Archive - Jun 4, 2013

UPDATE 2: Nikkei 225 touches 13,000 - down 750 from Abe highs (12,815 is 20% correction from highs)

UPDATE 1: Well that escalated quickly... Abe Speech ended-  NKY -450 from Abe spike highs, TOPIX -3% from Abe spike highs, JPY cracked back under 100 (80 pips from Abe spike), JGBs surging

For about 2 minutes there it looked as if we were back on track and by the power of jawbone alone, Abe could lift Japan from its malaise.

*ABE VOWS TO SLAY DEFLATION MONSTER WITH FISCAL, MONETARY POLICY
*ABE CALLS GROWTH STRATEGY CENTERPIECE OF ECONOMIC POLICY
*ABE WILL THOROUGHLY REMOVE ALL BARRIERS TO CORPORATE ACTIVITY

But a mere 10 minutes after vowing to slay the deflation monster, Japanese stocks have retraced their spike gains and JPY has retraced its spike lower - but on the bright side - JGBs are bid.

Here is a simple way to test if the last year of housing market gains have been due to a real, fundamental, consumer-led recovery, or nothing but the latest iteration of the Fed's money bubble machine manifesting itself in the place of least du jour resistance - houses: Assume rising interest rates.

Ongoing monetary stimulus is leading to heightened volatility, and the bull market which has been in place since 2009 is becoming overextended. The recent string of surprise downside moves in markets may be the canary in the coal mine for global investors. This is where we are today. The tide is rising for U.S. and Japanese markets and asset prices will ultimately move higher. The size and violence of each wave that advances or recedes will continue to increase due to the surge of liquidity from central banks. These tides of liquidity are strong, as are the currents underneath. We must guard ourselves from the risk of being pulled under.

The airwaves are full of stories of economic recovery. One trumpeted recently has been the rapid recovery in housing, at least as measured in prices. The problem is, a good portion of the rebound in house prices in many markets has less to do with renewed optimism, new jobs, and rising wages, and more to do with big money investors fueled by the ultra-cheap money policies of the Fed. It seems entirely wrong that the Fed bailed out big banks and made money excessively cheap for institutions, and that this is being used to price ordinary people out of the housing market.  Said another way, the Fed prints fake money out of thin air, and some companies use that same money to buy real things like houses and then rent them out to real people trying to live real lives. At the same time, we are also beginning to see the very same hedge funds that have re-inflated these prices slink out of the market now that the party is kicking into higher gear – all while new buyers are increasingly having to abandon prudence to buy into markets where the fundamentals simply aren't there to merit it. Didn't we just learn a few short years ago how this all ends?

Much has been made of the 'terrible-taper' losses that bondholders face (and have supposedly suffered in May) as the reason for the great rotation myth to rise phoenix-like from the flames of all-time-low yields. Talking-head after talking-head appears to make the same sheep-like thesis of buying dividend-paying stocks - being "paid-to-wait", why earn low Treasury yields when stocks offer more? Well the answer, though obscured from view to most, came in May. As we have noted over and over again (most recently here and here), the difference between bond (yields) and equity (dividends) are risk, drawdown, and uncertainty. It should be obvious - but with such a strong anchoring bias for stocks, sadly it is not. By way of example, the 4% dividend-paying Dow Jones Utility Index fell over 10% in May (losing 2.5 years worth of dividends) while the 2.3% yielding 10Y Treasury fell 2.5% in price. As we noted before, there is a reason boomers prefer bonds.

Despite the mainstream media's desperate need to play down any and every potential indication that all is not well with the "buy the dip" mentality, there is no hiding the fact that volatility is back and nowhere is that more evident in the guts of the Hindenburg Omen calculation. Just as we saw in October 2007, when NYSE margin was just as extended, credit spreads were just as compressed (and today's extreme range), and valuations were just as high, the Hindenburg Omen signals are starting to cluster (in a confirming manner). First on April 15th, second on Friday, and now third today marks the first such cluster since Bernanke saved the day in August 2010. Perhaps for those not running for the hills, UBS' Art Cashin's views are noteworthy, "proponents of the Omen will tell you there has never been a crash without the presence of the Hindenburg Omen. Sounds pretty compelling, indeed. Skeptics, however, note that every occurrence of the Hindenburg Omen has not been accompanied by a crash. In fact, three out of four times, there is no crash. Sounds a lot less compelling now. So, an omen is a caution – not a cause."

It is clear that Western capital markets no longer generally regard gold as money. It has been relegated to the status of a risk asset, useful collateral, or simply a commodity with a history of being used as money. This is a mistake.

And the beat goes on!  More studies, more surveys, more statistics, more data to feed the ongoing fires in present day American cultural wars.  Last week, the Pew Research Center released a study stating that women are now the primary breadwinners in 40 percent of households with children in the US.  A figure which more than doubled that of a generation ago. Economic circumstances usually determine the need for multiple breadwinners in a household, and the household today in no way resembles the nuclear family of yesteryear. Perhaps we would not be in these dire economic straits if instead of Erickson’s dominant males governing the US during the past 32 years… we had been ruled by brainy dominant females - not the Amazon-cliché type.  They couldn’t have fared any worse - as simply put: Americans - well, the bottom 80 percent - have lost control of their economic destiny…

Following on from our annual update on the wealth (re)distribution of nations, we thought it important to look at the other side of the household balance sheet - that of 'debt' to see just how much 'progress' has been made in the world. In the aftermath of the credit crisis (and the ongoing crisis in Europe), government debt levels continue to rise but combining trends in household debt highlights countries that have sustainable (and unsustainable) overall debt levels  - and thus the greatest sovereign debt problems. Whether the 'number' is from Reinhart & Rogoff or not, the reality is that moar debt is not better and the nations with the highest debt-per-capita may surprise many. Critically, despite the rise in 'wealth' from 2000-2008, the ratio of debt-to-net-worth rose on average by about 50% (and in many nations continues to rise). The bottom line - in almost all countries, government liabilities exceeded government financial assets in 2011, leaving the government a net debtor.

