Archive - Feb 24, 2013

Police state tactics used against, among others, raw milk producers, alternative health providers, and gold coin dealers is justified by the paternalistic attitude common in Washington, D.C. A member of Congress actually once told me that, “The people need these types of laws because they do not know what is good for them.” This mindset fuels the growth of the nanny state and inevitably leads to what C.S. Lewis said may be the worst from of tyranny “…a tyranny exercised for the good of its victims.” All Americans, even if they do not believe it is a wise choice to drink raw milk or use gold coins, should be concerned about the use of force to limit our choices. This is because there is no limiting principle to the idea that the government force is justified if used “for our own good.” Today it is those who sell raw milk who are being victimized by government force, tomorrow it could be those who sell soda pop or Styrofoam cups. Therefore, all Americans should speak out against these injustices.

Continuing to look back at what once was. Following Part 1's emergence from the civil war and the age of enlightenment, In Part 2 of the 4 part History Channel series, America continues to recover from the Civil War, undertaking the largest building phase of the country s history. While much of the growth is driven by railroads and oil, it's built using steel. From the Civil War to the Great Depression and World War I, for better or worse; for richer or poorer, in ethical and societal sickness or health; these five men - John D. Rockefeller, Cornelius Vanderbilt, Andrew Carnegie, Henry Ford and J.P. Morgan - led the way.

While the rest of the world was blissfully enjoying its latest reflation experiment, one country that has hardly been quite as ecstatic about all the blistering free money entering its real estate market (if not so much the Shanghai Composite) still warm off the presses of the G-7 central banks, has been China. Because China knows very well that while in the rest of the world, free money enters the stock market first and lingers there, in China the line between the reflating house market and the price of hogs - that all critical commodity needed to preserve social stability - is very thin. As a result, last week China withdrew a record CNY900 billion out of the repo market - the first such liquidity pull in eight months. This move had one purpose only - to telegraph to the rest of the world that the nation, whose central bank has patiently stayed quiet during the recent balance sheet expansion euphoria, will no longer sit idly by as hot money lift every real estate offer in China. Moments ago we got the second sign that China is less than happy with the reflating status quo, when the HSBC Flash PMI index for February missed expectations of a 52.2 print by a big margin, instead dropping from the final January print of 52.3 to just barely above contraction territory, or 50.4. This was the lowest print in the past four months, or just when the PMI data turned from contracting to expanding in November of last year.

For most portfolio managers, investable assets can be thought of as sitting somewhere on the risk-return curve. If we look at the risk-return curve today it is obvious that 75% of global financial assets are now locking in real losses, unless of course, inflation collapses and deflation takes hold in the major economies. If we are spared a massive deflationary wave the assets at the bottom left of the curve will lose 1.5% real per year for the next five years. This means that, for global assets to stay roughly in the same place, equities will need to provide a real return of 4.5% per year for five years. However, it is important to note that such returns will only serve to compensate for the capital destruction taking place in the fixed income market. Real returns on equities of 4.5% will not leave us any richer compared to our starting level. This means that investors will have spent five years on a treadmill running to stand still. When you consider that no asset growth was registered in the previous five years, we are facing a whole decade devoid of capital accumulation. Given the world’s aging population, isn’t this bound to be problematic?

From the youngest to the oldest nominee for best actress (Quvenzhane Wallis - 9 and Emmanuelle Riva - 85) to the relative money gambled on the outcomes, we thought it only appropriate to provide some education and information as this evening's self-congratulatory mutual masturbation begins. With TED scoring well in social media, hopes of an Angelina Jolie thigh-show high, and enough communal drinking-game directions to sink Seth MacFarlane, we hope this provides a little levity as the seriousness of Daniel Day-Lewis' method overwhelms.

There is a simple reason why the real money (as opposed to fast money tweakers) has been far less excited about the domestic equity fund inflows than the financial media and their sponsoring commission-takers would suggest. The reason is - as Goldman shows empirically, not anecdotally - fund flows 'lag' performance, 'not lead'! As we have noted previously, the great rotation myth is simply that - a unicorn-like belief that the investing public will sell down their bond portfolios (high-yield, investment-grade, and sovereign) to stake their future on stocks - when the reality is the flows (which are not rotating to stocks 'net' anyway) simply reflect the sheep-like herding of performance-chasing index-huggers hoping to beat the greater fool. There always has to be someone left holding the bag...

