Archive - May 2013

To Hell With War!

There is a reason why US corporate balance sheets have rarely been in better shape: it is because the Fed has become the S&P500's bad bank. As the chart below shows, in the six years between 2006 and 2012, corporate net debt of the S&P500 has barely budged from $1.5 trillion, even as corporate profits have soared (albeit profit margins have now declined for two straight years as SG&A has already been cut to the bone, while the marginal benefit from such below the line items as net interest is about to turn negative if and when rates really turn higher - hint: they won't, because Bernanke is all too aware of this particular nuance). What has offset this? Why the bad bank formerly known as the Federal Reserve of course, which has huffed and puffed, and force-fed $2.5 trillion in new credit money (mostly reserves) down the market's throat (created out of thin Treasurys), which has zero end-demand for such credit, as a result it has gone straight into the one place that will gladly accept it - the stock market. For now at least. At some point this fungible money will spill over and then all bets are off.

UPDATE 1: S&P 500 futures now red (-5.5 points from open); TOPIX -3%, Japanese banks and real estate leading the slide (-16% from highs).

UPDATE 2: JPY has broken back under 101.00

It seems the sell-the-f$$king-bounce crowd are back in Japan once again. Minutes from the last BoJ meeting are providing some ammo for the fall as doubts appear among the members of the committee...

*ONE BOJ MEMBER: DOWNSIDE RISKS FOR PRICES ARE LARGER
*A FEW MEMBERS: SEEMS HARD TO REACH 2% IN LATTER HALF OF PERIOD; KEEP MULLING STEPS TO AVOID DECLINING LIQUIDITY

For now, JPY has strengthened notably from its gap-weaker open and is trading around unchanged from Friday's close. JGBs opened modestly stronger. But it is the equity market that is fading fast with TOPIX now down 28 points (2.5%) from Friday's close - pressuring the lows once again (and the 10% correction) as the realization that 'Abe can't have his equity euphoria and eat his low interest rate cake too' increases...

The old idiom “you can lead a horse to water, but not make him drink” has proven itself true in the course of human learning. Or rather, it would be more accurate to label it man’s inability to learn from mistakes. You can hold a mirror up to grotesque instances of hypocrisy, but most men will remain mules – stubborn in their prejudice and beliefs. The ability to heed lessons from blunders is, often times, a skill unable to be mastered by the mass populace. The mule, being a universal symbol for stubbornness, has become indistinguishable from the average news and politics ingester. Toeing the carefully-planned ideological path of media personalities, divergence from party line is a hurdle most pedestrians are incapable of clearing. What’s not done is a forthright attempt to continually rectify our wrongs and pursue truth – even when it conflicts with inner bias. It’s far less painful to not acknowledge faulty logic.

Until the last few days, the attention of the mainstream business media has been on how 'wonderful' Japan's policy prescription must be since its stock market is soaring at a record pace. The reality is that the far bigger JGB market has been crumbling. As we explained here, this is a major problem for the bubble-blowers, as the extreme volatility (VaR shock) that the Japanese Government Bond market has been through in the last few weeks has some very large and painful consequences, that as yet, have not been discussed widely. The term 'shadow banking' has been one ZH readers are by now extremely familiar with as we have discussed this as the panacea of unseen leverage (most recently in Europe and China) for years; the funding markets in Japan, so heavily reliant on JGB repo for short-term liquidity and the efficient functioning of two-way markets in the bonds, are hitting a wall. As JPMorgan notes, the number of JGB 'fails' - where a repo deal breaks down - has more than doubled in the last week. For a market that represents 40% of the total Japanese money-market, this will be a critical area to watch for a JGB waterfall.

In the New Normal, where fundamentals ceased to matter some time around March 2009 when Bernanke decided to nationalize first the bond, then the stock market, and soon, every other "market", stuff like "data" is largely meaningless. However, for those who are still curious how the cash flow in the biggest corporate market - that of America - looks like, instead of merely chasing the latest trend or looking for a heatmap break out, here it is. Using Factset data for the 1500 largest stocks (ex fins), Morgan Stanley has broken down the world's biggest Income Statement by line item (and by sector). The results are as follows.

