Archive - Apr 18, 2013

Yesterday, courtesy of Nanex, we provided a close look into the internals of the flash crash that took place in yesterday's trading session of German stocks. What was made obvious, is that this crash happened as a result of the same sudden liquidity vacuum that took place in May 2010 in the NYSE, when the DJIA plunged by 1000 points on a surge in offers and no bids, leading to the infamous original flash crash (about which we warned in April of 2009 of course) crushing the market, before a mysterious buying power emerged out of nowhere and returned it to an almost unchanged level. What we did not know, and what makes yesterday's German mini crash both delightfully ironic and supremely humiliating to the largest German stock exchange operator, the Deutsche Börse, is that it was less than one short weeks ago that the very same Deutsche Börse, in a direct reply to Nanex itself, stated that what we witnessed on Wednesday night couldn't possibly happen. Six days later, it did.

The structural collapse in paper gold prices has been met a seeming 'money-on-the-sidelines' flourish of investors looking to buy the physical asset. However, when asset relationships break-down so significantly, as gold and stocks have in the past 90 days, one has to take a step back and think "what changed?" As the chart below shows, the last time the correlation between stocks and gold was this negative, things did not end so well for the high-valuation equity momentum chasers...

Thanks to the scapegoating of the Cahuzac affair, Europe can now move from its war against finance (Hollande declaring that finance was his enemy, the financial transaction tax, capping of bonuses, etc) to an outright war against tax havens (letting Cyprus sink, arm-twisting Luxembourg into abandoning its banking-secret policy, etc). Leaving aside the EU’s increasing penchant for forcing members to adopt policies that blatantly go against national interests (like the Tobin tax in the UK), yesterday’s announcement by Luxembourg of an “open-book” policy raises the question of whether the EU is cutting off its nose to spite its face. If tax havens have existed and thrived for so long, they must have some sort of economic justification. The reality for most tax havens is that their economies are far too small to absorb the excess savings that pour into their countries. Their banks thus end up being large buyers of assets outside of the country. In this position of weakness, going out all guns blazing after rich people and their wealth strikes us as sheer madness...

In a world in which one bank after another has scrambled to downgrade its outlook on gold, both before the recent bank CEO huddle with Obama last Thursday - the day the bottom fell out of the gold market - but especially after, when the real onslaught on gold truly started, it has been an outright blasphemy for the sellside to even hint at having a bullish outlook on gold. After all, how dare someone allocate capital to the barbaric metal at a time when the US is recovering nicely (it's not), and when the US currency is one again deemed safe (with the Fed diluting its monetary base by 3% per month every month until the end of 2014 and likely forever, it isn't), any deviation from this latest script which desperately attempts to push savers out of the safety of gold into the fiat paper, where the proceeds are invested into stocks or simply spent (a la what happened in Cyprus and the latent fear of deposit confiscation everywhere in Europe), is not permitted. Yet this is precisely what CLSA's Chris Wood, author of the famous Greed & Fear, which is never afraid to be contrarian or to break the lemming mold, has done. His brief take on the recent gold plunge? "This is a buying opportunity too good for investors to miss." Buyers of physical gold everywhere in the world agree.

The fleecing of the American public continues. The theft takes different forms, but it all serves one purpose — to transfer wealth from the average Joe to the crony corporatists and their political lackeys. Capitalism and free markets depend upon trust, integrity, property rights and the rule of law. Without these, there are no advantages to free markets. Nor are there any incentives to create wealth. Instead, an economy becomes little more than a massive plunder scheme where the powerful exploit the weak. No economic recovery is possible under such circumstances. Historians judge that it took Rome almost two hundred years to die. The US is in similar position. Unless you believe in the miracle of sovereign resurrection, the US is over. The coroner-historians have not pronounced death yet, but they, like with Rome, are behind the curve. This dead man too will eventually fall down.

Government On the Verge - Yet Again - of Doing Something Which Causes More Harm Than Good

Given the dramatic drops in gold and oil prices over the past few trading sessions, we thought it worth examining which miners and oil producers were most 'at risk' of generating negative cash flows at current and long-term prices. Goldman Sachs looks at 40 oil producers and 25 gold mines to create a complete 'cost curve' in terms of the best indication of what it actually costs to keep operations running. It is quite apparent that ~$85 Crude and ~$1150 Gold are key to the ongoing support for these industries.

