From Risk-Return To "No Risk, No Return" Courtesy Of Central Planning

Central Banks have repressed the sovereign bond markets of the world's currency printers to extreme. This relative pricing makes stocks look extremely cheap on an equity risk premium basis (thank you Ben); however, everyone knows this and, as we have discussed many times, margin balances and net long positions are as high as they have ever been. A zealous belief in the power of the central bank has compressed the market's risk perception to near-zero - but at the same time, returns have been crushed as even junk bond yields are at record lows. In other words - there is no risk any more, and no conventional return. Or rather, the only "return" is in the wholesale herding of cattle into the "safety" of the equity beta butcher house.

Guest Post: Is This The Terminal Phase Of Global Capitalism 1.0?

We often turn to cycles - business, solar, Kondratieff, etc. - to better understand current events. But what if this era is not just a cycle but the terminal phase of Global Capitalism 1.0? This heretical thought arises from the school of economic history pursued by Fernand Braudel and those he inspired. We need a new model, and a re-hash of the old broken models will no longer do. The road for both global capital and the State is narrowing to a rocky trail that leads to a cliff.

An Italian "Hung Parliament" - Europe's Biggest Political Risk

As was reported in the latest Tecne poll for Italy's SkyTG24 released a few hours ago, support for Italian frontrunner Bersani's coalition has dropped once more, declining by 0.8% to 33.2% in the week ended February 7, while the ratings of the bloc headed by Italy's former prime minister Silvio Berlusconi keep rising on momentum generated by Monte Paschi scandal, boosting his popularity to 29.2%, or +1%, and now entirely within the margin of error. At the same time outgoing PM Monti has seen yet another drop in popularity, now down 1% to 12.9% while ex-comedian Beppe Grillo's support keeps rising, and is now at 16.3% up 0.8%. Combining all this data means that with three weeks to go until Italy's February 24-25th election, courtesy of the seemingly improbable surge in Berlusconi's popularity in recent weeks, the biggest emerging risk for Europe in the coming month is that of an Italian "Hung Parliament" which would then likely result in another round of elections in a matter of months, jeopardizing the Italian "success story" and pushing headline political risk once again into the open.

Immigration Reform (For The Wealthy) As Green Card Purchases Surge Over 100%

With immigration reform the new hot topic in Washington (along with pretty much everything else that is), we thought it intriguing that, as Bloomberg notes, the government's program allowing foreign 'entrepreneurs' to purchase so-called EB-5 visas saw its numbers more than double in 2012 (up from 69 in 2002 to 3,677 in 2012). The program allows the foreigners 'Alien Residence' status providing they 'show' they will spur 10 jobs for every $500,000 spent. We wonder how much of that 'investment' has flowed directly into cash purchases of REO-to-rent property with some well-drafted white paper explanation for how real-estate-based Keynesian multipliers will create magnitudes more jobs from that spending. "Give me your tired, your poor, Your huddled masses yearning to breathe free... your 'anyone with some cash please...."

So Who Is Lying (More)?

Overnight China reported great trade data which saw exports and imports soar by more than 20% each compared to 2012. Of course, when one adjusts for January calendar effects the "rise" was virtually non-existent but that was too much work for the Shanghai Composite algos. A few hours later, the US did the same, reporting even better trade data which saw the trade deficit plunge the most in nearly three years. So far so good: we just have one question - who is lying more. Because unlike all other sole-sourced economic manipulated data which is solely a function of some excel goal seek model and various spreadsheets, bilateral trade has to foot. One country's net exports have to equal its countepart's net imports and vice versa.

Brent-WTI Surges To 2-Month Highs

Both the spring maintenance period in the US (creating a 'glut' of WTI), Seaway pipeline, and tensions in the Middle East are exaggerating the Brent-WTI spread which traded back to two-month highs. In the last week or so the differential has surged from around $16 to over $22 as WTI fell and Brent prices surged. There is a great degree of seasonality in this shift (and typically the Spring maintenance period has ended within the next week) but Iranian sanctions remain at the forefront (as does the belief that Germany's growth will be the engine of European demand - especially if EUR drops). This year was 'different' in so much as WTI outperformed for the first few weeks - potentially on the back of the global rise in risk-assets thanks to global central bank largesse. It appears the oil market is hinting at some slowdown.

