An Analytic Framework For 2013

In one sentence, during 2013, we expect imbalances to grow. These imbalances are the US fiscal and trade deficits, the fiscal deficits of the members of the European Monetary Union (EMU) and the unemployment rate of the EMU thanks to a stronger Euro. By now, it should be clear that the rally in equities is not the reflection of upcoming economic growth. Paraphrasing Shakespeare, economic growth "should be made of sterner stuff". Many analysts rightly focus on the political fragility of the framework. The uncertainty over the US debt ceiling negotiations and the fact that prices today do not reflect anything else but the probability of a bid or lack thereof by a central bank makes politics relevant. Should the European Central Bank finally engage in Open Monetary Transactions, the importance of politics would be fully visible. However, unemployment is 'the' fundamental underlying factor in this story and we do not think it will fall. In the long term, financial repression, including zero-interest rate policies, simply hurts investment demand and productivity.

One Year Of Tax Hikes On The Rich Is Promptly Spent As $60 Billion Sandy Relief Aid Bill Passes

After more than two months of political grandstanding, finally the $60 billion pork-laden Sandy relief aid bill has passed through the House in a 241-180 vote (with 1 democrat and 179 republicans voting no), with the vote passing courtesy of just 49 republicans who voted with the democrats. The reminder objected in protest "against a bill that many conservatives say is too big and provides funding for things other than immediate relief for New York, New Jersey and Connecticut" Politico reports. Specifically, the House approved a $50 billion relief bill, after several hours of contentious debate in which scores of Republicans tried unsuccessfully to cut the size of the bill and offset a portion of it with spending cuts. $9.7 billion had been already voted on January 4th for a flood insurance lending facility.The biggest winner today? Chris Christie whose anti-Boehner soapbox rant drama two weeks ago may have been just the breaking straw that forced the passage of this porkulus bill.

Exposing Europe's "Syphilitic Structural Core" With MEP Daniel Hannan

In an impassioned 80 seconds, MEP Daniel Hannan exposes the structurally rotten "syphilitic core" of a European Union whose existential crisis has now seemingly been pronounced 'over' by those wondrous self-denying members of the European elite. "There is an extraordinary denial going on," the eloquent Englishman expounds as he notes that they still "haven't addressed the fundamental problem," of 'applying a single monetary policy to countries with widely divergent conditions and means' leaving unemployment rising and growth stagnating. He notes that the crisis in one respect is over, the moment of decision of taking one of two paths, is indeed over - and "the squaller, the wretchedness, the unemployment and poverty have now become structural."

Platinum Overtakes Gold As South African Mining Problems Return

In some ways it is lucky that the platinum coin nonsense is dead and buried because there may have been certain procurement issues. The reason, as was the case late in 2012, is that the South African mining situation is once again rapidly unraveling, despite hopes by third parties that recent wage compromises between employers and unions had managed to leave striking workers and mining companies at a tense but cordial  impasse. However, as was easily predictable, following the substantial wage hike demanded by miners to end strikes, what resulted was perfectly expected: a collapse in profits. And now Anglo American Platinum has no choice but to shutter a variety of facilities and fire workers outright in order to restore the pre-riot profitability. From AP: "The world's largest platinum producer said Tuesday it will close some operations, sell one mine in South Africa and cut 14,000 jobs. Anglo American Platinum said a nearly yearlong review found that four mine shafts needed to be closed and one mine sold because of unprofitable operations. The government's minister of mines and the National Union of Mineworkers, NUM, expressed surprise and shock at the announcement." 

Deutsche's Bullish For 2013 Despite These 6 Huge Downside Risks

In their view, 2013 will likely mark the dawn of the post-crisis era, but it seems the premise for Deutsche's somewhat ebullient 2013 outlook (below) is that central-bankers remain on standby to counter any and all negative risks. Despite the brinksmanship, politicians will act to prevent systemic collapse and while structural long-term issues such as high debts across the developed world and unbalanced growth models in emerging economies remain unsettled, Deutsche argues that 2013 could be a year of stabilization after years of crisis-fighting. The following presentation is broad-based and lays out a "don't fight the central banker" meme perfectly; however, the six key downside risks (from China NPLs to European political unrest) that they highlight (but gloss over in their somewhat Pollyanna-ish way), should at least - in our humble opinion - raise some concerns about the bimodal distribution of outcomes that await risk assets in 2013.

