Archive - May 27, 2013

It seems that the BoJ has decided that the equity market rally (for now) takes precedence over a JGB market 'intervention'. After oscillating around unchanged for much of the late morning, Japanese stocks are testing the highs after the break - up around 1% (dominated by Consumer Goods and Industrials up around 2% as Utilities are hammered -4.75%). The problem is that Japanese government bonds are becoming the high beta correlated unintended consequence of this effort. While stocks are near their earlier highs, JGB futures are notably lower relatively speaking. JPY is not helping as the correlation to that devaluer-of-first-resort seems to have faded. Of course, to the clueless onlooker, a 0.50 drop in the price of a JGB would seem negligible, but as we have discussed, it is relative to the capital reserved to cover these swings. Today's move is a 3-Sigma swing in price for what is still considered high-quality repo-able collateral (for now).

A big part of the reason that per capita CO2 emissions are higher in North America than in Europe is our urban structure--in particular the vast suburbs that surround most city centres. Big suburbs are only possible due to easy money. With no easy money, working families would not aspire to owning (alongside their bank) a huge home with a vast lawn and with neighbours within 5 m. Without easy money there wouldn't be two or three cars in the driveway... Governments like this model of city development - it gives people hope, which helps keep the system going. ... So having created the template for massive CO2 emissions, the authoritarians wish to deny responsibility and shift the blame to their debt-serfs. Because the debt-serfs are refusing to absorb the costs, the authoritarians decry their denial of science. Hence, if you really care about global warming, end the Fed.

What's the next stunt he will pull?

Update: rumor of Price Keeping Operation in Japan. If correct, this means that the BOJ's $70 billion per month injection is no longer sufficient, that the BOJ's credibility is being actively questioned - by far the biggest stigma for any central bank anywhere - and pass-through financial entities have to artificially prop up the market by buying ETFs in order to preserve the galloping rate of increase or else face a collapse such as that seen in the past several days.

The "catalysts" in the new normal have become so hilarious that losing money in the centrally-planned market can be simply viewed as the price of admission to witness the most entertaining circus spectacle in capital "markets" history. Behold: the 8pm open of Japanese trading. Apparently, somehow, the fact that a market has reopened is not only news, but is massively sell the Yen news, at least by Mrs. Watanabe, and since every US algo is correlated to the USDJPY, this means a surge in the E-mini. But perhaps what those sneaky algos are discounting is that tomorrow is a Tuesday. And as every dart chasing monkey with an E-trade terminal knows: nobody ever loses money on Tuesdays betting on the Stalingrad & Propaganda 500 index any more.

Many are still wondering who (or what) stole the jam from the Japanese stock market's doughnut just three short days ago. Some blame an out-of-control bond market; others fear members of the BoJ recognizing they have blown the bubble too big too soon; still more fear the jawboning on JPY devaluation that has seemingly about-faced recently. The reality is - none of these were surprises or new to the marketplace. But in this world of free-flowing totally fungible central bank liquidity, we suspect the following chart is the real answer. Simply put, the S&P 500's bubble just couldn't keep pace with the Nikkei 225's and with USDJPY unable to support the relative price appreciation difference - the six-sigma richness of Japan to the US was just too much. Two-and-a-half months of 'outperformance' undone in 3 days leaves the question - is it over?

Peak collateral is just a notion - one we have discussed in detail many times (most recently here). The notion that at the time we want yield and growth we are running out of collateral which is supposed to underpin the high yielding assets and loans. Such a shortage would cause the ponzi-like growth that is necessary to sustain a bubble, to stall and then implode. We think our lords and rulers know this and have decided that it must not be allowed. And this – the need for collateral – is the reason for the endless QE. If this is even close to the mark, then recent murmurings about the Fed tailing off its bond buying will prove to be hollow. The Fed will quickly find it cannot exit QE without precipitating precisely the disorderly collapse, to which it was supposed to be  the solution.

Moments ago, the British foreign secretary William Hague tweeted that the arms embargo to the Syrian rebels has officially ended. The irony is that as has been known for a long time, and as the FT itself reported ten days ago, the Syrian "rebels" who actually have been Qatari mercenaries, have been receiving weapons shipments for years from the wealthy Persian Gulf country, with the implicit knowledge of both Europe and the US. So why the rush by France and Britain to allow weapons armaments to resume by official channels, even if it means even more weaponization of the Assad regime by Russia and China, more bloodshed, and more death?

Simple: natural gas.

in early May, several weeks before the government directly addressed the people pleading for the Indian population to "contain its passion for gold", the Reserve Bank of India issued a directive prohibiting the granting of advances (i.e., loans) against all non specifically minted gold coins sold by banks (excluding loans against gold ornaments and other jewelry).  Ironically, without imposing specific dimensional limitations, there was the risk that India may boldly go where only a bunch of financially illiterate, click-baiting media dilettantes, desperate to pitch the idiotic idea of a "trillion dollar coin" made out of platinum to bypass the debt ceiling limit (at least until the Treasury was forced to firmly crush this nonsense with a just as idiotic public statement), and arbitrage RBI directive loophole to create a massive coin, against which banks would subsequently lend out cash. Today, any hope that India may indeed be the first real source of a trillion dollar coin, one made out not of platinum but gold, were crushed, following a clarification by the central bank that there is a firm, 50 gram weight limit on all permitted "specially minted gold coins."

