Archive - Oct 7, 2013

"You don't need me to tell you that the developed countries, the US, Europe, Japan, are insolvent.... I don't want to paint  a picture of clarity about the workout of this thing. Because once a society, a financial system gets in a position of the central bank being trapped, and being unwilling or frightened of stopping this merry go round, things get very dicey. They may move to stopping the money printing, markets collapse, then they panic, go the other way... We are in a period where confidence should be jostled and it could be lost at any time for a variety of reasons, how this works out nobody knows.... There is one right thing to do right now: after five years of 0% interest rates, after $3.5 trillion here and several trillion sprinkled around the globe, this Fed chairman, the next Fed chairman, should say: "We've done enough. It is up to the president and Congress to remove the impediments for growth and provide the catalysts for growth, and help this country grow. The country is capable of growing at a far faster rate than it has been. And I think that the Fed, which is the only central bank which has a dual mandate, has embraced this dual mandate in a very harmful way because they actually revel in the role of being Atlas, holding up the world by themselves."

"Steve Jobs was really a pretty terrible man... and I just don't believe bad guys do well in the long run," is the subtle way the billionaire fund managed describes the ex Apple CEO before shifting his view to the broader market. A spell-bound Maria Bartiromo was looking for any silver lining when Julian Robertson responded ominously, "we're in the middle of a kind of bubble market," and when they "prick the bubble, there will probably be a pretty bad reaction." With views on The Fed's easy-money, Twitter, and market frothiness, Robertson is a breath of truthy fresh air that we suspect will not be back on the money-honey's show anytime soon...

Ever get that feeling of Deja Vu when year after year things don't go quite as well as expected in the beginning of the year. We are sure the Fed does, but the chart below should provide enough evidence of the "value" being added by a consensus of equity analyst extrapolators over the last 36 years. On average consensus EPS growth rates have performed the anti-Gartman - slumping from over-optimistic highs of the left to dismal reality check lows on the left. Of course, hope remains that this year will be different... but it doesn't appear to be heading that way.

We strongly suspect that both government debt growth and money supply inflation will continue unabated – any pause will immediately bring about the kind of short term economic pain these policies have explicitly sought to prevent and will therefore be quickly reversed. It is not unlike the situation the revolutionary assembly of France found itself in during the late 18th century: when it issued new money, industry seemed to revive. As soon as it stopped, industry slumped again. And so it was decided to issue ever more money, until the entire scheme blew up. There can be little doubt that modern-day governments are on the road to a similar date with destiny – and lately the speed at which they travel toward it has increased markedly.

In the past we have tried to show the growing divide between the haves and the have-nots in the US. Whether through this morning's "aggregate" Main Street vs Wall Street chart or various anecdotal indicators of diverging confidence. However, no one signifies the beneficiaries of the status-quo-sustaining government bailouts and stimulus better than Warren Buffett (who now, like Obama, sees stocks are full valued). The following chart shows just how well one can do with a few billion in your pocket and an ear for what the Government will do.

When the momentum chasing public greatly rotates to the IPO-du-jour, it would appear that bad things happen in the market. The last two times Bloomberg's IPO index doubled the market's performance (in 2007 and again in 2011) it seems it marked a euphoric top. Of course, based on 1998/99's IPO performance there is plenty more room to run since this time is different. Nevertheless, the volume of coverage allotted to this IPO or that IPO (and not just Twitter) is awfully reminiscent of the go-go days of yore (and we all know how that ends) - though you'll never be the bag-holder again right?

Our grandparents believed in the value of thrift, but many of their grandchildren don’t. That’s because cultural and economic values have changed dramatically over the last generations as political and media elites have convinced many Americans that saving is passé. So today, under the influence of Keynesian economists who champion government spending and high levels of consumption, thrift has been devalued (and is even punished).  It is the government’s role, Keynes’s followers believe, to keep the boom going through spending. So it is consumption, not supply, that makes a successful economy, they say. Mainstream media rehashes the message that the consumer, not the producer, is the biggest part of the economy. Politicians agree... But, despite the Keynesian sentiments of much of our political and media elites, we owe it to our grandparents to re-learn the lessons of thrift.

China started re-opening roads and airports in Beijing and surrounding areas that have been shut by record high levels of smog. An estimated 430 million people were expected to travel during the holiday that ends today and with the air quality index "improving" from its highest possible level to below 200 (the line between heavy and medium pollution), some will be able to return home. The clips below are stunning (and no that is not 'fog'); summed up best by one Shanghai-based accountant that Bloomberg reports noted, "I won’t go to heavily polluted places like China’s north region as it’s either hazardous to your health or causes trouble when traveling."

Over the weekend, we humbly suggested that the dream of ongoing US equity market multiple expansion may be over. It would appear SocGen not only agrees but finds current valuations very stretched. On the basis of Price-to-Book (valuation) and return-on-equity (profitability), the US equity market is extremely 'expensive'; and "hoping" for further expansion on the RoE to save the day is whimsical given the limits to leverage. Still, despite Obama's sell signal, it appears from today's open that the BTFATH crowd remains alive and well.

Feel like you have missed any of today's (non) developments in the week-long government shutdown debacle, or the countdown to the debt ceiling X-Date, which now is 10 days away (or 222 hours as dramatically inclined CNN helpfully points out), then this summary is for you. From Bloomberg:

“Diminishing Superpower” This was the headline streaking across the weekend edition of the Jakarta Globe, one of the largest newspapers in Indonesia. The photo beneath was of Barack Obama, his lips pursed and eyes steeled as if he was fighting back tears. Or perhaps staring off into the fiscal abyss. The subheadline read: “Obama’s APEC absence symbolic of US waning influence in Asia.” It’s so obvious to everyone else that the US is in terminal decline. As history has shown so many times before, this is exactly how the end begins.

Normally, we would report the change in total consumer debt (revolving and non-revolving) in this space, but today we will pass, for the simple reason that the number is the merely the latest entrant in a long series of absolutely made up garbage. It appears that in the "quiet period" of data releases, when the BLS realized its "non-critical", pre-update 8MHz 8086-based machines are unable to boot up the random number generator spreadsheets known as "economic data", Ben Bernanke decided to quietly slip a modest revision to the monthly consumer credit data. A modest revision, which amounts to a whopping $180 billion cumulative increase in non-revolving credit beginning in January 2006.

Weakness at the open last night extended lower during Europe's early session - testing the 11-month trendline levels for the S&P 500. As the US day session opened we bounced gloriously on the shoulders of JPY-driven mania (and absolutely and utterly no news) but as usual that lasted only as long as POMO and the markets stumbled along for the rest of the day - until IB raised margins and then the high volume dump started. All equity indices dived and VIX surged by its most in over 3 months above 19%. Away from the schizophrenia in stocks, FX markets were quiet after an early eruption in vol (USD -0.25% on the day); Treasury yields were 1-3bps lower (but off their best levels); Silver spiked near the open (as did Gold) and held gains. Stocks close at their lows with an ugly dump.

The massive outperformance of the smallest and most trashy companies over the past year, month, week, day etc... stalled this afternoon. No news; no macro data; no change in the situation in DC. So what was it? We suspect the answer lies in the all-time record levels of margin that we recently discussed holding up the US equity market. Interactive Brokers, it would appear, have seen the light and over the next week or so will be increasing maintenance margin to 100% - effectively squeezing the leveraged momentum chasing muppets out of the market (or at the very least halving their risk-taking abilities).