Archive - May 14, 2013

We can picture the scene of abject horror at the revelations the President read about the actions undertaken by what must surely have been a rogue element in the IRS. However, as the AP (ironically) reports, Obama believes some IRS employees failed to apply the law fairly and impartially. The blame, it would seem, is being laid at "lax managers'" feet for allowing this practice to continue for 18 months. Jack Lew has been asked to hold those renegades responsible and to ensure it never happens again - or else. Where's Fabrice Tourre when you need him?

While we have all heard the apocalyptic prognostications by the accented Swiss, and there is little doubt where the Gloom and Doom reside, here is some very unexpected advice on the Boom. Make that the "Boom Boom"... room.

I think it's indicative of a problem when, half-jokingly, the vernacular increasingly being used in the popular media includes: being "Corzined" and "Cyprus'd". The former meaning having your money stolen from or via the equities market, and the latter being theft directly via the banking system.

When is the economic collapse going to happen?  Just open up your eyes and take a look around the globe.  The next wave of the economic collapse may not have reached Wall Street yet, but it is already deeply affecting billions of lives all over the planet.  Much of Europe has already descended into a deep economic depression, very disturbing economic data is coming out of the second and third largest economies on the globe (China and Japan), and in most of the world economic inequality is growing even though 80 percent of the global population already lives on less than $10 a day.  Just because the Dow has been setting brand new all-time records lately does not mean that everything is okay.  Remember, a bubble is always the biggest right before it bursts.  The next major wave of the economic collapse is already sweeping across Europe and Asia and it is going to devastate the United States as well.

For the first time in naval history, a unmanned stealth drone (the bat-wing X-47B) was launched from an aircraft carrier. As Reuters reports, the launch from the USS George H.W. Bush marks an important step toward expanded use of drones in "providing very long range stealth" capabilities. Seen as a potential answer to the threat of medium-range anti-ship missiles developed by China and Iran; with a range of 2000 nautical miles the X-47B is "strategically very important." Because of its long range and the Navy's need to have it take off and land, day and night, from an aircraft carrier, the X-47B has been designed to operate with far greater autonomy than the remotely piloted aircraft currently in use. That has raised concerns among some organizations worried about the heavy U.S. reliance on drones in warfare and the rising use of autonomous robots by the American military; but Rear Admiral Ted Branch sees it as a "red letter day... we all saw history happen."

Back on April 25, in the aftermath of the latest epic precious metals takedown, we reported that something odd had happened: overnight, total Eligible gold held in the vaults of JPM dropped by 65%, or 260.8k ounces in one day, to a record low of only 141.6K ounces. Contrast that with the 2 million Eligible ounces the JPM vault at the basement of 1 CMP held when it reopened. Since that moment, many were curious if this may not be the start of the proverbial "run on the vault", and whether JPM's COMEX holdings could actually run out, and if so what happens then. And finally: is the dramatic plunge in gold related to any of this (and certainly to the Bundesbank's repatriation of NY Fed gold for the next five years)?  In the ensuing days, JPM's Eligible gold fluctuated in a tight range, until today, when another 22,780 oz were withdrawn from Blythe Masters' metals cellar, bringing JPM's eligible gold to a fresh record low of only 137,377 troy ounces.

But it gets worse...

The Nikkei 225 just passed 15,000 for the first time since January 2008 no up over 77% from its November 2012 lows. Even "Mr Yen" is worried...

*SAKAKIBARA SAYS MOVEMENT OF EQUITY PRICES `SOMEWHAT BUBBLY'

But the real story is in bond land. Twice last night Japanese bond futures were saved miraculously from a third day in a row and at the open this evening JGB futures are looking set for another test of the limit down (though being saved for now) - as 10Y yields spike above 90bps (+5.5bps on the day), the highest in 13 months; and 5Y yields jump another 5bps to 45bps - the highest in 22 months. The last 4 days in 5Y JGBs has been the worst in 5 years (since June 2008) and 10Y JGB's worst 4-days in 10 years (since August 2003). USDJPY is holding below 102.00 as it seems for now the JGB weakness is soaking up the inflation threat (as we discussed here). Amid all of this turmoil, JGB implied volatility is collapsing to 4 month lows - which smells a lot like hedges being lifted along with underlying risk unwinds.

