Archive - Apr 13, 2012

Obama may not be the most successful president when it comes to creating jobs at home, but when success is measured by the number of blowjobs outsourced abroad, he may be truly second to none, as his visit to Colombia proves before it has officially begun. According to the AP, "A dozen Secret Service agents sent to Colombia to provide security for President Barack Obama at an international summit have been relieved of duty because of allegations of misconduct." Relieved here being a perfectly randomly selected verb. Because according to a tip received by The Associated Press "the misconduct involved prostitutes in Cartagena, Colombia, the site of the Summit of the Americas. A Secret Service spokesman did not dispute that allegation." Or, as Goldman would call it, an "Asymmetric (Secret) Servicing Initiative" where much more than just inside information is leasked. Unfortunately, while he may be far more successful in generating jobs in Latin America than domestically, even those jobs have proven to be quite transitory, just like virtually all quickie temp jobs "created or saved" in the US in the past several years. Furthermore, just like in the US, we doubt that the incremental wealth benefits will trickle down to the local population. After all, unlike in the US, endogenous Colombian liquidity may be abundant everywhere but certainly not at the central bank, which is far, far tighter at a rate of 5.25% (and rising), compared to extra loose central planners the "developed" world over.

But they forgot to check with the Germans.

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My most recent trip to Calgary gave me a welcome chance to catch up with friends and colleagues in Cow Town's oil and gas sector. I found out about new projects, investigated companies of interest, and came away with an improved feel for the current state of affairs – what's hot, what's not, and why. The outlook from here is not great. When markets turn bearish, investment strategies often turn toward income stocks, and rightly so: if market malaise is expected to keep share prices in check, dividends become a very good place to look for profits. But whenever a particular characteristic – such as a good dividend yield – becomes desirable, it also becomes dangerous. The sad truth is that scammers and profiteers jump aboard the bandwagon and start making offers that seem too good to refuse. It was just such an offer that reminded me of this danger. In the question-and-answer period following my talk in Calgary at the Cambridge House Resource Conference, an audience member asked my opinion of a new, private company that was offering a 14.7% monthly dividend yield.

"All might be well in China, but Europe again is a cause for serious concern. Spain is the victim of the most intense violence – CDS trades to new all-time wides, and local banks sent nearly 5% lower. The hope might have been that once European markets closed, US equities would recoup losses. But there’s no place for hope on Friday the 13th, and stocks close at the low. The post-close price action in futures was even worse as ES1 drops further still. Back below the 50d again. Perhaps spillover from weakness in European financials, but problematic as tech, the other obvious leader of the year’s rally, is also flagging. SPX drops 17 to close 1370 (-1.25%). The DOW drops 137 to close 12850 (1.05%). The NASDAQ drops 44 to close 3011 (-1.45%)."

In the end having a system without rules is not the same as having a system without consequences. It may be hard to figure out the consequences in such a poorly articulated system, but in time the system will tell you.

That is what EMU is finding out and what the rest of the world is discovering as the flaws in the global financial system become more apparent. But we are much better at finding flaws that at finding solutions.  

The heaviest weekly loss (down 2%) in the S&P 500 since mid-December and largest two-week drop since the rally began in November was dominated by losses in financials (and energy). The major financials most notably have been crushed from the start of April (MS -13%, Citi/BofA -11%, GS -8.5% since the European close on 4/2). Credit broadly underperformed on the day (after ripping to pre-NFP levels yesterday) but HYG (the high-yield bond ETF) outperformed surprisingly but this appears to be related to an equity-credit (SPY-HYG) convergence trade as HYG looks very rich now once again to its NAV. The dismal close in ES (S&P futures) on significantly heavier volume and block size. VIX pushed back above 19.5% and we worry that the violent swings that we saw in credit and equity markets this week are very reminiscent of the beginning of the chaos mid-Summer last year - and perhaps rightfully so given the European situation that is escalating. FX markets were much more active today with EURUSD breaking back under 1.31 and AUD leaking lower after gapping down on China GDP news last night. Interestingly the USD ended basically unchanged from last week's close while Gold managed to hold onto its gains for the week (+1.5% at $1655) despite drops in Silver and Copper also today (Silver and Gold retracing the spike highs from yesterday). Copper kept sliding -4.7% on the week. Treasuries slipped lower in yield from late last night exaggerated by China's news with the entire complex notably lower (5-9bps on the week) in yield and flatter as the long-end outperformed. Stocks pulled back towards CONTEXT with broad risk assets at the close today though it remains rich to Treasuries and credit on a medium-term basis.

