Archive - Dec 5, 2013

Today, in the latest escalation by minimum paid restaurant workers who demand greater wages, Fast-food workers and labor organizers are set to turn out in support of higher wages in cities across the country Thursday and walkouts are planned in 100 cities, with rallies set for another 100 cities. While it's not clear what the actual turnout will be, how many of the participants are workers and what impact they'll have on restaurant operations, it is possible that your 99 cent lunch may be delayed or outright cancelled today.  While they are of course free to act as they choose, they may want to reconsider since in the very near future you may not even have the option of choosing, as it will be done for you. Earlier this week, restaurant chain Applebees unveiled what may soon be the "Waiter Terminator."

This tragic story emanating from the UK just doesn’t seem to go away. Probably because it’s true. The food crisis across the pond first came to our attention in earnest back in October when the Red Cross announced it was set to provide food aid to the UK for the first time since World War II. The latest twist to this unacceptable saga comes via a letter send by a group of doctors and senior academics from the Medical Research Council and two leading universities to the British Medical Journal calling it a “public healthy emergency” and accusing the government of covering up the problem by delaying a report on the subject.

Bitcoin and other Internet currencies are viewed by some as a Beanie baby fad and, as Citi's Steve Englander notes, by others as revolutionizing the financial system. Market acceptance of alternative currencies now looks to be growing a lot faster than the pace at which the supply of Bitcoin and Bitcoin wannabees is expanding the Internet money supply. The responses fell into five categories which we feel are well worth considering before trading or utilizing the digital currency (including Bitcoin's role in reserves management - Bitcoin with its inelastic supply and deflationary bias would look attractive to reserve managers as a complement to gold, and in contrast to fiat currencies in unlimited supply.). Among skeptics, a minority think that security is a much bigger issue than proponents admit. However correct the longer-term concerns, there is nothing obvious to derail the expansion of Internet currencies in the near-term, as they are meeting both legitimate and illicit economic and social needs.

Nearly a year ago, we penned "Return = Cash + Beta + Alpha": in which we performed "An Inside Look At The World's Biggest And Most Successful "Beta" Hedge Fund. The fund in question was Bridgewater, and Bridgewater's performance was immaculate... until the summer when the sudden and dramatic rise in yields as a result of the Bernanke Taper experiment, blew up Bridgewater's returns for 2013 and at last check, at the end of June, was down 8% for the year. As further explained in ""Yield Speed Limits" And When Will "Risk Parity" Blow Up Again", an environment in which rates gap suddenly higher (and in the current kneejerk reaction market all moves are purely in the form of gaps as risk reprices from one quantum to another in milliseconds) is the last thing Ray Dalio's strategy wants. Be that as it may, and successful as Dalio's fund may have been until now, tonight James Montier of Jeremy Grantham's GMO takes none other than Bridgewater to task, in a letter in which among other things, he calls risk parity "just old snake oil in new bottles", and sums up his view about the strategy behind Bridgewater in the following equation:

Risk Parity = Wrong Measure of Risk + Leverage + Price Indifference = Bad Idea

and proceeds to skewer it: 'At a fundamental level, risk parity is the antithesis of everything that we at GMO hold dear. " Read on for his full critique.

Bubbles are created when investors do not recognize when rising asset prices get detached from underlying fundamentals, but perhaps George Soros' perspective on bubbles is most prescient: "financial markets, far from accurately reflecting all the available knowledge, always provide a distorted view of reality. The degree of distortion may vary from time to time. Sometimes it's quite insignificant, at other times it is quite pronounced. Every bubble has two components: an underlying trend that prevails in reality and a misconception relating to that trend. When a positive feedback develops between the trend and the misconception, a boom-bust process is set in motion. Eventually a tipping point is reached when the trend is reversed; it then becomes self-reinforcing in the opposite direction. Typically bubbles have an asymmetric shape. The boom is long and slow to start. It accelerates gradually until it flattens out again during the twilight period. The bust is short and steep because it involves the forced liquidation of unsound positions." Does an asset bubble currently exist?  Ask anyone and they will tell you "NO."  However, maybe it is exactly that tacit denial which might just be an indication of its existence.

"Lamborghini Newport Beach in California is proud to announce that we are fully capable of accepting Bitcoin as payment for vehicles.  

We are excited to be opening the door to this new currency.