The high cost of living is a direct contributor to chronic stress. While there are numerous explanations for the rising cost of living--Baumol's Cost Disease ( Productivity, Baumol's Disease and the Cliff Just Ahead December 8, 2010) and the rising cost of energy, to name but two--the one key driver that nobody dares discuss is the state-cartel (crony capitalism) structure of our economy: cartels (defense, energy, sickcare, education, etc.) avoid competition, enabled and enforced by the State (government).  This explains why sickcare and education costs have skyrocketed far above the rate of inflation. Apologists try to invoke Baumol to explain the lack of productivity in sickcare and education, but the primary cause is the cartel structure of these industries which ruthlessly eliminates any real competition. Another factor few dare mention is debt-serfdom. By the time the brainwashed consumer has loaded up on the "absolutely necessary" debts--$100,000+ for college, $200,000 for a home mortgage, $20,000 for a vehicle loan, and whatever he/she can swing in credit card debt--the options to escape stress shrivel.  Bankruptcy and opting out is one option, but that requires sacrificing all the signifiers of identity and success--the very factors in a consumerist society that establish not just identity but self-worth and personhood. 

In other words: eliminate the real sources of stress and you bring down the entire economic, political and social order.

Demand for Japanese goods in China have plunged across the board since the Senkaku Islands dispute has led to widespread Chinese boycottts of Japanese products. As the FT reports, the last 12 months have seen shipments to China plunge over 9% to JPY11.3tn. But have no fear, the credit-loving, all-consuming US citizen stepped up to the plate (though we note not enough since Japan's trade balance has crashed anyway) buying cars, car parts, and electrical machinery. Exports to the US have risen over 10% in the last year to JPY11.4tn - now larger than China. This is the first time since May 2009. Clearly the slowdown in the Chinese economy is also exacerbating the problems for Japan but one analyst warns, "this weakness is structural, not cyclical." The IMF's chief economist was hardly optimistic, noting that the US overtaking China was a "big change" in light of a longer-term trend to deeper intra-Asia integration - "I hope the clouds clear soon." We are sure Abe is watching closely as the US economy also rolls over.

Fresh from his humiliating defeat in the Senate to promote his pacifist gun-control agenda yesterday, in the name of the "90%" of course (who apparently need to pick their senatorial representative just a little more effectively), the Nobel Peace Prize winner has decided that guns just may be the right answer when it comes to promoting peace, or least his agenda abroad. WaPo reports that  the Obama administration has ordered additional U.S. troops to Jordan for possible chemical weapons control, humanitarian response or “stability operations” in Syria. "The new troops, a headquarters element of the 1st Armored Division based at Fort Bliss, Tex., will not greatly increase the number of U.S. forces in Jordan. About 150 troops were sent last year to help train Jordanian military and Syrian opposition forces. Some of those troops will remain, and the new arrivals will increase the total to more than 200."

The German stock market, the DAX, has officially taken out its trendline from the June 2012 low when European Central Bank President Mario Draghi promised “unlimited bond buying” to support Europe.

Hardly anyone will be surprised to learn that moments ago we just got the latest disappointing economic indicator for an economy that is clearly accelerating in its deterioration. As expected, the April Philly Fed was the latest economic indicator miss, printing at 1.3, down from last month's 2.0, and below expectations of am increase to 3.0. And while the key New Orders reverted back into negative territory after one brief month positive, it was the other components of the Index that a far more pronounced deterioration, namely the Number of Employees which dumped from 2.7 to -6.8, the biggest drop since May 2012, boding ill for the upcoming April NFP number, as well as the Inventories which plunged from 0.0 to -22.2, which means downward Q1 GDP revisions will be forthcoming from every side momentarily as the Wall Street lemmings are forced to resume trimming their exuberance once more just like in 2012... and 2011... and 2010.

New all-time highs in the DJIA are a rare occurrence generally greeted with strong market emotions. The last few weeks have seen asset-gatherers clambering over each other to appear on TV proclaiming 'victory' and suggesting now is the time to buy stocks or miss out!! However, when one looks at the actual data (as opposed to anecdotes), while the returns one year out are fairly similar (6.72% after setting a new high vs. 7.07% on average over the last 113 years) Barclays finds that it is in the one-quarter time frame that the difference is most stark (-0.40% after setting a new high vs. 1.63% overall). This suggests a bias to profit-taking (and choppy trading) at all-time record highs, as opposed to a moon-shot.

In the six months since the IMF last provided its economic forecasts, the situation in Spain has gone from bad (but sustainable) to worse (and unsustainable). Their current forecasts show no 'peak' in debt-to-gdp ratios at least as far as 2018 with the budget deficit primarily to blame. As Bloomberg Briefs notes, general government primary borrowing, a measure that excludes the cost of paying interest on government debt, was revised up to 7.9% of GDP from 4.5% for 2012. The inability to narrow the budget deficit, surprise surprise, appears partially due to lower real GDP growth forecasts and even then a recent study has found that World Economic Outlook real GDP growth forecasts showed a tendency to systematically exceed outcomes. This phenomenon was particularly prevalent in countries with an IMF-supported program. The IMF warns Spain "will need to undertake unprecedented fiscal efforts to bring their debt ratios to traditional norms," as most countries have never experienced debt levels similar to current ones; and seemed to think a debt restructuring is more likely and will "entail substantial and long-lasting economic and social costs."