US Trade Deficit Drops To Lowest Since January 2010 As Crude Imports Plunge To 1997 Levels

Following November's massive trade deficit surge, when the final print of $48.7 billion was far worse than the $41.3 billion expected, it was only (il)logical that the December trade number would reverse this trend to the other extreme, which it did with the December trade balance plunging from a revised $48.6 billion to a tiny $38.5 billion - the lowest deficit since January 2010, and the biggest beat to expectations of $46 billion since February 2009. The deficit was the result of December exports which were $3.9 billion more than the $182.5 billion in November, and imports some $6.2 billion less than November's total $231.1 billion. Broken down by category, the goods deficit decreased $9.4 billion from November to $56.2 billion, and the services surplus increased $0.7 billion from November to $17.7 billion. A key driver of this move was a spike in Petroleum exports which shrunk the Petroleum product trade gap to the smallest it has been since August 2009 as the US imported the least amount of crude oil since February 1997. Whether this is due to rising domestic production, or just the ongoing collapse in end demand (which is to the US economy as electricity is China's traditional "8%" GDP) remains unclear.

Draghi: "Sell The EUR" Wink, Wink, Nudge, Nudge

With EURUSD having lost over 2 handles since Draghi began to speak at the press conference, we thought it worth examining just what he did (and did not) say. As Citi's Steven Englander notes, for the ECB it was a twofer.  They can claim they are not engaging in currency wars while giving a big wink and nod on monetary policy ease that says 'sell my currency'.  Yesterday when they said they were not too worried about currency, they didn't mention that they would sound very dovish on liquidity and monetary policy and stress the EUR's level  as a factor in inflation and economic forecasts. So while they did not do the currency war thing, they did the next best thing.

Third LTRO Put-Back Post-Mortem: €5 Billion Down, €873 Billion To Go

Today (February 8) at 11:00 GMT, the ECB announced the LTRO funds returned to it through the (third) weekly put-back option. Banks repaid €5 bn, bringing the cumulative repayment to €146 bn or 14% of the initial take-up. The cumulative amount of LTRO cash left in the system now stands at €873 bn.

Boeing New Aircraft Orders Implode From 183 To Just 2 In January

After the now several week old exploding battery fiasco, Boeing is nowhere closer to resolving the recurring problem for its appropriately renamed Nightmareliner. But the worst for the company may be yet ahead: as the following chart from Stone McCarthy shows, January new aircraft orders collapsed from 183 in December to a meaningless 2 in January: a seasonally strong month, with some 150 orders a year ago, and more weakness to come as Boeing just warned its first Norwegian delivery due in April may be delayed. But while it was expected that the company's quality control failure would eventually catch up to it, the broader implication is that this month's Durable Goods number, released February 27 and of which transportation is always a key variable at least at the headline level, will be a disaster.

Frontrunning: February 8

  • Rate-Rig Spotlight Falls on 'Rain Man' (WSJ)
  • Blizzard Cancels U.S. Flights, Threatens Snow in New York (BBG)
  • Monti says he did not know of bank probes (FT)
  • Japan's Aso: yen has weakened more than intended (Reuters)
  • Japan Pledges Foreign-Policy Response to Territorial Incursions (BBG)
  • Paratroops mutiny in Bamako in blow to Mali security efforts (Reuters)
  • China, Japan engage in new invective over disputed isles (Reuters)
  • Asteroid to Traverse Earth’s Satellite Zone, NASA Says (BBG)
  • EU leaders haggle over budget tightening (FT)
  • China Trade Tops Forecasts in Holiday-Distorted Month (Bloomberg)
  • Buffett’s Son Says He’s Prepared Whole Life for Berkshire Role (BBG)

Sentiment Muted As Northeast Braces For "Historic" Blizzard

It was a busy session for Chinese "data" (more on the laughable validity of Chinese economic releases shortly), after China released January export and import data, which rose 25% and 28.8% from a year ago respectively. Futures were delighted by the data, until someone pointed out that January 2013 had some five more working days than 2012 due to the calendar shift of the Chinese new year, and that adjusted for this effect exports were a far more modest 12.5% while imports rose only 3.4%. Credit growth in January also rose to a record, with aggregate financing of 2.54 trillion, including new local-currency loans of 1.07 trillion, exceeding forecasts, as China dumped gobs of money into the economy, while somehow quite mystrriously inflation came right on top of the expected 2.0%. The Yen soared overnight following comments from Taro Aso who said that the Yen had depreciated too fast. Heading to Europe, the biggest news so far was the latest ECB LTRO repayment which saw some 21 banks repay €4.992 billion, less than the estimated €7.0 billion. Finally, trading today will be slower than usual as Nemo is finally found in the shape of some 12 inches of snow blanketing the Northeast.