The publication, earlier this week, of the FOMC minutes seemed to have a similar effect on equity markets as a call from room service to a Las Vegas hotel suite, informing the partying high-rollers that the hotel might be running out of Cristal Champagne.  Around the world, stocks sold off, and so did gold. The whole idea that a bunch of bureaucrats in Washington scans lots of data plus some anecdotal ‘evidence’ every month (with the help of 200 or so economists) and then ‘sets’ interest rates, astutely manipulates bank refunding rates and cleverly guides various market prices so that the overall economy comes out creating more new jobs while the debasement of money unfolds at the officially sanctioned but allegedly harmless pace of 2 percent, must appear entirely preposterous to any student of capitalism. There should be no monetary policy in a free market just as there should be no policy of setting food prices, or wage rates, or of centrally adjusting the number of hours in a day. But the question here is not what we would like to happen but what is most likely to happen. There is no doubt that we should see an end to ‘quantitative easing’ but will we see it anytime soon? Has the Fed finally – after creating $1.9 trillion in new ‘reserves’ since Lehman went bust – seen the light? Do they finally get some sense? Maybe, but we still doubt it. In financial markets the press, the degrees of freedom that central bank officials enjoy are vastly overestimated. In the meantime, the debasement of paper money continues.

While cherry-picking individual macro data points to confirm self-referential biases appears to work for the majority of Wall Street's strategists and asset-gatherers, the sad truth is that fundamentally (top-down and bottom-up) things are not doing so great. We have exposed many of the divergences in the last few weeks and some cracks are appearing in the unbreakable vestibule of central bank liquidity; however, just as we saw late last summer (as gas prices rose once again), macro fundamentals have collapsed (based on Goldman's Macro data assessment platform) and with the normal hope-driven 2-3 month lag, equities are set to follow soon. The size of the shift implies a 5-10% correction to revert to 'reality' though we suspect - given positioning - if we ever saw it, the over-reach could be notably worse.

Cinema is the most beautiful fraud in the world--Jean Luc Goddard

Eric Sprott's findings support the growing meme that there is a massive bullion transfer from West to East. This should particularly concern those in the U.S., EU and Canada as his suspicion is that, increasingly, it's monetary gold that is being sold. "We are well into the financial crisis. Everyone’s trying to keep it together, even though it would appear from the reading of the economy things are not going well at all here. And everyone's ignoring things. But I think, in their hearts, the Central Bankers must know what they’re doing is totally irresponsible. And the tell of that irresponsibility – which is the debasing of the currencies – is the fact that real things will go up in value. This should be reflected in the price of gold and silver." For precious metals holders licking their wounds from the carnage of the past several months , this note offers both new insights and sound reminders of the long-term reasons for owning gold and silver.

In plain terms, the stock market has become totally detached from economic realities. There is a term for when asset prices become detached from fundamentals, it’s called “A BUBBLE.”

In our prediction two weeks ago of who the next Bank of Japan governor was likely to be, we said that "the tussle lies between a slightly less dovish bureaucrat in Toshiro Muto (favored by the opposition) and a banker, Haruhiko Kuroda, who is a front-runner in Abe's camp.... we suspect Abe will err on the side of uber-dovish to fight the currency wars alongside him." Sure enough, the uber-dove Kuroda, not to be confused with the Yankees pitcher, is now set to become BOJ governor. From Reuters, "Japan's government is likely to nominate Asian Development Bank President Haruhiko Kuroda, who has called for pumping more money into the economy, as its next central bank governor, the Nikkei newspaper reported on Monday. Kuroda, formerly Japan's top currency diplomat, has already been offered the post unofficially by the government, which plans to submit its nominees for three BOJ leadership posts to parliament this week, the paper said. Kikuo Iwata, an academic known as one of the most vocal advocates of aggressive monetary expansion, is likely to be nominated as deputy BOJ governor, the Nikkei said without citing sources."

Breaking support!

For several long months now, the market has been treated to an unadulterated diet of such gross monetary irresponsibility, both concrete and conceptual, from what seems like the four corners of the globe and it has reacted accordingly by putting Other People's Money where the relevant central banker's mouth is. Sadly, it seems we are not only past the point where what was formerly viewed as a slightly risqué "unorthodoxy" has become almost trite in its application, but that like the nerdy kid who happens to have done something cool for once in his life, your average central banker has begun to revel in what he supposes to be his new-found daring – a behaviour in whose prosecution he is largely free from any vestige outside control or accountability.  Indeed, this attitude has become so widespread that he and his speck-eyed peers now appear to be engaged in some kind of juvenile, mine's-bigger-than-yours contest to push the boundaries of what both historical record and theoretical understanding tell us to be advisable.

U.S. Department of Justice, Airgas, Alternative Investment Group, American Century, America’s Health Insurance Plans, ApexBrasil, Association for Corporate Growth, Bank of America, Bank of New York Mellon, Barclays Services Corporation, BNP Paribas, Capital Research, Citigroup, Deutsche Bank, Fidelity, Franklin Resources, Freddie Mac, Goldman Sachs, Intel, JP Morgan Chase, Microsoft, National Rural Utilities Cooperative Finance Corporation, NMS Group, Oracle, Pension Real Estate Association, Real Estate Roundtable, Reynolds American, Royal Bank of Scotland, Visa, Wells Fargo, Nomura Holdings America, Laurus Funds, Ripplewood Holdings