The latest CFTC Commitment of Traders report is out, and what a difference two months makes for a currency. After everyone was uber bullish on the Yen two short months ago with nearly record high bullish bias in the form of 57K net long non-commercial spec contracts, the Yen has become the most loathed, and despised currency, as the net short interest has slid to -66K, nearly the largest net short in 5 years, and the most gross short exposure since June 2007. And while the Euro is still vastly detested, the Yen is en route to becoming the one currency with the most net shorts. Which begs the question: is the Yen preparing to once again become the funding currency, and is Andy Xie's analysis about an upcoming JPY devaluation about to be proven prescient once again? Finally, anyone who thinks that the central planners west of Nippon will stand for this aggression, you have another thing coming.

"I cannot imagine any condition that would cause a ship to founder. I cannot conceive of any vital disaster happening to this vessel. Modern ship building has gone beyond that."--Captain Smith Commander of Titanic

It seemed appropriate, given Europe is hitting the wall again in its vicious cycle of self-financed self-hypnotizing recovery-less recovery, to present the 'World Collapse Explained In 3 Minutes' that so mockingly relates the real state of absurdity we face in today's financial markets.

Unlike under a gold standard, in paper money the rate of interest is subject to massive volatility. Sometimes, the government has its way, fueling rising prices and interest rates. Other times bond speculators front-run the central bank’s unlimited appetite for purchasing government bonds and the rate of interest falls. We are now in year 31 (so far) of this latter phase. As the total accumulated debt increases (feature #450 of irredeemable money is that total debt cannot go down), the effect of a change in the rate of interest becomes larger and larger. Today, even very small fluctuations have a disproportionate impact on the burden of debt incurred at every level, from consumer to business to corporate to government at every level. To say that this is destructive is a great understatement. This, rather than the quantity of money, is what people and especially economists should be focused on.

The link between government spending cuts and social unrest is highly non-linear and extremely troublesome. We first noted the must-read quantification of the relationship between so-called CHAOS of social unrest and spending cuts back in early January and this brief lecture reiterates some of the frightening conclusions. Critically, small spending cuts impact social unrest in very marginal ways but once the cuts begin to rise to 2-3% of GDP then the probability of considerable and painful social unrest becomes much higher. As Hans-Joachim Voth points out in this INET lecture, analogizing between a burning cigarette as a catalyst for a forest fire in an arid landscape, he suggests the rapid build up of combustible material caused by austerity (youth unemployment in Spain perhaps?) could be inflamed by a seemingly small catalyst that would otherwise be ignored in general (a poor immigrant being shot or motorist murdered in a bad part of town) when spending cuts are at the extremes we see across Europe currently. The frightening reality of the non-economic, real social costs of the Troika's handiwork look set to be tested going forward as the link between periods of very heavy unrest (clusters of rioting for instance) and austerity is very strong. His findings on the post-chaos fiscal policies, (what does the government do once social unrest explodes) are perhaps more worrisome in that governments will immediately withdraw from austerity patterns which leads to some tough game-theoretical perspectives on the endgame in Europe in a 'lose-lose proposition' for austerity as the uncertainty shock of these events cause dramatic drops in Industrial Production.

In yet another sad reflection on the state of the Schrodinger-economy, USA Today notes that  over 200,000 households will use their tax rebate this year to pay for (drum roll please) a bankruptcy filing and associated legal fees. The NBER research confirms a little known fact (outside of bankruptcy lawyer circles) that 'at the first part of the year, when Americans receive their tax refunds, there almost always is a spike in personal bankruptcy filings.' but this has been especially true since the cost of bankruptcy soared (from $921 in 2005 to $1477 two years later according to the US GAO) after law changes in 2005. The bulk of the fees go to the lawyers of course but the fact that the law was changed to prevent bankruotcy abuse as it was thought too many people who could afford to pay their debts were taking advantage of the system. The sadder truth, according to the USA Today article, is that the drop in bankruptcy filings doesn't necessarily mean that the change has curtailed abuse of the system. "It just means that financially distressed people are not necessarily getting the help they need," Last year's average tax refund was $2913 - enough for many Americans to file for bankruptcy. So we wonder what impact this will have on AAPL's earnings as bankruptcy fees outweigh iPad purchases from this year's rebates. Brilliant!

The iconoclastic rating agency, and fully recognized NRSRO to the dismay of some tabloids, which just refuses to play by the status quo rules, and which downgraded the US for the second time last Friday, to be followed soon by other rating agencies as soon as US debt crosses the $16.4 trillion threshold in a few short months, has just done the even more unthinkable and downgraded Fed boss JPMorgan from AA- to A+.