Archive - Jun 2013

The summit opens today for two days of public display of back-slapping and hand holding, championing the things that the west does best. The summit was preceded yesterday by the parading of 8 life-size puppets with huge heads to draw attention to poverty levels in the world.

• Obama prepares for chilly talks with Putin over Syria (Reuters)
• G8 opens amid dispute on Syria arms (FT)
• Economists Blame Fed for Higher Bond Yields (WSJ) - wait... what? Isn't the "stronger economy" to blame?
• What a novel concept - In the Czech Republic, a spying scandal has forced the PM to resign (BBG)
• Rigged-Benchmark Probes Proliferate From Singapore to UK (BBG)
• Economists Wary as Fed's Next Forecast Looms  (Hilsenleak)
• Banks Balk at New Rules for Small Loans (WSJ)
• Sporadic clashes in Turkey as Erdogan asserts authority (Reuters)

First it was the "most important" payroll print in years, then the "most important" retail sales number, and now we are just days ahead of the "most important" FOMC statement in years as well, as the fate of the centrally-planned markets lies in the hands of Bernanke's decision to taper, or not to taper. The main catalyst for now still appears to be an ongoing wrong interpretation of Hilsenrath's Thursday blog post in which some still see reaffirmation by the Fed that it won't taper, when all the Fed's mouthpiece said is that the short-end would be anchored even as the long-end is allowed to rise. Looking at the well-known no volume levitation futures action, which in the overnight session has wiped out all of Friday's losses and then some simply due to a 2.73% rise in the Nikkei overnight back above 13,000 driven by the USDJPY briefly regaining 95.00, the market has made up its mind (if only for the time being) that whatever decision the Fed takes regarding the monthly level of liquidity injection is a bullish one. At least until it changes its mind next.

Overview of these week's key developments

The Military mind is a dangerous mind. It promotes a lack of critical thinking.

We discuss legitimate credit vs. counterfeit central bank credit, the concepts of marginal time preference and productivity, speculation, and finally resonance.

Almost three years ago we first highlighted the real math behind the surging entitlement class that America has become. So why does a large portion of the population choose not to work when there are many jobs available? The answer is simple. If you can receive 2-3 times as much money from unemployment, disability, and/or welfare benefits (subsidized housing, food stamps, free cellphones, etc.) as you can from a temporary or part-time job, and live a life of leisure, why work? This is the ugly reality we illustrated just six months ago and the situation - amid what is apparently called a 'recovery' remains a depressingly real sign of the times. The political allure of free is so strong that an alarming number of people choose to become wards of the entitlement/welfare state rather than captain their own destiny. Indeed, while many are 'proud', 49% of American households now receive one or more government transfer benefits amounting to 18% of all personal income and a burden of $7,400 for every American - seemingly threatening the supposed self-reliance that has long characterized the American national psyche.

The recent market weakness (selling off in equity indices and widening in credit spreads) shares many elements of the previous dips this year, which should give bulls some comfort (the Italian- and Cyprus-led dips didn't last very long). However, there are elements which are concerning - as Citi notes, positioning in long equity and credit positions are notably 'long', and how weak cash credit has been this time around. As Citi points out, investors and the Fed are trapped in a prisoner's dilemma. Will everyone collaborate (investors hold to cash positions & dovish Fed) or betray (investors start unwinding cash positions & hawkish Fed)? The strategy each player follows will determine whether the weakness this time around is to be faded (like the previous ones this year) or not.

Two weeks after the break out of protests in Turkey, often times violent, the local discontent is nowhere closer to resolution. In fact, it is getting worse, and is on its way to converge with the "resolutions" adopted in its neighbor Greece following news that two Turkish union federations said on Sunday they would stage a one-day nationwide strike on Monday in protest at the forced eviction by riot police of hundreds of anti-government demonstrators from an Istanbul park. From Reuters: "The Confederation of Public Workers' Unions (KESK), which has some 240,000 members in 11 unions, and the Confederation of Revolutionary Trade Unions (DISK) announced the strike in a joint statement. Three other groups representing doctors, engineers and dentists will also join the action, it said."

Survivorship bias helps us understand why success stories are not what actually helps us succeed. We know that we learn from mistakes and failures, yet the study of failure is never recorded or saved unless the company or individual "came back from the dead," for example, Apple after Steve Jobs returned to lead the company from the abyss in 1996. Survivorship bias is a profound insight into how we confuse the known unknowns and the unknown unknowns.

There is no way to unwind. 

The espionage scandal that keeps on giving has released its latest installment, once more courtesy of the Guardian, which on the eve of tomorrow's starting G-8 meeting reveals that foreign politicians and officials who took part in two G-20 summit meetings in London in 2009 had their computers monitored, their phone calls intercepted, and fake internet cafes were set up on the instructions of the British Government Communications Headquarters (GCHQ), the sister organization to the US NSA. Naturally, it wasn't just the GCHQ - according to the Guardian, during the 2009 G-20 meeting there was an NSA attempt to eavesdrop on then-Russian leader, Dmitry Medvedev, as his phone calls passed through satellite links to Moscow. And while broad espionage allegations can be deflected by pretending by the rhetoric-endowed and teleprompter-aided that only terrorist threats were targeted, it will be very difficult to explain why the national information super spooks used every trick of the trade to spy on the so-called leaders of the developed world.

In the six weeks since the last FOMC meeting there has been almost uninterrupted relatively 'hawkish' chatter from Fed members. However, the consensus remains convinced there will be no 'Taper' anytime soon - as somewhat evidenced by the following summary of FOMC expectations from Goldman's Jan Hatzius. So the question is - if, based on the 'economy' there is a belief that no Taper will occur - why has the Fed been so 'hawkish'? We suspect, as we have noted numerous times, the decision to 'Taper' (or at least jawbone 'Tapering') is not economically data-driven but more a growing concern over technical impacts on the Treasury (fails and excess ownership) and mortgage (non-economic spreads crowding out private money and huge build in convexity) market and the bubble-like rational exuberance across every asset class that they have created.

In the wake of the recent news revealing the extent of the NSA's level of citizen surveillance through supernetworks like PRISM, Peak Prosperity's Chris Martenson speaks this week with Mark Skousen, former CIA agent turned founder of FreedomFest, one of the countries largest "gatherings of free minds". Mark argues that in this case, technology has advanced at a far faster pace than our culture's ability to understand how to use it effectively, responsibly, and how to regulate it... "...its like the Pentagon papers back in the early 70’s where we definitely need to tell government "You’ve overstepped your bounds"... The invasion of privacy is growing faster in technology than the privacy protectors... they’re just using this as a ruse and excuse to use this new technology."