Archive - Feb 2013

“Facts do not cease to exist because they are ignored.” – Aldous Huxley

The entire system is corrupt to its core. Both political parties, regulatory agencies, Wall Street, the Federal Reserve, and mainstream media are participants in this enormous fraud. They grow more desperate and bold by the day. The lies, misinformation and propaganda being spewed on a daily basis become more outrageous and audacious. They are using the Big Lie method on a grand scale. They frantically need to lure the muppets into the stock market and the housing market to keep the game going a little longer. You can sense we are reaching a tipping point. The system they have created is mathematically unsustainable. Therefore, it will not be sustained.

The US equity market continues to boldly go where no other market is willing to go (Dow outperforming EuroStoxx by 850bps this year). European stocks and bonds (+30-45bps) are down notably on the week (and year in some cases); Treasury yields are 4-6bps lower on the week; the USD is up 0.6% (as EUR bleeds a little lower into tomorrow's ECB); and Gold is up 0.6% (oddly with the USD) on the week; but US equities are unchanged with Staples and Industrials holding gains on the week. Today saw credit markets and treasuries pushing notably risk-off as stocks oscillated around unch on the week - pushing to the day's highs into the close on the back of yet another vol-selling ramp. Equity volume was average and trade size was lower than average as cash S&P and Dow managed small gains and Nasdaq a small loss as AAPL gave back its 'buyback rumor' gains. We've seen this EUR-USA disconnect before...

The most vocal justification provided for the disappointing Q4 GDP print by the mainstream was an increase in US government "austerity" resulting in a decline in the government contribution to the economic bottom line in the last quarter (or first fiscal quarter of 2013). Ironically, both total spending and total debt issuance in the past quarter increased, which means that far from being austere, the US actually spent more, not less, i.e., the opposite of austerity. And while it is true that Defense spending declined by a tiny amount in the past quarter compared to the year ago, it was more than offset by a surge in Medicare and Medicaid, as well as Social Security, or, as they are better known, welfare. And, as the CBO yesterday showed, these two components of US spending, which together account for half of all US spending and which couldn't be funded by all US revenues even if the government spent $0.00 for all other programs, which will soar in the coming years as US society ages, as more workers retire, and as more are reliant on Uncle Sam for the payment of every bill. So the next time someone say that the US has a defense spending problem and nothing else, show them this chart.

Presented with little comment aside from noting that the only time stocks have been this 'euphoric' was right before the collapse in 2000 and right before the collapse in 2008.

Yesterday we had our 15 minutes of fun with the CBO's latest budget forecast, which, while wrong as always, provided the mainstream media with its dose of propaganda optimism, by "forecasting" that the baseline 2013 budget deficit will be some $845 billion, well below the $1+ trillion deficit in 2012 (and quite a bit above the CBO's last year 2013 deficit forecast of $585 billion). It will be higher. And we know that not only because the CBO is a complete and utter failure when it comes to predicting the future (which as Rajoy would say would be "just as forecast, except for everything that does happen"), but because earlier today the Primary Dealers that make up the Treasury Borrowing Advisory Committee (a topic we have written extensively about in the past), released their own 2013 budget deficit forecast. The picture there is far less optimistic: the median estimate is some $929 billion, however it is the upside range that is where reality lies, and this number is, according to the likes of Goldman and JPM (who head the TBAC) as well as the 18 other Primary Dealers, as high as $1.037 trillion.

Some phrases are endowed with immediately recognizable symbolism.  When we hear them, we instantly know who and what the phrases are referring to, and can even gain a greater depth of understanding to a particular situation just by applying them. Throughout history there have always been people who were right, and usually a “majority” that were wrong, on any single issue.  Defenders of institutionalized ignorance argue constantly that truth is “relative”, and that they should not be criticized for having their own "opinions".  They use this relativism as a cover for their unwillingness to admit a lack of knowledge. What they fail to understand is that their “opinions” were never theirs to hold.  What they believe has merely been conditioned into them.  They are willing to embrace the system no matter how unjust, because their entire identity is predicated on its continued existence. We call them sheeple... Sheeple are puppets in the game of political reconstruction, and their job is to cheerlead the establishment and to drown out all honest voices.

And Other Kleptoderata...

