Archive - Sep 2010

In the week ended September 13, M2 rose to a fresh all time record, just above $8.7 trillion, representing the 10th consecutive increase in the broadest monetary aggregate tracked by the Federal Reserve, during which time $115 billion in new liquidity has been injected in the US economy. Additionally, since the 2010 M2 lows recorded oddly enough on April 19, around the time when the S&P peaked for 2010, there has been $235 billion of money injected into M2. Yet a peculiar observation arises when one looks at the components of the M2 - the bulk of the individual pieces of M2 (and M1 by definition) declined: there were W/W drops in Demand Deposits, Other Checkable Deposits, Savings Deposits at Thrifts, and especially Small Denomination Time Deposits, offset only by Savings Deposits at Commercial Banks. Now that is rather troubling, because the former list represents products used by the "less than wealthiest" to park their money. It appears that in the prior week (and throughout 2010), what's left of the middle class continues to actively withdraw its saved up money, but the net effect was offset by increased deposits into Commercial Bank savings deposits: traditionally capital storage reserved for the richer (due to the relative immobility of the capital: the vast majority of Americans for whom money does not grow on trees, prefer to have instant access to their deposits). This makes us wonder: is the trend seen in the stock market being replicated in the bank deposit realm? Are the lower and middle classes actively withdrawing money from banks, even as the wealthiest 1% continues to deposit? No wonder then that Huffington's campaign to punish the TBTF's by extracting their deposits is not working.

I'm forever blowing bubbles,
Pretty bubbles in the air,
They fly so high, nearly reach the sky,
Then like my dreams they fade and die.

As we have been expecting, the literature coming out of the investment banks analyzing the "Japan case", and specifically how it pertains to the US and the rest of the world, is coming hot and heavy. Yet the attached report by Soc Gen Klaus Baader and team could well be the definitive analysis on the topic. While we do not necessarily agree with the paper's finding, which is simply that "Japan is not the endgame", the multivariate analysis conducted is second to none. And another key topic analyzed by the Soc Gen economists is whether EM growth can offset the deleveraging in the mature economies: a topic near and dear to Jim "BRIC|N-11 Decoupling" O'Neill. Here the conclusion is more palatable: "We see the Chinese economy following Japan, but more of Japan in the 1950s and 1960s. Chinese policy makers also see this repeat pattern, but are taking steps to avoid the preconditions of a bubble economy that afflicted Japan in the 1980s." The paper's conclusion is presented with just the right dose of optimism and pragmatism (it does after all come from a sell side team): "Managing capital inflows is the next challenge. FX adjustments, fiscal and monetary tightening, domestic prudential regulation, and capital controls are the tools available to manage these inflows. These have significant investment implications. Further, slippages could exacerbate global imbalances and slow growth and other needed reforms."

Insofar as money is concerned, governments and central banks should be kept as far away from one another as a pedophile from Dakota Fanning. If ever the twain should meet, very bad things would happen. However, now, in the good ol’ U.S. of A., monetization is taking place—and it is happening right before our eyes, even though no one is realizing it. This monetization is invisible to sophisticated analyses, but obvious to anyone looking at the situation. It's what I call stealth monetization. —Gonzalo Lira.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 23/09/10

Once again, courtesy of Damien Cleusix, here is the second Q4 update in his must read series on Global Tactical Asset Allocation - Equities (the other updates in this series are coming soon). "We would underweight emerging markets (and are now advising to exit the long position in our preferred market since the end of 2008, Indonesia), Europe and small caps.We would overweight Japan (but hedge the currency risk) and the US. Buy high quality stocks (and hedge the market risk when we recommend it). Value and growth are likely to behave badly in a downturn so value managers won't offer the decorrelated returns they offered during the 2000-2003 decline. Buy value when value dispersion is high not low as it is now."

Is the Fed pushing on a string?

White House Press Secretary Robert Gibbs made a rather startling statement in a press briefing on September 21st. He acknowledged that the economy is bad and he further stated under questioning that the recovery would take several years.

