On The Game-Theoretic Market Crash 'Solution' To The Fiscal Cliff

We expect a return to a skittish environment in markets. We are confident in my prediction for the course of the economy by leveraging simple game theory in handling the upcoming crisis as Congress returns for its lame duck session. “Compromise” reflects a decision from either side that each find unpalatable. Both President Obama and Speaker Boehner would rather shove two sticks in their eyes than move from their hardened stance despite some of the recent rhetoric in favor of bargaining in good faith.  As long as the loss of utility from both sides’ digging in their heels is more favorable than conceding to the preferences from those across the aisle, then the game arrives at a Prisoner’s Dilemma. the above matrix concludes that the fiscal cliff virtually guarantees an aggressive selloff for equities until the stop loss for the Democrats and Republicans has been triggered.  For example, if the clock hits midnight on New Year’s Eve with the blue chip index at or near its September peak, each faction would feel comfortable standing up to the other well into January.

"Hot Money" At Boiling Point: Hong Kong Apartment Sells For Record $8773 Per Square Foot, New Asian Record

Over the past year, one of the more confounding developments has been the relentless surge higher in the Chinese currency, whose unpegged version has soared to multi-decade highs against the USD, even as the economy has been mired in a downward secular shift with various indicators showing an ongoing decline. The reason for this "hot money" phenomenon is the easy money policy adopted by all the world's central banks (except for the PBOC of course, which is forced to stick with reverse repo-based ultra short-term money injections), coupled with the anti-foreign capital stance adopted by Switzerland, making China, Hong Kong and Singapore as the go to targets for "excess global cash." And as long as the hot money continues to flow and keep the inflation threat "on the sidelines", all attempts to cool its notwithstanding, the PBOC will be unable to ease, and allow US tech companies' stock prices to finally rise, as their profitability is and has always been a reflection of Chinese end-market demand. By the looks of things, the PBOC will be stuck in a holding pattern for a long time, as just confirmed by the sale of a luxury Hong-Kong 6,683 sq. foot apartment in the Gehry-designed Opus Hong Kong in Mid-Levels East, at a price of HK$455 million, which translates to HK$68,000 per square foot, or just under $8,800: a new all time record for Asia. So much for cooling the hot money.

Living In 'The Day Before'

Markets, you see, always live in this “day before” where the bend in the highway never comes, where the path is always straight and fixed and where it is generally thought that nothing of consequence will happen. Then some event takes place, something magical or wonderful or awful occurs and the world is turned on its axis and nothing is ever the same again. We are in danger, “clear and present danger” and the strategy of the “day before” is no longer appropriate. $400 billion has poured into bond funds this year, an all-time record, with yields at depressed levels indicating a quite real flight to safety. The United States lost thirty-six percent of its wealth during the American Financial Crisis and, people or institutions, the song rolls across the landscape, “We won’t get fooled again!”

Frontrunning: November 13

  • The Bild is now a source for EURUSD stop hunts: Germany eyes 'bundled' loan payment to Greece-paper (Reuters, Bloomberg)
  • Congress comes back Tuesday to confront “fiscal cliff.”  (Reuters)
  • Gen. John Allen ensnared in Petraeus scandal (Politico)
  • FBI Agent in Petraeus Case Under Scrutiny (WSJ)
  • Comcast's NBCUniversal unit lays off 500 employees (Reuters)
  • University Fees Stoke U.K. Inflation (WSJ)
  • Consumers Closing Wallets in Japan Add to Noda’s Woes (Bloomberg)
  • John McAfee Wanted for Murder... and explaining bathsalt anal suppositories (Gizmodo)
  • Europe Gives Greece 2 More Years to Reach Deficit Targets (Bloomberg)
  • Where Spain Is Worse Than Greece (WSJ)
  • Microsoft's Windows unit head, once a possible CEO, exits (Reuters)
  • Glitch stops NYSE trading in 216 companies (FT)
  • Large European Banks Stash Cash (WSJ)
  • The death of San Bernardino: How a vicious circle of self-interest sank California city (Reuters)
  • Apple stores most productive US shops (FT)
  • Treasuries See U.S. Falling Over Cliff as Yields Converge (Bloomberg)
  • Bra-Bodysuits Make H&M One Hit Wonder as Zara Prospers (Bloomberg)

