Archive - Jun 2011

The latest episode in the "we'll make it up as we go along" rescue of the Euro comes from France where as Le Figaro reports, a working group of French banks led by BNP Paribas has proposed, and been agreed to by the French Treasury, that maturing debt would be rolled over into a a 30 year maturity piece, accounting for 50% of the total existing debt, and another 20% would go into a "zero coupon" fund focused on high quality stocks. Also according to Le Figaro, borrowings under the proposed scheme would pay an interest equivalent to what Greek "public" interest is plus a variable interest rate "likely to be linked to an economic Greek indicator such as GDP" (which being negative for years will likely means lower interest than prevailing).

If man leaves scarcity behind, and thus the need for money, what about our earlier assertion that “Money…is essential to any society that we would call civil”? If society leaves money behind, won’t it thereby render society uncivil? Of course not. For when society succeeds in evolving beyond money, it will merely be doing what it did when it evolved beyond barter, only vastly more so. That is, society will increase its co-operative powers by orders of magnitude and thereby vastly increase its ability to civilize itself. No more “Getting and spending,” in other words, that “lay waste our powers.” Instead, we will be empowered to not only boldly go where no man has gone before but to become what no man has ever been before...When will this singular event take place and “cascading technological progress” begin? It will begin when the computing power of a typical laptop today surpasses that of “One Human Brain” – roughly 2030 which, ironically, is precisely when Keynes (getting virtually everything else wrong) predicted that “the economic problem” will be solved.

While the fact that over the past few quarters private payrolls have increased has been widely touted by the administration as an indication that the economic recovery has taken root (even if recent NFP numbers have been decidedly below consensus), the fact is that spin of NFP data looks solely at one part of the monthly change in payrolls data: the new payrolls one. Alas, as the 12 Month rolling average chart straight out of JOLTs below demonstrates a just as important, and far less spin-friendly, part of the equation is jobs "separations." The simple math is that the monthly change in payrolls, establishment or household survey aside, is simply equal to new hires less total separations. And it is the latter that is now at decade lows. Said otherwise, payrolls are only up because of the rate of firings is the lowest in the past ten years now that companies have virtually nobody left to fire. This also means that as far as wage negotiations are concerned, workers will have absolutely no leverage. Which can be seen on the second chart. While having picked up modestly in the past several months, the percentage of people voluntarily quitting their job is nearly half of where it has been during the past decade. It also appears to be once again plateauing, now that the jobless recession has double dipped again, and "New Jobs" postings are once again on the wane. The bottom line, the "employment gains" have not been due to increased hiring, but due to ever more desperate people no longer daring to leave whatever job security they may have (and willing to take pay cuts as a condition of keeping said jobs).

Our global society needs a reset. The insolvency of Greece or the growing US fiscal imbalance are only symptoms of a much deeper problem. It is easy for market participants to sit behind their red and green charts and point blame at "the Bernank." It is easy for homeowners to forego their mortgage payment to fund the expenses they are "entitled" to. It is easy for the Mortgage Bankers Association to "strategically default," after all it's a "business decision."... The solution to the world's problems is simple. People know the answer. The convict who lives on the lam for twenty years is relieved at their capture for they are tired of the hunt. People have debt they know they are slaves to. People have jobs they know brings them misery. People are in relationships they know brings them unhappiness. Yet they do nothing until they are forced to act. Until they are confronted they will continue to run waiting for the day of capture when they must face reality and begin the process of healing.

Perhaps even more than exposing the instability of the worldwide economic ponzi system, so far 2011 has been most remarkable for fully demonstrating the fragility of the global energy complex, which in the aftermath of the Fukushima nuclear crisis (and the moratorium on nuclear energy in Germany now, and soon other places), and the MENA revolutions, have raised the question of what happens in a world in which crude is getting ever scarcer, while the one main legacy energy alternative, fission-based nuclear power, just took a giant step back. The topic of limitations in conventional and possibilites in alternative energy has gripped the general public's mind to such an extent that Popular Science magazine has dedicated its entire July edition to answering that very critical question. As PopSci says: "Oil’s amazing efficiency is one reason it remains in such high demand, especially for transportation, and it’s also why finding an alternative will be so difficult. But find one we must. We have already burned our way through most of the world’s easy oil. Now we’re drilling for the hard stuff: unconventional resources such as shale and heavy oil that will be more difficult and expensive to discover, extract, and refine. The environmental costs are also on the rise." So what is the existing line up of future alternatives to the current crude oil-dominated energy paradigm. Below we present the complete list.

