Archive - Apr 2013

We are a long way from really resolving the argument between the Keynesian and Austrian economic theories, despite some so-called experts proclaiming Krugman's victory this week. The discovery of the calculation error in the Reinhart/Rogoff study does little to change the overall premise that excessive debt levels impede economic growth and have, historically, led to the fall of economic empires.  All one really has to do is pick up a history book and read of the Greeks, Romans, British, French, Russians and many others. Does fiscal responsibility lead to short term economic pain?  Absolutely.  Why would anyone ever imagine that cutting spending and reducing budgets would be pain free?  However, what we do know is that the path of fiscal irresponsibility has long term negative consequences for the economy. In the meantime we can continue to ignore the long term conseqences in exchange for short term bliss.

We recently showed 220 years of US Treasury bond yield history but all too often, the average investor is unfortunately unaware of the relationship between bond yields (interesting on a relative-value perspective) and bond prices (the thing that matters for your portfolio's returns). The two measures are inextricably linked obviously (a higher yield implies a lower price and vice versa) but the relationship is not a straight line - it has 'convexity'. The following charts may help understand the upside-downside changes from 'yield' movements, what the Fed is doing to the relationship, and how inflation expectations impact these changes.

The crypto-currency Bitcoin is still merely a speck on the global monetary landscape. It is young, experimental, and for all we know, it may ultimately fail to break into the monetary mainstream. However, on a conceptual level some are willing to call it a work of genius and arguably the most exciting development in the field of money for more than 130 years. The outcome is probably binary: Either Bitcoin ultimately fails and the individual Bitcoins end up worthless. Or Bitcoin takes off and Bitcoins are worth hundreds of thousands of paper dollars, paper yen, paper euros, or paper pounds. Maybe more. Those who buy Bitcoin as a speculative investment should consider it an option on the future success of the crypto-currency. We still consider gold to be the essential self-defense asset in the ongoing paper money crisis. The brand-new crypto-currency Bitcoin has to first earn its stripes as a monetary asset by proving itself as a ‘common’ medium of exchange. That is why we view Bitcoin very differently from gold, although the attraction of both has its origin in the demise of entirely elastic, politicized state fiat money. In the meantime, the debasement of paper money continues.

While not in the throes of a real estate crash, Italian banks are seeing a sharp deterioration in the quality of their assets. And while Italy's bond spreads head back to pre-crisis lows, as BofAML's Alberto Cordara notes, the ongoing pace and depth of asset quality deterioration further erodes the banks' ability to help Italy on the way back to growth. Critically, the lack of demand for banks' NPLs suggests that asset valuations may be overstated, thereby posing doubts on the real solvency status of Italian banks (i.e. they are not being totally truthful about their balance sheet assets); which explicitly means more capital is needed and soon. The rate of acceleration in newly impaired loans is staggering as it appears the current recession, driven by falling internal demand, is more insidious than the export-led crisis in 2009. And no matter how the Italian banks try to differentiate their bad loan composition, it is an ugly picture. The Italian House Price Index (IPAB) decreased 4.6% yoy as a result of tightening credit conditions, new property taxes and a difficult macro environment; and is unlikely to provide any assistance any time soon. Based on losses and capital, ISP appears best positioned, and BMPS worst - and do not expect a new LTRO to help as this is "not a normal economic downswing."

Six months in and a 30% devaluation in the JPY and it would appear Abenomics is not having quite the desired effect. With an oh-so-exciting 2% inflation target that we are sure will be appearing any second now, Nationwide CPI just printed -0.9% YoY - its worst (most deflationary) levels since April 2010, missing expectations by the most in 10 months! But wasn't Abenomics supposed to be... inflationary? Well it is in one place - Utilities costs are the only sub-index higher YoY (by 2.3%) - that's a good thing, right? Given that the only reason Abenomics will work is the propagandized concerns of inflation (as we noted here), this could be a problem for Kuroda (perhaps triple the monetary base will do it).

When you’ve got a guy like Senator John McCain who says “The battlefield is the United States of America,” it tells you that almost nothing is safe in the Land of the Free. Whatever remains of civil liberties is going to feel the full brunt of the state’s boot heel.

Youth unemployment has become a worrying phenomenon with 74.6 million young people unemployed globally in 2012. Rising youth unemployment has a detrimental effect on economic growth, political and social stability as well as on the ability to exploit the potential demographic dividend. Young people who are neither in employment nor in education or training (NEET) are a particular social concern. The economic and social impact of a growing number of NEET young people aged 15 - 24 has raised concerns as they represent a dead weight burden.