Overnight Sentiment: Europe Stumbles Over Itself, Again

It wouldn't be the New Normal if the basket case that is Europe, and its amusingly named "Union", didn't somehow manage to trip over itself. This is precisely what happened last night at the European finance ministers meeting after IMF head Lagarde and pathological liar and chair of the Europe's mostly broke Finance Minister, Jean-Claude Juncker, openly disagreed with each other, an event even the FT called a "feud" after they proposed two alternative visions for Greece, one which envisioned the 120% debt/GDP debt target goal pushed forward to 2022 (for Juncker), and on the other hand, IMF, which has been humiliated enough with its horrible predictions, and which refuses to budge from its 2020 Greek target. Per the FT: "In a rare breach, Mr Juncker told a post-meeting press conference the target would be moved to 2022, prompting Ms Lagarde to insist the IMF was sticking to the original timeline. When Mr Juncker again insisted it would be moved – “I’m not joking,” he said – Ms Lagarde appeared exasperated, rolling her eyes and shaking her head. “In our view, the appropriate timetable is 120 per cent by 2020,” Ms Lagarde said. “We clearly have different views.” Officials will meet again November 20 in an effort to reach agreement, Mr Juncker said. Despite the delay, officials insisted Greece would not default on Thursday, when Athens must make a debt payment of about €5bn without the benefit of international aid." Nothing like total coordination and organization within a monetary union that may not exit if Greece does not make its November 16 bond payment, which it likely will, by issuing debt and forcing the ECB to accept it as eligible collateral so that Greece can roll the maturity. And concluding this hilarious incident was Juncker's statement this morning that there is "no real dispute" with the IMF. When it gets serious...

Samsung Hikes Apple Component Price By 20%

Two months ago, when we commented on Apple's pyrrhic courtroom victory in which it managed to halt sales of older generation Samsung smartphones - a "victory" which would backfire with Samsung phone sales soaring, while AAPL results missed, forcing the company to accelerate its product launch cadence to a ridiculous 3 months with news that the iPhone 5s is already in the works a month after the launch of the iphone 5 -  we said "The paradox here is that AAPL's victory is quite pyrrhic: if and when Samsung feels sufficiently threatened, it can just pull a Gazprom and halt the supply of mission critical components to the world's biggest publicly traded company." Naturally, the hyperbolic all out response would mean an immediate nuclear war of attrition between the two electronics giants. Instead Samsung would be even better served to show Apple who is boss in quantized increments. Today, it has done just that, forcing Apple to swallow a 20% price increase on hundreds of millions of Samsung application processors used in iPads and iPhones. "Apple first disapproved it, but finding no replacement supplier, it accepted the (increase.)" Game, set, match Samsung.

Guest Post: Japan's Last Remaining Nuclear Power Plant May Be Built On An Active Fault Line

Following the disaster at the nuclear power plant in Fukushima last year, nearly all of Japan’s reactors have been shut down. The only power plant to remain operational today is the Oi nuclear plant in western Japan. A geologist working as part of team looking at the power plant, its location, and the geological history of the area, has now stated that the power plant is built on top of a fault line that can be described as ‘active’, and advises that it be shut down immediately. Watanabe fears that any seismic activity on this fault line could cause a catastrophe similar to the one at Fukushima; although his colleagues on the advisory panel disagree.

Post-Election Performance: Dip-Buyer's Dream Or Valuation Slump

With the S&P 500 down a staggering 6.5% from its post-QEtc highs, the world and their wealth adviser is beginning to get that Deja Deja Deja Vu feeling all over again. The commission-takers are being trotted out left, right, and center to spew forth every market myth from "money-on-the-sidelines" to "markets-hate-uncertainty"; from "valuation is cheap" and "whatcha' gonna do - buy bonds at 1.5% yield?"; and from "healthy retracement" to "long-term horizon". In today's episode of epic realizations of the truth, we thought we would look at year-end multiple expansion (contraction) seasonals - since we suspect earnings expectations (which are still running dramatically high; even though recently trending lower) - remain exorbitantly hopeful of a fiscal cliff resolution bringing joy and happiness to the world. Fact: post-election-year multiples have on average contracted around 1x versus a 0.6x expansion in non-election years.

