Archive - Jun 2013

June 30th

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Guest Post: America - Government By Terror, Torture and Tyranny





Everything that's wrong with Amerika today...

 

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China PMI Drops To Lowest In 9 Months; Schrodinger's Economy Continues





Following South Korea's dip back into contractionary mode (PMI sub-50 for first time in six months - prompting JPY strength and NKY weakness, on implicit KRW weakness retaliation), it appears China's government-sanctioned PMI (printed at 50.1 relative to 50.8 prior and 50.1 expectations) is converging down to the nation's HSBC PMI (whose Flash print was 48.3 - final due at 2145ET). This is the equal lowest print in 9 months but provides just enough cover to the current administration to maintain its tight policy stance - even if it was the biggest MoM drop in 10 months. On a side-note, all PMI sub-indices also fell MoM. The market's response is modest AUD strength and Nikkei weakness which suggests investors were hoping for a little weaker data to push China a litte closer to folding on their bubble-popping position.

 

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Goldman: "We Think That Payrolls Will Likely Disappoint"





For all those unable to sleep tonight without the knowledge what Goldman thinks about this week's most important economic release, Friday's Nonfarm Payrolls number (and the unemployment rate, which is guaranteed to continue the previously observed divergence from GDP in a centrally-planned and completely "brokun Okun" environment), read on for your trivial Ambien. From Goldman "Our forecasts for the US dataset to be released this week will likely be mixed for rates... we think that payrolls will likely disappoint market expectations." As a reminder, consensus expectations are for a 165K print, declining from May's 175K, while Jan Hatzius now expects 150K. And with that the second great US renaissance which Hatzius forecast in late 2012 is being "tapered" away the same way his 4% GDP prediction in late 2010 devolved into sheer nothingness.

 

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Guest Post: The Deflationist Error





Many people believe there is a significant risk that the Irving Fisher debt-deflation theory of great depressions is still an economic threat today. They overlook the fact that Fisher published his theory examining debt-deflation events under a gold standard, which does not apply today. Financial credit contractions therefore take a different appearance. It is indicative of our economic biases that we completely overlook the differences between the sound money of 1929/30 and the infinitely expandable money of 2008/09. We make this error because today’s economists lead us astray with a fundamental belief that the state through monetary intervention can fix everything. Even though today’s economists are a broad church they follow beliefs instead of well-reasoned economic theory. Beliefs are better left to clerics.

 

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The Perfect Storm In Bonds





The Fed has managed to remove some of the complacency in financial markets for now, but we would also argue that financial markets have managed to remove any complacency the Fed (and any other central banks) may have had regarding how easy the exit strategy from QE was going to be. As we discussed here, the market and the Fed are trapped in a prisoner’s dilemma, and, as Citi notes, the events over the past three weeks make it clear that 'collaboration' is the best strategy – i.e. a non-complacent market and no hawkish surprises from central banks. There is a big risk to this scenario though. As Citi explains, a risk that we fear not even the recent dovish messages by central banks may be able to do much about. The recent sell-off has, unlike the previous sell-offs this year, managed to trigger outflows in funds and ETFs; as we mentioned above, our credit survey reports the first outflows since 2008. The negative feedback loop which has been triggered around (retail-driven) fund and ETF outflows has gained a momentum of its own and the following four charts suggest bonds are in fact primed for the perfect storm.

 

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Multiple Government Agencies Are Keeping Records Of Your Credit Card Transactions





Were you under the impression that your credit card transactions are private?  If so, I am sorry to burst your bubble.  As you will see below, there are actually multiple government agencies that are gathering and storing records of your credit card transactions.  And in turn, those government agencies share that information with other government agencies that want it.  So if you are making a purchase that you don't want anyone to know about, don't use a credit card. This is one of the reasons why the government hates cash so much.  It is just so hard to track.  In this day and age, the federal government seems to be absolutely obsessed with gathering as much information about all of us as it possibly can.  But there is one big problem.  What they are doing directly violates the U.S. Constitution.

 

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The Drag From Higher Mortgage Rates





Mortgage rates have increased more than 1 percentage point since early May, jumping half a percentage point since last week’s FOMC meeting, raising concerns that this rapid rise may derail the housing recovery and dim the outlook for the broader economy, especially in the context of generally tighter financial conditions. As Goldman notes, the rise in mortgage rates may impact the economy through two broad channels: (1) the direct impact on construction activity and home sales, which feed into the residential investment component of GDP, and (2) the indirect effects of lower home prices and less refinancing activity on consumption. Goldman estimates Housing Starts could plunge 11% in the coming quarters, total home sales could drop 7%, residential investment may fall 6 percentage points, could weigh on home prices, and pull up to 0.4 percentage points from real GDP growth - presenting a significant downside risk to their somewhat rosy current outlook.

