Archive - Nov 5, 2012

Having made clear in Part 1 the various policy leanings, uncertainty, and potential reform headlines, we delve a little deeper into the specifics of what the systemic and idiosyncratic implications might be. In two simple tables, Goldman lays out the top-down asset-class perspectives as 'new' China addresses its systemic issues and then looks at how China's equities (and by implication global equity indices) can meaningfully re-rate with a background of economic sustainability concerns as reforms impact various sectors more or less. As Goldman concludes: "Cyclical adjustments can help to restore confidence, but investors will likely be unwilling to meaningfully re-rate the market until more concrete progress is made on the reform front…but reforms may not be good for all sectors."

The imminent once-in-a-decade leadership handover in China will likely be one of the most important if not the most important leadership changes in the world this year and beyond in Goldman Sachs' opinion. Not only because it has the potential to mark a shift in policy direction in what has become a global economic giant, but also, as they note, because it comes at a time of substantial economic and social uncertainty in the country, with the economic future of China and the legitimacy of its current power structure potentially at stake. On the eve of this important transition, understanding this somewhat complex power structure, the composition and policy leanings of the likely new leadership, and the potential new policy priorities and reforms ahead is critical.

While Chinese government and consumer debt can be whatever China wants it to be (and when it isn't, any discharged and non-performing debt is merely masked over with more debt: China doesn't have $3 trillion in foreign reserves for nothing) corporate debt, in keeping with Western-style reporting requirements, is far more difficult to obfuscate and falsify in recent years. It is here that we get the first glimpse of the true sheer extent of the Chinese credit bubble, which as the chart below shows, is already the largest in the entire world.

Life imitates math.

The yakuza scandal didn’t help.

Even If You Are Boycotting the Presidential Election, Vote Yes on Proposition 37 ... Unless You Are Against Freedom of Choice

When it comes to sleepless nights, Toimi Soini of Finland originally set the record by using the "toothpicks under the eyelids" method for 11 straight days. In hindsight, Toimi was an amateur. Toimi Soini was not a banker and this was his downfall. As for the Canadians, Swiss and British – yes they are all bankers, but not just any bankers. This terrific trio have the displeasure of forever being known as the bankers who sold their gold. The irony of course, is the action of the World’s central bankers themselves is the reason why gold is destined to remain golden for sometime to come. And with gold sitting near $1700/oz, and with no end to the money printing games, the sleepless nights are destined to continue. IceCap's Keith Dicker opines on the wrong-ness of Alan Greenspan's economic miracle, equity manager's misplaced rationalization of performance as skill, China's gold-buying spree, the Nobel Peace Prize debacle, and the inexorable growth of 'fake money'.

Just over 400-years ago today, a group of 13 conspirators was caught trying to assassinate King James I of England and blow up the House of Lords in what became known as the Gunpowder Treason. If you’ve ever seen the movie V for Vendetta, you know the story. The plot of 1605 may have been a failure for the conspirators, but given enough time, a system so screwed up, so unsustainable, was destined to collapse on itself. Curiously, we’re not so different in the west today; just like the English monarchs, we have a tiny elite that controls absolutely everything about our economy– taxation, regulation, and the supply of money. Needless to say, this is also unsustainable. And history shows that these types of unsustainable systems will always collapse under their own weight.

The regional government of the Communidad Valencia owes pharmacies in Valencia, Alicante, and Castellon five and a half months of prescription payments. The EUR450mm debt that is owed has prompted a remarkable (and somewhat justified) action by the pharmacies. As ThinkSpain reports, from today, two in every three pharmacies will be closed each day, on rotation, until the debt is settled. Last week the government settled half of their April debt and half of their May debt using funds from the Regional Liquidity Fund (FLA) but as the pharmacists point out, "this [merely] moves [them] back to where [they] were, since on Wednesday, we'll be adding another month's worth to the ongoing debt." Perhaps this fact - among all the others - combined with the ECB's lies, will bring some reality to the minds of those who see these bailouts as anything but a band-aid - and in fact (in this case) an entirely back-filling band-aid as everyone is faced with a "dramatic situation which has forced [pharmacies] to close indefinitely."

Americans are on pace to buy more firearms than ever before in 2012. Yet in the run-up to the 2012 election, both President Obama and Governor Romney have downplayed the topic of gun control. And given that neither one is an avid shooter, special interest groups such as the NRA and the Brady Campaign have dominated much of the campaign rhetoric. The following infographic provides a historical look at how the position on guns of both Governor Romney and President Obama has "evolved" since both entered the political realm.

By now we are confident that everyone is sick to death and beyond of listening about elections, polling, conditional probabilities, permutations, (confusing) statistical sampling and heuristics, and all those other things that the vast majority of the population fail in STAT 101 yet somehow end up as experts in during cocktail hour, on TV, on Op-Ed columns and, of course, on twitter. Which is why we are delighted to bring you this comic interlude. Presenting Donald "The Hairpiece" Trump vs Mark "Avion Tequila" Cuban.

Today doesn't matter. Tomorrow won't matter either. 

"Around the year 2005, a sudden spark will catalyze a Crisis mood. Remnants of the old social order will disintegrate. Political and economic trust will implode. Real hardship will beset the land, with severe distress that could involve questions of class, race, nation and empire." Strauss & Howe wrote these words in 1997. They understood the dynamics of how generations interact and how the mood of the country shifts every twenty or so years based upon the generational alignment that occurs as predictably as the turning of the seasons. The last generation that lived through the entire previous Crisis from 1929 through 1946 has virtually died off. For those who doubt generational theory and believe history is a linear path of human progress, I would point to the last week of chaos, disarray, government dysfunction, and misery of those who didn’t prepare for Superstorm Sandy, as a prelude to the worst of this Crisis. The lack of preparation by government officials and citizens, death, destruction, panic, anger, helplessness and realization of how fragile our system has become is a perfect analogy to our preparation for this Fourth Turning. The regeneracy of the nation will occur during the next presidential term. The mathematical impossibility of sustaining our economic system is absolute.

For all those traders scratching their heads, wondering why the treasury market is rallying in front of the big 01 auctions, this blog post is for you.

UPDATE: Zillow is getting monkey-hammered -27% after-hours on outlook cut

With S&P 500 futures volume around 25% below average, it is little surprise that the little-algos-that-could did their damnedest to get up to Friday's closing VWAP. Equities were in a world of their own today relative to broad risk assets with high-yield credit lower, volatility up, and rates lower - seemingly supported by its correlation with oil (which managed to pop over 1% on the day to almost $86). Utilities were hurt the most as QE-sensitive Materials, Energy, and Tech managing to outperform as AAPL levitated from lower lows ($570) pre-open to bring today's price up to Friday's closing VWAP and that's where we wriggled most of the day, with every rally faded at that magical level. Whether investors were placing chips last minute into the election is unclear (Energy outperformance, Financials unch, and Utility underperformance possibly suggest Romney victory and split house?) but certainly conviction was low as evidenced by volume and pre-ramp ranges. Despite USD strength, Gold and Silver also outperformed on the day as Treasury yields dropped 2-4bps. The S&P ended the day at resistance half-way between Bernanke's Bottom and Draghi's Dream levels...