Both the recent increase in interest rates and renewed questions about the duration of QE3, sparked by the release of the December FOMC minutes, have raised concerns about a 'Great Rotation' out of credit and into stocks. Barclays notes that the story goes something like this: negative total returns in fixed income and increasing equity prices will drive investors to sell the fixed income assets they have accumulated over the past several years and buy stocks. This “Great Rotation” will force investment grade corporate spreads wider. However, in nearly 100 years of data, Barclays finds no evidence of a period when rates rose, spreads widened, and equity returns were positive. Risky assets are generally correlated. The few times that higher rates were accompanied by wider spreads happened in the 1970s and early 1980s, when inflation was accelerating. In each of these periods, equity prices fell sharply. As we have been warning, credit spread deterioration has tended to front-run equity weakness (with some false positives) but never with the divergence remaining consistent as a 'rotation' would suggest.

Some thought the irony of a Treasury Secretary who cheated on his taxes was extreme but Germany has gone one better as the nation's Education Minister has just been stripped of her PhD due to plagiarism. As Spiegel Online reports, the University of Düsseldorf has revoked German Education Minister Annette Schavan's degree because "she systematically and deliberately presented intellectual efforts throughout her entire dissertation that were not her own." As such, she was guilty of "intentional deception through plagiarism." Schavan is yet to resign from Merkel's Cabinet. What next? A skeet-shooting gun tzar, a job tzar responsible for thousands of jobs losses while in the private sector, or a Nobel Peace Prize winner building a drone army.

The Global Currency War Is Escalating

While it is a time-honored tradition that every single person who worked with Tim Geithner, usually on spotless terms, never daring to say one word out of place for fears of offending the former Treasury Secretary and jeopardizing their government salary, has upon exit from the public sector penned a book bashing none other than the Tax-challenged former head of the New York Fed (whose leaks of imminent Fed activity will never be investigated by any US judicial body), it is certain that Tim Geithner's upcoming book will have a different subject. And since the centrally-planned US population is always glad to help out with ideas, today's key trending hash-tag in twitter is none other than #geithnerbooktitles, which as the name implies, is the collective twitter subsonciousness' proposal for what Timmy's new book should be called. The real time list is presented below. Readers are naturally encouraged to provide their own suggestions.

An equivalent amount for the US would be if it were discovered that members of Congress fled the US last year taking $300 BILLION them. Bear in mind, if you added up the total net worth of every politician in Washington you wouldn’t come even close to $300 billion.

16 point 7 trillion dollars.  That is our current national debt.  12 point 8 trillion dollars.  That is the amount households carry in mortgage and consumer debt.  We are now addicted to debt to lubricate the wheels of our financial system.  There is nothing wrong with debt per se, but it is safe to say that too much debt relative to how much revenue is being produced is a sign of economic problems.  At the core of our current financial mess is how we use debt as a parachute for any problem.  We’ve been masking the shrinking of the middle class by allowing households to take on too much debt for a couple of decades.  The results were not positive. People think that this recovery has come from organic forces when in reality, it has come because of number games and also the Fed injecting trillions of dollars into the banking industry.  Ironically these banks are using this money to speculate in markets like stocks and housing where they are now crowding out working and middle class Americans.  When you have access to a printing press with no restraints, it becomes too tempting to spend into oblivion. Addictions are never easily cured and we have yet to come to terms with our insatiable appetite for debt.

Due to job destruction in the private sector that is gasping for air.

The coincidental resurrection of Bunga Bunga boy Berlusconi, amid financial and political fraud allegations (and facts), appears to have struck fear into the heart of European investors. The Draghi 'promise' seems to be getting ready to be tested as 'populist' Berlusconi closes the gap on his adversaries in Italy's election - and with it brings the threat of an end to austerity and any sense of stability in the new normal fiscal and political calmness that has 'apparently' existed for a few months. As the chart below indicates, via Bloomberg, as interest has risen in Berlusconi, so stocks (and Italian credit markets) have plunged at their fastest pace in five months. Recent polls by Sky Italia show the gap narrowing every week as the Monti Paschi debacle drags more and more of Europe's elite into its quagmire. The critical aspect of this renewed 'fear' is the thesis supporting much of the world's risk-assets is predicated on a few fulcrum securities in Europe indicating a cessation of tail risk - with Italian bond yields at six-week highs, concerns are starting to show.