Kerry, John Kerry: Defense Secretary

Just when the newsflow surrounding America's military-industrial complex couldn't get any more surreal, and on Veterans day on top of everything, here comes the WaPo with news that virtually assures all defense companies should open limit up tomorrow: "President Obama is considering asking Sen. John F. Kerry (D-Mass.) to serve as his next defense secretary, part of an extensive rearrangement of his national security team that will include a permanent replacement for former CIA director David H. Petraeus." That's right: John "Swiftboat" Kerry, the same John Kerry who accused Vietnam vets of committing war crimes; the same John Kerry of the whole military service controversy. More "Although Kerry is thought to covet the job of secretary of state, senior administration officials familiar with transition planning said that nomination will almost certainly go to Susan E. Rice, the U.S. ambassador to the United Nations." As to Petraeus, who may or may not testify over the Benghazi affair, but apparently is excused due to his familial infidelities, and whose sexual dalliances were (not) ironically captured best by The Onion, his replacement is also becoming clear: "John O. Brennan, Obama’s chief counterterrorism adviser, is a leading contender for the CIA job if he wants it, officials said. If Brennan goes ahead with his plan to leave government, Michael J. Morell, the agency’s acting director, is the prohibitive favorite to take over permanently. Officials cautioned that the White House discussions are still in the early phases and that no decisions have been made."

The Devil You Know

Many Americans voted for “the lesser of two evils” and were disappointed in the result.  This must have been an emotional double whammy in the sense that not only did the guy you disliked so much that you were willing to vote for a candidate you didn’t like win, but you didn’t vote your conscience. What allowed Mike Krieger to do this was the complete and total recognition that under both major candidates America loses. His major issues are:

  1. The Federal Reserve scam and Wall Street theft.
  2. Civil liberties and the destruction of the Constitution.
  3. Our aggressive foreign policy and imperial wars abroad that help only the oligarchs and impoverish the masses.

The country has cancer, not a common cold, and our response therefore must be much more serious than either of these corporate candidates are willing to commit to. Unfortunately, it will get ten times worse in the coming years, and we strongly believe that 2013-2016 will be a historic period in the political transformation of the United States.  The show is over.  It’s time to buckle up.

The Five Stages Of A Sovereign's Life-Cycle

Bridgewater's Ray Dalio believes four factors drive relative economic growth: competitiveness, indebtedness, culture, and luck. The returns from his machine-like investment process clearly indicate he is on to something as he notes that the most powerful influences of this relative income (and power) are 1) the psychology that drives people’s desires to work, borrow and consume and 2) war (which we measure in the “luck” gauge). Throughout history, Dalio advises these two influences have changed countries’ competitiveness and indebtedness which have caused changes in their relative wealth and power. He goes on to add that since different experiences lead to different psychological biases that lead to different experiences, etc., certain common cause-effect linkages drive the typical cycle of a nation's growth, power and influence - and that countries typically evolve through five stages of that cycle.

The Gini Is Out Of The Bottle: Did China "Outcapitalism" The US, Or Did America "Outcommunism" China?

The patriotic thing preoccupying the lucky successor to Chinese President Hu Juntao will be a simple one: how to promote the well-being, and equality among the people. After all, caring about the people is the primary preoccupation of any good communist country. As such, key concern for the new leader and his government will be the income distribution inequalities and corruption among the Chinese population, something outgoing leader Hu himself stressed. Indeed, as the most recent Chinese Gini coefficient (the measurement of inequality of income in a given society) reading shows, in China this has risen from 0.42 in 2007 to 0.48 in 2009. It is this reason why the Chinese society will have to engage in far more effective wealth redistribution because the last thing the country with no real social safety net can afford is social unrest and upheaval in a time of declining economic growth. So far so good. Where there does arise some confusion, is when juxtaposing Chinese social inequality with that of the US. Recall that China is a de facto communist country, whose society is, at least on paper, equal. One wonders, then, how it happened that US society now has a Gini coefficient that is lower than that of China: did communist China "outcapitalism" the US, or has the US simply, and quite successfully, "outcommunism" China?

Greek Neo-Nazis Not "Liked" By Facebook

While Google's historic tagline of 'Don't Be Evil' has occasionally been questioned, it would seem Facebook has taken up the mantle (Chinese censorship style). As ekatherimini reports, the third most-supported political party in Greece - the neo-nazi Golden Dawn - has been blocked by Facebook in what the party calls "an act of censorship" and a "relentless attack against nationalist users" of the site. With over 10% of the Greek population currently polled as voting for this nationalist party, evidently Facebook did not 'like' the posting of various Nazi symbols. See no evil, do no evil, 'like' no evil; as it appears Zuckerberg and his California crew will have no evil on their servers (or any other popular political parties' insignia we presume). Raises lots of questions this one...

