have to turn to the shadow-banking sector for credit and avoid default. The result is an explosive growth of the size of the shadow-banking sector. The PBOC thought it could control this by limiting liquidity but underestimated the effects of its measure. Largely because Chinese borrowers tend to cross-guarantee each other’s debt, squeezing even a relatively small number of borrowers could produce a cascade of default. The reaction in the credit market was thus almost instant and frightening. Borrowers facing imminent default are willing to borrow at any rate while banks with money are unwilling to loan it out no matter how attractive the terms are. Should this situation continue, China’s real economy would suffer a nasty shock.

What Keeps Goldman Up At Night

If one listens to Goldman's chief economist Jan Hatzius these days, it is all roses for the global economy in 2014... much like it was for Goldman at the end of 2010, a case of optimism which went stupendously wrong. Goldman's Dominic Wilson admits as much in a brand new note in which he says, "Our economic and market views for 2014 are quite upbeat." However, unlike the blind faith Goldman had in a recovery that was promptly dashed, this time it is hedging, and as a result has just released the following not titled "Where we worry: Risks to our outlook", where Wilson notes: "After significant equity gains in 2013 and with more of a consensus that US growth will improve, it is important to think about the risks to that view. There are two main ways in which our market outlook could be wrong. The first is that our economic forecasts could be wrong. The second is that our economic forecasts could be right but our view of the market implications of those forecasts could be wrong. We highlight five key risks on each front here." In short: these are the ten things that keep Goldman up at night: the following five economic risks, and five market view risks.

Obamacare Is Coming... To Russia

With "keg-standing bros" and "easy women" having been tempted already (unsuccessfully from what we know) to participate in the government's 'affordable' care act, Politico reports the Obama administration today unveiled its plans for an Olympic-size ad blitz during the winter games next month. No comments yet on which images will be used (it's too soon for any Schumacher references) but we suggest 'skeleton' will provide the right 'stimulation' to get insured.

The Disenchantment Of American Politics (And The Coming Uproar)

If party politics are weak, muddled, and contradictory, the divisions between Americans are starkly clear: wealth in America has never been so unevenly distributed — the fabled one percent versus everyone else. Despite the election of a mixed-race president, and the wish-fulfillment fantasies of Hollywood, race relations in the USA remain tense. Divisions between men and women are tragically compounded by the dangerous dynamics of work in America that leave many men (especially men) in a vacuum of purpose, meaning, and potency. It is almost impossible these days for low-skilled men to support a family. The indignity of this thunders through broken communities and the penitentiary cellblocks. The ongoing national culture war pits the “traditional values” faction against the sexual libertarians; the red states against the blue states; urban against the conflated suburban and rural; the Christian fundamentalists against an array of other positions and belief groups; the entitlement “socialists” against the “free market” conservatives. Perhaps most divisive of all will be the schism between the young and the old over the table scraps of the dying industrial economy.

Shrinking Bulls?

As the following chart shows, investors can worry no more of over-exuberance, uber-complacency, and super-confidence as the AAII bull-bear survey saw bulls drop to a mere 60.6% this week... panic over... Not!

Here Is The Next Wall Street Crack Down (And Yes, JPMorgan Is In The Middle Of This One Too)

Nearly a year ago, we predicted that the party for bond traders was over. The reason: MBS bond trader Jesse Litvak, formerly of mid-tier, perpetual aspirational bulge bracket, and the place where every fired UBS banker has a safety cubicle, Jefferies, got not only too greedy (that's ok, everyone on Wall Street is), but what's worse, got caught, and as we said at the time, ended the party for Wall Street's bond trading cash bonanza. Little did we know how correct we would be, because not only did the former MBS trader, who "proceeded to rip virtually all of his clients on seemingly every single trade he executed for the three years he was employed at Jefferies, lying to everyone in the process: both clients and in house colleagues, generating some $2.7 million in additional revenue for Jefferies for the duration of his tenure, and who knows how much in personal bonuses", end the party, but it appears he unleashed the next big regulatory crack down on Wall Street. And one which may just cost perennial Department of Justice favorite JPMorgan another several billion in "litigation reserves."

NJ Governor Christie Statement: (Some) "People Will Be Held Reponsible"

New Jersey Governor Chris Christie is rapidly trying to distance himself from the 'deputy chief of staff plotting to create traffic problems' bridge controversy... his full statement (below) can be summed up: ...

"This behavior is not representative of me or my Administration in any way, and people will be held responsible for their actions."

People will indeed be held responsible, with one very prominent exception.

The US Consumer Is So Strong, Macy's Just Fired 2500 And Announced The Closure Of Five Stores

Just out from Macy's, which first said the following: "The 2013 holiday season was successful for Macy’s and Bloomingdale’s as we offered fresh and distinctive merchandise, delivered great value to the customer and provided a robust omnichannel shopping experience... Even in a questionable macroeconomic environment with challenging weather in multiple states, the positive response from our customers during the holiday season is yet another vote of confidence that our well-established strategies continue to work for us." What well-established strategies one may ask? Why the following of course, which was also just disclosed in a separate news release "outlining cost reduction initiatives to support continued profitable sales growth": "Approximately 2,500 employees are expected to be laid off and are eligible for severance as a result of these organizational changes. Other associates are being reassigned with new duties or transferred; some open positions will not be filled."