Western central banks have got themselves horribly wrong-footed as a result of not adjusting their anti-gold policies to allow for the realities of Asian gold demand. Though their dealings are shrouded in secrecy, there is compelling evidence that much – if not most – of Western central bank gold has been quietly sold over the last three decades. More recently members of the Shanghai Cooperation Organisation, a common security and trading bloc led by Russia and China, and future members (India, Iran, Afghanistan, Mongolia, Belarus and Sri Lanka), with their citizens numbering over 3 billion people, have together cornered the global market for physical supply, without even taking account of demand from the rest of South East Asia’s gold-hungry population. The result is that gold markets are now failing to clear. The ability of the Western central banks to supress gold prices appears to be ending.

For the the latest "unintended casualty" of Bernanke and his ZIRP policy, we look at corporate pension funds, which as WaPo reports, are finally starting to crack under the weight of pervasive central planning, brought to the brink by none other than the Chairman's "good intentions." On the surface this makes no sense: after all pension funds invest in assets - the same assets that Bernanke's policy of serial cheap credit funded bubble creation are supposed to inflate. And they do. The only problem is that pension funds also have offsetting matching liabilities: or the amount of money a company has to inject in order to cover future retiree obligations. And in a period of low discount rates brought by a record low interest rate environment, these liabilities painfully and relentlessly increase when discounting future cash needs. Quote WaPo: "Assets held by pension plans of the firms that make up the Standard & Poor’s 500-stock index increased by $113.4 billion in 2012, according to a report by Wilshire Associates, a consulting firm. But largely because of low rates, company liabilities increased even more: by $173.6 billion. That left the median corporation’s pension plan 76.9 percent funded, with just over $3 of assets for every $4 of liabilities."

When you step back and look at the long-term trends, it is undeniable what is happening to us.  We are in the midst of a horrifying economic decline that is the result of decades of very bad decisions.  30 years ago, the U.S. national debt was about one trillion dollars.  Today, it is almost 17 trillion dollars.  40 years ago, the total amount of debt in the United States was about 2 trillion dollars.  Today, it is more than 56 trillion dollars.  At the same time that we have been running up all of this debt, our economic infrastructure and our ability to produce wealth has been absolutely gutted.  Since 2001, the United States has lost more than 56,000 manufacturing facilities and millions of good jobs have been shipped overseas.  Our share of global GDP declined from 31.8 percent in 2001 to 21.6 percent in 2011.  The percentage of Americans that are self-employed is at a record low, and the percentage of Americans that are dependent on the government is at a record high.  The U.S. economy is a complete and total mess, and it is time that we faced the truth.

UPDATE: As if by magic, the 'spike' lower has been fully retraced with a 'spike' higher. Of course, in the preceding sentence one should replace "magic" with a selling algo suddenly taking out the bid stack simple because it is programmed to do so, only for another algo to step in and try to make the entire move less obvious, in the process showing just how much of a farce price discovery in paper gold has become...

With markets quiet, what better time than now to smash the 'price' of spot gold lower than the moment US futures close and all that is left are a few Spot FX traders. Of course this makes perfect sense for any 'rational' bullion seller looking to unwind a position (or even a short looking to set out a decent trade) - wait until there is no liquidity so that your price action culls the order book and leaves you with anything but 'best execution' - but then again, when you don't have to worry about MtM, that doesn't matter. It seems that while the volume cat's away, the gold manipulators will play...

Just like last year, when it was the turn of Europe-focused crushed and battered hedge funds to generate outsized returns due to some brief ECB-inspired euphoria, if only for a brief period, and then promptly fall back into obscurity, so now it is the time of the "Japan" strat. As the latest HSBC hedge fund performance report confirms, the best YTD returns are, as expected, those for Japan-focused funds. So how are the legacy titans of the hedge fund world doing? The answer is in the table below: of the vast majority of hedge funds, only a handful are outperforming the market year to date. This is becoming a major concern for an industry that has underperformed the S&P for the fifth year in a row, and which has to fight tooth and nail to justify its exorbitant fees in a world in which there is noneed to hedge any risk any more: after all, Ben Bernanke has everyone covered. One fund that has nothing to worry about is Dan Loeb's Third Point as it continues its juggernaut of crushing both returns and competition without pause.

Bitcoin has made significant progress towards becoming the world's first truly global currency over the past few years. To gain better perspective on bitcoin’s impact, we took a look at global wallet downloads, demonstrated interest by region, exchange volumes across currencies, mining node locations, real-world interactions around bitcoin, and the major companies and investors pushing the bitcoin economy forward. Perhaps most intrguingly, interest from China has grown extremely rapidly in the last 30 days.

While Japanese stocks plummet further during the admittedly thin European day session extending their losses from the Japan day-session, it seems the cats have been herded to the next high beta junk market - European sovereign bonds. Spanish and Italian bonds rallied 12bps today for their best day in over a month! European stock markets also benefited from Mrs. Watanabe's scramble ending the day up around 1% (Italy +1.4% despite Grillo's comments on the inevitability of a debt restructuring). Amid all this euphoria, European corporate and financial credit markets were not playing along at all. US equity futures got a helping hand from a ridiculous shunt in AUDJPY and CADJPY (FX carry) which lifted S&P futures 10 points off overnight lows. Treasury futures drifted tick-for-tick lower with S&P futures gains (implying around 3-4bps rise in yields). Obviously volumes were light and markets were thin. The USD is ending unchanged as JPY corrects lower and AUD higher but Gold and Silver are up 0.5% and 1.2% respectively.