Archive - Jan 2013

In the wake of the Sandy Hook Elementary School shooting, the usual cadre of politicians, pundits and commentators are hitting the airwaves and condemning believers of the “guns don’t kill” rationale. This exercise in demonization is being followed with pleas to strip Americans of their guns and place a ban on vaguely-defined “assault” weapons. What’s been lacking in the flurry of proposals that inevitably followed a catastrophe like Sandy Hook has been a deeper look at the kind of environment impressionable minds are coming of age in. Far too often, politically-minded observers fall back on reactionary emotion for the solution to problems without actually engaging in critical thinking as to the root of what they are trying to solve. What must be considered is why some individuals are so drawn to violence, what effect has the increased prescription rate of antidepressants had, and why casualties in war have become so dehumanized. There is an uncomfortable but common denominator in all these factors. I would hope anti-gun zealots notice it before they ramp up their War on Firearms.

Following on from our earlier discussion of how a Chinese hard landing would evolve, SocGen now examines how a Chinese hard landing would impact the global economy. They see the contagion in several ways: mechanically (since China is part of the global economy) and through trade, financial and market channels. Mechanically, a slump in Chinese GDP growth to just 3% would cut our global GDP growth forecast by 0.6pp. Add to that the channels of transmission to the global economy, and our expectation is that a Chinese hard landing would result in 1.5pp being slashed from global GDP growth in the first year.

Oaktree Capital's Howard Marks begins his latest missive with a few hard truths. Anyone who has read his memos of the last 23 years will see he returns often to a few topics. This is due to the frequency with which themes tend to recur in the investment world. Humans, he notes, often fail to learn. They forget the lessons of history, repeat patterns of behavior and make the same mistakes. As a result, certain themes arise over and over. Mark Twain had it right: “History doesn’t repeat itself, but it does rhyme.” The details of the events may vary greatly from occurrence to occurrence, but the themes giving rise to the events tend not to change. Most or all of these themes have to do with behavior that’s observed in the markets over and over. The good news is that today’s investors are painfully aware of the many uncertainties. The bad news is that, regardless, they’re being forced by the low interest rates to bear substantial risk at returns that have been bid down. Their scramble for return has brought elements of pre-crisis behavior very much back to life. In 2004, I stated the following conclusion: “There are times for aggressiveness. I think this is a time for caution.” Here as 2013 begins, I have only one word to add: ditto.

As Japan’s Liberal Democratic Party national defense task force announced on Jan. 8 that it would increase the nation’s defense budget by more than 100 billion yen ($1.15 billion), three of five scenarios explored by the defense ministry recently involve the Self-Defense Forces squaring off against the People’s Liberation Army (PLA). While the scenarios remain in the realm of speculation, Japan’s inclusion of a Taiwan contingency again underscores the importance Tokyo places on Taiwan remaining de-facto independent. Certainly, China’s assertiveness in 2012 in both the East China and the South China Sea has done little to reassure Tokyo that it could live comfortably with a CCP-controlled Taiwan so close to its waters and territory.

When job hunting in one's field turns tough, college graduates may return to school for another degree (even in economics). But for some Americans, multiple degrees won't guarantee a job in their field (or even at the Fed) - or even keep them above the poverty level... Over the past few years, more and more highly educated people have turned to food stamps and other forms of welfare for help...

A year ago, out of nowhere, the grotesque suggestion to "resolve" the US debt ceiling with a platinum dollar coin came, and like a bad dream, mercifully disappeared even as the debt ceiling negotiations dragged until the last minute, without this idea being remotely considered for implementation, for one simple reason: it is sheer political, monetary and financial lunacy. And yet there are those, supposedly intelligent people, who one year later, continue dragging this ridiculous farce, as a cheap parlor trick which is nothing but a transparent attempt for media trolling and exposure, which only distracts from America's unsustainable spending problem and does nothing to address the real crisis the US welfare state finds itself in. And while numerous respected people have taken the time to explain the stupidity of the trillion dollar coin, few have done so as an integral part of the statist mainstream for one simple reason - it might provide a loophole opportunity, however tiny, to perpetuate the broken American model even for a day or two, if "everyone is in on it." Luckily, that is no longer the case and as even Ethan Harris from Bank of America (a firm that would be significantly impaired if America was forced to suddenly live within its means), the whole idea is nothing more than "the latest bad idea" straight "from the land of fiscal make believe." We can only hope that this finally puts this whole farce to bed.

