Archive - Sep 2012

Equities had their now-ubiquitous schizophrenia over 'bad-is-good'-macro data, BTFD - VWAP magic, and back-to-work-after-labor-day (volume better) but ended the day fractionally lower. Average trade size was low but volume was a little above average for the last few weeks as the chase to VWAP and then to green in S&P 500 e-mini futures (ES) saw some notable blocks go through - which was accompanied by (or aided by) AAPL's stunning revelation that there will be an iPhone5 </sarc> driving it up 1.5% to fill last week's gap. Away from the equity silliness, there was a clear theme of USD strength (as AUD weakness led but EUR weakness from the European open dragged DXY into the green from Friday by today's close). Treasuries leaked 2-3bps higher in yield on the day. However, while Oil prices dropped (down 1% now from Friday's close), Silver and Gold bucked the stronger USD trend and pushed higher (with the former up 2% on the week and Gold testing up towards $1700). VIX jumped 0.85 vols back above 18% (highest close in a month) almost reaching 19% intraday. Risk assets generally synced well with stocks into the European close, then stocks lagged, overshot (supposedly on Gross' comments but we doubt that) and then reverted back down. Two words - palpable anxiety.

NO FOOD OR BEVERAGES!!!

In two days Mario Draghi may, although without Germany's blessing most likely will not, announce vague terms of how the ECB plans on monetizing hundreds of billions in short-term (sub-3 Year) bonds by Spain and Italy, which according to the ECB is not really monetization, and the only thing that is needed is for the two countries to admit they are insolvent, something which paradoxically will never happen as long as the ECB does everything in its power to spook markets away from fair clearing levels, and to keep the cashflow implied price at record divergence from the centrally-planned "valuation" determination. But let's assume Draghi does go ahead and one up Bernanke, announcing the next easing round a week ahead of the September FOMC meeting, as both central banks take the lunge into the latest lap of currency devaluation. What happens then? Well, as JPM's Michael Cembalest puts it quite succinctly, Draghi will unleash nothing short of the transformation of the ECB from the European Central Bank to the European Creosote Bank (see below for the reason). Numerically, this will mean that once the ECB is done monetizing another €1 trillion or so in bonds in the next year, the ECB will then hold just shy of a unimaginable 50% of the entire Eurozone GDP, taking the New Normal monetary world well beyond the rabbit hole and deep inside the twilight zone.

Energy prices are soaring (though down a little this week). However, a strange thing has occurred since the lows in 2009 and the lows in 2011 - both indicative of coordinated and massive central-banking largesse - Oil prices in hard-money have been extremely range-bound. In fact, the price of Oil in Gold and Silver has been rather coincidentally stable over this period - we leave it to the reader to consider the global energy-producing nations' implications of a hard-money 'peg' for energy prices - as Central Banks attempt to inflate their way out of trouble.

The odds of some instability erupting globally in 2013-14 seem high, but what the trigger might be remains unknown. The fragility and vulnerability of systems pushed to extremes are like sandpiles: it doesn't really matter which grains finally trigger the cascade; the system's rising instability is the causal factor. Where does this put us? If the ultimate crisis is another decade away, we might as well enjoy what we can in the meantime and assemble the pieces of a semi-sustainable life: income streams that we own/control, a very low cost of living, and property in areas that are universally desirable, i.e. they have decent weather, surface supplies of water, concentrations of intellectual and financial capital, and ideally, a functioning local government that isn’t hopelessly corrupted by vested interests. Any disadvantages in these resources can be offset by a solid network of friends, family, associates, business contacts, etc., i.e. social capital. I think it is safe to assume the promises of Social Security, Medicare and pensions will be chipped away by one force or another (inflation, taxation, “austerity,” etc.) and so those who have written these out of their own personal expectations will be psychologically primed for self-reliance embedded in local support networks.

Drought has devastated crops around the world this year. While most have focused on the extreme issues in the US, we noted two weeks ago that the Monsoon season was shaping up to add fuel to the fire of illiquidity. As the NY Times reports, there is simply not enough rain in India as the annual monsoon season is down 12%. "If this situation continues, I'll lose everything" is how one soybean farmer highlighted his plight (and no government insurance or subsidies there). Famine is not an immediate threat though as India has stockpiles of food (though we know the issue there) but critically this, as we noted here before, places inordinate pressure on central bankers (specifically the PBoC) where its citizens are already facing record high prices for staples like soybeans as the world's markets (devoid of contemplation of the plight of the average citizen - so long as my AAPL stock goes up) anticipate the free-lunch of central bank liquidity while its that non-metaphorical liquidity that could ease pressures on millions.

