Archive - Mar 28, 2013

The Russians are taking a page from the Europeans book (and not a positive one for libertarians). Given the substantial criminal activity and illegal entrepreneurship in Russia - the grey and black economies account for 50–65 percent of GDP and estimates that about $50 billion was taken out of Russia illegally in 2012 alone - the great and glorious leaders have decided to impose restrictions on cash transactions. As Russia Beyond The Headlines reports, Russia may ban cash payments for purchases of more than 300,000 rubles (around $10,000) starting in 2015 - starting with a higher ($19,500) restriction in 2014. They will also enforce mandatory cash-free salary payments (cash compensation accounts for 15% of GDP currently) in an effort to both bring some of the population's 'grey' income out of the shadow; and increase the volume of cash reserves in the banks. It would appear that wherever we look now, leadership are realizing that the limits of fiscal and monetary policy have been reached and now changing rules, limiting freedom, and outright confiscation are the only way to maintain a status quo. Ironic really, when the enforcement of said rules may just be the catalyst for the end of the status quo as the middle class suffers.

It's not been a great evening so far for the leadership in Japan. We are now six months into the greatest monetary policy bluff of all time and thanks to the sound and fury from Abe (and now his henchmen) the JPY has devalued by an impressive 25%. The goal, of course, to target inflation and combat the dreaded deflation - that Abe himself today said "can take a long time." So how are we doing? Not so great it seems. Just as the US went 4-for-4 today in dismal data so Japan is 3.5-for-4 as the much-watched 'inflation' missed expectations once again with a -1% print (that would be deflation) - the worst level since August 2010; Japanese Industrial Production slumped 11% year-over-year, far in excess of the consensus 5.8% drop (biggest miss since Feb 2009) and the biggest collapse (ex-Fukushima) since October 2009; and to top it all off, Japanese unemployment ticked up higher than expectations to 4.3% - equal worst in 7 months. The one saving grace was a PMI above 50 (but driven by an 18-month high print in input costs and accompanied by a drop in backlogs and slump in employment sub-indices - so not exactly bursting with euphoria). Need moar Abenomics...

As the holiday weekend starts and quarter ends, what better time is there to go out on a new S&P 500 Index high? The new high was in the cards.

One thing bulls should worry about is a report that pension plans may rebalance as much as $29-35 billion out of stocks to bonds and other assets with the quarter end. We’ll see how that works this coming week.

First it was thousands of dead pigs floating in the Shanghai water supply (at last estimate over 16,000), then a thousand dead ducks were pulled from a river in the Sichuan province, and now, pushing the meme beyond even its most grotesque boundaries, we learn that five black swans were found floating lifeless on the pond of Anhui University’s old campus in Hefei, traditionally inhabited by a bevy of black swans. From Danwei: "The latest instance of floating dead animals in China – first pigs, then ducks, and now black swans – these mere five black swans became an object of heated discussion on the Internet right after the announcement was made. How did they die? Was it a natural disaster or another man-made one? As Star News tells us today, upon hearing of the news yesterday it immediately sent a journalist to the scene to find out exactly what happened. What he found was just one more filthy pond filled with oily water and garbage."

A summary of Cyprus' events, for those who may be partial to information. I think you will be thoroughly entertained. 

The “Cyprus deal” as it has been widely referred to in the media may mark the next to last act in the the slow motion collapse of fractional-reserve banking that began with the implosion of the savings-and-loan industry in the U.S. in the late 1980s. The happy result will be that depositors, both insured and uninsured, in Europe and throughout the world will become much more cautious or even suspicious in dealing with fractional-reserve banks. They will be poised to grab their money and run at the slightest sign or rumor of instability. This will induce banks to radically alter the sources of the funds they raise to finance loans and investments, moving away from deposit and toward equity and bond financing.