Israel's 25bp cut in its policy rate earlier in the week was the 514th reduction worldwide since June 2007 (and Serbia this morning the 515th). As Bloomberg's Niraj Shah notes, Eastern European countries have made the biggest cuts this year as their economies struggle to grow. With the ECB's cut taking its 'real' rate to -0.7%, Belarus has cut borrowing costs by an impressive 500bps in 2013 (more than any other central bank) followed by Poland and Hungary. As we noted last week, it seems the Einsteinian repetition of failed actions is not a fool's errand, instead it appears the domain of the smartest people in the room - or simply fighting the hot money flow drivers with their own weapon (but as Bernanke told us - its not competitive devaluation if we all do it).

In what may be the strangest story we have seen in a while related to the gold market, it appears $982 million worth of gold has left JFK international airport in New York to some undisclosed location in South Africa.  While it remains unclear what purpose this gold serves, it seems the most likely explanation is to fulfill demand for Krugerrands (South Africa’s popular gold bullion coin) to meet elevated demand in the face of constricted mine production.

Just another "Tepper" Tuesday...

When we look at the entire summation of elitist efforts to remake the world, all we see is a naïve reorganizing of a much greater work of art.  Life is not perfect, at least, not by our definition, but life is also not a science; it is an emotional creation, with an emotional and spiritual brand of “logic”.  In reality, they believe in engineering future trends.  The elites want godlike power, but the greatest power of god is to create from nothingness.  Technocrats do not create.  Instead, they violently scoop up what already exists and fumble with it wildly, stupidly, fancying themselves omnipotent, like children lording over the ocean while pretending it’s a fish tank. They do not comprehend the substance of what they meddle in, and this is their greatest downfall.  You cannot improve on something you do not understand. Fundamental unknowns derail the pursuit of full knowledge, and thus, full control.  The universe has its own checks and balances in place to counter the ambitious, striking down thirsty faux gods who reach too high for what they do not respect, and will never deserve.

Or how a forecasted surplus turned out to be a $1+ trillion deficit in three short years...

Thanks to POMO (and the simple explanation of what everyone already knows from David Tepper), the 18th Tuesday in a row has closed with a bright green shade across the screen. Trannies gained 2% but the 25 point gain off overnight lows for the S&P 500 is the most impressive... with gains sustained by more short covering. As predicted first thing today, when we said the S&P 500 EPS multiple will increase by at least 0.15x on the back of POMO, we were not surprised to see the closing print result in precisely this amount of multiple expansion:

Today's POMO: $2.75 - $3.50 billion. Should be enough to expand S&P multiples by 0.15-25x

— zerohedge (@zerohedge) May 14, 2013

A QE-unwind theme was modestly evident in other asset-classes: Treasuries (snapping higher after EU Close); Oil, gold, and silver all down; and credit spreads notably rolled over. But of course, equities don't care; why would they?

With home prices rising at near-record paces in SoCal, corporate debt yields at record-lows, equity markets surging at near-record rates, and high quality assets dwindling by the minute under the heel of a central bank jack boot; it is perhaps no surprise that investors have switched from finding leverage through the balance sheet (i.e. crappy quality firms) to finding leverage through the instrument (i.e. structured credit). The trouble this time is that yields (and spreads) being so low, the creators of the new-normal ABS, CDOs, and CLOs have to stoop to the old tricks to make their money (as we noted here). As Bloomberg reports, bond issuers are once again exploiting the credit rating agency pay-for-performance business model to create "high-quality" collateralizable assets from utter garbage - such as auto loans.