Archive - 2012

Not the sudden apocalypse that the headline number promised, but of a depression that started in 2005

It seems not every nation's head of central banking believes in the Bernanke Doctrine of moar QE is better QE... Hong Kong Monetary Authority Chief Executive Norman Chan said Monday that quantitative easing is not a panacea, and added:

... there is a possibility that the process of deleveraging is disrupted by quantitative easing, leading to sharp increases in asset prices in the first place. Yet, since such increases are not supported by economic fundamentals, any increase in wealth will be seen as transient... (and asset prices might drop sharply and remain volatile). As a result, households are unwilling to increase spending and in the end, the real economy fails to rebound.

Now that is a rattling sabre. While markets for now are seemingly shrugging off this 'fly-by', we suspect the people of Okinawa were more than a little surprised:

NORTH KOREA LAUNCHED ROCKET AT 9:51 AM LOCAL TIME: YONHAP
N. KOREA ROCKET LAUNCHED IN SOUTHERLY DIRECTION,JAPAN GOVT SAYS
N. KOREA ROCKET PASSES OVER JAPAN'S OKINAWA, NHK SAYS
JAPAN GOVT: NO ORDER GIVEN TO SHOOT DOWN N.KOREA ROCKET
N. KOREA ROCKET EXPECTED TO FALL IN SEA EAST OF PHILIPPINES:NHK

What is most surprising is not the rocket launch: it was largely expected and overdue after the humiliation from the last one; it is that Korea has brazenly defied US warnings and the threat of sanctions just to make a rather meaningless political point. The imminent escalation in sanctions and N.Korea's response is what is the true variable here, confirmed by the markets who have not even blinked as a result of the rocket launch.

Last week we noted: "...when taking into account the recent slate of economic weakness, post-election we are likely to see many of the recent job gains revised away as the data aligns itself with overall economic activity...." Since that time jobless claims did indeed rise, and with the release of the November jobs report, we saw the previous two month's gains in employment revised down by a total of 49,000. What is important to remember is that the BLS only publishes revisions to the prior two months even though it has data for months prior.  This is why the annual revisions to the employment data can be significant.  Furthermore, given the weakness in the employment components of the major economic surveys, as shown by the composite employment index, we should expect to see negative revisions to the 2012 data employment data next year. While it is too early to say that employment has peaked for this current recovery cycle - there is mounting evidence that this may indeed be the case.

There is "no point" earning less in a minimum wage job is how Leanna Broderick - 20-year-old mother of two - justifies the benefits she claims adding that "she is better off on benefits" and would not get a job unless she could continue her luxury lifestyle, which includes designer outfits, holidays abroad, clubbing, lunches out and expensive gifts for her daughters Zelekah, two, and Zakirah, one. The UK's Daily Mail reports that Leanna saved GBP2,500 (~USD4,000) last year while living on GBP15,480 (~USD25,000) which she intends to spend on iPads and gold earrings for her kids - adding that "This way, taxpayers know I'm raising two well-brought-up kids." However, all is not rosy in Leanna's house as she fears next year may not be so lavish because of Government benefits cuts. "I'm not against the cuts, but only if the Government helps me find a job," she said, "In the meantime, I’ll stay on benefits and get as much as I can out of it."

The Fed is set to become considerably more dovish in 2013 and beyond as Evans and Rosengren become voting members. It seems unlikely that any new 'Bernanke' would drastically alter the Fed's path; and so we present the 'Doves' path to prosperity (in nominal terms). As BofAML notes, "More immediately, the doves largely support the idea that policy should be kept easy “for a considerable time” after the recovery is underway. Market participants thus should be cautious not to overreact to better near-term data: the Fed isn’t likely to turn notably more hawkish any time soon."

Minutes before Michigan Governor Snyder signed the 'Right-To-Work' bill into law, Teamster leader Jimmy Hoffa appeared on CNN,as seen in the clip below, warning that: "This is just the first round of a battle that's going to divide this state. We're going to have a civil war," as the bill to weaken unions' power is passed.

