Archive - Feb 22, 2013

Plus an important announcement concerning Visual Combat Art Prints...

While the world's attention has been focused on a precious metals' slide and a 'dire' 2% correction in stocks, another metal has been sending some ominous signals. So-called Dr. Copper is down 5.5% this week dragging it to negative for the year and highly suggestive (see 2011 and 2012 charts below) of a pending slide in US equities. The reason for stocks to extend their losses, we believe, comes back to the little known fact that China is the marginal inflation center of the world. When global inflation gets too hot, it will tend to hit China first/hardest given its high food-weighting and energy demand; China then, subtley mind you, complains to the Big-5 Central Banks and an implicit tightening occurs - which then fades global stocks as the liquidity pump dries up. As we noted recently, the Chinese never had a strong equity tradition and instead the trillions in deposits ($14 trillion last) is mostly going to fund loans used to buy homes (and marginally away from gold). However, the PBoC is clearly nervous and took matters into their own hands - with the largest liquidity withdrawal (tightening) on record in the last week (net repo redemptions). Perhaps, as we have seen again and again, with liquidity all there is left to create 'growth', Dr. Copper's credentials are worth paying attention to.

The GOP is fighting to spare the Pentagon from $500 billion in cuts. Yet, as Bloomberg Businessweek notes, the across-the-board reductions will probably hit Democrats harder than Republicans. A look at the 20 districts that receive the most in defense contracts highlights this shot in the foot.

When in doubt how to justify the latest central-bank funded stocks ramp, take advantage of the fact that algorithmic memory is so short, the entire market can move higher on exactly the same catalyst used twice in the span of three days.

The Coming “Lira-Ization” of the euro. And gold?

This in a nutshell is Europe’s financial system today: a totally insolvent sewer of garbage debt, run by corrupt career politicians who have no clue how to fix it or their economies… and which results in a big fat ZERO for those who are nuts enough to invest in it.

While today's lower than expected LTRO repayment news was largely a strawman set by misguided expectations set under the impression that Europe is fixed (it isn't), and that the ECB is willing to witdraw excess liquidity (it isn't as the result was a spike in the EURUSD so high it got quite a few political officials talking the EUR down to prevent an export-sector crunch), there is a bigger issue facing Europe in the context of liquidity, and that is a maturity cliff of some €1.7 trillion over the next 3 years. As the chart below from Goldman shows, the excess LTRO cash remaining after today is a modest €807 billion, meaning that not even half the required prepayment capital can be funded outright. It is even worse when calculating the closed European Excess System cash in the second chart below, which also according to Goldman has declined to just under €400 billion. This means that while rolling the maturing debt is certainly an option, the incremental pick up in interest rates will mean far more cash leaves Europe's banks, which at a time when virtually not a single European bank can generate any positive cash from operations bank liquidity shortages will once again return.

Europe ends the week very mixed - as real macro data was dismal but sentiment and hope positive. Credit underperforming notably - especially financials - but equity indices varied from a 2% drop in Italy to a 1.8% gain for Switzerland (which seems like a squeeze given positioning). Italian bond spreads also suffered the most this week heading into the election - gaining 15bps. Portugal was the worst on the week with its spread to Bunds rising 18bps. The real news of the week is the EUR which extends its losses - down 1.5% on the week - to the biggest three-week drop in seven months. GBP weakened the most against the USD on the week - down 1.7% as currency wars progress. Europe's VIX closes at its highest of the year at 20.9% - up over 2 vols on the week.

Forget 'red balloons', StreetTalkLive's Lance Roberts expands from his recent visualization of Bob Farrell's investment rules to six more market mavens with insights into money management and being a successful investor. What you will find interesting is that not one of them promote "buy and hold" investing for the long term - probably because in reality it doesn't work.

To the Execs at Walmart, and all of those other retailers that are feeling the SS pinch, I say "Welcome to the club".

Yesterday we mentioned the chasm between European union nations' minimum wages from the core to the periphery, but when even the so-called 'core' nations are diverging aggressively in their macro-conditions, we ask - rhetorically once again - how can they expect to hold this together with a single monetary policy. The difference is exhibited in many ways: manufacturing (yesterday's PMIs) differentials are the highest since Feb 2011, and as Bloomberg notes, the third highest on record; France's weakness relative to its German neighbor is also evident in GDP where Germany has recovered its post-2008 losses but France remains lower; Unemployment levels are stunningly wide with Germany at a mere 5.3% relative to France's 10.6%. All of this is summed up perfectly in the 'Taylor Rule' suggesting main policy rates that are 4 percentage points apart - a record since the Euro began - stoking inflationary concerns in Germany (relative to France). The market, as repressed as it ever was, is starting to wake up to this divergence with France 10Y yields at their widest relative to Germany in 2013 today.

It was only two weeks ago that Fed governor Jerremy Stein delivered a speech titled "Overheating in Credit Markets" in which he observed the obvious and warned that a new credit bubble was forming (not to mention housing, tech, student loan, GM channel stuffing and much more). And it was only yesterday that we learned that Bernanke, after a 6 year hiatus, just had his latest "everything is contained" moment.  And just as when Maria Bartiromo asked him in July 2005 "what is the worst case scenario if prices come down substantially", so now his response, as then, is "I guess I don't buy your premise, it's a pretty unlikely possibility. We have never had a decline of house prices on nationwide basis." Of course, three years later the Fed had to do everything it legally could, and also much more, to prevent the modern financial system from terminally imploding.

Sickcare is unsustainable for a number of interlocking reasons: defensive medicine in response to a broken malpractice system; opaque pricing; quasi-monopolies/cartels; systemic disconnect of health from food, diet and fitness; fraud and paperwork consume at least 40% of all sickcare funds; fee-for-service in a cartel system; employers being responsible for healthcare, and a fundamental absence of competition and transparency. If you set out to design a corrupt, inefficient, wasteful, unfair, deranged and unreformable system, you would arrive at U.S. healthcare. The neutron bomb has gone off, unseen by politicos and the Elites who wrote the bill.

As we speculated from the very beginning, and as was reaffirmed in "Is Nigeria, And Its Light Sweet Crude, About To Be Drawn Into The Mali "Liberation" Campaign?", the "French" (with complete and fully-comped US support) Mali campaign is slowly but surely migrating to its intended target: Nigeria, and rather its holdings of light sweet crude. And while the US presence in this latest resource land grab, this time in Africa, was so far rather stealthy, it appears the time for foreplay is over and moments ago Obama told congress has has dispatched 40 more American troops to Niger this week, bringing the total U.S. military presence in the west African country to 100. Let's hear it for the full retroactive transparency demanded by the War Powers Resolution.

Having had yesterday off, it appears the ubiquitous morning dump in precious metals is back in all its glory... but didn't Jim Bullard just tell us 'Fed policy will stay very easy for a long time'?