Archive - Jun 2013

Japanese individuals now make up 43% of total equity volume  - up dramatically from a mere 27% in November of last year - with commissions at brokers quadrupling year-over-year and an increasing number of 'get-rich-quick' investors turning to day-trading. Amid the huge volatility induced by Abenomics and deregulation of margin trading - enabling 300% leverage, the 'investing' public's attention span has collapsed to minutes: "winning at stocks is about predicting the future," one trader said, "I have a lot better chance of predicting what’s going to happen in the next few seconds than what will happen in the next six months." The volatility provides more room for these 'day-traders' to make money when they bet correctly (forget about the downside) on a stock's direction - long or short - and "now you can borrow endlessly." What could go wrong? One trader, as Bloomberg notes, leveraged $4.5mm in cash into as much as $67mm in daily stock bets and made $350,000 this year - triple his annual average of the last eight years.

Government Hypocrisy Is the Core Problem

The recent one month spike in interest rates, along with the mind numbing chatter about the end of the "bond bull market," has sent investors scurrying from from the bond market right into the waiting arms of a stock market correction. Will the "bond bull" market eventually come to an end?  Yes, it will, eventually.  However, the catalysts needed to create the type of economic growth required to drive interest rates substantially higher, as we saw previous to the 1980's, are simply not available currently.  This will likely be the case for many years to come as the Fed, and the administration, come to the inevitable conclusion that we are now in a "liquidity trap" along with the bulk of developed countries.  While there is certainly not a tremendous amount of downside left for interest rates to fall in the current environment - there is also not a tremendous amount of room for them to rise until they begin to negatively impact consumption, housing and investment.  It is likely that we will remain trapped within the current trading range for quite a while longer as the economy continues to "muddle" along.

Until now, we have refrained from trying to explain Fedspeak to the masses. The truth is it's not opaque. It's not indecipherable. It's simple. Or at least you can choose to believe it is, as we have. At last week’s press conference, Federal Reserve Chairman Ben Bernanke fielded questions from reporters employed by some of the world's most esteemed news organizations. Here is a summary, translated from Fedspeak into ordinary American English and heavily condensed for easy tweeting.

Why is it when the market goes up, it is the correct response to some news or event and when it goes down, the market is getting the wrong message?

The Government of Ecuador has received an asylum request from Edward J. #Snowden

— Ricardo Patiño Aroca (@RicardoPatinoEC) June 23, 2013

Ten days ago, we penned "Chinese Liquidity Shortage Hits All Time High", in which we predicted ridiculous moves in the Chinese interbank market as a result of short-term funding literally evaporating as a result of the PBOC's stern refusal to step in and bail out its banking sector (despite the occasional rumor of this bank bailed out or that) by injecting trillions in low-powered money. A few days later this prediction was confirmed when the overnight repo and SHIBOR market for all intents and purposes broke down as was also reported here previously.  Now, for the first time, China, via the Politburo's Chinese Hilsenrath-equivalent, Xinhua, has provided its own version of events which is as follows: "It is not that there is no money, but the money has been put in the wrong place."

The adjustments in core rates markets driven by repeated Fed commentary about its QE policy led to widespread selloffs in EM assets - and as we explained yesterday, this has potential vicious circle implications for developed markets. The significance of the EM selloffs has raised concerns about whether investors could abandon the asset class and trigger 'sudden stop' scenarios as they prepare for a post-QE world. Barclays believes we have likely entered a 'bumpy transition' towards a normalization of core market interest rates, and while they agree with us that the fundamental vulnerability to an end of QE may still reside with many DMs (eg, euro area periphery), rather than EMs, the large capital inflows into EM economies makes them extremely vulnerable to a rapid outflow of external capital.

They’re worried the system might break down if the bond bubble were allowed to inflate further only to implode in a “disorderly” manner.

Just to confirm that in a world in which China and Russia (and Caracas... and Cuba) are increasingly seen as the paragons of liberty, virtue, and civil rights and the US is slowly but surely sinking into the role of the turnkey totalitarian tyranny antagonist, we just go this from House Intelligence Committee Chairman Mike Rogers: "Edward Snowden's reported choice to fly to Cuba and Venezuela undermines his whistleblower claims... Everyone of those nations is hostile to the United States, the Michigan Republican said on NBC's "Meet the Press" news talk show. "When you think about what he says he wants and what his actions are, it defies logic," said Rogers. Actually, Mike, when "you think about what he says", his actions make all the sense in the world, and certainly validate his "whistleblower claims."

Moments ago Edward Snowden landed at Sheremetyevo airport in Moscow, but since the American citizen has no Russian visa he will remain in the transit zone. And as Reuters reports, we now have some details on his next destinations, at least according to an Interfax source at Aeroflot: first Havana, Cuba, and finally Caracas, Venezuela as had been speculated earlier (although this may well be misdirection). Oddly enough, no Iceland (for now).

From Wikileaks: "Mr Snowden requested that WikiLeaks use its legal expertise and experience to secure his safety. Once Mr Snowden arrives at his final destination his request will be formally processed. Former Spanish Judge Mr Baltasar Garzon, legal director of Wikileaks and lawyer for Julian Assange has made the following statement: "The WikiLeaks legal team and I are interested in preserving Mr Snowden’s rights and protecting him as a person. What is being done to Mr Snowden and to Mr Julian Assange - for making or facilitating disclosures in the public interest - is an assault against the people"

Edward Snowden is no longer in Hong Kong. About an hour ago, the Hong Kong Authority released a statement which says that the NSA whistleblower has left Hong Kong today "on his own accord through a lawful and normal channel" which was yet another slap in the face of the US, saying the US provisional arrest warrant "did not fully comply with the legal requirements under Hong Kong law." In fact, not only did the HK authority defy the US arrest warrant, but it officially demands that the US clarify its own hacking of Hong Kong computer systems:"Meanwhile, the HKSAR Government has formally written to the US Government requesting clarification on earlier reports about the hacking of computer systems in Hong Kong by US government agencies." Having been given the blessing of HK to defy the US, Snowden is now supposedly en route to Moscow, from where he is said to continue further to Iceland.

All tyranny needs to gain a foothold is for people of good conscience to remain silent--Thomas Jefferson

People at the Fed are people in politics, who need to promote their allies and maintain their patronage networks. So perhaps it’s significant that the last two times the Fed tightened, it was in a President’s second term. It’s safer to anger an incumbent who is leaving, and dangerous to anger one who may have another six years in office. The party that lost the Presidency after one term, as a result of a crash in financial markets, would never forgive the Fed for its intervention. So if you are in the business of blowing up bubbles to win points with incumbents, and popping them at times when that is less of a concern, of course the President’s second term is when you do the popping. In this scenario, beliefs about an economic recovery play no role in motivating the tapering talk. It seems more likely that what’s really driving everything is the American electoral cycle. Well, what did we expect?