Archive - Feb 2013

There was corn planted in makeshift small lots, open fields, small farms, and bigger farms. 

The resignation of the Pope was followed by a lightning strike on the Vatican. A meteor storm has killed more than 150 people in Russia. UK retail sales collapse in January, falling 0.6% increased of rising 0.5% as the consensus expected. Insult was added to injury as the November and December series were revised lower.

Gold edged up on Thursday, as bargain hunters showed buying interest and gold was particularly strong in euro terms after data from Europe confirmed the continent remains very vulnerable to economic shocks.

The euro area recession deepened and data showed that the euro area economy shrank the most since 2009 and its three biggest economies, Germany, France and Italy, suffered slumping output.

Infotainment channels and slide-show CPM websites could easily mistake the data in the following charts as balance sheet stress, economic pressures, and financial industry health in Europe is improving.  To contrary, it's so bad that the vehicle used to transfer the worlds reserve currency to those sovereign regions reaching out for help that the FED is now hopelessly handing cash right over.

Hard assets are gaining momentum once again as market participants digest the potential impact of central bank printing initiatives. After last year's record level of central bank intervention, 2013 is gearing up to be an even more prolific year on the money-printing front. Japanese Prime Minister Shinzo Abe recently unveiled Japan's tenth Quantitative Easing program to follow the country's current $224 billion stimulus announced on January 11th. The US Federal Reserve is steadily printing US$85 billion a month under its QE3 & QE4 programs, and reports indicate that the European Central Bank is close to launching its much-awaited Open Market Transaction (OMT) program to purchase European sovereign debt. It's a money-printing party and everyone's invited. Even the new Bank of England head, Mark Carney, has hinted of plans to launch more monetary stimulus. Professional investors have noticed and are expressing concern over the consequences of concerted currency devaluation and the continuation of zero-percent interest rates. Despite being long-time precious metals enthusiasts and active investors in gold and silver, we did not focus on "the other precious metals", platinum or palladium, until very recently.

According to dictionary.com, Deflation is “a fall in the general price level or a contraction of credit and available money.” Falling prices. That sounds good, especially if you have set some cash set aside and are thinking about a major purchase. But as some additional research with Google would seem to demonstrate, that would be a naïve and simple-minded conclusion. According to received wisdom, deflation is a serious economic disease - St.Louis Fed: "...discourages spending and investment because consumers, expecting prices to fall further, delay purchases, preferring instead to save and wait for even lower price..." The problem with deflation, then - we are told, is that it feeds on itself, destroying the economy along the way. Deflation is far worse than its counterpart, inflation, because the Fed can fight inflation by raising interest rates. Deflation is nearly impossible to stop once it has started because interest rates can only be cut to zero, no lower. In case you’re not already scared straight, the deflationary doomsday has already happened in America when (according to the New York Times) it caused the Great Depression. I hope that everyone is clear on this. Now that you understand the basics, I have some questions for the people who came up with this stuff.

Following on from our earlier discussion of the boomerang foreclosure problem, we thought a recent interview between Goldman and Bob Shiller well worth considering - given his relative independence and honesty - on the reality of the housing 'recovery' - he is not gung ho. Has the US housing market bottomed? "Maybe, but I still worry about further price declines. There’s no really concrete reason for an upturn now... are all clouds on the horizon. That’s why I think home prices may still go down," and on the recent improvement in prices, "I also think that price increases that were likely caused by the decline in foreclosures may have been mistakenly taken by the public as a note of optimism." And with Obama pushing homeownership and refinancing acts once again, Shiller adds: "We were so single-mindedly pursuing home ownership that we allowed our lending practices to deteriorate to a tragic end. And there are many advantages to renting, which oftentimes allows more flexibility and more convenience." 

Over ten years ago, when Europe was a bright and shining example of experimental monetarist "brilliance", and when the money was flowing, the continent decided to do the ethical thing and actively promote the pursuit and development of renewable energy through countless government subsidies. As a result, Germany and Spain became the undisputed leaders in the race for a green future, and both created similar laws to encourage the development of renewable energy. There were two problems: i) green energy, while noble in theory, is about the worst idea possible when it comes to profitability and capital self-sustainability and constantly needs governmental subsidies, and ii) it was the end consumers who would pay for the government's generosity, in the form of a surcharge on electric bills. In Germany, for example, as the industry grew (in size, and thus in losses) demand for the subsidy increased, driving the surcharge higher. In January, the surcharge, which amounts to about 14% of electricity prices, nearly doubled to 5.28 euro cents per kilowatt hour. And here is where a third problem comes into play, because while German and Spanish consumers were happy to pay a surcharge in the golden days of a Dr. Jekyll Europe when everything was great, soon Europe become a doomed Mr. Hyde-ian Frankenstein monster, with imploding economies, 60%+ youth unemployment and resurgent neo-nazi powers. In short: the German and Spanish consumers have had it with funding an infinite money drain (even bigger than Greece), when cash flow is scarce and getting worse, and have just said "Basta" and "Nein", respectively.

