In a number of stories in China's top newspapers today, the US has been slammed for its moves to restrict Iran's oil trade which could see Chinese banks sanctioned. As The People's Daily noted, Hong Lei (a Foreign Ministry spokesperson) warned such unilateral action was not only wrong but could exacerbate the stand-off over Iran's nuclear program. Arguing that China 'imports oil based on its economic development needs' without violating relevant resolutions of the UN Security Council and undermining the third party's and international community's interests, he noted China will not accept the practice of saddling unilateral sanctions on the third country. Adding to this, China Daily notes the typical UN blah-dom of Wang Min's comments of the "more pragmatic importance to be firmly committed to dialogue and negotiations in order to properly solve the Iranian nuclear issue". While China is clearly 'disappointed' in the US efforts, Russia turns the dial to 11 with its comments that the US efforts are inflaming, as Russia's Foreign Minister Sergei Lavrov said Tuesday, "Scientists in nearly all countries....are convinced that strikes may slow down the Iranian nuclear program. But they will never cancel it, close it down or eliminate it" warning that Iran will have no option but to develop nuclear weapons should the US strike. Well you can't please all the people all the time eh? Just ask Ben.
High-frequency traders have caused U.S. commodity futures prices to disconnect from market fundamentals of supply and demand since the 2008 financial crisis. An extensive and detailed analysis by the United Nations Conference on Trade and Development just confirms what we have shown again and again (most recently here in Silver) that HFT's impact on the world is not all unicorn-tears and liquidity-providing. Markets are more exposed to 'sudden and sharp' corrections, and as Reuters notes "The strategy of those involved in high-frequency trading tends to reinforce the correlation between equities and commodities". In a somewhat stunning conclusion from an academic treatise, the authors find "We are not saying that it's all about speculators and (that) fundamentals don't matter. But we are saying that they tend to matter less, except in extreme cases,". Unlike other studies on the linkages, the UNCTAD study uses tick-data and finds correlations rising and trade size dropping as frequency increased dramatically since the crisis in 2008. Critically, one final consequence is that investors seeking to diversify or hedge against other investments in their portfolio are often disappointed as the increased HFT creates a destabilizing effect on commodities (increasing volatility) and can often create bubbles.
Quietly, and with little fanfare, President Obama signed a “National Defense Resources Preparedness” Executive Order on Friday. As the name suggests, the order intends to shore up the country’s national defense resources in advance of a national emergency. To be fair, this is not the first time that such an order has been written. President Obama’s order, however, takes things much, much further.This is all playing out with nearly perfect historical precision. Time and time again throughout history as once great empires accelerated their declines, governments have taken steps to protect their interests against the people. In the past, they have imposed curfews, disarmed the population, curtailed civil liberties, and declared national emergencies, usually against some great faceless enemy from abroad who threatens their way of life. As it turns out, though, our great faceless enemy is not some mythical boogeyman living in a cave, nor some angry brown person who hates us for our freedoms… but the very people within the system who’ve taken an oath to ‘support and defend the Constitution of the United States against all enemies, foreign and domestic.’ Have you hit your breaking point yet?
While financial and sovereign spreads in the most optically sensitive entities has rallied magnificently for the last few months – helped and extended by LTRO 1 and LTRO 2 – the weakness of the last week or so in both of these critical systemic risk indicators (Sovereign spreads in Spain and Italy and the LTRO Stigma that we noted earlier) should be worrisome for many of the leaders who are using market action as a corollary for their actions. What is most worrisome however is the absolute and utter lack of impact to the ‘real economy’ of Europe as PMIs have continued to slip and sentiment stumbles – nowhere is this more evident than in charts of Corporate Credit Demand and Corporate Credit Availability, which as Morgan Stanley notes today, suggest the deleveraging balance sheet recessionary impacts felt in Japan and the US are now writ large in European minds as minimizing debt dominates maximizing profits (or living standards). Demand for credit is sliding for both large and small firms and bank lending standards continue to tighten aggressively for both large and small firms. As austerity continues and credit contracts, it seems apparent that the much-hoped for shallow recession in Europe will be deeper and longer than most currently believe.
