Archive - Jan 2013

We are not epidemiology experts, but something tells us the US flu (or is that communist?) epidemic is getting worse, not better.

Keynesian stimulus policies (deficit spending and low-interest easy money) create speculative credit bubbles. The U.S. economy is a neofeudal debt-serf wasteland with few opportunities for organic (non-Central Planning) expansion. The velocity of money is in free-fall, and borrowing, squandering and printing trillions of dollars to prop up a diminishing-return Status Quo won't reverse that historic collapse. Put another way: we've run out of speculative credit bubbles to exploit.

And the game continues as Speaker Boehner appears to be kicking the can across the corridor to the Senate (and implicitly the Democrats) as he quite specifically advises them that with no budget, there is no talk of debt-ceiling extensions. The principle is simple, he notes, "no budget, no pay." As Dow Jones reports, the 'compromise' deal is that the House will propose a three-month extension of the debt-ceiling in exchange for a budget (i.e. spending cuts from the Senate) - which of course is all but impossible given the years of inability to pass a budget anyway. Check to Obama (though we know the response)...

• *U.S. HOUSE WILL PASS 3-MONTH DEBT LIMIT INCREASE NEXT WEEK
• DJN - DJ U.S. HOUSE TO SEEK THREE-MONTH EXTENSION OF DEBT CEILING
• DJN - DJ U.S. REP CANTOR: IF HOUSE AND SENATE DON'T PASS BUDGET IN 3 MONTHS LAWMAKERS WON'T GET PAID

"April 10 was the first trading day in London after the “London Whale” articles were published. When the U.S. markets opened (i.e., towards the middle of the London trading day), one of the traders informed another that he was estimating a loss of approximately $700 million for the day. The latter reported this information to a more senior team member, who became angry and accused the third trader of undermining his credibility at JPMorgan. At 7:02 p.m. GMT on April 10, the trader with responsibility for the P&L Predict circulated a P&L Predict indicating a $5 million loss for the day; according to one of the traders, the trader who circulated this P&L Predict did so at the direction of another trader. After a confrontation between the other two traders, the same trader sent an updated P&L Predict at 8:30 p.m. GMT the same day, this time showing an estimated loss of approximately $400 million. He explained to one of the other traders that the market had improved and that the $400 million figure was an accurate reflection of mark-to-market losses for the day."

It was the best of times, it was the worst of times. That just about sums up the divergence of opinion among credit (bad) and equity (good) traders had as the week ended on a very sour note for bonds. Financials, which have seen nothing but compression and exuberance, have swung notably wider in the last 36 hours or so - as the spectre of the repayment of LTRO begins to show forth. Meanwhile, stocks are flatly ignoring that reality and close (broadly) at the highs of the week. Sovereigns in general trod water (+/-5bps) except for Spain which rallied 21bps (of course it did, the awesome bad loans data must have been the bad-is-good driver?). EURUSD also started to sag today back to its lows of the week - even as Swiss 2Y rates broke back above 0% for the first time in 9 months and Europe's VIX is stable at around 16%.

Fresh off the printers today comes a new release from Haim Bodek titled The Problem of HFT.

UPDATE: VIX and SPX have recoupled

Given the compression in realized volatility and surge in stocks, it is not totally surprising that spot VIX would see some catch down compression. Sure enough, spot VIX just plunged to 13.00 (for the first time in almost 6 years). Stocks are falling as VIX is falling though - in a convergence from yesterday's gap-open. Longer-date VIX futures are also falling but not as much - implying further debt-ceiling deadline steepeners being laid out.

1.  We came to understand that our government is powerless over its spending - that our nation's debt had become unmanageable.

According to Bloomberg's rankings (based on wealth disparity, average unemployment benefits, and overall unemployment pool), and somewhat confirming the food-divide discussion we had last night, the following states are the worst to live in if you are unemployed. Connecticut tops the list with its massive wealth disparity - more than one $200,000 household for every household earning less than $10,000. New York, California, and D.C. are close behind with Oregon and Alabama in 19th and 20th 'worst' place to be unemployed. Welcome to the bifurcated un-recovery.

All commentary at this point on the infinite monetary sinkhole of Southern Bavaria, f/k/a Greece (whose lack of privatization efforts have angered Mother Merkel, who is now demanding more Greek assets be sold to "willing buyers") is now worthless:

• IMF SEES GREECE NEEDING EXTRA EU5.5-9.5 BILLION IN 2015-16
• GREEK GDP TO SHRINK 4.2% THIS YEAR, GROW 0.6% IN 2014, IMF SAYS
• IMF RECOMMENDS HAIRCUTS ON BILATERAL GREEK LOANS FROM EUROPE
• IMF RECOMMENDS RATES `CLOSE TO ZERO' ON BILATERAL GREEK LOANS

Has the IMF hired Armstrong yet?

Back in late August, we presented a chart whose foresight and accuracy turned out to be so spot on, it scared even us. We asked: "With Apple overtaking Microsoft's 'peak-market-cap' and becoming the most 'valuable' company ever traded, we thought a reflection on what humans (as opposed to machines programmed by humans) did the last time a world-changing technology company went ubiquitous. Comparing AAPL's last few years to the run-up in MSFT's peak in 1999..." Or, in other words, "is it different this time?" Turns out, the answer is, No. It was not different this time. It never is.

With Spanish and Italian sovereign bond spreads back at 19-month lows (admittedly driven by OMT 'promises' and self-referential buying from any and every domestic fund possible), many are arguing that all is well, crisis averted and the world can go on its merry way to Dow 30,000. However, the reality is extremely different in the real economy - and the optics of the spread compression have done nothing but armor the politicians to stall any needed reforms for now. The ultimate cognitive dissonance is highlighted nowhere better than in Italian GDP (whose 2013 forecast was just slashed further to -1% - and remember in Jan 2012, the 2012 GDP forecast was -0.4% and it is currently running at a 6x miss around -2.4%); and Spanish bad loans, which are now running at ever-new record highs of 11.6% and accelerating year-over-year. The chasm between the facts on the ground (reality) and the market's optics have never been wider as data point after data point indicates stagnation at best (core and periphery) and depression at worst.

Yesterday, UBS' Maury Harris released a naive note titled "UofM confidence bounce after tax deal?" which we did not understand: would the bounce be on the ongoing depression, the uncertainty over the debt ceiling, the fate of the sequester and coming spending cuts, the manipulated market which just saw a $610 million reserve injection via repo to be followed by another $1.5 liquidity injection via POMO, or the fact that everyone is now paying more taxes in 2013? Turns out the confusion was irrelevant as the preliminary January UMichigan consumer confidence number just printed at 71.3, far below the December final 72.9, and the biggest miss to expectations in seven years. It was also the lowest print since November 2011. And of course, the reaction of the central bankers' soapbox formerly known as the "market" is.... up.

Sometimes people, a vast majority of people, just don’t get it and so the present tense of the world goes on for a while until reality pops up or is forced upon them. It is rather like momentum which proceeds until the fuel runs out. Sometimes it is like living on Earth; the lack of recognition that hydrogen and oxygen surrounds you does not negate the fact that these two gases are present even though you cannot see them; you are still alive and breathing afterall. What we are used to, what we look for, are bubbles that reflect one asset class or another. In the past it has been Real Estate or dot.com or high tech or equities or bonds so that the search is constantly defined by some sector. Present conditions, however, dictate something entirely different, in my opinion, which is not one asset class or another as defined by relative valuation but all of the world’s asset classes as defined by global policies set by the world’s central banks acting in collusion. We are living in a gas house bubble.

Finance maybe?