The world is heading into a horrific economic nightmare, and an inordinate amount of the suffering is going to fall on innocent children.  If you want to get an idea of what America is going to look like in the not too distant future, just check out what is happening in Greece.  At this point, Greece is experiencing a full-blown economic depression. And as you will read about below, child hunger is absolutely exploding in Greece right now.  Some families are literally trying to survive on pasta and ketchup.  But don't think for a moment that it can't happen here.Sadly, the truth is that child hunger is already rising very rapidly in our poverty-stricken cities.  Never before have we had so many Americans unable to take care of themselves. Unfortunately, more poor families slip through the cracks with each passing day, and these are supposedly times in which we are experiencing an "economic recovery".  So what are things going to look like when the next major economic downturn strikes?

We are confident that in the aftermath of our article from last night "Just What Is Going On With The Gold In JPMorgan's Vault?" in which we showed the absolute devastation of "eligible" (aka commercial) gold warehoused in JPM's vault just over the Manhattan bedrock at 1 Chase Manhattan Place (and also in the entire Comex vault network in the past month), we were not the only ones checking every five minutes for the Comex gold depository update for April 25. Moments ago we finally got it, and it's a doozy. Because in just the past 24 hours, from April 24 to April 25, according to the Comex, JPM's eligible gold plunged from 402.4K ounces to just 141.6K ounces, a drop of 65% in 24 hours,and  the lowest amount of eligible gold held at the vault on record, since its reopening in October 2010!

All one can say is: "LOL"

The S&P cash got within a point or two of its closing high but between FSOC concerns about US financial stability, German court concerns over Draghi's OMT and ESM, and a large (likely CBOE-shutdown-inspired) imbalance into the close, stocks tumbled off those highs with the Dow almost back to unchanged before a small ramp into the close. While equities were on most media headlines, today was 'epic' for commodities. The biggest jumps in gold, silver, and oil prices in between five and nine months despite significant USD strength in the US day session. JPY carry was in charge early (and late as we sold off) with EUR ran the show in the middle of the day. With CBOE down for much of the morning, once it reopened it traded down with stocks up but gradually leaked higher all afternoon to end the day very slightly green. Treasuries rallied into the close to end unchanged. Another low volume day that saw the Dow unable to close above pre-Boston levels. So stocks mixed (Russell +0.6%, TRAN unch), VIX unch, Treasuries unch, EURUSD and JPYUSD unch, Oil/Copper/Gold/Silver up 2.5 to 5%!

Even those at the top of the neofeudal debtocracy know our economy and political order need real reform. Behind closed doors, they will discuss this with others in the Power Elite and gloomily shake their heads. The usual reasons why real reform is impossible are duly trotted out: political stalemate/gridlock, the power of vested interests, etc. The real reasons are deeper than economics or politics.

What new Disney attraction could possibly keep the Ring Master from his Annual Jackson Hole Freak Show...

It is balmy, spring weather outside: the kind of weather one can't blame NFP, GDP, retail sales or German ZEW misses on. Which means Europe's protest season is now officially open. Courtesy of El Pais, we present this live feed of today's protest from Spain, where as reported previously, youth unemployment is now over 57% (which is good news as there is only 43% before youth unemployment can only improve) so the majority of those 25 and under really have nothing better to do than throw stones at the riot police, and vice versa. For now the protest is largely languid, as it is still siesta time. Once night falls, however, we expect to upgrade the protestcam to riotcam, outlook escalating.

The last few minutes have seen markets taking a decidedly negative stance. Led by FX carry, risk-assets in general are rolling over. Some attributed it to Bernanke waking the devil from his slumber: 

• *BERNANKE SAYS VULNERABILITIES REMAIN IN FINANCIAL SYSTEM

but it appears that the decision of Germany's Top court is the market-moving event:

• *BUNDESBANK REJECTS OMT IN OPINION FOR TOP COURT: HANDELSBLATT

Instantaneously EUR is tumbling, financials are dropping, and the 'promise' of Draghi's tail-risk killer is perhaps being removed. Remember, the high court is due to vote in June on whether the ESM is constitutional under German law and this rejection of 'OMT' leaves that decision much more in limbo than the market was expecting.