We just sold our very first vehicle with Bitcoin as legal tender! "

As the President loses his Millennial voting base, despite "fixing" Obamacare, his populist push for a raise to the minimum wage (who wouldn't want more money than 'market rates' for doing the same shit) and class-warfare-inspiring inequality speech may be his party's last best hope. However, in the meantime, if US citizens can tear themselves away from X-Factor for 30 seconds, the following clear concise chart shows how easy it is to create 140,000 jobs... Our question... why not raise the minimum wage to $100?

On September 26, mere hours after a foundering JCP swore up and down to CNBC it would not, repeat not, sell shares to raise much needed liquidity, the same company proceed to go ahead... and sell 84 million shares of stock via Goldman Sachs (which two days earlier suggesting JCP may be a bankruptcy candidate in a credit research report). Back then we summarizes JCP's actions as follows: "Guess what. They lied. Is this criminal? Surely the SEC will get involved immediately." Obviously, the last statement was delivered with an unlimited dose of sarcasm. Which is why we were absolutely floored to read in the company's just released 10-Q that the SEC did, in fact, do just that. 

The last few years have seen over $10 trillion in global central bank liquidity 'drugs' pumped into the system of the world's economy. Some may remember the '80s commercial, "this is your brain on drugs;" we suspect, after looking this chart below, they will want to "just say no" to the Fed...

"There are going to be consequences to central bank balance sheet expansion all over the world," Kyle Bass tells Steven Drobny in his new book, The New House of Money, adding "It’s a beggar-thy-neighbor policy, but everyone is beggaring thy neighbor." The Texan remains concerned at QE's effects on wealth inequality and worries that "at some point this is going to ignite and set cost pressures off." While Gold-in-JPY is his recommended trade for non-clients, his hugely convex trades on Japan's eventual collapse remain as he explains the endgame for his thesis, "won't buy back until JPY is at 350," and fears "the logical conclusion is war."

After struggling for many months, Nelson Mandela has passed away at age 95. Leaders from South Africa's Zuma, New Zealand's Key, UK's Cameron, and now President Obama seemed to be ready with prepared statements and Obama is due to address the nation at 1720ET to mourn the "inspirational leader, remarkable man."

David Woo's earlier discussion of the 'maximum' fair value for Bitcoin, we thought his colleague Ian Gordon's view on the advantages and disadvantages of the virtual currency were worth noting. Woo believes Bitcoin can become a major means of payment for e-commerce and may emerge as a serious competitor to traditional money transfer providers. As a medium of exchange, Bitcoin has clear potential for growth, in his view, but its high volatility, a result of speculative activities, is hindering its general acceptance as a means of payments for on-line commerce...

It is amazing what a few short months of intense regulatory scrutiny, a few multi-billion fines, and the occasional janitorial arrest can do to fraudulent bank business lines. First, recall that as we showed a week ago, and as we have been saying for the past five years, banks were recently "found" to manipulate, in a criminal sense, pretty much everything. Then recall that yesterday the European Union lobbed the biggest monetary fine in history against bank cartel behavior, with the guiltiest party, at least based on monetary amounts, being Deutsche Bank. So now that outsized profits as a result of illegal "trading" become virtually impossible to procure, what is a self-respectable criminal enterprise to do? Why shut down all formerly infringing lines of business of course. Which is what Deutsche Bank just did, which announced a few hours ago that it has pulled the plug on its global commodities trading business, cutting 200 jobs in the process (200 jobs that will certainly be able to find a job in a jurisdiction where criminal trading behavior is still not as intensely scrutinized).

"Good news" once again proved the undoing of the equity market (which some bright spark on TV said "has priced in the taper") and bonds and bullion also fell. Despite the ubiquitous late-day ramp to VWAP (thanks to to JPY selling and VIX stomping), equities closed red for the 5th day in a row for the first time since mid-September. Perhaps most notably, new 52-week lows reached its highest in almost 4 months. Volume was above average yet again as Treasuries saw yields hammered higher with the belly underperforming +4.5bps as 7Y broke above 2.20% to near-3-month highs. The USD sold off - driven more by EUR strength as Draghi disappointed in his jawboning - which proved to stumble all the carry trades as USDJPY moved back below 102. Gold and Silver were volatile but ended the day lower. VIX closed back over 15% for the first time in over 2 months and its reaching extreme inverted levels for 2013 into tomorrow's all-important NFP print.