Archive - Apr 2013

Nuclear Regulators Just “Rolling the Dice”

When European governments buys goods and services they often do not pay their suppliers in full. Many countries in the euro area are in arrears. These are not included in the Maastricht definition of debt. Italy is the most egregious and this in turn has aggravated the credit crunch for the SMEs and increase the non-performing loans at banks.

Herbalife (NYSE: HLF) today announced that KPMG LLP notified Herbalife on April 8, 2013 that KPMG was resigning, effective immediately, as Herbalife's independent accountant. KPMG stated it had concluded it was not independent because of alleged insider trading in Herbalife's securities by one of KPMG’s former partners who, until April 5, 2013, was the KPMG engagement partner on Herbalife's audit. KPMG advised the Company it resigned as Herbalife's independent accountant solely due to the impairment of KPMG's independence resulting from its now former partner’s alleged unlawful activities and not for any reason related to Herbalife's financial statements, its accounting practices, the integrity of Herbalife's management or for any other reason....at no point during the three fiscal years ended December 31, 2012 and the subsequent interim period through April 8, 2013 were there any (1) disagreements with KPMG on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures, which disagreement(s), if not resolved to the satisfaction of KPMG, would have caused it to make reference to the subject matter of the disagreement(s) in connection with its reports, or (2) “reportable events” as such term is defined in Item 304(a)(1)(v) of Regulation S-K.

France is engulfed by a political, economic and moral paralysis. The president has record low popularity, unemployment is making new highs and the tax czar of a supposedly left wing government just quit after repeatedly lying about a pile of cash he had stashed in a Swiss bank account. From such a sorry state of affairs, you might think that things could only get only get better. Unfortunately, economic cycles do not work this way and it is my contention that France is about to enter what was known during the gold standard era as a “secondary depression.” The rigid design of the euro system means the whole eurozone is prone to the kind of brutal cyclical adjustments seen in that hard money era of the 19th and early 20th centuries. But having reached the logical limits of its decades long experiment in state-run welfare-capitalism France is far more exposed than even its struggling neighbors. Until quite recently, our working assumption was that a full-blown French debt crisis would occur between 2014 and 2017. In light of the extraordinary malfeasance of the current government we have changed our mind and believe that France is now extremely near to that abyss. Fasten your seat belt in Europe - the world’s last truly Communist country is about to implode.

"Governments are good at creating work, but they are not good at creating value-generating jobs," is the conclusion from this insightful 3-minute clip from Professor Steve Horwitz. Too often the jobs that politicians 'create' are simply to their own benefit. Critically, Horwitz explains that transitions (from agriculture to manufacturing to service to information for instance) are temporarily painful but relatively quickly re-allocated. If, however, politicians attempt to prevent this transition - to stall the free market's signals - this will halt innovation, growth, and create more poverty (ring any bells). Creating meaningful valuable jobs (something we saw earlier today is not occurring) does not appear too complex - "the best job-creation program in human history is the free market and the entrepreneurship it generates" - it simply means our politicians must get out of the way.

Moments before the open, HLF stock, of the infamous Ackman-Icahn spat, was halted for trading with news pending. Rumors quickly spread that this was due to Icahn pushing to add insult to injury and either tendering for the company, or LBOing it outright. Then moments ago, NYT's DealBook reported that this is due to a KPMG resignation over an investigation, which immediately was assumed by the other camp to imply a fault with HLF's books. Yet, as we reported in the frontrunning post (and tweeted subsequently), the resignation may have nothing to do at all with Herbalife and everything to do with a KPMG partner leaking inside info, and totally unrelated to any improprieties at HLF.

Are bitcoins better than fiat currencies? Of course. Are they immune from banker manipulation? Possibly but the verdict is still out. Are BTCs sound money? No.

Here is a short quiz for you. Ready?

• What’s the current situation with Lindsay Lohan’s rehab?
• Who won the latest “Dancing With the Stars”?
• Name five celebrities with “baby bumps.”
• Explain how the Cypriot banking crisis could impact the European economy.