Presenting The Working Poor Of America

Much has been made of the slow but steady 'improvement' in the unemployment data we are treated to on a weekly and monthly basis from the hallowed eves of the BLS. Just as much has been written on the ugly under-belly of this apparent improvement with the work-force becoming dominated by older workers forced to stay in jobs for longer and an increasing downshift in the kind of jobs available and taken. To wit, Reuters cites a report from the The Working Poor Families Project that highlights the surprising levels of poverty so many Americans find themselves in. The number of low-income 'working' families has increased three straight years - and now stands at over 10.2million, with more than 46 million people living in low-income families. "Although many people are returning to work, they are often taking jobs with lower wages and less job security, compared with the middle-class jobs they held before the economic downturn," which means that nearly one in three working families in the United States is struggling to meet basic needs. Although they are often overlooked, the number of low-income working families has been increasing steadily, resulting in a shrinking middle class and challenging a fundamental assumption that in America, work pays - as we have pointed out before (at these levels, it simply doesn't thanks to the benefit availability).

Jim Grant: Heads Bankers Win, Tails Taxpayers Lose

Interest Rate Observer, Jim Grant, played an important role as explainer-in-chief in the forthcoming movie "The Bubble" - a documentary that interviews the experts that predicted the 2008 crash and asks what happens next. The brief interview embedded below provides a smorgasbord of Grant's thoughts on topics from Fannie and Freddie as government-sponsored titanic hedge funds, his concerns at the unintended consequence of the debt-sustaining mortgage interest deduction, why MBS are not the root of all evil, and how the federal government is socializing risk for bankers. As usual, the ever-so-erudite Grant sums it all up superbly: "American bankers, based on the experience of 2007-8-9, don't know much about banking, but there's one institution that knows still less and that institution is the United States Congress." Adding that the past two or three years have all been about the unintended consequences of federal "spending, promising, and intervening" in finance and banking to delay a day of reckoning, Grant believes a correction is coming but again warns (in as succinct an eleven-word-sentence about our real world as we have seen recently), that "Bankers get the upside and we - the taxpayers - get the downside."

Stocks And Bonds Bid As AAPL Catches Down To Nasdaq

From the start of 2012, AAPL was the beta-transforming game in town. Fund after fund claimed their stock-picking excellence when really, they were just running a higher beta fund being overweight AAPL. Today saw that come to an end (for now). AAPL and Nasdaq have recoupled (both +19.5% from 12/30/11) as the former fell to 11-month lows. One thing is clear, given strength in the indices today, everyone and their mom appeared to be in the long AAPL, short index trade isolating their performance. S&P 500 futures pushed inexorably higher all afternoon (even as bonds rallied, and the USD went bid on Juncker's verbal intervention) - testing unchanged on the week. From soon after this morning's POMO, US equities disconnected almost entirely from the rest of risk assets. Gold and Silver rose, Oil and copper slid, HY Credit snapped lower and recovered in the afternoon as the VIX term structure yawns ever wider across the debt-ceiling deadline, CHF was offered all day, and the short-term T-Bill curve is now inverted (stressed) across the debt-ceiling deadline.

Bill Gross Gets It

R.I.P. Retirement: 28% Of Americans Are Raiding Their 401k Plans

This trend has been in place since the financial crisis, but the fact that it is accelerating is extremely disconcerting.  First off, this is not the kind of behavior that should be witnessed in an “economic recovery.”  Second, we need to remember the huge percentage of Americans on food stamps and/or disability.  As we have discussed previously, many of them also have jobs.  So essentially, a wage and a check from the government is still not enough to survive.  They still need to tap into a loan from their 401k plans.


We realize the subject matter is about as tangential to the core themes discussed here as possible, but since hypocrisy of this magnitude has to be seen to be believed, and traditionally was only possible when emanating from the Federal Reserve (did we say  tangential?) we present: Liestrong... in his own words.