There are still plenty of opportunities out there.

While trying to buy 500 shares of a preferred stock this morning, Principal Financial Group Inc. series B (NYSE:PFG-B), PreMarketInfo's Dennis Dick encountered the algos heads on. As he notes "It is such a challenge to trade any type of illiquid issue as the execution of orders is nearly impossible in this HFT world."  Here is the sequence of events. Some serious issues are highlighted in these few minutes of activity: 1) Inability for market participants to access a quote; 2) Excessive quote pollution as HFT algorithms battle each other; 3) Market fragmentation can lead to inferior execution; and 4) HFT penny jumping can discourage market liquidity. The bottom line is that all of these issues discourage participants from trading illiquid securities – making these securities even more illiquid.

Jeff Gundlach presents his latest thoughts in the following 75-slide presentation and webcast. Briefly summing it up, he expects considerably more volatility to re-appear in Europe, thinks JPY is a short (and NKY a buy) and Japan is to be closely watched, prefers Gold to stocks as a vehicle to play more quantitative easing, and is anxious of the fiscal cliff - noting that the problem was created from years of budget deficits. Some notable quotes include: "A lot of that GDP is phony"; "Japan is really out of policy tools"; "Many countries can be net debtors if central banks are monetizing debt."

Presented with little comment, but as we head into another FOMC meeting, we remind all those 'recovery is just around the corner'-ites that the market's expectations for how long the Fed will be on hold has never been higher at around 35 months - certainly doesn't suggest an expectation of things getting better in reality any time soon.

Within a few minutes of the day-session open, US equity markets decided today was the day to test the Election highs and QE3-announcement lows. Starting with a little jog, the chatter gathered pace as weak data was dismissed, eyes kept focused on the prize of running the stops above the Election highs leveraging the pre-FOMC 'habit' and hope of a fiscal cliff resolution. This was not to be. VIX was the leverage tool of the day early and led (beta-adjusted) stocks higher until the explosion of volume at the highs with shorts giving up amid a plethora of big blocks suggesting pros selling into that auctioned strength. The straw to break the rally-camel's back was Harry Reid's comments and sure enough we rotated all the way back down to the day-session open's levels. While all this excitement was occurring, risk-assets twiddled their thumbs in general, snickering the impetuous youth of the exuberant equity market and the pundits admiration that 'well, the market knows that a deal will be done'. Into the close, S&P futures ramped up to VWAP settling their at the day-session - only to extend a little after the close.

Here are two short clips to serve as a harbinger of what may and most likely will happen in the US as labor unions are stripped of even more power in the coming months and years, showcasing their reluctance to go gentle into that good night. This is how close the US is from violence at any one moment. Luckily, nobody was seriously hurt this time.

There are five distinct stages in the life cycle of sovereign nations. These life cycle stages map to generational cycles and to Long Cycles such as the Kondratieff Cycle. Since these cycles are fundamentally behavioral shifts, they consequentially take the nations economic and political process with it. Democracies become exposed and borderline ungovernable in Stage V. This is a result of the electorate's expectations, entitlements and James Madison's "Complicity from the Tyranny of the Majority", as outlined in the "Federalist Papers". Success breeds complacency and complacency breeds leverage. Fiat currency enables a late stage country to delay the realization that it is no longer rich, but not avoid it. In a period of major Global Imbalances, which the world presently faces, this will make democratic policy setting extremely difficult and in fact will show democracies to be borderline ungovernable. In cases of grossly distorted expectations, such as the US, it will be found to be ungovernable.

It was all going so well. In general the cone of silence was working. Stops had been run, hope was among us once again and while no-one had a clue why stocks were rallying (apart from Johnny 5), the interpretation was that - well the market must believe a deal is being done... until Harry Reid opened his mouth....*REID: REPUBLICANS HOLDING MIDDLE CLASS TAX CUTS 'HOSTAGE' *REID SAYS REPUBLICANS HAVE OFFERED NO SPECIFICS ON WANTS and S&P 500 futures dropped 5 points - halving the day's gains.