Archive - Feb 2013

I meet people that still believe that the world is fine. They believe things like:

• The US government has plenty of money.
• Government cares for its citizens.
• The economy cannot crash.
• We are not in a recession (Depression).
• The lives of their children will be better than their own.
• The government can continue to print money to fund promises they cannot afford.

Despite these untenable beliefs, these are not stupid people.

2012 Q4 GDP has been weak in G3 and indeed Europe more broadly, (however it has generally surprised to the upside in Asia), consequently, the momentum of business sentiment will be key to watch. The Euro area flash PMI, German Ifo and the Philadelphia Fed survey are released this week (the China flash PMI will be released on Feb 25). The consensus expects a further small rise in the Euro area services and manufacturing readings. The week also brings a batch of central bank commentary, where the focus will be on references to currency strength; these include the RBA minutes followed by testimony, a speech by RBNZ governor Wheeler, Bank of Thailand policy decision and Bank of England minutes. The Federal Reserve will release the minutes from the last meeting and they may contain important clues on the bias of the Committee with respect to how long it expects the current QE program to last. Additionally, the Committee may have discussed the potential merits of outcome-based guidance for balance sheet policy, which may be reflected in the minutes.

Here come da judge...

The tender (and doomed to fail) truce obtained several months ago between miners and platinum mining companies is formally over, following reports from Johanesburg that at least five workers have been shot outside of the the Rusetenberg mine by security officials during a standoff between rival unions. Reuters adds: "Johannesburg - At least five workers were shot on Monday after security guards at an Anglo American Platinum mine in Rustenburg opened fire following clashes between rival union factions, eNCA television said. The station said it believed one worker at the Siphumelele shaft had been killed."

While the recent move in gold lower, attributed primarily to the fickle rotations of assorted hedge funds who have gotten crushed on their AAPL holdings and thus forced to liquidate profitable positions mostly in ETFs and other paper gold representations (as demand for physical precious metals has never been greater), has seen many pundits scream (as they do every year) that the move higher in gold and precious metals is over, what everyone as usual forgets is that the big move up in gold in 2011 was not driven by Soros or Paulson or Einhorn buying (or selling) laughable amounts of the yellow metal but by relentless end consumer demand out of China and India, when inflation was surging. And with the entire world now openly reflating the one country that has the lowest buffer to hot external money - China - is about to see prices for all products go parabolic once more. It's just a matter of time. Of course, last week's Lunar New Year and closed exchanges bought some time for the bearish gold thesis, but that is now over, quite literally with a bang as demand out of both China and India explodes out of the gates, proving that the sensible money is merely waiting for every dip in the PM complex to buy.

Beleaguered Prime Minister Mariano Rajoy just broke another record. As if a plague of corruption scandals was not enough, Spain's debt-to-GDP has now reached levels not seen in over 100 years. As El Pais reports, Spanish debt levels rose at an alarming EUR 400 million per day in 2012 making for the largest annual increase in debt in the nation's history - all the while proclaiming austerity. The EUR 146 billion increase in debt in 2012 is the equivalent of more than 14 percentage points of GDP leading to a staggering EUR 882.3 billion or 84% of GDP overall - far exceeding the government's own budget forecast of 79% and expected to rise significantly further in 2013. The last time levels of debt were this high relative to GDP Spain was recovering from war and the loss of its colonies. At EUR 38.7 billion, Spain has never spent so much money to pay only the interest on its debt, 33% more than budgeted for last year. Still think Europe's crisis is over?

• G-20 Signals Support for Japan Easing Without Yen Talk (BBG) - but how will Mrs Watanabe know to sell the JPY without nightly proddings?
• Obama Faces Risks in Pipeline Decision (NYT)
• White House Immigration Plan Leaked (WSJ)
• Reader’s Digest Is Bankrupt as Iconic Magazine Falters (BBG)
• Venezuela's Chavez in surprise return from Cuba (Reuters)
• German Recovery Hinges on Euro Zone (WSJ)
• Hong Kong’s Bankruptcy Requests Climb to Almost Two-Year High (BBG)
• China New Year Retail Sales Growth Slows on Frugal Drive (BBG)
• Debt Bubble Born of Easy Cash Prompts Swedish Rule Review (BBG)
• In Europe's tax race, it's the base, not the rate, that counts (Reuters)
• Ugliest Danish Banks Find No Buyers in Toxic Asset Trap (Bloomberg)
• Italian Undecided Voters Targeted in Campaign’s Last Week (BBG)

With the US closed today, the Shanghai Composite red after a week of partying not helped by news from China’s Ministry of Commerce showed that spending during the week-long Lunar New Year break grew at the slowest pace since 2009, and the Nikkei merely a tick-for-tick proxy of whatever the USDJPY does which in turn is a mood indicator for how any given G-7/20 statement is interpreted, the only relevant news in today's thinly traded market would come from Europe, where the EUR is once again modestly higher in overnight trading, even as Spain and Italy bonds are selling off.