The infamous hacker group LulzSec, best known for hacking the website of an FBI affiliate, the Sony network, and even the CIA, has now officially shut down. Their final manifesto, which is reproduced below in its entirety, is summarized as follows: "For the past 50 days we've been disrupting and exposing corporations, governments, often the general population itself, and quite possibly everything in between, just because we could. All to selflessly entertain others - vanity, fame, recognition, all of these things are shadowed by our desire for that which we all love. The raw, uninterrupted, chaotic thrill of entertainment and anarchy. It's what we all crave, even the seemingly lifeless politicians and emotionless, middle-aged self-titled failures...Again, behind the mask, behind the insanity and mayhem, we truly believe in the AntiSec movement. We believe in it so strongly that we brought it back, much to the dismay of those looking for more anarchic lulz. We hope, wish, even beg, that the movement manifests itself into a revolution that can continue on without us. The support we've gathered for it in such a short space of time is truly overwhelming, and not to mention humbling. Please don't stop. Together, united, we can stomp down our common oppressors and imbue ourselves with the power and freedom we deserve. We hope we had a microscopic impact on someone, somewhere. Anywhere." Well, it was fun while it lasted. And so FedWire is safe again. So is, for the time being, the internet.

In the last week of trading, the only variable that mattered was the EURUSD, much more so than at any time in 2011, as the correlation between the FX pair and the SPX hit a near all time high. Which is why it is not surprising that China is now the de facto saviour not so much of Europe (as discussed earlier), but of America's wealthiest, as the only Central Planner mandate continues to be to keep the Russell artificially high for as long as possible while the oligarchy converts paper wealth into hard assets (yes, Comex physical silver just dropped to a new all time low on Friday). And with technicals mattering far more in FX than in stocks, we once again present John Noyce's weekly technical compendium and podcast, as all the major risk indices continue to be at key inflection points. This is particularly true of the GBPUSD, commodities (CRB), the Shanghai Composite (which just closed below the October 2008 primary updtrend, slide 13), Spanish 10 Years, also Irish and Portuguese bonds, the AUDUSD, but most importantly the EURUSD, which is at 2 standard deviations above fair value which is at about 1.15. Should it revert to that level, the S&P would find itself at about 900 if not lower.

One of Zero Hedge's recurring peeves with modern economics (at its basis, the flawed premise behind modern broken capital markets) is that modern economics, as taught by every Ivy League, and other, institution, and implemented by modern acolytes of Keynes and other spin off theories, is nothing but garbage: a sham voodoo science, which attempts to attribute an empirical basis to something which is inherently irrational. It is this irrationality that alternative, and thus non-mainstream, approaches to popular economics attempt to discredit, so far with zero success, as such a coup d'etat would mean an immediate end of the "status quo"^TM which is for all intents and purposes the only thing that must be maintained in order for the wealthy to retain their wealth, and get far wealthier in the future (Paulson's 3 page blank check proposal to Congress was nothing but a band aid attempt to fix the cumlination of decades of Keynesian failure). The below attached interview between Max Keiser and Sandeep Jaitly provides a 3 minute, must watch glimpse into the basis of Austrian economics, although not through the lense of von Mises, but of Austrian founder Carl Menger, who founded the Austrian school on one axiom only: "value does not exist outside mankind's consciousness." As Jaitly goes on to say, "all other forms of economics, classical, neoclassical economics, ascribe value to something else other than the human mind." And the punchline, coming from a mathematician: "all of the equations in neoclassical economics are rubbish. The differential equations describe nothing. Economics is not about mathematics, it is about the human being."

"It has become part of our day-to-day lexicon… something as American as apple pie. Whatever happens of an unpleasant or nefarious nature, it must have been caused or created by a “few bad apples.”--Ben Tanosborn

If you are a human being, you should hold your self to certain standards, amongst which include-not lying. When you are the Prime Minister of a country, one would think, as an elected official, you should certainly adhere to the not lying principle. Now, if you are a human being, the prime minister of a country, AND the head of financial ministers for the Euro (2nd largest currency in the World), one would think and hope (keep your fingers crossed) that you would simply never ever lie. Not so for the dis-honourable Prime Minister of Luxembourg, Jean-Claude Juncker as he plainly stated that “when it becomes serious, you have to lie.” The European financial system is a “serious” mess. Greece is insolvent, Portugal and Ireland are not far behind. Spain is also clearly struggling as are certain Italian banks, meanwhile Belgium doesn’t even have a government. Mr.Juncker: here’s an idea–instead of lying, force the banks to accept losses on their bad investments in bonds from the just listed countries. Investors can use all of the information available in the World to make decisions, however when very powerful individuals resort to lying to keep things together you have to be concerned... Can Greece “grow” out of their problems? Acceleration in domestic growth is highly unlikely. The EU/ECB austerity medicine of higher taxes, lower wages and layoffs is guaranteed to reduce spending on everything. By default (pun intended), the only other option for Greece is to “export” its way to growth and prosperity. Now please excuse our ignorance, however we are not aware of (m)any Greek products or services that are of high value, needed all around the World and offered by no one else. Compounding the export challenge, is the inability of Greece to de-value their currency to make their exports cheaper. At the end of the day, it’s a “Heads Greece loses, Tails Greece still loses.” The only difference is how soon the “fan” comes back into play.