Today I just want to focus on one thing and one thing only, making sure I pin the top on the S&P 500 rally started in late August as I strongly believe the next wave will take us sub 1,000 in the S&P future. - Nic Lenoir

Apparently it has to do with conservative listeners willing to diversify into "precious metals": "Currently, the most popular talk radio shows in the United States are hosted by conservative commentators such as Messr. Beck, Levin and Thompson, and Ms. Ingraham. The demographics of these radio programs strongly favor those who are inclined to diversify their portfolios with precious metals. (This is best exemplified by the number of competitors who advertise among these same marketing channels.) The radio hosts themselves share an interest in owning precious metals, an important consideration when deciding where to advertise."

This one needs no commentary. The only corporate embarrassment episode that is more ironic is the BSOD during the Windows 98 introduction. And one wonders why the telepresence company's shares are down 11% in the past three months...

Guess the old man is not going to fill Larry Summers sweaty shoes:

• Volcker: "So Difficult" To Dig Out Of Recession
• Volcker: Will Take "Long Time" To Repair Economy
• Volcker: "Underlying" market problem is "too big to fail" issue

and FTW:

• Volcker: Mortgage market is "absolutely broken"

For anybody that values results over brand names, the housing market has a much rougher road ahead than many presume and banks are literally the walking dead! Having accurately called the fall of the WaMu, Countrywide, Bear Stearns, MBIA, Ambac, Lehman, residential and commercial real estate I am confident that the list of big name failures WILL EXPAND! Every single variable that can be plugged into a housing value equation is explicitly negative, save the manipulated mortgage interest rates (meaning another bubble to burst).

Let’s be honest. Forget recessions, forget even Depressions, the US is an empire in decline.

You can literally see it crumbling right in front of you. Just start looking at how people live, eat, and act on a day to day basis. Look at how our Government runs itself, how it manages our affairs, how it spends our tax Dollars. Look at how our justice system works, who it protects and who it punishes.

It’s all out there, right in the open for you to see. You don’t need an expert degree or some kind of advanced education. It’s OBVIOUS to anyone who bothers looking around.

The fact we don’t admit it doesn’t mean it’s not true.

Yesterday's Microsoft issuance of $4.75 billion in new debt, of which the 3 Year maturity portion priced at the lowest yield ever for a corporate bond of 0.875%, came at the pristine, and much discredited AAA rating. Yet what this little experiment revealed, in addition to confirming that the corporate bond bubble has never been greater, is that the cash on the sidelines argument used by every single permabull on CNBC is sorely lacking in some factual details. Namely, that a dollar at home is worth more than a dollar abroad, as BofA's Hans Mikkelsen puts it succinctly. Let's back up for a second: the primary reason why investors are funneling their capital in droves in tech and other companies that have key foreign operations is precisely due to the fact that while their domestic subsidiaries may be expiring, it is the foreign subs that are generating the bulk of the revenue, profit and thus, cash. Yet what very few have considered, is that repatriating his cash to the good old USA would cost companies hundreds of billions in US corporate taxes. That's right: even though companies are taxed abroad, the issue of double taxation is resolved by subtracting foreign taxes paid from the US tax liability. However, because foreign corporate taxes are typically lower there is an adverse tax consequence associated with remittance to the parent company. In other words, of the $1.2 or however many trillions in total corporate cash on balance sheets, a good 30% chunk of this belongs to Uncle Sam if these companies wish to use it for domestic IRR purposes. And yes, just so there is no confusion: using foreign cash to pay dividends or share repurchases is considered repatriation from the perspective of US tax regulations. Enter Microsoft: most of its cash resides abroad and is essentially useless for dividend purposes, unless the company wishes to see its net cash position cut substantially upon repatriation. Yet with everyone now clamoring for increased dividends and stock buybacks, the company is forced to access domestic capital markets and use that money for shareholder friendly activities. This is a capital mismatch fiasco just waiting to happen. The only possible winner out of this - Uncle Sam, who may soon order foreign cash to be repatriated over corporate pleas otherwise.