Everyone seems to have an opinion on asset valuation these days, even commentators who are normally quiet about such matters.  Some are seeing asset price bubbles, others are just on the lookout for bubbles, and still others wonder what all the fuss is about. Simply put, our financial markets weren’t (and still aren’t) structured to be efficient, and consistently rational behavior is a pipe dream, history shows over and over that the idea of a stable equilibrium is deeply flawed. Policies focused on the short-term tend to exacerbate that cycle, as we saw when decades of stabilization policies and moral hazard exploded in the Global Financial Crisis. Maybe if macroeconomics were rooted in the reality of a perpetual cycle - where expansions eventually lead to recessions (stability breeds instability) and then back to expansions - we would see more economists and policymakers balancing near-term benefits against long-term costs. Or, another way of saying the same thing is that mainstream economists should pay more attention to Austrians and others who’ve long rejected core assumptions that are consistently proven wrong.

Just when you thought the R&R debate was finished, it seems Paul Krugman's latest "spectacularly uncivil behavior" pushed Reinhart and Rogoff too far. In what can only be described as the most eruditely worded of "fuck you"s, the pair go on the offensive at Krugman's ongoing tete-a-tete. "You have attacked us in very personal terms, virtually non-stop...  Your characterization of our work and of our policy impact is selective and shallow.  It is deeply misleading about where we stand on the issues.  And we would respectfully submit, your logic and evidence on the policy substance is not nearly as compelling as you imply... That you disagree with our interpretation of the results is your prerogative.  Your thoroughly ignoring the subsequent literature... is troubling.   Perhaps, acknowledging the updated literature on drawbacks to high debt-would inconveniently undermine your attempt to make us a scapegoat for austerity."

In a masterclass of what is 'really' going on in the world (as opposed to what we are told/spoon-fed on a daily basis), Grant Williams (of Things That Make You Go Hhhmm infamy) provides a must-watch presentation. Starting from the premise (unusual in this day and age) that the laws of mathematics are inviolable ("if it makes no sense, it is nonsense"), the Aussie investment manager sets out his own set of philosophical 'problems' that the world of 'markets' seems incapable of grasping. In a chart-filled extravaganza, Williams ranges from "Problem 1: If the global economy is stalling, Europe is in recession, China is slowing and growth is seemingly impossible to generate, what are equity markets doing at all-time highs?" to "Problem 7: The Gold Price and The Price of Gold are mutually exclusive" leaving the participant questioning everything Bob Pisani would have us believe warning in conclusion that gold is critical and "beware suppressed volatility."

A week later and everyone is a bit more nervous, with the speculation that US sovereign debt purchases by the Federal Reserve will wind down and with the Bank of Japan completely cornered. In anticipation to the debate on the Fed’s bond purchase tapering, on April 28th (see here) we wrote why the Federal Reserve cannot exit Quantitative Easing: Any tightening must be preceded by a change in policy that addresses fiscal deficits. It has absolutely nothing to do with unemployment or activity levels. Furthermore, it will require international coordination. This is also not possible. In light of this, we are now beginning to see research that incorporates the problem of future higher inflation to the valuation of different asset classes. Why is this relevant? The gap between current valuations in the capital markets (both debt and credit) and the weak activity data releases could mistakenly be interpreted as a reflection of the collective expectation of an imminent recovery. The question therefore is: Can inflation bring a recovery? Can inflation positively affect valuations? The answer, as explained below, is that the inflationary policies carried out globally today, if successful will have a considerably negative impact on economic growth.

However, the best argument why the type of Quantitative Easing imposed by Ben Bernanke, and the associated "necessary and sufficient" condition to exit this greatest of all monetary experiments, or eventually allow Ben and Kuroda to taper QE, i.e., the "great rotation" from government bonds into stocks (because otherwise both the Fed and the BOJ will be stuck monetizing and monetizing and monetizing until one day, soon, they own all government bonds), will never work in Japan is a simple one. And quite visual...

Hi-tech sleuthing for rounding up leakers...how innovative!

The aftermath of the largest liquidity injection process in the history of the world, is that politics, and the entire fiscal process, has effectively been rendered obsolete, and politicians are now nothing but figureheads in a central banker world. Perhaps, the general public would be angry if it were to realize that the only entity left making global macro economic decisions is a private organization run by academics, who in turn are merely firgureheads for the world's private banks. That, however, would entail that the co-opted media would actually explain to the broader population just what is going on behind the scenes: a process that would entail the loss of core advertising revenue, which is why expect confusion about just who pulls the strings to linger for years.

Inflation, housing, unemployment figures, personal spending and utility bills are all improving across the US.

But this time, the decision by European Commission was greeted with an outburst of loathing and mockery.