Archive - May 7, 2012

As can be seen in the attached clip Warren Buffett, as part of his anti money tirade, both real (gold) and fiat, the Chairman of Berkshire is certainly not a fan of holding cash in any form. To wit: "cash is as risky an asset you can own over time." In other words, the opportunity cost of not owning something else with that cash is indicative of even more risk in the equities arena. So one wonders: is the fact that Buffett's firm now has a record amount of cash on its books more an example of senility or hypocrisy.... Or is all hell about to break loose as per Buffett's own words? We can't decide.

Well, that lasted far less than the three days expected:

• SAMARAS SAYS WAS UNABLE TO FORM GOVERNMENT
• SAMARAS SAYS DID ALL POSSIBLE TO FORM GOVERNMENT
• SAMARAS HANDS BACK MANDATE TO PRESIDENT PAPOULIAS
• SAMARAS SAYS AIM TO KEEP GREECE IN EURO

And now the broad-left coalition Syriza gets the mandate to form a coalition government. If successful, and with nearly 60% of the parties in parliament being anti-bailout it would not take much for differences to be resolved, all bets are off as the anti-bailout powers will finally gain control of Greece, effectively ending European control over Greece. Alternatively, if nothing is achieved, then it is very likely that Greece will have another election within 3-4 weeks. And then another. And then another.

There was a little mentioned tangent to last Friday's very disappointing NFP print of +115,000 (driven by a surge in temp jobs offsetting a collapse in full time positions): as David Rosenberg notes, the jobs number was about half of another far more important number - that of Americans applying for disability, which in April was +225,000. He continues: "this is the new stealth stimulus program - so far in 2011, nearly one million Americans have applied for disability and year-to-date, 333k have actually enrolled (covering 539k family members). In total, more than five million people have been added to disability coverage since President Obama took over three years ago." The punchline will make all those who adore (insolvent) welfare states shake with giddy delight: "So look - either safety standards at work have eroded dramatically or the "99%" have found a creative way to milk the system and turn the economy into a quasi welfare state".... Yup. What he said. Because remember: the BLS assumes that any amount up to the total 53 million people, is not in the labor force as they have other "wefare" based forms of government handouts and see no need at all to look for a job. Is there any wonder why US unemployment is realistically 20% if not much higher? As for the other chart, food stamps, we know that story all too well.

In France, no one can hear you scream.

Here I issue an old school challenge to Goldman Sachs, both the Morgans, and the tabloidal MSM in regards to the Facebook IPO and simple fundamental valuation!!! Have at Thee!

In a little over 80 seconds, this animated clip provides everything you need to know about exactly what Hollande's victory today means to Europe's glorious future.

While there may be a plethora of geopolitical reasons to be 'cautious' of getting over your skis in US equities, there are a number of more quantifiable reasons for not buying-the-f##king-dip here. Between the sustainability of US earnings and the sell-in-May mantra, we highlight five foods-for-thought before you push all-in this morning. Of course the only bullish reason left is Central-Bank-driven and remains the elephant in the room but as we get closer and closer to the election, the Fed will be increasingly snookered and require a market plunge of more than 1.5% to step in and save the civilized world with S&P 500 1285 as a target for Fed action based on last Summer's excitement.

Dollar vs. Stocks 

The global economy is facing a structural surplus of labor and a scarcity of paid work. Here is the critical backdrop for the global recession that is unfolding and the stated desire of central banks and states everywhere for "economic growth": most of the so-called "growth" since the 2008 global financial meltdown was funded by sovereign debt and "free money" spun by central banks, not organic growth based on rising earned incomes. Take away the speculation dependent on "free money" and the global stimulus dependent on massive quantities of fresh debt, and how much "growth" would be left? The Internet has enabled enormous reductions of labor input. A mere 15 years ago when I first learned HTML (1997), you had to code your own site or learn some fairly sophisticated website creation/management software packages, and you needed to set up a server or pay a host. Now anyone can set up a Blogspot or equivalent blog for free in a few minutes with few (if any) technical skills, and the site is free. The other trend is the cost of labor in the developed West is rising as systemic friction adds cost without adding productivity. Workers in the U.S. only see their wages stagnate, but their employers see total labor costs rising as healthcare costs rise year after year. In effect, the U.S. pays an 8% VAT tax to support a bloated, paperwork-pushing, inefficient and fraud-laced healthcare system that costs twice as much as a percentage of GDP as other advanced democracies. No wonder many entrepreneurs are selling their high-overhead businesses and becoming flexible, low-cost one-person enterprises.