Beginning on May 13, when JPM's commercial gold holdings tumbled to an all time low of 137,377 ounces, the firm's daily Comex updates became erratic with daily reallocations out of its Registered holdings into Eligible. Over the next three weeks, some 209K ounces had their warrants detached, and shifted into customer account, all the while the total number of ounces held in the JPM gold warehouse at 1 Chase Manhattan Plaza, remained flat at 817,167. Then two days ago the first withdrawal in nearly one month took place, with 13K ounces pulled out of JPM's Eligible holdings. Moments ago, the daily Comex update showed that yet another 15.4K ounces were withdrawn out of JPM, following the latest gold withdrawal, offset by a 49K ounces reallocation. This however is still short of the roughly 70K ounces due for delivery. Long story short, as of close of activity on June 3, the total gold held by the JPMorgan depository is now the lowest it has ever been at just 788,786 ounces and once again falling fast.

In yet another hit for both the administration's trustworthiness and the hope of some spin-off of the GSEs, the WSJ reports that the Federal Housing Administration's projected losses over 30 years could reach as high as $115 billion under a previously undisclosed stress test. The results, which were not included in the agency's independent actuarial review (because of the potential uproar it might create according to emails), are based on the Fed's stress-test scenario - which seems like something that should (perhaps) have been included. The fact that this data was omitted from the report is "troubling" to House Oversight Committee head Darrell Issa. In its annual audit, the agency disclosed that under current conditions, total losses would exceed its reserves by $13.5 billion over 30 years (with a $943 million loss this year alone). The projected shortfall under a 'protracted economic slump' is $64.5 billion but the 'tail risk' event, that was originally included in earlier drafts, based on the Fed's stress test, is $115 billion. Hardly the upside-encouraging potential that private-finance will be looking for in funding FEDMAGIC.

House prices - with respect to both levels and changes - differ widely across OECD countries. As a simple measure of relative rich or cheapness, the OECD calculates if the price-to-rent ratio (a measure of the profitability of owning a house) and the price-to-income ratio (a measure of affordability) are above their long-term averages, house prices are said to be overvalued, and vice-versa. There are clearly some nations that are extremely over-valued and others that are cheap but as SocGen's Albert Edwards notes, it is the UK that stands out as authorities have gone out of their way to prop up house prices - still extremely over-valued (20-30%) - despite being at the epicenter of the global credit bust. Summing up the central bankers anthem, Edwards exclaims: "what makes me genuinely really angry is that burdening our children with more debt to buy ridiculously expensive houses is seen as a solution to the problem of excessively expensive housing." It's not different this time.

It's that time of the year again when DoubleLine's Jeff Gundlach delivers his mid-year sermon, which with the fascinating title "What In The World is Going On", promises to be quite a feast at 4:15 pm Eastern. So sit back, tune in, forget today's "Unlucky 21" Tragic Tuesday Taper (which would have been a victory for the bulls no matter what: Maria said so), and let some so very rare these days counterpropaganda wash over you.

It's just not fair!! Today started off so well with Monday's late exuberance (which now looks like front-running the Tuesday gift) extending overnight through Asia and Europe and pushing beyond the open in the US. Then we started to fade - no news, no catalyst, just S&P futures tagged the ledge level from Friday's late dump. As the day progressed blame for the weakness in equities was put at Esther George's 'speechless' hawkishness - but Treasuries rallied on that weakness, hardly a sign of Taper concerns. We suspect the selloff was as much about the BoJ REIT-buying news as it was simply the retaliation of yesterday's bounce. Of course, 330 Ramp Capital played their part with some mild JPY weakness momentum ignition (and VIX was slammed), S&P futures scrambled up to VWAP - and stopped... This was the worst Tuesday in over six months... but as Maria B says "Anyway you look at it, this is a victory!"

Wondering why the current 10Y Treasury note is now trading special in repo? Look no further than the following visualizations. The fact that overnight repo on that bond is now at its limit (since 3% is the penalty rate for failure to deliver) strongly suggests the collateral shortage we have been warning of is becoming increasingly severe. Of the nearby bonds, The Fed already owns the maximum 70% of the 8 3/4% of 8/15/20, the 7 7/8% of 2/15/21, the 8 1/8% of 5/15/21, the 8 1/8% of 8/15/21, and the 8% of 11/15/21... Perhaps this is why so many of the Fed heads are starting to try and jawbone back the exuberance... In two wonderfully simple brief clips, Stone McCarthy visualizes the growth in Fed holdings by security type and the average maturity of the central bank's balance sheet. The calm before the storm - before the pending chaos - is evident when one considers just how this will all get unwound (let alone tapered).