Santelli Slams Keynesians: "The Answer Is Always More Money"

Correlation, causation; cause-and-effect; Birinyi's Ruler; and Bernanke's Hammer. CNBC's Rick Santelli attempts to open some minds to the "nefarious" levels to which banks and politicians will go to infer from data and bolster our crowd-sourced confirmation biases. Santelli dismisses the meme that government dysfunction is the cause of our problems - instead stating that it is the effect. The main cause of this dysfunction is that we have problems we need to solve, politicians who know how to solve them, but that solving them is not only going to be painful for everyone - but most importantly for their respective bases - and therefore dysfunction ensues. From ratings downgrades not being caused by dysfunction (rather by an inability to deal with entitlements spending and debt) to the Federal Reserve losing the nation's trust acting not for liquidity needs but for insolvency; Santelli aims his magic marker finally at the Keynesians, for whom cause-and-effect is all, adding that their answer to everything is "always more money" to paper over short-term pain, as he rhetorically asks "in ten years when we look back, is the weight of all this debt going to take care of all of these impulsive upticks?" Must watch...

Juncker Warns EUR Exchange Rate "Dangerously High", Or Europe Wants Its Cake And To Eat It Too

We have long been discussing the fundamental paradox dichotomy that Europe finds itself in, where on one hand the continent needs ECB intervention to keep it together with indirect debt monetization and current account deficit funding via TARGET2, yet on ther other, where ECB intervention always ends up pushing the EUR higher relative to its FX peers as the natural trendline of the artificial currency is to its natural long-term price level: 0.00. The problem of course, is that the higher the EUR goes, the weaker German exports become, and as we observed just this morning, the faster Germany's collapse into recession happens. Sure enough, Europe finally figured out what has been obvious to virtually anyone with half a brain for many months:


That's great, and we agree with Juncker for once, but there is major problem with this: the lower the EUR goes, the greater the redenomination risk. Sorry Europe - that's just the way it is. The second the EUR goes back to the mid and lower 1.20s (or below) PIIGS bonds will go bidless, liquidity will go bump in the night, currency swaps will get all banged up, and "redenomination risk", or fear of currency implosion, will once again rear its ugly head. But at least German exports, and thus German GDP, and thus the only viable economy in Europe, will prosper.

As Germany Prepares To Repatriate Its Gold, We Hope They Have Learned From The "Monetary Sins Of The Past"

As initially reported here yesterday, in what is the biggest news of the week, and possibly the year, the Bundesbank has broken away from its "all is well" posturing exhibited as recently as three months ago, and in a dramatic reversal of its diplomatic position, has demanded repatriation of some of its NY Fed and all of its Paris-domiciled gold. We applaud Herr Wiedmann for this move, although we hope that the German people are allowed to witness, and verify, the arrival of the actual gold as opposed to simply empty crates. Of course, at the end of the day the actual delivery is irrelevant: what matters is this first shot across the bow of the current monetary system - one which juxtaposes sound money versus infinitely dilutable electronic fiat more than ever before - by a major conservative central bank, one in possession of the second largest official gold reserve, second only to the Fed itself. That said, we can only hope that the German request for gold repatriation is not met with the same enthusiastic response that France encountered when it too attempted to repatriate its gold held by London back in the 1930s, just before a whole lot of things in the global economy went horribly wrong...


As we anxiously await the titanic announcement about to spew forth from Menlo Park, we thought a look at 2013's +20% performance was worthwhile. We would expect to hear a plethora of 'monetizing mobile' and a cajillion eyeballs must mean something. Will the Facebook phone replace the Obama-phone? Will being 'liked' provide external stimulus? Will they be merging with Dell (or Radioshack?) Feeling bullish? Be wary, implied vol is at its most expensivce to realized vol in 7 months... Rest assured, we will bring the critical headlines as they break...