• Lesson #1 Government agencies allocate capital better than the private sector
• Lesson #2 Central banks should control asset prices and prevent them from falling
• Lesson #3 Darwin & Schumpeter were wrong, creationists are right; there is such a thing as a free lunch
• Lesson #4 Towards a new orthopraxy
• Lesson #5 Wondrous tools used by the clergy to grow GDP
• Lesson #6 How to finance infinite needs

The housing recovery was described by one muppet on CNBC yesterday as 'parabolic' so we decided to go in search of this mystical anecdotal surge that is so often heard on the airwaves of the preachers. It turns out, the recovery (if that's what you want to call it) is not so much. Just as in Europe, it seems if we repeat the same lie (or hope) often enough, it may just come true. So it is in the US. Headlines crow of YoY gains and ad hoc surges (Vegas and Silicon Valley) but if you dig down just an inch or two into the real data, the housing 'recovery' is the little train that isn't. As Bloomberg notes, regional home prices have recovered to only 2004 levels and while the REO-to-Rent model remains for the late-to-the-gamers, it is inevitably a self-destroying bubble if there is no organic growth and one glance at the rate of mortgage applications ('real' buyers) says all we need to know about the housing 'recovery'.

When the world's leading expert on Sovereign debt restructurings believes that the endgame for Cyprus might be another round of restructuring, adding that "I'm not sure this is over," it is important to listen. With the calmness in Cyprus today more reflective of paralysis than confidence,  Lee Buchheit senses that the parameters of how much money will be needed to recapitalize the banks have changed. He tells Bloomberg TV's Lee Pacchia in this brief clip, "the situation is spiraling down... they'll need more money because the economy is worse, tax collections less, deposits will flow out when they can flow out." As for which European nation will be next in need of assistance with its sovereign debt burdens? Buchheit agrees with us that while many are looking to Slovenia, he sees real economic and political problems in both Italy and Spain remaining especially since the EU "have certainly changed the rules of the game."

Everything you wanted to know about the 'unique, exceptional, non-template, toolbox-of-blueprint-instruments' bailout of Cyprus but were afraid to read more than 100 words.

Appropriately enough, the S&P 500 closed at its all-time high closing price today on pretty much the lowest volume day of the year. Q1 ends with the Dow up 11.25% (on ever-decreasing volume) and the Long Bond down 2% (but don't expect a rotation as it was down 3.75% in Q1 2012). Gold and Silver down 3.6 and 6.4% respectively (as physical demand has surged) while WTI crude is up 4.25%. Ignoring the first day of the year's exuberant spurt, credit markets are unchanged and VIX is only modestly lower. Healthcare was the biggest winner in Q1, rising over 15%. The last time we had a Q1 as good as this? 1987... dun dun dun...

With the S&P 500 on track for an 11% gain in Q1, and the foundations of global growth (China?), and European tail-risk (back in a big way) now off the table; it would appear that the asset-getherers are falling back to 'earnings' as the meme-du-jour. Despite the now more-than-anecdotal evidence from several major bellwether stocks, faith is strong that margins will expand and the "mother's milk' of stocks will flow. However, it appears in reality that things are a little different; as we noted here, actual margins have fallen to Q1 2010 levels (even as expectations soar) and with labor costs rising (and Okun's law broken), the following chart should make it extremely clear just where the pain will have to come from to confirm the 'hope'. US firms have been slashing labor costs for a decade and it appears they have hit a self-destructing wall as sentiment, spending, and employment gang up to ruin the party - no matter how hard the government tries to fund the great rotation from employment to benefits.

The food fraud story has now progressed from somewhat humorous with the undersized Subway footlong subs, to the highly disturbing with the revelations of horse meat and fake tuna, to the really creepy with the now potential emergence of dog meat in UK lamb curry.  No you can’t print lamb folks, which is exactly why many humans are now eating worse than their pets in the Western world.

Many were wondering what Russia's response to Germany's deposit confiscation drill in Cyprus would be. The confusion was moderated somewhat after it was uncovered that the very Russians who were supposed to be punished, have been able to withdraw some or most of their Cyprus-based cash either before the Cyprus D(eposit Confiscation)-Day or during the capital controlled blackout using various disclosed loopholes. Yet that doesn't mean that Putin would avoid this opportunity to give the "developed world" and his closest neighbors a quick lesson in realpolitik. After all, who better than a former KGB agent understands that one should never let a crisis go to waste. Sure enough, today at 4 am, in a very surprising move, Puitin ordered the launch of large-scale Russian military exercises in the Black Sea region in a move which according to Reuters "may create tensions with Russia's post-Soviet neighbors Ukraine and Georgia." Of course, it may create tensions with our island nations reachable by the Russian naval fleet, such as Cyprus, which would naturally mean tensions with the same European (read German) forces who structured the entire Cypriot bail in.