Archive - Oct 2013

Yes, the United States dodged another bullet with a last-minute deal on the debt ceiling. But, with 90 days left to bridge the ideological and partisan divide before another crisis erupts, the fuse on America’s debt bomb is getting shorter and shorter. As a dysfunctional US government peers into the abyss, China – America’s largest foreign creditor – has much at stake. For more than 20 years, this mutually beneficial codependency has served both countries well in compensating for their inherent saving imbalances while satisfying their respective growth agendas. But here the past should not be viewed as prologue. A seismic shift is at hand, and America’s recent fiscal follies may well be the tipping point. The days of its open-ended buying of Treasuries will soon come to an end.

"The question is not 'tapering'," Marc Faber exclaims to his hosts on CNBC's Squawk Box this morning, "the question is at what point will they increase the asset purchases to say $150 [billion] , $200 [billion], or a trillion dollars a month." QE-4-EVA is here to stay, as Faber explained "every government program that is introduced under urgency and as a temporary measure is always permanent." Simply put, "The Fed has boxed itself into a position where there is no exit strategy," and while inflation may not be present in the 'chosen' indicators, Faber blasts, there's been incredible asset inflation - "we are the bubble. We have a colossal asset bubble in the world [and] a leverage or a debt bubble." There will be massive wealth destruction, he concludes, "one day this asset inflation will lead to a deflationary collapse one way or the other. We don't know yet what will cause it."

Why are we so rich and the poor so poor? Econophile takes a look at Kenya as a laboratory of bad ideas and how to fix it.

The high-beta honeys were not amused (despite another melt-up in NFLX into earnings) as the Russell 2000 underperformed (-0.25% on the day). The Dow and S&P ended practically unch, Nasdaq bid (helped by AAPL ahead of the product news tomorrow) and Trannies closed their highs of the day exuberating all the way... Treasury yields rose 2-3bps (steepening). FX was quiet with the USD very slightly higher (helped by JPY weakness) but AUDJPY was in charge of S&P 500 trading today. Oil dropped 1.6% closing back under $100 (first time in over 3 months) and Silver rallied 1.3%. Hedgers were active (6though clearly the selling was limited) as credit spreads and volatility markets saw protection buyers active.

And the hits just keep on coming for McDonalds. An animal rights organization is urging McDonald’s Canada to take a firm stand against what it calls “shocking animal cruelty” captured on a graphic video it says was taken at two Alberta farms, which shows dead hens rotting in the cages, and chicks being covered in feces. . As The Globe and Mail reports, McDonald’s, however, says while it does get eggs from Burnbrae along with many other Canadian companies, it says its eggs do not come from the farms referenced in the W5 story.

There can be little doubt from recent actions that China is preparing herself for the demise of the dollar, at least as the world’s reserve currency. Central to insuring herself and her citizens against this outcome is gold. The West selling its stocks of gold has become the biggest strategic gamble in financial history. We are committing ourselves entirely to fiat currencies, which our central banks are now having to issue in accelerating quantities. In the process China and Russia have been handed ultimate economic power on a plate.

Across the entire curve, credit spreads on JCPenney are exploding. The curve is inverted with the market indicating an almost 50% chance of default within the next 2 years (specifically in 2014 as opposed to pre-2013 Xmas). The stock price is collapsing further (though we suspect a gaggle of analysts calls to catch the accelerating knife - just as we saw last time). At $6.30, this is the lowest stock price since March 1981, on the back of yet another downgrade (this time with a $1 target) by none other than the same Mary-Ross Gilbert who proclaimed the most recent quarter a success and suggested buying the debt in just August.

Petro-dollars, the word used to describe the billions of dollars earned from the sale of oil and natural gas, have helped change the shape and future of many counties in the Middle East, usually for the better, but not always. In a few short years Petro-dollars have helped shape the Gulf states into the modern and futuristic looking cities of the future that one finds in today’s architecture in Dubai, Doha and Riyadh. But now those petro-dollars are being used to shape the political future of the region and to model specific policies in a number of countries, such as Syria, for example, where petro-dollars are hard at work today.

Newsflow is weak to non-existent. S&P futures volume is 40% below average for this time of day; and ranges across all asset classes are low. Is this the calm before tomorrow's jobs report storm or the calm before storming even higher... The S&P 500 tested new all-time highs earlier (just after the US open) but is fading back. The Nasdaq and Trannies are outperforming with a notable drift lower in the almighty Russell (as momo names stutter - ahead of NFLX earnings maybe?). Treasury yields are modestly higher; the USD in unchanged (back from higher earlier); and Oil is down 1.4% from Friday's close. Silver is up 1.5% while gold and copper are unchanged. Thera er two things of note: VIX remains divergent from stocks... and credit markets are not happy.

Money put into the system would, in normal times multiply aggressively in use (e.g. Fed to bank, bank to business, business to consumer, consumer to restaurateur, restaurateur to farmer, farmer back to bank etc etc.) In reality, as Citi notes, there are often even more legs to this multiplier. However when QE puts artificial support under the Equity and Bond market you get misallocation of capital and no velocity of money. If ever there was a chart of the gross misallocation of capital caused by QE, this has got to be it...

Historians who look back on these strange years of suspended consequence will marvel at how this empire of grift kept its wheels turning after its engine died. Being on the downhill slope is often enough to keep anything going. One might think the young people of this land would be seething at the eclipse of their futures, but it seems they have been successfully lobotomized with cell phones — when the endorphin hits lag between text messages, they can watch sitcoms, or porn. You can be sure there will be a snapback from all this drift and anomie, and when it comes, the snap will be savage.

Okuna My Data!

First it was David Viniar, rumored for so long to be Lloyd's next logical replacement, who rode into the Goldman sunset. Now it is the turn of Goldman's Vice Chairman, Michael Evans, one of the firm's most senior execs and the person who many had expected would ultimately replace Lloyd Blankfein when it was time for succession at the firm that executes God's will (net of 3-5% in commissions) to depart quietly into the night.

If Obama’s budget projections prove accurate, the National Debt will top $20 trillion in 2016, the final year of his second term. That would mean the National Debt increased by 87%, or $9.34 trillion, during his two terms.