… Or Communism, BP during the Gulf Oil Spill, Nixon During Watergate or King George During the American Revolution

In Europe the political leaders are now not only proclaiming that the “worst” is over but that in fact the crisis as a whole is over. To say this is political grandstanding would be understatement of the year so far: EU unemployment just hit a new record of 11.8%. Also, both Greece and Spain have issued reports revealing that their banks are massively undercapitalized and in fact have negative values.

The Chinese economy has been enjoying a cyclical rebound since the beginning of Q4 2012. SocGen's central scenario is that this recovery will last until early Q2 2013 and then gradually lose momentum. In the medium term, they still anticipate a bumpy path of secular deceleration, leading to an average growth rate of 6-7% over the next five to seven years, down from 10% per annum over the last three decades. This piece focuses on what is probably the most popular “what-if” question about the Chinese economy – what if China hard lands (with real GDP growth rate plummets to below 6%)? As China undergoes demographic ageing and growth of the working-age population slows, this minimum stable growth level will decline further. However, if progress in rebalancing and structural reform remains slow, the probability of a hard landing will rise over the medium term. In the tail risk scenario set out below, 2013 will see several quarters with just 3% growth and full year growth would stand at just 4.2%, but what are th triggers, how would it evolve, how would the government respond, and how bad could things get?

Rather than attempt to predict the unpredictable – that is, specific events and price levels – let’s look instead for key dynamics that will play out over the next two to three years. Though the specific timelines of crises are inherently unpredictable, it is still useful to understand the eventual consequences of influential trends. In other words: policies that appear to have been successful for the past four years may continue to appear successful for a year or two longer. But that very success comes at a steep, and as yet unpaid, price in suppressed systemic risk, cost, and consequence.

In what may be very disturbing news for the AAPL-borg collective and the broader Hotel AAPLfornia, WSJ is reporting that Apple is working on a lower-end iPhone, a move which it dubs "a big shift in strategy as its supremacy in smartphones has slipped." To call this a big shift is a major understatement: no longer will Apple have the premium, ultra-luxury, aspirational product cache, which for a broad selection of its customers was the primary reason to keep buying iteration after iteration of the company's releases and lining up in droves around the block on release day. Especially since anyone seeking a "cheaper" iPhone could just buy a previous generation iteration of a gadget whose new product launch cadence is now jumping to twice a year, soon thereafter three times, and so on. Yet saddest for all those who have watched the progress of this iconic company over the past decade from the sidelines regardless of sentiment, the consumer products "Ferrari" that Steve Jobs built, just announced it is launching its own Yugo.

Presented with little comment aside to ask the seemingly obvious question - who would you rather piggyback on - Ackman or Tilson? We hate to say it, but - we told you so...

A desperate, misbegotten, taxpayer-funded deal

Despite the vol-compressing efforts, the S&P 500 closed down for the second day in a row as the last 30 minutes or so saw a totally normal +/-5point roller-coaster around VWAP in its very 'human' way. The afternoon's dips and rips as VIX melted down further (now recoupled with SPX) had the feel of hedged longs unwinding both legs and for sure VWAP was the focus as Treasury yields fell and the USD rose on the day. Despite USD strength, precious metals rose into the green for the week. Risk assets in general saw correlations rise as the day progressed but the very narrow 10 point or so range that ES has traded in since the initial gap-open on Jan 2nd seems vulnerable here - and perhaps explains the urgency to compress the front-end vol to keep us up. Interestingly S&P 500 futures closed today at almost exactly the VWAP for the year (around 1452) so far. HY credit dumped into the close but overall it was a normal day of two halves - selling into the European close and buying after...

Today at 4:15pm Eastern, DoubleLine's Jeff Gundlach will present his 2013 outlook "Year of the Snake" touching on the economy, markets and "his outlook for what he believes may be the best investment strategies and sector allocations for 2013."