If anyone is confused why the BOJ refused to do anything of note until January 1, 2013 at which point it would proceed with open-ended monetization a la the Fed and the ECB's OMT, the reason is simple: it allows the country's (transitory) leaders to jawbone, threaten, cajole and coax, in what will be daily attempts to talk the currency lower without actually implementing any monetary action: just like the ECB has done so far. Case in point: the now daily speeches by Japan's economic and fiscal policy minister Akira Amari, who every single day of the past week has been talking to reporters, on many case openly contradicting himself, and whose only purpose is to spook any remaining Yen longs into submission. Sure enough here comes today's sermon:

• AMARI: ABE CAREFULLY CONSIDERING BOJ GOVERNOR CANDIDATES
• AMARI: ABILITY OF BOJ CANDIDATES MORE IMPORTANT THAN BACKGROUND

But funniest of all:

• AMARI: GOVERNMENT HAS NO TARGET FOR STOCK MARKET

Wait, back up, what? It was just four days ago that Amari himself made it very clear that he would not sleep until the Nikkei hit 13,000 by the end of March.

In typical 'crazy-talk' ways, Venezuela is 'pledging' that its currency devaluation will not increase inflation in the country and, as The FT reports, has warned it will crack down on businesses that raise prices. Hot on the heels of Argentina's ignoration of inflation and recent price controls (and advertising bans), it would appear Venezuela is next as grey market dollars are changing hands for 22 Bolivars - massively lower than the official (just devalued) 6.3 Bolivars per USD rate. An 'equilibrium' rate is believed to be around 9 Bolivars but with Chavez still MIA and Maduro running the show, the 'nymphomania' for dollars - as Venezuela's finance minister called it - continues as businesses are simply unable to find tenable USD to use for imports. Contagion is also spreading as Colombia's FinMin Cardenas fears goods being smuggled across the border - creating inflation there too.

The great trade, capital flow and debt imbalances that were built up over the preceding two decades must reverse themselves. Michael Pettis notes, however, that these imbalances can continue for many years, but at some point they become unsustainable and the world must adjust by reversing those imbalances. One way or the other, in other words, the world will rebalance. But there are worse ways and better ways it can do so. Pettis adds that, any policy that does not clearly result in a reversal of the deep debt, trade and capital imbalances of the past decade is a policy that cannot be sustained. It is likely to be political considerations that determine how quickly the rebalancing processes take place and whether they do so in ways that set the stages for future growth or future stagnation. Pettis' guess is that we have ended the first stage of the global crisis, and most of the deepest problems have been identified. In 2013 we will begin to see how policymakers respond and what the future outlook is likely to be. The following 10 themes are what he will be watching this year in order to figure out where we are likely to end up.

Just over two years ago, we reported that "The Farce Is Complete: S&P Downgrades Moody's To BBB+ From A-2", or in other words, one rating agency downgraded another rating agency, with the following rationale: "While we believe it is likely that the new pleading standard will lead to an increase in litigation-related costs at Moody's and therefore poses an element of risk, whether the new pleading standard may increase the likelihood of successful litigation against Moody's will be determined in the future by the courts.... Moody's management has stated that it plans to adapt its business practices in an effort to offset any potential new litigation-related costs associated with the legislation. Nevertheless, we believe that Moody's will likely face higher operating costs, lower margins, and increases in litigation-related event risk that we believe may present risks to the company's reputation." Well talk about irony, and of course role-reversal, now that it is not Warren Buffett's pet company Moody's (which is just as guilty as US-downgrading S&P was in rating financial toxic garbage as AAA), but S&P that was just sued by the DOJ and the kitchen sinks. And the last laugh - the piece de resistance as it were - sure enough, belongs to Moody's, which just downgraded S&P parent McGraw Hill.

Another day, another ugly glimpse of economic reality, another volume-less bid for every dip in stocks as momentum is all. Today, it seems, the bullish meme remains: earnings, which we know were abysmal if judged correctly (and appear extended longer-term); valuations, which we know are higher than at the previous peak on a forward P/E (and are notably expensive on a long-term cycle basis); dividends and cash on the balance sheet (which has been created by relevering firms significantly and in no way represents 'flexibility'); and buybacks - if management is buying then we're all in - which, based on SocGen's Albert Edwards' excellent works, turns out to be a great market-timing tool for bulls to run for the hills. Four charts for the bullish faint of heart...

As the charts below show, more quantitative easing is unlikely to have a beneficial effect. The transmission mechanism is broken. What good is new money if it’s just sitting unused on bank balance sheets? What new productive or useful output can be summoned simply by stuffing the banks full of money if they won’t lend it? The sad truth is that a huge part of the financial sector has failed. Its inefficiencies and fragilities were exposed in 2008, as a default cascade washed it into a liquidity crisis. And yet we have bailed it out, stuffed it full of money in the hope that this will bring us a new prosperity, in the delusional hope that by repeating the mistakes of the past, we can have a prosperous future. The sad truth is that the broken, sclerotic parts of the financial sector must fail or be dismantled before the banks will start lending again, start putting monies into the hands of people who can create, innovate and produce our way to growth.