In continuing its recent pursuit of "white knight on full retard tilt" policies vis-a-vis the endless European bailout, and throwing good money after bad after horrible after totally lost, today Chinese premier Wen Jiabao said that not only would China do everything in its power to preserve the EUR (after all that CNY needs to be cheap against some currency) and "work for expeditious recovery and stable growth" but also unveiled that it is now preparing to go ahead an buy Hungarian bonds. As if owning Greek, Portuguese, Spanish and Irish debt was not enough. It seems China has learned from the best, and either knows something others don't (except for the SHIBOR market of course) or is actively preparing to become Too Biggest To Fail by making sure that should something bad happen to it literally the entire world will follow it into the depths of hell. Which, as Jamie Dimon, Vik Pandit, Lloyd et al have known for the past 3 years, is not a bad strategy. Look for China to keep buying up ever more European debt as it intertwines its fate with that of the rest of the central planning cartel: a development we can only compare to the ever deteriorating Spanish Cajas desire to buy up as many semi-healthy banks as they possibly can to prevent a policy determination to shut them, and their billions of bad debts, down.

With a record 44 million Americans collecting foodstamps, the topic of a systemic and systematic class divides (especially now that Mort Zuckerman picked up on some of the very troubling developments to Marxists everywhere, first caught by Zero Hedge) will only get increasingly pronounced, and of all troubling trends in global finance, is likely the one to be the catalyst (as it always has in world history) for less than peaceful class upheavals. We have written extensively on the topic in the past (here and here), although for those new to this theme, below is a chart from the Guardian which effectively summarizes the snapshot distribution of the world's wealthiest at the end of 2010. As the bottom chart shows, the aftereffects of the financial crisis may be here to stay for 99% of the population... but not for the world's wealthiest 1%.

With
today's release of the corporate profit data I thought it was important
to remind you of the demise of America at the expense of Wall Street.  
America was once a country built on the solid foundation of the hard
work, satisfaction and pride in the building of stuff.   We aren't
talking about "namby pamby" stuff - we are talking about real stuff.  
We used to produce everything from automobiles to steel to blue jeans;
right here in America.   We ran telephone lines, built roadways and
bridges, drilled for oil and constructed buildings.    It was the sweat
of the brow and the strain on the back that built America into its
former shining self.  A country of opportunity and prosperity with a
solid moral foundation and a strong military to back it up.

It must come as music to every fundamental analyst's ears to learn that, as Goldman's David Kostin puts it in the his latest weekly chartology, "Frustration is clearly evident across the portfolio manager community. The S&P 500 has returned 3.0% YTD compared with 2.7% for  the typical large cap core mutual fund and 1% for the average hedge fund." It gets worse: "Investors of all styles are lagging their benchmarks. With just a week to go before mid-year, 78% of the large cap growth mutual funds are lagging the 3.6% return of the Russell 1000 Growth Index by a median of 150 bp. Similarly, 63% of large-cap value mutual funds lag the Russell 1000 Value index. Just under half (49%) of core funds are underperforming the S&P 500." It is stunning how when the levered beta tide goes out, i.e., the only strategy that has been working for everyone, that we learn point blank how asset managers are nothing but levered lemming with access to a repo desk and a 200/20 record net leverage exposure (not to mention a penchant for investing in Chinese fraud companies without any diligence). It gets even worse: "The levered investment community is faring no better than long-only institutions. The typical hedge fund has returned roughly 1% YTD. However, capital is still flowing into absolute return strategies as evidenced by our conversations with pension funds, endowments, and family office representatives attending two recent Goldman Sachs Capital Introduction events in New York and Rome. In contrast, mutual funds have experienced outflows totaling cumulative $6 billion during the past two months." Odd, it seems like only yesterday that Zero Hedge was warning about the combustible effects of mixing 8 weeks of consecutive outflows and a near record margin debt exposure. And lucky for these same leveraged, and long-only critters, the pain has yet to unfold. The 20% drop in the S&P which has to happen for Operation Twist 2 is inevitable and will put many of them out of business. As such we hope Kostin revisits the them of portfolio manager desperation in a few months.

The third part of the series on information theoretic methods of analysis for dynamic systems is taking longer than anticipated. Crunching the numbers is killing me. So I'll take a break from it and look a little farther forward--how we can use the methods I have been describing so far to forensically examine the algorithms used in various high-frequency trading events of the recent past. As seen on Nanex and Zero Hedge, there has recently been a lot of strange, algorithmically driven behaviour in the pricing of natural gas and individual stock prices on very short time frames. In an earlier article I pointed out that the apparent simple chaos we observe in the natural gas price appeared to be an emergent property of at least two duelling algorithms. In this series of articles we will begin analysis of the algorithms involved. Today's discussion will mostly focus on framing the issues that must be addressed in order to study unknown algorithms on the basis of their time-varying outputs. Future articles will present results from the various analyses.