Archive - Oct 2013

"Change" indeed...

It takes a lot of courage to go against the crowd. Whether in investing, or acknowledging that your country is heading towards an epic fiscal crisis, it isn’t easy to stand alone... especially when everyone else is betting the other way. After more than a decade of positive returns, many investors have abandoned their precious metals positions. The conventional wisdom says that gold is ‘finished’. After all, the dollar price is falling... so it must be a bad ‘investment’. Others, however, are looking at where gold is right now, where it probably will be a few years from now, and thinking that it’s a hell of a bargain.

UDPATE: Futures bouncing a little off their opening lows (down 7)

Despite the US equity market's efficient "knowing better" on Friday, the total and utter lack of progress this weekend in any and all fiscal issues in Washington has seen the gains from Friday evaporate as the S&P 500 futures open  down 10 points. We are sure the headline-driven ping-pong will continue to drive stocks though as there remains over 15 hours until the US day-session opens. Gold and FX markets are practically unchanged for now.

Perhaps it is time to rename the Dow as its trend of de-industrialization provides the perfect visual example of what David Stockman called the 'Sundown in America'.

If you listen to TV commentators, you’ve been told the worst is behind us. Growth is picking up, and Europe is coming out of its slumber. No one seems to be concerned that this tepid below-2-percent growth is being entirely fed by the central bank’s massive money printing. It’s a “growth at any price” policy. How quickly we forget. We currently fear Fed tapering, as we should. Yet, we should be even more fearful that it doesn’t taper. Today, we really have a dreaded choice of losing an arm now or two arms and a leg tomorrow. Because the price distortions have been massive, the adjustment will be horrendous. Government policy makers and government economists simply do not understand the critical role of prices in helping discovery and coordination.

Given the post-crisis record pace of growth in the Federal Reserve's balance sheet (aka money-printing) it is perhaps surprising that year-to-date, Gold has underperformed its cross-asset-class peers. But considering the 2-and-20 that is flushed away by "sophisticated" investors year after year, the dismal performance of the average hedge fund remains a symbol of the only thing that has worked this year: buy-every-dip, dash-for-trash, always sell vol, and never (ever) sell...

The last time we opined on the possibility of a Cyprus-style "bail-in" in Greece, which is essentially a legally-mandated confiscation of private sector assets held hostage by the local financial system, until such time as the balance sheet of said financial system is viable, we were joking. Well, not really joking. But not even we thought that a banking sector "bail in", in which unsecured bank liabilities, which include bonds and of course deposits, are used as a matched source of extinguishment of non-performing bad debt "assets" could spread to the broader economy, and specifically to unencumbered private sector assets. Alas, this is precisely what Greece, which is desperately to delay the inevitable and announce it needs not only a third but fourth bailout, appears keen on doing. As Kathimerini reports, the Greek Labor and Social Insurance Ministry is "seriously considering drastic measures in order to obtain the social security contributions owed by enterprises and to avoid having to slash pensions and benefits." What drastic measures? "The ministry is planning to force companies to pay up or face having their assets seized, so that the 14 billion euros of contributions due can be recouped."

When, according to Google trends, Americans are suddenly more interested in the "Government Shutdown" than perrential sources of distraction such as "Miley", "Kardashian" and "Bieber", it may be time to panic.

While we documented (and predicted) the surge in October 31 T-Bill yields, now that the market is increasingly pricing in the probability of a (supposedly brief) technical default of short-term US debt around October 17, aka the "X-Date", a more disturbing development has been the rapid rise in November 14 Bills, as increasingly more traders become concerned not only about a failure to successfully negotiate away the debt ceiling, but the possibility of a protracted debt ceiling fight continuing well into November. So just what are the US government's key obligations in the immediate aftermath of the X-Date? Here, once again, is a breakdown of key events and cash "deliverables."

There isn't anybody out there...

Argues that despite the growth the of the state in response to the crisis, what characterizes the current investment climate is the weakness of the state.  This asssessment is not limited to the US, where the federal government remains partially closed.   

There used to be a time when US manufacturing set the pace for the entire world, and was the leading indicator for growth in developed and emerging economies around the globe. Unfortunately, in the days of the New Normal, this indicator has lost its potency, and has been replaced by the only variable that currently matters: which central bank is injecting the most credit money into a fungible, globalized marketplace (where for some reason analysts continue to confuse the economy with the centrally-planned market). Still, what the US does has reverberations around the world. Which is why the following chart showing MarkIt manufacturing index (PMI) data for the world's countries may be troubling. Despite hitting a global two year high of 51.8 in September, the key US subcomponent has been on a downward slope since the start of 2013.

STEPHANOPOULOS: So are you saying that if he continues to refuse to negotiate, the country is going to default?

BOEHNER: That's the path we're on.
...
STEPHANOPOULOS: So bottom line, you're saying this is your absolute position. If the president continues to refuse to negotiate over the debt limit, if Democrats refuse to continue to negotiate over the government shutdown, the government is going to remain closed and the United States is going to default?; BOEHNER: The president -- the president, his refusal to talk, is resulting in a possible default on our debt.

Same political disfunction. Same blue team indifference to soaring government debt. Same hypocrisy from those on the red team who helped set debt on its upward trajectory. Same lack of any serious effort to tackle the most important issue – the unsustainable paths of our major entitlement programs. But there is one difference.

The US government's foreign policy appears to be most effective when it is shut down. First, we learned that the CIA has accelerated its training and weapons supply of Syria's Al-Qaeda insurgents only after the funding for the non-critical government functions was halted. Then, overnight, John Kerry showed that while he gives to Al-Qaeda with one hand he takes from it with two following two U.S. raids in Libya and Somalia that captured an Islamist wanted for bombing its Nairobi embassy 15 years ago. These actions "show Washington's determination to hunt down al Qaeda leaders around the globe" Secretary of State John Kerry said on Sunday. So in 15 years the then secretary of state will be proud to announce that Al-Qaeda leaders operating in and around Syria, armed with US weapons, have also been captured. And so the wheel will keep on turning.