Several hours ago, the latest hacker group to gain prominence, AntiSec, a subset of Anonymous, disclosed that it had obtained the confidential user data contained in some some 12 million Apple units after hacking an FBI Dell Vostro notebook computer, "used by Supervisor Special Agent Christopher K. Stangl from FBI Regional Cyber Action Team and New York FBI Office Evidence Response Team was breached using the AtomicReferenceArray vulnerability on Java" which contined a file titled NCFTA_iOS_devices_intel.csv, which "turned to be a list of 12,367,232 Apple iOS devices including Unique Device Identifiers (UDID), user names, name of device, type of device, Apple Push Notification Service tokens, zipcodes, cellphone numbers, addresses, etc. the personal details fields referring to people appears many times empty leaving the whole list incompleted on many parts." In other words, the FBI had the personal data of a substantial number of Apple device users, certainly all of which had been obtained without prior permission. Naturally the question here is why on earth does the FBIO have this data, and as TNW suggests, "They published the UDID numbers to call attention to suspicions that the FBI used the information to track citizens. Much of the personal data has been trimmed, however, with the hackers claiming to have left enough for “a significant amount of users” to search for their devices." AntiSec has subsequently released one million of these UUIDs and their associated data. Find out if your device is on the list as explained below.

It’s perhaps no co-incidence that the trend towards persistent deficits started around the final collapse of the last link to a quasi-Gold standard back in August 1971. As Deutsche Bank's Jim Reid notes, in a world of the Gold Standard or equivalent, those countries loosening policy too much would have seen a rush to convert their currencies into Gold thus destabilising their economic policy framework. Multi-year (let alone multi-decade) deficits and the GFC could not have occurred under a gold standard. So with the shackles off and with nothing backing paper money, the post-1971 period has seen a uniquely long period of fiat currencies globally with a beggar-thy-neighbour rolling period of credit creation. Never before in observable history have so many countries been off a precious metal type currency system for so long. So after 41 years of global fiat currencies and an unparalleled amount of debt that is proving very difficult to shift, we really are venturing into the unknown.

On December 20, 2010, Netflix CEO Reed Hastings had one message to everyone who cared: "Cover Your Short Position. Now."

NFLX price then: $178.05...  NFLX price now: $55.40; Return: -71.20%. And they say CEOs know their companies best...

Thanks for the advice Reed. But we'll stick with our short. But hey, when the whole CEOing thing doesnt work for you, the ECB will surely hire you as it is in dire need of people who sound sophisticated, pretend they know what they are talking about just because they speak loud and with confidence, and write long-winded essays of windbaggery, that say nothing, and end up 100% wrong.

Don't look at 10Y Spanish bond yields; ignore Swiss 2Y rates dropping; it's all about the front-end of the Spanish yield curve - that's your tell that "everything's awesome." We even saw some proclaiming the 5Y Spain 'strength' as indicative that the market is 'buying it, and Draghi will deliver'. Problem is - he can't! Even if he announces a non-monetizing short-dated monetization plan, and gets it by his BuBa buddies - the market knows the problem: that without this 'temporary feature' becoming permanent (and therefore the ECB basically embarking on open-ended monetization - see Gold), the market expects Spain's short-dated cost-of-funding to more than double (to 6.5% from 3% currently) over the next three years. The steeper the curve, the more the ECB will have to buy and while thin illiquid bond markets manipulated by CB intervention are 'most' people's indicator, consider youth unemployment, capital outflows, and loan delinquencies before becoming euphoric.

When it comes to who controls Europe, the answer is simple - hint: it is not Goldman Sachs via its puppets Mario Monti or Mario Draghi. Nor is it Angela Merkel. No - the entity in charge of the continent of 300+ million is the nation-corporation known as Gazpromia, which also happens to be is the holding company of the new and somewhat improved USSR, aka Russia. Why? Because if Gazpromia decided to play the vengeful god role it is known to embrace now and then, it could simply shut down the gas pipeline to Europe and millions of people would realize that heating in deep subzero temperatures is far, far more important than having a (un)stable currency or wheelbarrows full of money. As such, it is always better to let sleeping gods lie. Oddly enough, Europe decided to not do that, and moments ago the WSJ and BBG reported that the EU has decided to bite the hand that warms it and has launched an antrust case against Gazprom.

Let them die. 

There is still some compression margin, but where to put the credit spread, real or “perceived”, from a (real) default possibility point of view or even from the shunned convertibility point of view?