Archive - Jul 2012

The following two charts show just why any hopes that corporate earnings can mask the US economic deterioration this year, as they did in 2011 (probably the first and only way in which 2012 is not a carbon copy of 2011 so far), should be promptly dashed.

Corporations may or may not be people, but money has always talked, and the wealthy certainly do have a lot of excess cash lying around which they would rather prefer spending in hopes of generating the highest IRR possible by influencing the outcome of the presidential race. Below is a look of the uber-rich who have contributed at least $1 million to the major PACs as disclosed to the Federal Election Commission.

They're creepy and they're kooky...

Falling interest rates are a feature of our current monetary regime, so central that any look at a graph of 10-year Treasury yields shows that it is a ratchet (and a racket, but that is a topic for another day!).  There are corrections, but over 31 years the rate of interest has been falling too steadily and for too long to be the product of random chance.  It is a salient, if not the central fact, of life in the irredeemable US dollar system. Irving Fisher, writing about falling prices (I shall address the connection between falling prices and falling interest rates in a forthcoming paper) proposed a paradox: “The more the debtors pay, the more they owe.” Debtors slowly pay down their debts and reduce the principle owed.  This would reduce the NPV of their debts in a normal environment.  But in a falling-interest-rate environment, the NPV of outstanding debt is rising due to the falling interest rate at a pace much faster than it is falling due to debtors’ payments.  The debtors are on a treadmill and they are going backwards at an accelerating rate. How apropos is Fisher’s eloquent sentence summarizing the problem!

Bulgaria speaks up in the euro fiasco. A balanced budget, growth, and an income tax rate of 10%?

In part three of our five-part series tying the Olympics to economics (previously here and here), we note that in a rather surprising coincidence, the Olympics' host nation has been a rather simple tool to pick long-term 'winners' in the FX market. As Goldman points out, while we doubt that the Olympics directly affects the FX market, it has provided excellent long-term appreciation potential. We assume this means that the BoE will stop QE or we really don't see cable extending this performance record, though the findings suggest that systematically picking the 'next' host tends to pick winners more than losers.

Because a broken picture is worth a thousand Econ PhD essays

It’s tough to do just about anything today without experiencing the far-reaching hand of the growing regulatory state.  Virtually everything the average shopper see on the store shelf is stamped with government approval.  With the increasing use of red light safety cameras and even domestic surveillance drones, the dystopian world which George Orwell painted so brilliantly in 1984 is sounding more prophetic by the day.  The result is a new generation that is coming of age amongst a pervasive and all-inclusive nanny state.  With a federal register that grows by tens of thousands of pages each year, tyranny is spewing forth across America from Leviathan’s home of Washington D.C. every single day. In a free society, it would be unjust to force some into paying for the constant supervision of those less cautious of life’s risks.  Just as a child learns to avoid a hot stove by painfully touching it, we all learn through misfortune.  The Jersey Shore drownings, tragic as they are, should serve as a lesson all beach visitors.  Common sense isn’t something to be legislated.  It can only form when the right incentives are involved for people to make smart decisions without relying on a central source of authority.  And just like the free market, common sense is also a product of spontaneous order.

Oh the exuberance. CRAAPL led the NASDAQ down heavily today as its high-beta ebullience reverted back to 'normal' and the S&P 500 and NASDAQ are closing practically unchanged for the month of July. The Dow Industrials are down 0.4% but the Dow Transports are down 2.65% - near their lows of the month. Financials have been monkey-hammered as today's offer-a-thon dragged them dramatically lower (MS/BAC -13% for the month). A late-day OPEX-inspired activity burst dragged volume up from near year lows and likely inspired the surge lower in VIX into the close (even as stocks went sideways to lower) - but still ended up 0.75vols back above 16%. Treasuries end the week down 2-3bps at the long-end and 4-5bps at the short-end with a decent rally today. The USD is up a modest 0.25% on the week - thanks to notable weakness today in EURUSD (which broke its pattern of reverting today) though dispersion was broad with AUD stronger by 1.5% and EUR weaker by 0.75% on the week. Gold and Silver are practically unchanged on the week, Copper down around 1.5% and WTI up over 5% - but only WTI is up for the month. Cross asset class correlation picked up towards the end of the day as ES caught-down to broad risk asset's less sanguine view of the world. ES ended the week up around 7pts, VIX down around 0.5 vols with financials -2.25% and Energy +3%.

Strength is fading. Parity is visible. Reform is the only option. European markets are tumbling and the euro has slipped to record lows against several major currencies. The market is in reaction mode responding Spain and Greece in the headlines.

It has been a tempestuous week where good is bad, worse is better, but European news is to be sold. Here is your one stop summary of all the notable bullish and bearish events in the past seven days.

So the end stage of neoliberalism threatens a Dark Age of poverty/immiseration – most characteristically, one of debt peonage. ~ Michael Hudson

The rats everywhere are now jumping furiously off the titanic, but few had taken the time to write a letter explaining in detail just how cracked and broken the hull really was. This has now changed, with the departure of Peter Doyle, formerly a division chief in the IMF’s European Department responsible for non-crisis countries and currently an adviser to the Fund. Not content with quietly slinking off the scandal ridden organization which has become the butt of all jokes in the international community, where humor about Lagarde's Louis Vuitton panhandling bag is as pervasive as punchlines about just how incompetent the organization is at actually doing its duty, Doyle has penned the following scathing letter which tears down every myth about the IMF: from its impartiality, to the selection process of its head, to its effectiveness. The letter also contains the following gem: "After twenty years of service, I am ashamed to have had any association with the Fund at all." Pretty much says it all. This is a scandal in the making, and one which may shake to the core the credibility of the IMF in the context of international organization.

Yes, it's happened again. One of these markets is not like the other ones.

The most corrupt moron of a Treasury Secretary the country has ever known...