Archive - Jun 2013

All over the United States, frustrated homeowners are banding together, arming themselves and patrolling their own streets.  One of the primary reasons this is happening is because police budgets all over the nation are being slashed at a time when violent crime rates in the United States are increasing and many our our largest cities are being transformed into crime-infested war zones.  So instead of waiting for government to come up with a solution, many Americans are taking matters into their own hands.  For example, one community group in Milwaukie, Oregon has started posting flyers with an ominous message for potential criminals: "This is a Glock block. We don’t call 911." 

The 20th century could be categorized as THE century when communications took off and we started living in each other’s pockets. Lives had been ruined by war, trouble and strife. Wealth had been redistributed beyond belief. There were no longer just a few that were making the profits, but there were growing classes of people that wanted recognition.

It appears that unlike the president, whose rating is plunging in the aftermath of PRISM-gate, US corporations are not eager to double down on their privacy intrusive ways, and some are becoming increasingly concerned about what all the recent exposure may do to their bottom line. Such as Google, which earlier today became only the first company to challenge the long-standing gag order issued by the secretive Foreign Intelligence Surveillance Court (FISA), arguing that the company has a First Amendment right to speak about information it is forced to give to the government. From Google: "Greater transparency is needed, so today we have petitioned the Foreign Intelligence Surveillance Court to allow us to publish aggregate numbers of national security requests, including FISA disclosures, separately." And yes, GOOG, which once upon a time pretended its motto is "don't evil" and since transformed it to "be evil, just don't get caught", still refer to "constitutional rights" - how quaint.

While disappointment from the FOMC's comments tomorrow may not be enough to create 'the big one', it is perhaps worth a look at the more meaningful corrections over the last 10 years in equity and credit markets for some sense of context for what is possible. So far, it is clear, especially given today's equity rally (and ongoing credit weakness) that the consensus of the equity herd are not expecting disappointment tomorrow - while credit markets are preparing for the 'flow' to slow.

A conversation with a mining entrepreneur who succesfully built and sold a Mongolia Coal explorer.

Think Cyprus is the only country that will need a repeat bailout (as the FT reported earlier)? Think again. Cause heeeeere's Greece... again.... where as Kathimerini reports, a brand new, massive budget hole for €1.2 billion has just been "discovered." Only this time it is not some C-grade government service that can just be swept away: it is to fund the country's biggest healthcare provider, EOPYY. And the deadline is imminent: Greece has less than a month to plug it.

It can’t be emphasized enough (I’ve emphasized it here, here and here) that there’s a close link between the Fed’s narrowing focus and the core, theoretical models that economists developed in the decades after World War II. These model builders naïvely ignored boom-bust cycles in credit and asset markets, just as the Fed disastrously eliminated the relevance of these cycles from its policy framework. Or, more precisely, policymakers reversed Martin’s maxim, spiking the punch bowl when credit and asset markets weaken but dismissing the case for action when the 'party gets going'. In order to explain, we thought it might be interesting to create one of those island economy stories to demonstrate a problem with the Fed’s policy framework - how the Fed’s inflation target can cause policymakers to do the exact opposite of what they should be doing.

To summarize, the SEC which admits it was clueless in analyzing the modern, fragmented market (yet which found definitively that the culprit for the May 2010 flash crash was Waddell and Reed, and nobody else, using what technology at the time, nobody knows), uses a platform developed by High Frequency Trading firm Tradeworx... to reach a conclusion that High Frequency Trading firms are innocent of every flash crash resulting from an HFT algo gone haywire...

For the sixth day in a row, the Dow managed a triple digit gain/loss - the first time since Sep/Oct 2011 - as markets appear to playing out a perfect echo of last year's June FOMC meeting with a ~3% 4-day gain in the run-up to the decision only to give it all back in the next few days. In the same way as last year, despite the rally in stocks, VIX (hedging) is rising, credit is diverging (hedging), and bonds are bid (though this appears more a Taper-off trade this time). Today's volume was among the lowest of the year (even accounting for holiday trading days) but that didn't stop the Dow ended up within a Hilsenrath headline of its all-time highs (though VIX near YTD highs, credit near YTD high spreads, and bonds close to YTD high yields). Silver, gold, and copper were hit hard today (-1.8% on the week) as WTI surged back up to $98.50; the USD retraced back to unchanged on the week (JPY -1%); Treasury yields are now up 4-5bps on the week (unch today); and while stocks looked good off the Friday surge, the last few minutes today saw them give back some of the exuberance back as hedgers turned to sellers (helped by a smash'n'grab in HYG) but all-in-all, equity investors seem very confident that Bernanke won't let them down.

Demand for physical gold across the world continues to surge at an unprecedented pace leading India to blame its soaring current account deficit, sliding currency and even deteriorating economy on it (even if failing in its attempts to regulate demand for the yellow metal), and yet gold continues to slide. How come? One word - paper, or rather, ETF paper.

No matter how much pushing on the market- or economic-string a central planner tries, eventually the risk-based pricing of credit (as opposed to nominal price based stocks) turns the corner from accepting rising leverage as potentially good thing for growth to worrying that cash flows are at risk from an over-generous management transfer to shareholders. The four-year bullish period of this credit cycle is nearing its historical average and leverage is near its cycle highs with near record numbers of firms raising leverage YoY suggesting the credit cycle is over.

As noted yesterday, and perhspa even more prescient now Anastasiades is back with the begging bowl, the debt crisis in Cyprus and the subsequent "bail-in" confiscation of bank depositors' money matter for two reasons: 1. The banking/debt crisis in Cyprus shares many characteristics with other banking/debt crises. 2. The official Eurozone resolution of the crisis may provide a template for future resolutions of other banking/debt crises. It also matters for another reason: not only is the bail-in a direct theft of depositors' money, the entire bailout is essentially a wholesale theft of national assets. This is the inevitable result of political Elites swearing allegiance to the European Monetary Union.

With that in mind, I suggest keeping a close eye on the bond markets. These will be the “tell” of what the Fed is likely to announce.

A week ago we showed a chart from Charles Gave which does a terrific job at explaining why the modern economic "science", in conjunction with the Fed's negative rate environment, have failed at their ultimate stated mission - to stimulate growth. The reason: the Keynesian multiplier, which has tracked the nominal US GDP 7yr average change with a very high correlation, is now negative. From Gave: "shows that the marginal efficiency of public debt, at least in the US (public spending in emerging markets from a low base usually improves productivity) has been declining structurally since 1981. And it seems that this marginal efficiency has now reached a negative level."... There is now another problem: as the chart below shows, China has developed a Keynesian multiplier problem of its own. Even as the Chinese politburo and the PBOC have been injecting an ever increasing amount of credit into the private sector - the primary source of Chinese growth - the incremental GDP growth has been trending lower, and lower, and lower...

It appears the plethora of talking heads discussing the FOMC's potential decision to 'Taper' - and the subsequent sell-offs in a number of risk-assets - believe this action has stemmed from better economic data (as the 'manipulated' unemployment rate has drifted faerie-like towards their target - but don't call it a threshold). However, as Barclays notes and we have been warning, there is another interpretation that is more worrisome for the market - that is a change in the Fed's 'reaction function'. As is clear from the minutes of the latest FOMC meeting, there is a growing concern over bubbles, technical dislocations, and the cost-benefits of a QE program out of control. The market's reaction to these two reasons for 'tapering' will be significantly different and reading the Fed tea-leaves even more critical than ever.