Despite Late-Day Melt-Up, Stock Stumble-On As Treasury Curve Crushed

Credit markets had been nervous for the last 48 hours heading into today's Fed minutes and reflective of the FOMC's worries over small-cap forward multiple and covenant-lite loan issuance (both of which we have discussed in great detail as excessive) sparked weakness in the Russell and credit spreads. Yesterday's bounce gave way to selling after the minutes (and on a "good" data day). But a late-day no-JPY-supported melt-up saved the day but stocks are still down after first 5 days of the year - still worst since 2008. Treasury yields leaked higher into the minutes then flattened dramatically with 10s and 30s rallying and 5s and below weakening. 5s30s dropped 7bps on the day - biggest flattening since Taper. 10y did not close above 3%. Gold and silver slipped lower after 2pm then recovered into the close, but WTI crude slid all day - holding losses after the Fed ($92.50). The USD limped lower after the Fed with EURUSD unch on the week before tomorrow's ECB statement.

 

They Give Awards For That?!

The “Ig Nobel Prize” is parody of the Noble Prize that is awarded every year for the most trivial scientific achievement. For example, the 2007 recipient for the ‘Ig Nobel Peace Prize’ went to the United States Air Force Wright Lab in Ohio, for proposing the development of a ‘gay bomb’ that could be dropped in hostile territory and make enemy troops sexually attracted to each other. Make love, not war? So when we opened my email yesterday and saw the subject line: “Central Bank Governor of the Year”, we immediately presumed it was a similar satire. It wasn’t...

95% Of Total Consumer Credit Lent In Past 12 Months Is For Student And Car Loans

Putting it all into perspective, of the total $178 billion in consumer credit expansion in the past 12 months, a tiny $9 billion, or just 5% of total, was to fund credit card purchases. The rest went - you guessed it - into purchases of cars and paying for tuition, for which GM and strateospheric college tuitions are most grateful. And that is the New Normal economy in a nutshell.

USD, Bonds, And Bullion Down Post Fed Minutes

Broadly speaking, markets shrugged at the Fed minutes but as te last 30 minutes evolved, the relative hawkishness (though remember tapering is not tightening) QE message - and fears over excessive risk-taking - have sparked weakness in several asset classes (except stocks for now)...

The Fed Is Concerned About Small Cap Forward Multiples And Covenant Lite Loans?

"Participants also reviewed indicators of financial vulnerabilities that could pose risks to financial stability and the broader economy. These indicators generally suggested that such risks were moderate, in part because of the reduction in leverage and maturity transformation that has occurred in the financial sector since the onset of the financial crisis. In their discussion of potential risks, several participants commented on the rise in forward price-to-earnings ratios for some smallcap stocks, the increased level of equity repurchases, or the rise in margin credit. One pointed to the increase in issuance of leveraged loans this year and the apparent decline in the average quality of such loans." - FOMC

Fed Minutes Reveal "Waning Benefits Of QE", Mentions Risk Of "Capital Losses"

As one might have expected the tension during the most recent FOMC meeting was palpable in the minutes as opposing dovish and hawkish less dovish views on the costs and benefits (and non-comprehension of the machinations) of QE were evident.

  • *FED OFFICIALS SAW WANING BENEFITS FROM MONTHLY BOND PURCHASES
  • *MANY FOMC MEMBERS FAVORED QE TAPERING IN `MEASURED STEPS'
  • *MOST FOMC PARTICIPANTS WERE MORE CONFIDENT IN JOB MARKET GAINS
  • *FOMC PARTICIPANTS `MOST CONCERNED' ABOUT QE RISKS TO STABILITY

The likely path of tapering seems clear (and mention of extending the reverse repo facility is notable) but how forward guidance will be implemented remains the hottest topics and Eurodollar prices suggest the latter even more so than the former.

Pre-FOMC Minutes: S&P Futs 1832.0, Gold $1225.5, 10Y 2.995%, EURUSD 1.3570, USDJPY 104.95

Visualizing The Fed's "Increased" Transparency

As the world prepares to comprehend, in their own recency-biased manner, the minutes of the most recent FOMC meeting, we thought it worth a reminder of just how Fed communications have ballooned in the past 20 years. The first statement, issued on Feb. 4, 1994, was a mere 99 words. December's 'most important FOMC statement ever' was a stunning (record) 867 words - and even so Jon Hilsenrath managed to interpret and write on it in 3 minutes. As we noted earlier, the minutes tend to be a platform for even greater 'communication' - and notably are not the actual minutes of the meeting but a prepared annotation of what the Fed wants the public to know about the meeting. Transparency and communications, it would appear, has been transformed from clarifying to endless caveat-ing.

Preparing For Civil Disobedience? London Mayor Wants Water Cannons In London By The Summer

The US may be blanketed in freezing cold, but the UK is already preparing for what should be a hot, dry summer. Either that, or the request of London mayor Boris Johnson to distribute water cannon on the street of the capital may be an indication that at least some major municipal centers are preparing for a jump in civil disobedience and are looking for appropriate, "non-lethal" means to contain it. SkyNews reports that "the London Mayor says the weapons will be used only in "the most extreme circumstances", however, there are fears the cannon could be deployed to break up small-scale legitimate protests. Mr Johnson says the water cannon are necessary in case there is a repeat of the summer riots of 2011." So "just in case."