Archive - Mar 2013

Government to Spy On Everyone Who Banks In the U.S.

The “Fix” Is In?

Two of the key characteristics of an empire in terminal decline are complacency and intellectual sclerosis, what we have termed a failure of imagination. (The others are military over-reach, chronic deficits, a parasitic Elite that is immune to what's left of the rule of law, weak leadership, mass dependence on the Central State and excessive consumption.) It is important to discuss alternatives before the Status Quo devolves and collapses, so we have an intellectual framework to guide healthier, more sustainable alternatives once the current system implodes.

It seems more likely to Morgan Stanley's Gerard Minack that central bankers may win the battle: sustaining recovery in developed economies with extraordinarily loose monetary policy. For a while this would go hand-in-hand with better equity performance. The battle is against a crisis caused by too loose monetary policy, elevated debt and mis-priced risk. Ironically, he notes, central bankers may overcome these problems by running even looser monetary policy, encouraging a new round of levering up, and fresh mis-pricing of risk. However, winning the battle isn't winning the war. If central bankers do win this round, the next downturn could be, in Minack's view, an omnishambles. In short, it seems more likely that central bankers may add another leg to the credit super-cycle. The key question for investors in this scenario is when (and how) this cycle may end, and Minack's hunch is that this cycle is already closer to 2006 than 2003.

A few weeks ago we pointed out something curious: despite the so-called massive "slack" in the US economy - the traditional alibi used by Bernanke & Co. to justify ongoing endless QE, labor productivity has slumped while labor costs have soared at the fastest pace in 11 months. This is a result that is directly at odds with the assertion that the structural unemployment for the US is still at 5%, and indicates that the New Normal baseline jobless rate is more likely well above, perhaps in the mid to higher 7% range (which also means that the Fed will never voluntarily end QE as the unemployment will not drop to 6.5%, and as for inflation, well, there's BLS' Arima-X-12 goalseeker for that). While the immediate implication of this is that central planning has merely broken yet one more law, that of Okun which maps productivity to GDP, a topic we have covered in the past, there is another aspect to what lies in the future, which is the topic of Albert Edwards' letter today. In it, he observes as we do, the rising labor costs, and the inherent inflationary pressures these bring, yet his thesis is that any inflation will be short-lived, and that unlike the mainstream which is advocating for a rotation out of bonds (apparently falling on deaf ears as inflows into bond funds are once more far greater than those into equities), he is suggesting to stay invested in bonds.

Why do I bring all of this up? Because it was China’s stimulus and China’s economy that supposedly lead the world back towards growth again. China is the proverbial canary in the coalmine, the economy that most quickly reveals what’s coming and where we’re all heading…

The United States is expected to lead the pack among non-OPEC members in terms of oil supply growth for 2013. That's the assessment from this month's market report from the Vienna-based cartel. OPEC, in its forecast, said U.S. oil supply growth is projected at 600,000 bpd this year. That figure, however, is 40,000 bpd less than the previous year. The Vienna-based cartel said U.S. oil growth could go either way for 2013, but noted growth from tight oil developments in states like North Dakota is expected to slow down. While improved drilling technology may offset some of that decline, OPEC said that factors like price issues may dampen the oil boom in the United States.

Inside the FOMC...

Yesterday we noted the fact that China's Shanghai Composite was now red for 2013 as inflationary fears once again raise the odd specter of a central bank suggesting less than orgasmic expansion of its free money. While the 'Pisani's of the world see the relative outperformance as some 'rotation' in the smart money, we humbly suggest he take a trip down memory lane and note how rapidly the so-called 'smart money' reverted to China's lead in the last few years as the lack of an inflation shock absorber led the PBoC to pull back and implicitly drag on the world's equity market-based linearly-extrapolated economic growth hopes. As a reminder, it's never different this time.