 

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How The "Taper Tantrum" Cost US Banks $25 Billion In Q2 Net Income





Despite best effort to immunize banks from rate swings and debt MTM risk, a substantial amount of duration exposure has remained with the glorified hedge funds known as FDIC-insured bank holdings companies under the designation of “Available For Sale” (AFS) or those which due to their explicit short-term trading fate, would have to be subject to mark to market moves. It is the bottom line impact of these securities that threatens to crush bank earnings in the just concluded second quarter by an amount that could be as large as $25 (or more) billion.

 

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Meanwhile, In Egypt... - Live Feed





Update: The Muslim Brotherhood offices have been set on fire...

It appears the re-civil-war in Egypt is gathering pace. What started at tens of thousands has swelled to hundreds of thousands of people crowded into the infamous Tahrir Square. As the live feed below shows, for now it is lasers, fireworks, but fires are starting to breakout and small skirmishes with police are being reported as the crowds call for Morsi's ouster. Morsi's supporters/civil servants, meanwhile, demand that "the elected president has to complete his term. We will not relinquish this even at the cost of blood."

 

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Guest Post: Is The Economic Crisis An Indictment Of Capitalism?





One of the sad narratives of the financial meltdown of 2008 and its aftermath is that it was and remains the result of unbridled capitalism. Too much freedom spoiled the economic broth. We must never tire of explaining the fallacies in the thinking of those who think the Great Recession is a clear case of the failure of capitalism. In fact, it is a quintessential example of the failures of interventionism to bring about anything other than economic destruction and relative impoverishment.

 

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EU Parliament "Shocked" At NSA "Bugging" Diplomatic Offices; Threatens Trade Talks





The president of the European Parliament, Martin Schulz, said he was "deeply worried and shocked about the allegations of U.S. authorities spying on EU offices" made in a report published Sunday by Der Spiegel. The latest round of NSA 'transparency' suggests U.S. intelligence agents bugged EU offices on both sides of the Atlantic, leaving some EU lawmakers calling for concrete sanctions against Washington - calling for an immediate investigation into the claims and suggesting that recently launched negotiations on a trans-Atlantic trade treaty should be put on hold. "If the media reports are accurate, then this recalls the methods used by enemies during the Cold War," notes one German minister, adding that, "it is beyond comprehension that our friends in the United States see Europeans as enemies." Schulz concludes, "It would be an extremely serious matter which will have a severe impact on EU-US relations."

 

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Global Macro In 12 Simple Charts - Find The Clean Shirt





Day after day we are bombarded by the sound and fury of each and every macro-economic data point that is then extrapolated as meaning either a) it's bad enough that the Fed will be behind us forever more, or b) it's good enoughthat we are on the path to self-sustainable escape-velocity based utopia. The US, especially, seems to have been proclaimed the cleanest dirty shirt ("where else are you going to put your money" is mantra'd into our minds - especially odd now since treasury yields exceed equity dividends by such a large margin). But, as usual, a glimpse at the data and reality hits the investor squarely in the face. The following 12 charts of global macro surprise indices - i.e. just how well nations are doing relative to PhD economist expectations - should summarize the sturm und drang we suffer each day.

 

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The US Treasury Website Has Been Down (For Some) For 10 Hours And Counting





UPDATE: It appears the site is up for some (premium members?)

When we first noticed, we assumed Treasury.gov was down for un-scheduled maintenance, but now, 10 hours later, it appears the site is down for other reasons? Overwhelmed by NSA DDoS attacks (as government pension funds seek more information on where their investments are heading)? Sequestration claimed the Webmaster? Hacked? Or simply the first cost-cutting measure for a Fed who just suffered their largest loss ever in a quarter (of course, that is, if they were bound by 'normal' mark-to-market rules). There are no explanations as yet.

 

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Mortgage Bond Prices Collapse By Most Since 1994 'Bond Market Massacre'





"What just occurred [in the mortgage-backed-securities (MBS) market] is indicative of just how important QE is," as government backed US mortgage bonds suffer their largest quarterly decline in almost two decades. As Bloomberg reports, the $5 trillion market lost 2% in Q2, the most since the 'bond market massacre' in 1994 (when the Fed unexpectedly raised rates) as wholesale mortgage rates spiked by the most on record in the last two months. The reason these bonds have been hardest hit - simple - fear that the Fed's buying program is moving closer to an end. "The Fed, at times during this period, was the only outlet in terms of demand for securities," explains one head-trader, as the Fed’s current buying provided demand as other investors retreated and has grown as a percentage of forward sales by originators tied to new issuance, which is set to fall as higher rates reduce refinancing. With Fed heads talking back what Bernanke hinted at, there was a modest recovery in the last 2 days in MBS but the potential vicious cycle remains a fear especially now that “what was once deemed QE Infinity is no longer viewed that way."

 
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