At this point everyone in the world knows what a drone is: some have been bombarded by one, others, thousands of miles away, have done the bombardment, and everyone else is split whether or not this remote-controlled form of international retribution and global Pax Americna should be allowed over the territory of the US - either for purely peaceful, or outright military, as was the case with the Chris Dorner manhunt, purposes.  And as with most issues that polarize US society, the approach is one of form opinion first, and investigate the underlying facts later. To that end on Friday, the Government Accountability Office, or GAO, issued testimony on Unmanned Aircraft Systems (UAS, or also Drones), titled "Continued Coordination, Operational Data, and Performance Standards Needed to Guide Research and Development" which while full of largely useless information, does have an informative section detailing which entities received Certificates of Waiver or Authorization (COA) or said otherwise "permissions to drone" for a period , from the FAA, which is the ultimate authority granting UAS flyovers in the US. Among the agencies seeking and being granted such permissions are all domestic military; public (academic institutions, federal, state, and local governments including law enforcement organizations); and civil (private sector entities). So which entity engaged most actively in US-based droning in 2012? It will come as no surprise that of the 391 COAs issued in the past year, the Department of Defense accounted for 201 or, well over half of all authorized droning operations. One can rest assured that America is truly well defended, if mostly from enemies domestic.

With the G-20 (and G-7) concluding with what appears to be a slap on the wrist and a wink-and-a-nod to Japan, it seems the game of competitive devaluation will continue. Much pixel and ink has been spilled the 'potential' winners and losers in such an evolving game, but as Bloomberg notes, there has been one winner in the last 10 years each time the world has fretted over "currency wars". As fear (and actuality) of currency wars flares, the USD has borne the brunt of the buying. From 2004's JPYtervention to Mantega's 2010 comments and each time in between, when competitive devaluation is on the world's lips, then the USD is implicitly bid as the currency du jour is offered to any and every willing carry trade riderthere is. The trouble is - for the lowly US investor - each time the USD is bid, so the US equity market has hit an FX-translated earnings hump and fallen back. So while talking heads will exaggerate the nominal performance of Japanese and British equity markets as their currencies free-fall, perhaps the US investor should be careful what they wish for.

We recently introduced the four main candidates in the 'how easy can we be' glamor parade that is the BoJ Governor race. With Abe potentially set to name his nomination as early as this week, the rhetoric is heating up. Citi grades the BoJ governor candidates on a scale of 1 to 5 from the perspective of JPY bullish/bearish. Mr.Kazumasa Iwata will be the most JPY bearish candidate as he is a proponent of the BoJ’s foreign bond purchase. On the other hand, Mr.Toshiro Muto is the most JPY bullish candidate among the big three but he would still be far more dovish on monetary policy (and JPY negative) compared with Shirakawa, the current governor. The third candidate Kuroda will be middle between Iwata and Muto. Also, we need to pay attention to who shall be the deputy governors with USDJPY projections from 90 to 100 depending on the combination.

Fundamentals? What the hell does that mean?

Economist Vilfredo Pareto's (1848 - 1923) data-driven discovery that 80% of the land in Italy was owned by 20% of the population led to the Pareto principle, known as the 80/20 rule. Research has turned up an astonishing range of natural and social examples of the 80/20 rule: fixing 20% of software bugs eliminates 80% of the tech support calls, 20% of the customers are responsible for 80% of the complaints, and so on. The 80/20 rule can be further reduced (80% of 80 is 64 and 20% of 20 is 4) to a 64/4 rule: the 4% "vital few" have outsized influence on the "trivial many" 64%. We can see the rough outlines of this distribution in income and taxes: The top 1% of taxpayers reported almost 17% of all taxable income and paid 37% of all income taxes; the top 5% reported 32% of all income and paid 59% of the taxes, and the top 10% earned 43% of the income and paid 70% of the taxes.

Banzai7's got it covered...