While "this time may be different" for the centrally-planned stock market, every historic example of subsequent ruin notwithstanding, the very recent past is again hitting Carnival Cruise Lines with a vengeance, as one short month after its disabled Triump cruise ship fiasco, in which passengers were trapped on board a filthy ship for five days, the cruise company is forced to suffer through a very humiliating case of deja vu. Reuters reports, "A Carnival Cruise Lines ship was stuck at port in St. Maarten in the Caribbean on Thursday with equipment trouble, a month after another Carnival vessel was disabled in the Gulf of Mexico by a fire, trapping thousands of passengers for nearly five days. The captain of the Carnival Dream reported a problem with the emergency diesel generator, which controls the ship's propulsion, a U.S. Coast Guard spokesman said.  "Right now the passengers are being kept on board the ship for accountability reasons," Doss said. "They were scheduled to leave today so the captain has decided to have everybody remain on board at this time. CNN reported that passengers aboard the Carnival Dream had contacted the cable news channel complaining of power outages and overflowing toilets, tales reminiscent of the troubles on the Carnival Triumph." And to think the passengers could have just stayed home, opened their E-trade accounts, BTFD, and basked in the glow of the wealth effect, knowing full well at the current rate of Fed liquidity injections they could all soon afford their own private island.

For all those who have the displeasure of trying to reconcile the cognitive dissonance of a record high stock market, and European employment at 2006 levels, here is some more fuel to the fire from Germany's Finance Minister:

SCHAEUBLE SAYS 'NO REASON TO BE DEPRESSED' ON ECONOMIC OUTLOOK

This is precisely the pep talk that the just announced record high number of unemployed Greek and Spanish youth needs.

Italy has its own set of problems with huge debt loads, soaring unemployment, and a growing social revolt against the new normal austerity status quo but there is one issue that is not discussed much in the mainstream media that is as critical. Italy has the second fastest aging population in the world (and highest in Europe). Japan is the worst/fastest based on Bloomberg Brief rankings - driven by factors such as the speed of aging in one generation, concentration of seniors, the pipeline of elderly, and the number of seniors not participating in the labor force. As Niraj Shah notes, nine European nations make the world Top 10. Doesn't exactly bode well for Europe's future as dependency ratios are set to soar but it appears, sadly, that Italy is closer to Japan's dismal quagmire than Spain's based on demographics.

Meetings between public company managements and investors are the bedrock of the fundamental investment process.  The reason for that, however, is often lost in translation.  It is not, for example, because most investors or analysts are systematically better at reading “Body language” about the quarter or new products.  Seriously – they aren’t.  No – the reason that management meetings are useful is because, over time, managements let down their guards and act like regular people.  And in those moments, truth – about character, about wisdom, about judgment – comes rolling out.  Today we offer up a personal highlight reel of examples from +20 years of management meetings. Between the earnings forecast and the actual results sit only two things: time and management.  Time is uniform; management quality is not. 

The grind lower in initial jobless claims continues, which from an upwardly revised 342k (was 340K) last week, declined to 332K in the most recent week ended March 9, on expectations of an increase to 350K. This was the third consecutive beat in a row and the lowest total print since January, which in turn takes it all the way back to January 2008. Continuing claims were also better than expected, dropping from an upwardly-revised 3113K, to 3024K, on expectations of a 3090K print. According to the BLS, unlike the last time we had an abnormally low print, no states were estimated this time around.

If it appears that there has been a period of perplexing quiet in the financial comedy TV's hammering on the topic of the great rotation, it is because that is indeed the case. The reason? As per ICI, following the start of year inflow surge into domestic equity mutual funds, we have experienced a steady trickle lower in inflows, and then, as noted last week, have had not one but two consecutive outflows, confirming that the pattern from 2011 is fully set. Finally, for those curious where the surge in early 2013 inflows came from, we suggest rereading our post from December on "A Record $220 Billion "Deposit" Injection To Kick Start To The 2013 Market." In summary: there has been zero, zilch, none "great rotation" out of bonds into stocks, especially since bond funds have seen far greater inflows in 2013 compared to stocks, and the only money "rotating" has been the parked deposits in year end 2012 ahead of the Fiscal Cliff, being reallocated back into equities (of which there is now no more), and some modest money market fund moves, which also have now tapered out.