Guest Post: U.S. Shale Goes Boom, Rest Of World Goes Bust

OPEC, in its World Oil Report, said there's an overall sense that developing shale oil and natural gas could start to redefine the global energy mix. In the United States, the cartel said shale natural gas production alone grew by more than 60 percent from 2010 to 2012.  For shale oil, supplies in the United States have already passed the 1 million barrel-per-day mark. Though shale reserves may ultimately be a game changer, said OPEC, outside the United States, the sector is in its infancy.

A Whole Lotta Something Going On

Sigh... Volume is around 50% of average. USD ends the day unchanged; Treasury futures imply an unchanged cash market; Equity indices close practically unchanged but there are some odd-ones-out on the day. Utilities were sold much more heavily that the rest of the S&P sectors (with Tech the only other red sector). Copper managed an outlier gain while oil/gold/silver all dropped. Individual stocks suffered from some exchange drama but all eyes were on JCP (which potentially lost Mr. Ackman $106mm today and ended with a $17 handle (-13%) - its lowest since March 2009; AAPL slid from 'exciting' opening highs to close -0.75% finding every ramp to VWAP was sold into. VIX was the story of the day as much was made of the collapse in front-end risk premia - this (as we explained earlier) was only half the picture as the longer-dated VIX rose relatively as the fiscal-cliff event risk is gradually priced in at year-end. Stocks were considerably more volatile intraday than broad risk-assets (thanks to Treasuries closure) especially after Europe's close, but they ended the day pretty much recoupled.

Guest Post: The Smartest Investment Of The Decade

Here’s something crazy to think about. Roughly 200,000 people were born today. That’s net world population growth, births minus deaths. Each one of them constitutes a new mouth to feed. And when they come of age, those 200,000 people will consume, conservatively, about 1,250 Calories per day. Collectively, that’s 91.25 billion Calories per year for the entire 200,000 people that were born today. Where will they get that food from?  Increasing demand. Tightening supply. Destructive policy. All of these point to a long-term trend in food. And the trend is enormous. The best case scenario is steep food prices. The worst case scenario is severe shortages. This makes agriculture probably THE place to be over the next ten years. Like owning physical gold, farmland gives you not only the financial upside of rising agricultural prices, but also the personal assurance of a guaranteed food supply.

October Hedge Funds Performance Update: Mixed

With the market largely flat in October (the biggest market selloff in one year took place after Obama's reelection), it is no surprise that the most prominent hedge funds performed largely in line with no notable outliers either in the positive or negative columns.

Guest Post: America Isn't The Greatest Country Anymore

It may seem blasphemous on such an important day of remembrance to suggest that what is being protected is somehow not as worthwhile as it once was but as Street Talk Live's Lance Roberts shows America is no longer the greatest country in the world - based on numerous statistics... 7th in literacy, 27th in math, 12th in prosperity...You get the idea.  The rise of economic strength was built on the backs of hard working Americans who built stuff from skyscrapers to railroads.  We farmed, we produced and we raised families.   The pride of "built in America" was the flag that we waved. America has become a debtor nation and the cancer of debt has eroded our economic prosperity. Can America be great again?  Absolutely.  America has an indomitable spirit and a will to succeed unmatched my any on this planet.  It just requires a spark to bring us together. It's not too late for America.  Newsroom's Will McAvoy is right: "The first step in solving any problem is recognizing that there is one."

On America's Generous "Patriotic Millionaires" Who Just Can't Wait To Pay Down The US Debt

Several months ago, an ad hoc consortium of self-proclaimed millionaires, sent a letter to Obama, Reid and Boehner, demanding that "For the fiscal health of our nation and the well-being of our fellow citizens, we ask that you increase taxes on incomes over $1,000,000." This grass roots initiative sprung up into existence in the aftermath of Warren Buffett's, since defunct, proposal to impose a "millionaire tax" rule. Luckily, as all these very much informed millionaires know quite well, the US Treasury has a dedicated section, named simply pay.gov, which allows anyone: billionaires (here's looking at you Mr. Buffett), millionaire, or even thousandaire, to make a donation which is used directly to pay down the US debt. Because in the absence of the government mandating rich people pay their "fair share" (as determined by a subcommittee of course) for now at least, there is always that other alternative: voluntary action, as per the auspices of something called free will.And not only that, but the US Treasury also provides the general public with a running tally of just how much "Patriotic Millionaire" initiatives have given so far to paying down said debt. As in talk is cheap, signing petitions even cheaper, but putting money where your mouth is actually does go to the bottom line. The bottom line so far in 2012? $7.7 Million - this is how much has been volunteered in total gifts to pay down the US debt. The $16.3 trillion in US debt.