Archive - Dec 18, 2013

Q. "How does it feel to be back in the "New Normal" USSR?"

A. "Horosho"

All I can say with certainty is that stocks are in a dangerous position. They’ve been in one for a while now and the higher they go the more dangerous it becomes.

Last Friday we reported of a freak near-incident in the South China Sea, when a US warship nearly collided with a Chinese navy vessel, operating in close proximity to China's only aircraft carrier, the Liaoning, although details were scarce. Today, with the usual several day delay, China reported what was already widely know, admitting that "an incident between a Chinese naval vessel and a U.S. warship in the South China Sea, after Washington said a U.S. guided missile cruiser had avoided a collision with a Chinese warship maneuvering nearby." According to experts this was the most significant U.S.-China maritime incident in the disputed South China Sea since 2009. Which naturally warranted the question: whose actions nearly provoked a potential military escalation between the world's two superpowers. Not surprisingly, China's version is that it was all the US' fault.

Today is the big day. Investors are on the edges of their seats, waiting to find out what the Fed will do. Taper? No taper? Or maybe it will taper on the tapering off? Investors don't seem worried... Most of the reports we read tell us the economy is improving. Unemployment is going down. Meanwhile, manufacturing levels are rising. Compared to Europe, the US is a powerhouse of growth and innovation, they say. Compared to emerging markets, it is a paragon of stability and confidence. But wait... What if all these things were delusions... statistical folderol... or outright lies? What if the true measures of the economy were feeble and disappointing? What if the US economy was only barely stumbling and staggering along? As Rick Santelli so uncomfortably asked, "What is Bernanke afraid of?"

Today's key economic data point, aside from the FOMC announcement of course, was the monthly Housing Starts and Permits report. And with November starts printing at 1091K, a massive 202K unit surge compared to the revised 889K in October, this was the highest monthly print since early 2008 and biggest monthly jump since... January 1990! Supposedly builders just can't get enough. Well, maybe. Until one again looks below the headlines, where one finds that a substantial portion of the jump is once again due to the builders' bet that rental housing demand will continue growing, as multi-family unit starts soared from 281K to 354K - just shy of the highest print since 2008 as well. Additionally, the single-family print barely rose from 49.2 to just 51.9, well below the highs seen in the summer of 2013, when unadjusted single-family starts were higher than the November print from March until August! In fact, at 51.9K, single unit homes are back to mid-2011 levels. Thank you seasonal adjustments. But nowhere was the seasonal adjustment in today's data more evident than in the Housing Permits number. What happens when one looks at the non-seasonally adjusted number? It cratered from 90.3 to 70.9K - this was the lowest print since February and the biggest absolute monthly drop in 5 years since November 2008!

It’s like a futuristic film with hoards of evil masses of people, poverty-stricken, living off the land, while the rich and wealthy continue to lord it, served to their hearts content and just raking it in, while the others hardly get enough to eat and drink.

Spanish loan delinquencies as a percentage of the total have risen for the 8th straight month to a new record high of 13.00% (even as sovereign bond spreads continue to plunge to multi-year lows signaling all is well). With unemployment rates stuck stubbornly high, however, reality is starting to dawn in the Spanish banking system as mortgage defaults are rising following the Bank of Spain's order for lenders to review their portfolios. As Bloomberg reports, the default rate for Banco Santander alone jumped to 7% (from 3.1%) following its "reclassification" of loans that it had refinanced (never expecting to be repaid) and with home prices still falling, "there is an urgency to come clean" as regulators see the need for banks to cover a further EUR5 billion shortfall in provisions.

There is a saying: "don't buy the hand that feeds you" but there is nothing in popular aphorism literature about suing the hand that bails you out. Which is precisely what JPM did overnight when it sued the Federal Deposit Insurance Company, claiming the agency was responsible for over $1 billion in liabilities assumed by the bank as part of its takeover of Washington Mutual in 2008. Of course, having been the subject of a relentless battery of lawsuits by every US agency imaginable, many were wondering when JPM would strike back, or rather if it would have the temerity to sue the same government that bailed it out with billions of direct injections and even more billions in FDIC-subsidized bond issuance. The answer is yes, and as JPMorgan alleged in the complaint, the FDIC agreed to shield it from liability from lawsuits claiming failures by Washington Mutual. JPMorgan said it took on only limited liabilities in its purchase of the Seattle-based bank’s assets. What next: Jamie Dimon sues the Fed for forcing it to acquire Bear Stearns' assets at the firesale price of $2 $10 per share, in which the bank assumed Bear's assets if not so much its liabilities - after all there was a government to bail it out for that.

Yesterday it was the US Treasury's Financial Crimes Enforcement Network that tightened its grip on businesses that accept Bitcoin. Today, it is China, where the world's largest Bitcoin exchange by trading volume, BTCChina announced that he had received word from "above" that his platform would no longer be able to accept renminbi from BTC buyers. "As of right now, we have received notice from our third-party payment company that they will disallow customers from making deposits into our exchange," Bobby Lee, a former Yahoo developer who co-founded BTCChina this year, told the Financial Times.  The result, not surprisingly, is an overnight crash in BTC, which crashed by 50% from $900 two days ago to just $455 hours ago.

• MOAR: BOJ Said to See Significant Room for More Bond Purchases (BBG)
• Meltdown Averted, Bernanke Struggled to Stoke Growth (Hilsenrath)
• New Mortgages to Get Pricier Next Year (WSJ)
• Republicans to Seek Concessions From Obama on Debt Limit (BBG)
• Hunting for U.S. arms technology, China enlists a legion of amateurs (Reuters)
• Jury Begins Deliberating in Case of SAC Portfolio Manager (WSJ)
• BP to Write Off $1 Billion on Failed Well (WSJ)
• Rajan Unexpectedly Keeps India Rates Unchanged to Support Growth (BBG)
• Thai protesters say they will rally to hound PM from office (Reuters)
• SEC Brings Fewer Enforcement Actions, Slows Early-Stage Probes (WSJ)

The Federal Reserve's balance sheet is set to exceed a whopping $4 trillion today, prompting warnings its ultra loose monetary policies are inflating asset price bubbles and will lead to a devaluation of the dollar and signifigant inflation in the coming years. 

Of the 8 "most important ever" FOMC decisions in 2013, this one is undisputedly, and without doubt, the 8th. As Jim Reid summarizes, what everyone wonders is whether today’s decision by the FOMC will have a bearing on a few last-minute Xmas presents around global financial markets. No taper and markets probably breathe a sigh of relief and the feel-good factor might turn that handheld game machine into a full-blown PS4 by Xmas day. However a taper now might just take the edge off the festivities and leave a few presents on the shelves. Given that the S&P 500 has pretty much flat-lined since early-mid November in spite of better data one would have to say that some risk of tapering has been priced in but perhaps not all of it. Alternatively if they don’t taper one would expect markets to see a pretty decent relief rally over the rest of the year. So will it be Santa or Scrooge from the Fed tonight at 2pm EST?

All that glitter is not gold.

I normally write about gold and economics, but Edward Snowden has brought to the attention of America—and the whole world—a different issue.

“These Programs Were Never About Terrorism: They’re About Economic Spying, Social Control, and Diplomatic Manipulation. They’re About Power”