Presented with little comment except to note that just when you thought a sense of reality had returned (and Treasuries and stocks re-coupled), equities feel the need to hype once again - fool you once shame on you, fool you the 50th time and we give up.

About two years ago the Norwegian sovereign wealth fund did something truly remarkable: it invested for infinity: "Norway, which has amassed the world’s second-biggest sovereign wealth fund, says Greece won’t default on its debts. The Nordic nation’s $450 billion Government Pension Fund Global has stocked up on Greek debt, as well as bonds of Spain, Italy and Portugal. Finance Minister Sigbjoern Johnsen says he backs the strategy, which contributed to a 3.4 percent loss on European fixed income in the second quarter, compared with gains on bonds in Asia and the Americas. Norway says its long-term perspective will protect it from losses. “One could say we are investing for infinity,” Johnsen said." Well, we all know how the experiment ended: "Norway Sovereign Wealth Fund Purges All Insolvent Eurozone Debt Holdings." So much for infinity. But that has not stopped others to boldly catch falling knives where so many other have tried to catch falling knives before, and failed. Enter Greylock Capital and various other hedge funds who are positive they have rediscovered the wheel.

In France, Hollande has the rep of having no backbone like a jelly fish (or flan). We will see what he really stands for and what he can achieve. Moreover when he tries to govern we’ll see if this election was more about picking him or dumping Sarkozy. I suspect it was more the latter... Greece is just a mess and I don’t know what model you apply to understand it. It may take a number of election iterations before the ‘people’ figure out they have a bitter pill to swallow and pick someone to figure out what it will look like.

What are the classic signs of an asset bubble? People piling into an asset class to such an extent that it becomes unprofitable to do so. Treasury bonds are so overbought that they are now producing negative real yields (yield minus inflation). And so America’s creditors are now getting slapped quite heavily in the mouth by the Fed’s easy money inflationist policies. John Aziz proposes (much to the consternation of the monetarist-Keynesian “print money and watch your problems evaporate” establishment) that this is a very, very, very dangerous position. And that those economists who are calling for even greater inflation are playing with dynamite. See, while the establishment seems to largely believe that the negative return on treasuries will juice up the American economy — in other words that “hoarders” will stop hoarding and start spending — we believe that negative side-effects from these policies may cause severe harm. Do we really want to risk the inflationary impact of continuing to print money to monetise debt (and hiding the money in excess reserves, thereby temporarily hiding the inflation). As John wrote recently - "So, does the accumulation of excess reserves lead to inflation? Only so much as the frequentation of brothels leads to chlamydia and syphilis." We’d call that playing dice with the devil.

Back in March India did a quick flipflop on its then announced Cotton export ban following complaints by China and domestic trade groups, which created quite a stir in the cotton market, first sending it soaring then plunging on supply concerns. This was promptly followed by another misguided attempt to control and benefit from the price of a key commodity, in this case gold, when the country announced it would impose an excise tax on gold jewelry, sending its gold merchants into a nationwide strike. This did not last long either and a few days later, merchants cancelled their strike following promises form the government that too would be promptly overturned. Sure enough, the excise tax has been officially withdrawn, and the biggest source of gold demand is set to see gold imports unleashed once again.

We have been warning of the pending fiscal cliff in the US and the somewhat inevitable debt ceiling debacle, election uncertainty, and the question of Fed independence in an election year as potential catalysts for risk flares in the US and abroad. For now, US equities are happy to ignore these events, still drawn in their Pavlovian-educated manner to US equities for their nominal enrichment. The trouble is - there are clear warning signs from some particularly noteworthy markets that all is not well (that appear more capable of comprehending fundamentals). Forget for a moment the overnight plunge and recovery in futures as this will bring only anchoring bias; a step back to 30,000 feet and we note that the spread on USA Sovereign CDS has risen by over 30% in the last month (now back at 40bps or 3-month wides) flashing a worrying warning signal for US equities if the past is any guide. Remember that US CDS are denominated in EUR and do not simply reflect the 'default' risk of the fiat-issuing USA but the devaluation or restructuring risks - and it appears market participants are getting nervous once again of the profligacy of the US government and the ineptitude of the central banks with their one-trick-pony experimentation. At the same time, central banks' broad repression has crushed volatility in every asset class - except, as Morgan Stanley notes - credit which is inferring considerably higher chance of a risk flare in the short-term. So while this week will bring cheers of growthiness and cooperation and decoupling, the all-seeing eye of credit markets remain far less sanguine.