Archive - Nov 5, 2012

Tim Geithner's public "servant" tenure has not been without its blemishes: from his deplorable run as the (figure)head of the New York Fed (from 2003 until 2009), when the entire financial system literally imploded under his watch, to his epic failing up as Hank Paulson's replacement as treasury Secretary of the United States, despite his legendary inability to navigate the Minotaurian labyrinth that is the TurboTax income tax flowchart, the Dartmouth alum has had his share of run ins with adversity (and adversity won). Of course, Geithner's tenure in charge of the Treasury in the past 4 years has been somewhat mollified by the fact that here too here was merely a figurehead, and the true entity that runs the US printing presses is none other than the JPM and Goldman Sachs co-chaired Treasury Borrowing Advisory Committee (for more on the TBAC read here and especially here as pertains to the former LTCM trader and current head of JPM's CIO group), meaning that the US Treasury, just like the Fed, are merely branches of the one true power in US governance: Wall Street. Geithnerian figureheadedness aside, the one undeniable fact is that Tim Geithner's days as head of the Treasury are now numbered: he has made it quite clear that he will not accompany Obama (should the incumbent be reelected) into his second term. So what is a career "public servant" to do once the public no longer has any interest in retaining his services? Bloomberg's Deborah Solomon has some suggestions...

Investors' perceptions of risks, both normal (volatility) and tail (event), have intriguingly run to both extremes at the same time. 'Normal' volatility has been so suppressed by Central-Bank action as to become an almost useless indicator (or at best contemporaneous) - or as Artemis Capital notes "volatility has become a shadow currency" with the USD (safe-haven) becoming considerably more correlated with volatility. Extreme volatility concerns are where the 'unintended' consequence has appeared. In a somewhat stunning market realization, options markets currently suggest a 1 in 4.7 chance of a greater-than-50% drop in the S&P over the next year. That is more likely than the lifetime risk of a heart attack. The question then is, are tail-risks over-priced? Or are investors willing to overpay for that kind of 'deflation' insurance since we now know that the impossible is possible!

We have had two Greek moments, a Portuguese moment, an Irish moment and we are about to possibly have the “moments of our lives” during the next two weeks. America’s primary moment will be tomorrow when the people of the United States exercise their constitutional right and choose a President and a significant amount of the members of Congress. One thing that can be said with certainty is that we have a choice and a real choice. While America turns inward and pays attention to very little else besides our election on Tuesday we may well find ourselves peering outward on short notice. We are told by Greece that they have one week on money left to pay their bills. Pay attention here; decisions will be made as forced by the financial condition of Greece and can kicking is no longer an operative solution now.

More of my contrarian, yet highly accurate Apple research released free to the public, unfortunately not in time to save Rochdale's ass...

Just in case anyone wanted to know what not to say to defend the absolute horrific mess of self-aware vacuum tubes and errant algos, formerly known as "the market", here is a great primer from Credit Suisse's trading strategist Phil Mackintosh.

Over the last few weeks we have looked at where the two candidates stand, the implications of a Romney win on the economy, how investors are positioning in equity and bond portfolios for each candidate's potential victory, what gold will do, what stocks will do, and the fact that either way; the easy-money days are over. The last market to look at is the largest - the foreign exchange market - and Citi's Steve Englander provides a succinct explanation of how the various asset-class shifts post-election will impact flows in the FX market. Most specifically, how sensitive various safe-haven and risk-sensitive FX crosses will be to House composition. He also notes the potential for knee-jerk reactions as timing issues across various state poll closings offers exit poll information - especially as a Romney win is very much not priced in.

Canadian household debt as a percentage of income by now vastly exceeds the peak that was seen at the height of the US real estate bubble. CIBC thinks the huge amount of household debt in Canada and the beginning cracks in the housing bubble are nothing to worry about. The main reason for this benign assessment seems to be that there have been a few other credit and real estate bubbles in the world that have grown even bigger than the US one before it burst. What a relief. It is generally held that Canada's banking system is in ruddy health and not in danger from the extended credit and real estate bubble, mainly because a government-owned organization, Canadian Mortgage Housing Corp. This kind of thinking has things exactly the wrong way around. It is precisely because such a state-owned guarantor of mortgages exists that the vaunted lending standards of Canada's banks have increasingly gone out of the window as the bubble has grown.

Friday's afternoon avalanche was unevenly distributed across asset classes with Gold and Oil leading the move lower, the USD limped higher, and until late in the day, stocks and Bonds meandered along together. Equities' late-day plunge saw it catch down to Gold's move and this morning we see the USD and US Treasuries rallying and resyncing to the rest of the asset classes. Volume is leaching away now that Europe is closed and correlation across asset-classes is on the rise as they now seem range-bound. The most notable 'divergences' are among the various ETFs as VXX (volatility) is rising notably, HYG (credit) is losing ground, and TLT (rates) are rallying while SPY (stocks) are unchanged (for now)...

Could Cost Billions to Replace

The center cannot hold because it has failed the nation by defending the Status Quo kleptocracy. As a case study, let's look at Greece, a nation that is the leading-edge of Status Quo delegitimization and destabilization. As the Status Quo fails to protect the national interests and the citizenry from the neofeudal kleptocracy, faith in the political center fades. What happens when people lose faith in the financial institutions and their coercive "fixes"? They move their capital to less-risky, more productive climes. In other words, capital flight is another positive feedback: as people move their capital out of the country, then there is less available per capita for productive investment. The same holds true for every nation ruled by kleptocratic Elites that has attempted to "grow our way out of debt" by piling debt on debt. Doesn't that include Spain, Italy, China, the U.S. and a host of other nations?

Nothing really mattered… Eventually. Europe correcting Friday’s excessive optimism, in line with the US, treading water ahead of the elections. Still, the Periphery remained under (controlled) pressure with Spain cornering most, if not all negative headlines today – ahead of Thursday’s auction. 10 YRS periphery backing up to (selective) symbolic levels of 5% and 5.75% (damn’ near 6%).

For the tenth day in a row, Portugal's bond spreads widened - now the biggest two-week move since January as its absolute spread is back well above 700bps once again. Spain and Italy have been leaking wider consistently in the last few weeks (+15-25bps from the tights on Friday) and Spanish and Italian equity markets are tumbling back off their post-Draghi euhporia highs (down 2% from Friday's highs alone). Critically, safe-havens are seeing heavy flow; Germany 2Y is back below zero for the first time in two months and Swiss 2Y is below -20bps again. EURUSD is reverting back down to its swap-spread-model implied fair-value as 'hope' fades of OMT's ability to do anything 'real'. Europe's VIX jumped its most in over two weeks to 22.2%.

"I got this moron thing that I do, it's called thinking."-- George Carlin

As so often happens, the conventional wisdom said to buy every day ahead of the election day because the S&P would surge and peak with the election. Conventional wisdom was wrong. Which is to be expected: in the New Normal one should take any technical signal or old trader wives tale, and do the opposite. Needless to say, the market now is unchanged from where it was two months ago, and from the day Barrons' came out with its latest top tick cover (as we said "here comes that patron saint of all contrarian indicators") page praising the "Teflon Market." So now that the "buy the election" meme is over and done with, what is there to look forward to for the rest of the year? According to Goldman, here comes the "sell ahead of the coming dividend and capital gains tax hike."

Yesterday we assessed the impact a second Obama term would have on the US economy and markets. Now let’s assess what impact a Romney Presidency would have on the US economy and financial markets.