Archive - Oct 2013

What politicians want from their regulatory efforts is a world of pure beta and zero alpha. This is the ultimate “level playing field”, where no one knows anything that everyone else doesn’t also know. The presumption within regulatory bodies today is that you must be cheating if you are generating alpha. How’s that? Alpha generation requires private information. Private information, however acquired, is defined as insider information. Insider information is cheating. Thus, alpha generation is cheating. QED. Why would politicians want an alpha-free market? Because a “fair” market with a “level playing field” is an enormously popular Narrative for every US Attorney who wants to be Attorney General, every Attorney General who wants to be Governor, and every Governor who wants to be President … which is to say all US Attorneys and all Attorneys General and all Governors. Because criminalizing private information in public markets ensures a steady stream of rich criminals for show trials in the future. Because the political stability of the American regime depends on a widely dispersed, non-zero-sum price appreciation of all financial assets – beta – not the concentrated, zero-sum price appreciation of idiosyncratic securities. Because public confidence in the government’s control of public institutions like the market must be restored at all costs, even if that confidence is misplaced and even if the side-effects of that restoration are immense.

Having been urged by none other than Nigel Farage to see some kind of alternative sane path forward, the Croatian government decided instead that accession to the EU was for them. Now, according to government estimates, since the joined the EU on July 1st, exports have fallen by 11% compared to the same period last year. As presseurop reports, The decline for the month of August alone was 19%. During the first eight months of this year, exports were down by 6.3% when compared with 2012. The reason for the fall-off, notes the newspaper, has do with the impact of EU accession — "which has exposed Croatia to greater international competition, and the loss of privileges associated with the Central European Free Trade Agreement (CEFTA)." Looks like Farage was right...

With the cash bond market closed, the indicator of choice (short-term T-Bills) remains absent from view but it is clear from the equity market's reaction (plunging back to T-Bill reality from Friday) that hope is starting to fade. Gold and silver are in demand (+1.2% this morning) and appear the preferred safety trade as Treasury futures imply only a 2-3bps compression in yield at the long-end (and only -1bps for 5Y). The Gold rally has recovered all the losses from the "stop-logic" idiocy from Friday's open - though we are sure there are plenty more G-20 members lined up ready to support the status quo (after this weekend's commentary). Equities have eradicated all Friday's gains and are testing below Thursday's close (S&P -14 points from Friday's close). The USD is under pressure (-0.25%) led by strength in JPY and a bid for CHF too...

The ongoing government shutdown will continue to affect the quality and/or the release schedule of official macro data. In the meantime, survey data is probably the best set of indicators to follow. The Empire (NY) and Philly Fed surveys are likely the highlight for this week. The US TIC data will get released as scheduled on Wednesday. Given the evidence of large capital outflows in recent months it will be interesting if this trend has abated. Data that will likely not be released this week includes September CPI, Housing Starts, and Industrial Production. It's ok: one can just draw a trendline and extrapolate. That's what the BLS does.

• Headline of the day: U.S. Risks Joining 1933 Germany in Pantheon of Deadbeat Defaults (BBG)
• As Senate wrestles over debt ceiling, Obama stays out of sight (Reuters)
• The "Truckers Ride for the Constitution" that threatened to gum up traffic in the capital was a dud as of Friday afternoon (WSJ)
• China New Yuan Loans Top Estimates as Money-Supply Growth Slows (BBG)
• Vegetable prices fuel Chinese inflation (FT)
• China Slowing Power Use Growth Points To Weaker Output Data (MNI)
• London Wealthy Leave for Country Life as Prices Rise (BBG)
• Gulf oil production hits record (FT)
• Every year like clockwork, analysts start out bizarrely optimistic about future results, then “walk down” their forecasts  (WSJ)
• Weak Exports Show Limits of China’s Growth Model (WSJ)

2013 Prize in Economic Sciences awarded to: Eugene F.Fama, Lars Peter Hansen & Robert Shiller #NobelPrize pic.twitter.com/hOkPHQqi7W

— Nobelprize_org (@Nobelprize_org) October 14, 2013

Commodities are no longer on investors’ radar screens. Various signals, however, are pointing to a new rally within the commodities super cycle.

In a world devoid for the past two weeks and certainly for foreseeable future of most US economic data (this week we get no CPI, Industrial Production and New Home Sales among others), markets are now reliant on China for an indication of how the economy is doing, which is why this weekend's weaker than expected Chinese exports (ignoring the fact that China trade data is largely made up) and higher than expected consumer price inflation (driven by higher vegetable prices), even as new yuan loans soared to CNY787 billion, well above the CNY675 billion estimate despite broader M2 slowing from 14.7% in August to 14.2% in September, means the Chinese economy is once again in a vice and following the summer's liquidity driven boost, is set to roll over. Which in turn means that once again the PBOC is flying blind: unable to inject more liquidity without risking broader inflation, while most indicators are already rolling over. In short, ugly and certainly rolling over Chinese economic indicators for the market to mull over on Columbus day, even though all this will be promptly forgotten once the Washington debt ceiling song and dance resumes and the now traditional 10:30 am surge grips the algotrons as the latest set of "imminent deal" rumors is unleashed.

It’s a Myth that the U.S. Has Never Defaulted On Its Debt

Under the Big M...

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November 14th – not October 17th – is the key date for Doomsday watchers to circle on their calendars. For 66 years, Goldman Sachs notes, the Bulletin of the Atomic Scientists has published a Doomsday Clock showing how close the world is to global catastrophe. On November 14th the committee will vote again whether to adjust the minute hand on the proverbial clock face. However, most market participants characterize October 17th as the fiscal Doomsday when the federal government hits its debt ceiling. It seems, for now (though this evening's futures market suggests a little more fear), that everyone assumes a deal will be reached to avert disaster just as nuclear Armageddon has been avoided since 1947.

Enter Goldman Sachs, whose Alex Phillips just said that: "If a longer-term resolution can be reached over the coming days, we would expect the downside risk from the fiscal debate to be limited to about 0.5pp in Q4, compared to our current growth forecast of 2.5%." In other words, pro forma for the 14 day government shutdown (and continuing) Goldman has just cut its Q4 GDP forecast from 2.5% to 2.0%. And to think this was the year that Jan Hatzius was desperately praying his optimism (for the 4th year in a row - and who can possibly forget Hatzius boosting its Q4 2010 GDP estimate from 4% to 5.8% - and the same every year since) would finally be rewarded. Sorry Jan: we were right again, you were wrong. Again.

There are two characteristics of a currency that make it useful in international trade: one, it is issued by a large trading nation itself, and, two, the currency holds its value vis-à-vis other commodities over time. These two factors create a demand for holding a currency in reserve. Of course, psychological factors entered the demand for dollars, too, since the US was seen as the military protector of all the Western nations against the communist countries for much of the post-war period. Today we are seeing the beginnings of a change. The Fed has been inflating the dollar massively, reducing its purchasing power in relation to other commodities, causing many of the world’s great trading nations to use other monies upon occasion. President Obama’s imminent appointment of career bureaucrat Janet Yellen as Chairman of the Federal Reserve Board is evidence that the US policy of continuing to cheapen the dollar via Quantitative Easing will continue.  As we noted before, nothing lasts forever...  (especially in light of China's earlier comments)