Arm Syrian Rebels: CIA, Pentagon And Hillary Said Yes; Obama Just Said No

It would appear the undecideds had it. The WSJ reports that a proposal to arm Syrian rebels was stalled by the White House (cough Obama cough) because of lingering questions about which rebels could be trusted with the arms, whether the transfers would make a difference in the campaign to remove Syrian leader Bashar al-Assad, and whether the weapons would add to the suffering. It seems, however, that the Pentagon, the State Department, and the CIA were all gung ho for the plan last year as a Senate hearing today uncovered some of the facts (and disagreements). As WSJ notes, the disclosures thrust a spotlight on the extent to which President Barack Obama charts his own course in the face of calls to action by members of his own team, and on the extent of his caution about entering a new conflict. In the post-Kofi Annan talks break-down in June 2012, Hilary pushed to arm the rebels and the CIA said arms would "materially" affect the situation to overthrow Assad. With the introduction of Kerry, Hagel, and Brennan, the tensions may flare once again though only the latter has suggested anything but backing Obama's perspective.

Remember 1994

Big round numbers always encourage reflection.  Turning 40 or 50, for example, or making (or losing) a million dollars.  Or a billion.  And so it is with “Dow 14,000.”  ConvergEx's Nick Colas has three critical observations as we traverse this particular “Big round number.”  First, it is clear that equity prices (and volatility, for that matter) are much more a direct tool of central bank policy than in prior economic cycles.  Second, the rally off the bottom in March 2009 has left the investing world with very few money managers who can legitimately claim the title of “Smart money.” Lastly, you have to consider the way forward.  The roadmap from Dow 6600 (March 2009) to Dow 14,000 was – in retrospect – clearly marked by signs labeled “Follow the central bank yellow brick road.”  Good enough signage to get us here, clearly.  But, as Nick notes, fundamentals – corporate earnings, interest rates, and economic growth – those are the metrics which will have to guide us as central banks inevitably reduce their liquidity programs. As he considers the way forward for U.S. stocks, he reflects on Spring 1994 - U.S. stock investors thought they had it all figured out as they exited 1993, just as they do now...

Will Japan's "Attempted" Reflation Succeed And Will It Spill Over Into Full-Fledged Currency War?

Yesterday we presented a simplistic analysis of why for Japan "This Time Won't Be Different", a preliminary observation so far validated by the just announced Japanese December current account deficit which was not only nearly double the expected 144.2 billion yen, printing at some 264.1 billion yen, but was only the first back-to-back monthly current account deficit since 1985. But perhaps we are wrong and this time Abe will succeed where he, and so many others, have failed before. And, as is now widely understood, perhaps Japan will succeed in finally launching the necessary and sufficient currency war that would be part and parcel of Japans great reflation, as even various G-8 members have recently acknowledged. The question is will it, and when?  One attempt at an answer comes from the fine folks at Bienville Capital who have compiled the definitive pros and cons presentation on what Japan must do, and how it will play out, at least if all goes according to plan.

Lessons From The 1930s Currency Wars

With Abe picking his new dovish playmate, and Draghi doing his best to jawbone the EUR down without actually saying anything, it is becoming very clear that no matter what level of bullshit histrionics is used by the politicians and bankers in public, the currency wars have begun to gather pace. Japan's more open aggressive policy intervention is the game-changer (and increasingly fascinating how they will talk around it at the upcoming G-20), as if a weaker JPY is an important pillar of the strategy to make this export-oriented economy more competitive again, it brings into the picture something that was missing from earlier interactions among central banks of the advanced economies – competitive depreciation. The last time the world saw a fully fledged currency war was in the early 1930s. Morgan Stanley's Joachim Fels looks at what it was like and what lessons can be drawn for the sequence of events - there are definite winners and losers and a clear first-mover advantage.

Guest Post: When Lindsay Graham And Barrack Obama Agree... Run The Other Way Fast

The easiest way for a patriotic, civil liberties defending U.S. citizen to know whether to support or oppose an issue is when two of the most authoritative, narcissistic politicians from the two controlled political parties in America are in strong agreement. In this case, I am referring to Lindsay Graham and Barack Obama’s recent love fest on drone warfare...

"An Economy Built On An Illusion"

Asset inflation often produces something called "wealth illusion," the belief that pricier asset holdings necessarily make one permanently richer. Illusions are dangerous. Eventually, painful reality intervenes. The "wealth illusion" of asset inflation is seductive, which is why central banks in charge of a fiat currency and subject to no external disciplines so often drift in that direction. Politicians smile in satisfaction and powerful Washington lobbies cry for more.  But an economy built on an illusion is hardly a sound structure. We may be doomed to learn that lesson once again before long.