Archive - Jun 2013

Near-term outlook for the major currencies discussed and a brief analysis of the short-coming of fair-value "discounting" models in understanding recent price action.  

As the following chart from Perpe showing June performance, who needs money printing when one can generate gobs of "wealth effect" simply by centrally-planning the destruction of their economy, crushing the currency, and living constantly on the edge of a banana republic military coup. Presenting Venezuela: + 40.7% in June and +144% YTD... the occasional toilet paper shortage notwithstanding. Truly the shape of "wealth effects" to come.

At the end of the day, Friedman jettisoned the gold standard for a remarkable statist reason. Just as Keynes had been, he was afflicted with the economist’s ambition to prescribe the route to higher national income and prosperity and the intervention tools and recipes that would deliver it. The only difference was that Keynes was originally and primarily a fiscalist, whereas Friedman had seized upon open market operations by the central bank as the route to optimum aggregate demand and national income. The greatest untoward consequence of the closet statism implicit in Friedman’s monetary theories, however, is that it put him squarely in opposition to the vision of the Fed’s founders. As has been seen, Carter Glass and Professor Willis assigned to the Federal Reserve System the humble mission of passively liquefying the good collateral of commercial banks when they presented it. Consequently, the difference between a “banker’s bank” running a discount window service and a central bank engaged in continuous open market operations was fundamental and monumental. In short, the committee of twelve wise men and women unshackled by Friedman’s plan for floating paper dollars would always find reasons to buy government debt, thereby laying the foundation for fiscal deficits without tears.

Last week's liquidity crunch and market panic is a reminder that Beijing is playing a difficult game. Regardless of what happens next, the consensus expectations that China's economy will grow at roughly 7 percent over the next few years can be safely ignored. Growth driven by consumption, instead of trade and investment, is alone sufficient to grow China's GDP by 3 to 4 percent annually. But it is not clear that consumption can be sustained if investment growth levels are sharply reduced. If Beijing can successfully manage the employment consequences of decreased investment growth, perhaps it can keep consumption growing at current levels. But that's a tricky proposition. It's likely that the days of the super-powered Chinese economy are over. Instead, Beijing must content itself with grinding its way through the debt that has accumulated over the past decade.

Remember: what is unsustainable, can never crash...

Recent comments by the Federal Reserve Chairman Ben Bernanke have shocked the world financial markets. Since the first allusion to tapering, volatility has been on the rise across the board (stocks, currencies and bonds). The chaotic reaction by market participants and the corresponding increase in yields now risks destabilizing this very fragile equilibrium. It is yet unclear whether or not the damage control from the other Fed Presidents will put a lid on yields and market volatility, or if the damage to the Fed’s (poorly executed) exit strategy is permanent.

Stand By Your Man.

Back in 2002 Warren Buffet famously proclaimed that derivatives were ‘financial weapons of mass destruction’ (FWMDs). Time has proven this view to be correct. As The Amphora Report's John Butler notes, it is difficult to imagine that the US housing and general global credit bubble of 2004-07 could have formed without the widespread use of collateralized debt obligations (CDOs) and various other products of early 21st century financial engineering. But to paraphrase those who oppose gun control, "FWMDs don’t cause crises, people do." But then who, exactly, does? And why? And can so-called 'liquidity regulation' prevent the next crisis? To answer these questions, John takes a closer look at proposed liquidity regulation as a response to the growing use of 'collateral transformation' (a topic often discussed here): the latest, greatest FWMD in the arsenal.

When it comes to deflation, mainstream economics becomes not the science of common sense, but the science of nonsense. Most economists today are quick to say, “a little inflation is a good thing,” and they fear deflation. Of course, in their personal lives, these same economists hunt the newspapers for the latest sales. The person who epitomizes this fear of deflation best is Ben Bernanke, chairman of the Federal Reserve.

Presented with no comment...

If there is a better way to admit guilt, and several decades of ill-gotten billions courtesy of now legendary "information arbitrage", coupled with some heavy expert network hot tips and one year contract retentions of every biotech expert from here to Calcutta, than pleading the Fifth, we have yet to hear it. We are confident, however, that SAC FoF investor Anthony Scaramucci will provide some truly memorable examples. Or if not that, then at least a few guest passes to his "fun" and brilliant "Hooters for Hedgies" concept.

Succinctly summarizing the positive and negative news, data, and market events of the week...

The S&P 500 ended the month with an odd shade of green (called red). This is the worst month in stocks for 8 months and makes only the 5th negative month in the 20 months since the global central bank co-ordinated save in Q4 2011. The week, however, saw the S&P gain around 1.25% on the back of endless repeated bullshit from various Fed heads about how we all got it so wrong... which also saw Treasury yields drop notably (30Y -8bps on the week and 10Y down 16bps from its Monday highs). Equities remain the big year-to-date winners and despite some of the biggest single-day gains in over a year today gold and silver remain at the lower end of the pile. The Nikkei and the S&P lead global DM equities (now what do they have in common?). Then with minutes to go, S&P futures collapsed on massive volume to the lows of the day...

Just. One. Moar...

It seems, based on the latest Fed POMO schedule that there will be no 'Taper' anytime soon. We are downgrading our communications warning from "shorting the market on these days 'will' cause pain" to "shorting the market on these days 'may' cause pain" based on the increased volatility and total disarray that appears to have broken out among the great, good, and wise at the Fed this week - we still await the big "just kidding..." line from the Bernank... In summary, spot the non-tapering trend: May POMO: $44 billion; June POMO: $45 billion; July POMO: $45 billion.