If you answered the first three questions but are clueless on the fourth, you’re in good company. Estimates are that up to half the population in America is ignorant about the situation in Cyprus. Oh sure, they hear snippets on the evening news, but since it’s far away and happening to other people, they don’t worry about it. There are many people who just can’t “see” anything wrong with our country. People continue to cling to the notion that our leaders are working for us, not for themselves. So people sit on their butts watching “American Idol” or reading about celebrity baby bumps. Can the U.S. economy crash? Nah. It can’t happen here.

I see Japan as a global aggressor, the country doesn't give a damn about where the chips fall outside of its borders.

While the dominant flow of policy action from the Japanese has, until last week, been of the jawboning variety, the actual selling pressure on the rapidly devaluing currency has come from foreign sources. As the following chart shows, the last few months have seen not Mrs Watanabe (euphemistically selling her JPY to find better returns elsewhere) but the likes of Mr. Soros and Mr. Bass who see the endgame disorderly collapse of a currency (or perhaps it is the rest of the G7 central bankers unwinding JPY-based reserves to 'help' their fellow central planner out). The bulk of JPY selling pressure has come during non-Tokyo trading hours, as the Japanese, until last week at least, appear much more timid about Abenomics' chances of success.

April 5th, 1933, FDR confiscated every gold coin, bar, or certificate and people had to turn in their gold to the Federal Government or else they would face a fine of $10,000 or 10 years in jail. That is about $179,000 in today’s money.  You were able to keep a small amount or some rare coins and those that did give up their gold received about $20/oz.  “Why would the government do that?” asks Ms. Steel.  They did this for the following reasons:

1. To prevent hoarding.
2. To devalue the dollar during the Great Depression.
3. The government set the gold price at $35/oz and pegged it to the dollar.

“But this could never happen again, right?” asks Ms. Steel. “Well tell that to Texas.” 

In a shocking state of affairs, it would appear the stock market's wealth effect is not rubbing off on the real economy. The National Federation of Independent Businesses (NFIB) shows 0% of their members planning to hire. One can only presume we need moar QE, moar deficits, and moar wealth effect.

Need yet another confirmation showing the US consumer has entered a phase of terminal retrenchment (in addition to all the other ones of course)? Below is a chart of Casino gaming spending in the past 15 years. What the chart shows is quite clear: at a drop of 4.3% Y/Y, far below the cyclical rises in 2011 and 2012, discretionary spending allocated for proceeds one can "afford to lose" is back to Great Recession levels, and sliding lower. As Bloomberg Brief summarizes, Gary Loveman, CEO for Caesars Entertainment, said the company felt the impact of curtailed consumer discretionary spending in their most recent quarterly results. Loveman noted that his company’s strategy was implemented “against the backdrop of ongoing uncertainty in the macroeconomic picture in this country and consumer weakness in the U.S. economy that negatively affected discretionary consumer spending and ultimately our gaming results." On the other hand, with most of the gambling these days taking place in your retail brokerage screen with bets on when the Fed's record high house of superglued cards finally comes tumbling down, perhaps consumers have merely changed their definition of gambling. It was once known as "investing."

One can only sit back and watch...

• JPMorgan Leads Job Cuts as Banks Seek to Bolster Profit (BBG)
• North Koreans don't show for work at Kaesong factory park (Reuters), as NK urges foreigners to leave South Korea (FT)
• Lisbon Struggles to Close New Budget Gap (WSJ)
• Portugal may face delay to bailout funds (FT)
• Putin Squeezing Out UBS to Deutsche Bank Using Oligarchs (BBG)
• China's Xi Says Fast Growth Over (WSJ)
• Spain’s PM wants more powers for ECB (FT)
• Bernanke Says Interest on Reserves Would Be Main Tightening Tool (BBG)
• Bird Flu Claims 7th Victim in China (WSJ)
• Texting While Flying Linked to Commercial Helicopter Crash (BBG)... No, Bernanke wasn't the pilot