A mere two days ago we were enlightened on the glory of the central banking system and the general denigration of sound money and the gold standard as Part 1 of Bernanke's re-education lecture series. Today we are treated to Part 2 - a historical perspective of how the Fed has saved the world since World War II. As we watch the stream below, we suspect the word 'inflation' will outpace 'deflation' and 'monetary policy' will dominate 'intervention' or 'picking-winners' as the Chairsatan presents his view of the world-according-to-central-planners. Some early headlines of note:
*BERNANKE: MOST EVIDENCE SHOWS FED DIDN'T CAUSE HOUSING BUBBLE
The March silver futures contract first entered backwardation on Mar 9 and with a few zigs and zags has not only remained there but has gone deeper and deeper in. The April gold future just entered backwardation today. We shall see what the coming days bring for the April gold future, but the fact that backwardation has occurred at all is significant. The fact that it is now a “normal” occurrence since fall 2008 indicates a deep pathology. Backwardation means that anyone who has gold or silver could simultaneously sell the metal and buy futures contracts to recover their position, and make a profit. The market is tight. The metal is out there, but obviously those who have it in an unencumbered form are not able (retail) or willing (others?) to take this backwardation bait.
While some believe we can decouple from the primary and secondary impacts of a China slowdown (jst what happens if we all decouple from the world?), it seems like wishful thinking that the growth engine of the world can now be waved aside on the back of "well, they will just re-stimulate and will be well" especially given where oil prices are currently. Michael Cembalest is little more sanguine that us on China's growth (expecting 7-8% GDP growth to fuel Asian economic activity) but given the 'easing' that has already occurred in China: Chinese government has injected more liquidity; expanded the quota for foreign equity investment; cut bank reserve requirements; delayed tighter capital adequacy rules; created a program through which municipalities can issue bonds with government guarantees (rather than having to borrow from banks); eased first time homebuyer restrictions; and injected capital into its biggest banks; and yet still the macro data is leaking weaker as these 12 charts highlight only too harshly.
Commodities are broadly under significant pressure but nowhere is it more noteworthy than in Crude (even though the USD is only modestly higher on the day). Brent is falling but WTI is underperforming as it trades down on the day at the biggest drop in over three months. Brent-WTI is leaking higher though as the focus shifts increasingly to Brent. WTI and Brent are trading down close to the SPR-rumor spike-low levels as China and Russia both raise the rhetoric against the US on Iran.
Depending on debt to fuel nominal growth leads to an economic death spiral. Sometimes one chart says it all. Charted against consumer credit, the S&P 500 (SPX) collapsed after the 2000 dot-com bubble burst and has been tracing out a descending channel since then. The Fed's injections of liquidity via trillion-dollar purchases of toxic mortgages and Treasury bonds does not funnel money into productive investments--all it accomplished was to further incentivize speculative churning and financialization to enriched the few at the expense of the many. So sit back, tighten your seatbelts and enjoy the death spiral ride, brought to you by the Federal Reserve and your elected servants of the financial Elite.
FX traders of the world have been forlorn for a week or two as the lack of directional guidance from the anti-guru-du-jour Thomas Stolper of Goldman has been sorely lacking. Worry no more. He is back with with his latest 'Fadance' (/fey-dyns, verb/ - "Advice" which Goldman Sachs provides to "muppets") in that he prefers to be short USDJPY from 82.8 (suggesting JPY strength on the back of seasonal patterns and the recent deterioration in the trade balance as being transitory temporary). Given his recent track record, being long the USD against the JPY would seem appropriate and his stop (and therefore the target) at around 84.5.
It will come as no surprise to many that the warm-weather-induced ebullience and renaissance in the US housing market is perhaps floundering as all that demand was dragged forward. Today's notable miss in the FHFA Home Price Index (at unch vs an expectation of +0.3%) is ugly but the huge downward revision from +0.7% to merely +0.1% in the previous month is now the ninth consecutive notable downward revision.Add to that the fact that FreddieMac just reported mortgage rate cracking over 4% (from 3.92% to 4.08%) and the ugly data on MBA applications and...well at least we're decoupling.
We have covered the topic of BLS seasonal adjustment to death and beyond, as well as the endless expansion of those dropping out like flies from the labor pool (did those not in the US labor force, one way or another, whether due to mistracking, statistical aberrations, or outright data manipulation, increase by 1.2 million in January? It did? Next question... or does the government now desperately need an apologist for its own upwardly biased data 'mismanagement'?). Yet some of the formerly relevant elements at the less than cutting edge of asset management-cum-blogging decided to call out Art Cashin for daring to point out just this glaringly obvious seasonal adjustment issue. Of course, Art does not need us rushing to his defense. He can do a good enough job on his own.
Fed chairman Ben Bernanke is covered in a long profile by Roger Lowenstein in the Atlantic. The sympathetic account takes the reader blow-by-blow through the criticism that he has received from virtually all quarters during his tenure as Fed chair. What Lowenstein hones in on are the reviews and criticisms of Bernanke’s performance in “resurrecting the economy” — the interest rate policy, his interpretation of the dual mandate, quantitative easing, Operation Twist, etc. But for a piece that clocks in at 8,287 words, Lowenstein pays scant attention to the emergency actions taken to save the financial system itself.