*FACEBOOK ANNOUNCES GRAPH SEARCH                          :FB US

FB stumbling now -1.7%

Pictet's Four Horsemen Of The Euro-pocalypse

Euro area industrial production decreased in November, for the third month running, and reached its lowest since April 2010. Pictet notes that, in terms of country, the industrial production figures were mixed with 8 out of 12 countries experiencing negative m-o-m growth. It is worth noting that all periphery countries recorded a sharp monthly decrease and while recent 'surveys' have confirmed a stabilization (albeit in negative territory), this week's data (as shown in the following 4 charts) suggests that current optimism may be challenged. The bottom line - despite hope of an improvement in activity in Q1 2013, the overall picture remains very gloomy, especially for the periphery countries. Without external help (ECB unorthodox measures, fiscal federalism, etc.) these countries are likely to remain entrenched in recession.

Guest Post: Why Expansionist Central States Inevitably Implode

The S-Curve usefully charts the gradual development, explosive rise and eventual stagnation and collapse of complex systems. Remarkably, natural phenomena such as the spread of bacteriological diseases and financial dynamics both follow S-Curves. The S-Curve also helps us understand why the Expansionist Central State is doomed to inevitable implosion/collapse. The key dynamic in State spending is this: the allocation of public capital is intrinsically a political process, not a market or communal process. We are at the inflection point indicated on the chart below where the lines cross, just before the crisis: tax revenues are lagging spending in an enormous structural deficit. Tweaking tax policy or raising the debt ceiling will not change any of these dynamics. The Expansionist State is on the path to implosion (insolvency) and collapse, i.e. a political crisis. If we understand the core dynamics of the Expansionist Central State - the political allocation of scarce national income to favored constituencies and cartels - we understand why this process is inevitable.

The Golden Age Of US Corporations Is Ending: S&P 500 Cash Has Peaked And Is Now Declining

One of the biggest "givens" of the New Normal was that no matter what happens, US corporations would build their cash hoard come hell or high water. Whether this was a function of saving for a rainy day in a world in which external liquidity could evaporate overnight, whether it was to have dry powder for dividends and other shareholder friendly transactions, or to be able to engage in M&A and other business transformations (but not CapEx, anything but CapEx), corporate cash swelled to over $2 trillion (the bulk of it held in deposit accounts, or directly invested in "cash equivalents" i.e. risk assets, in banks in the US and abroad). Whatever the use of funds, the source was quite clear: ever declining interests rate which allowed corporate refinancings into ever lower cash rates, a "buyer's market" when it comes to employees, the bulk of which have been transformed into low paid geriatric (55 years and older), part-time workers: the only two categories that have seen a steady improvement in employment since the start of the second great depression, and low, low corporate taxes (for cash tax purposes; for GAAP purposes it is different story altogether). So some may be surprised that the great corporate cash hoard build appears to have finally tapered off. As the chart below from Goldman shows, after hitting an all time high of 11.2%, the ratio of S&P500 cash to total assets has once again started to decline.

Widest Discrepancy Ever Between AAPL Reality And Analyst Hopium

With price-targets now apparently nothing more than a 'talking-point', it is, perhaps, of little surprise that the gap between the average sell-side analyst's price target for AAPL and the current price is the widest it has ever been. And of course, the 'buys' versus 'sells' has not budged at all... for your reading pleasure, the 50 analysts' price targets for AAPL... and the two non-lemmings (Per Lindberg and Edward Zabitsky) that see potential downside for AAPL.

Why Americans Are Broke, And Getting Further In Debt

Just as the president reminded us yesterday we are not a deadbeat nation, merely borrowing money today to pay the bills of yesterday, so, as the NY Times reports in this all-too-real article, many of the citizens of the US are also living not just paycheck-to-paycheck but short-term-loan-to-short-term-loan. As one debt-consolidation service noted "They've been borrowing just to meet payments on previous loans; it builds on itself." Rings an awfully loud bell eh? (and yes, we know the government's finances are not run like a households - though at some point the check book needs to balance). People in tough 'economic' situations fall into the 'poverty trap', borrowing money at ever higher interest rates in a shell game to keep previous borrowers at bay. The average debt for households earning $20,000 a year or less more than doubled to $26,000 between 2001 and 2010 - as people dig deeper, precisely because they long to escape. As the focus of the article notes, "the belt-tightening was the easy part... the larger problem was cash-flow." Critically, experiments show that 'economic' scarcity by itself - independent of personality or any other factors - fuels a drive to borrow recklessly.