Archive - Jun 2013

While it isn't news to regular readers, the fact that one of the key pillars of the "housing recovery" (the other three being foreign oligarchs parking cash in the US courtesy of an Anti Money Laundering regulation-exempt NAR, foreclosure stuffing and, of course, the Fed's $40 billion in monthly MBS purchases) have been the very biggest Wall Street firms (many of whom had to be bailed out the last time the housing bubble burst) who have also become the biggest institutional landlords "using other people's very cheap money" to buy up tens of thousands of properties, appears to still be lost on the larger population. Intuitively this is to be expected: in a world in which the restoration of confidence that a New Normal, in which everything is centrally-planned, is somehow comparable to life as it used to be before Bernanke, is critical to Ben's (and the administration's) reflationary succession planning. As such perpetuating the myth of a housing recovery has been absolutely essential. Which is why we were surprised to see an article in the very much mainstream, and pro-administration policies NYT, exposing just this facet of the new housing bubble, reflated by those with access to cheap credit, and which has seen the vast majority of the population completely locked out.

Technology, technology, and more technology—this is what has driven the American oil and gas boom starting in the Bakken and now being played out in the Gulf of Mexico revival, and new advances are coming online constantly. It’s enough to rival the Saudis, if the Kingdom allows it to happen. Along with this boom come both promise and fear and a fast-paced regulatory environment that still needs to find the proper balance. In an exclusive interview with Oilprice.com, Chris Faulkner, CEO of Breitling Energy Companies - a key player in Bakken with a penchant for leading the new technology charge—discusses: How Bakken has turned the US into an economic powerhouse; What the next milestone is for Three Forks; What Wall Street thinks of the key Bakken companies; Where the next Bakken could be; What to expect from the next Gulf of Mexico lease auction; What the intriguing new 4D seismic possibilities will unleash; What the linchpin new technology is for explorers; How the US can compete with Saudi Arabia; Why fossil fuel subsidies aren’t subsidies; How natural gas is the bridge to US energy independence; Why fossil fuels shouldn’t foot the bill for renewable energy; Why Keystone XL is important; Why the US WILL become a net natural gas exporter

Bulls and Bears. It’s all about predicting when that upturn or that downswing in the market is going to take place and when you need to sell or buy that stock to hit the jackpot and make the millions. People have been doing it for centuries and that doesn’t look like it is going to stop right now. There have been dozens of financial crises over the centuries and each of them has had an effect on the lives of people to varying degrees.

If the CME's mission with its Lumber margin hike last night was to make lumber more affordable and thus force it into the hands of homebuilders who otherwise wouldn't touch it 10% higher, it has succeeded: lumber just dropped by the daily 10% limit. The disconnect continues... on not-so-terrific Tuesday...

The store of wealth demand is not just from Chinese ‘aunties.’ There remains an under estimation of the demand coming from wealthy Chinese and high net worth and ultra high net worth individuals (HNWs and UHNWs). 

This has not been commented upon or analysed but we have direct experience of wealthy Chinese people looking to store gold in Hong Kong and Switzerland, as have other storage providers.

Back in September 2012 we forecast that absent major changes, the Fed's security holdings, which then were under $3 trillion, would hit $5 trillion by the end of 2014. One possible "change", and the topic that has consumed the market and pundits over the past month, and led to a spike in equity vol, has been whether or not the Fed will taper its purchases of securities from the current $85 billion per month, to a lesser number, in the process reducing the liquidity "flow" injected into risk assets via Primary Dealers. The prevailing consensus appears to be that Bernanke may trim the monthly number by about 25%, and lower the monthly purchase quota from $85 billion to $65 billion, with an announcement due at the September 18 FOMC meeting. So assuming this is correct, and Ben does as expected, what does this mean? The chart below shows the unprecedented calamity that such as "drastic" move by the Fed would lead to...

The latest ISM reading came in at 49. Any reading below 50 is considered recessionary. And an ISM of 49 is the worst in four years.

Common wisdom, which in this market of media-led hope and hysteria rapidly becomes the meme-du-jour, is that, as American Banker puts it, for banks that are currently earning slim yields on stagnant pools of loans, higher interest rates are a welcome prospect. However, in reality (that annoying fact-based world in which we really live) Net Interest Margins (NIM) are not so simple and linear and in fact. There is simply a lot of noise in NIM figures. Data over the last decade or so hints that there is a positive link between how steep the yield curve is and how wide net interest margins are - which makes sense to the extent that banks lend long and borrow short - but imbalances in the durations of assets and liabilities are risky and a more important factor for short-term changes in margins is whether banks are positioned to be hurt or helped by a simultaneous move in rates across the curve. The bottom line - rising rates and steepening curves do not infer higher NIM - facts are facts.

The “branding” of modern central banking started in the United States in the early 1980’s under then-Federal Reserve Board Chairman Paul Volcker. Facing worrisomely high and debilitating inflation, Volcker declared war against it – and won. In delivering secular disinflation, he did more than change expectations and economic behavior. He also greatly enhanced the Fed’s standing among the general public, in financial markets, and in policy circles. Building on Volcker’s success, Western central banks have used their brand to help maintain low and stable inflation. In the last few years, however, the threat of inflation has not been an issue. Instead, Western central banks have had to confront market failures, fragmented financial systems, clogged monetary-policy transmission mechanisms, and sluggish growth in output and employment. Facing greater challenges in delivering desired outcomes, they have essentially pushed both policies and their brand power to the limit. They will have materially damaged their standing and, consequently, the future effectiveness of their policy stance.

Recent price action amid the heavily shorted solar stocks has seemingly been predicated on hope that late May chatter of negotiated settlements in the industry would occur and everyone could go happily about their business. While hope remains for a settlement - and tariffs have been delayed 2 months, as the WSJ reports - the EU is set to announce drastic anti-dumping levies on Chinese solar panels in a move that could trigger a trade war between two of the world's largest economies:

• *EU SAYS SOLAR-PANEL DUTY TO START AT 11% ON JUNE 6
• *EU SAYS SOLAR-PANEL DUTY TO RISE TO 47.6% IN AUGUST
• *EU'S DE GUCHT SAYS NOT CLOSE TO SOLAR-PANEL PACT WITH CHINA

Sadly this is playing out very similarly to the Great Depression period as tariffs and protectionism replaced domestic focused fiscal and monetary policy and escalated problems rapidly. China rejects the EU's price-dumping allegations, but the problem is not new for Beijing. The U.S. last year imposed punitive tariffs on solar panel imports after finding that China's government was subsidizing companies that were flooding the U.S. market.

If we see the economy as a system, we understand why removing or suppressing feedback inevitably leads to financial crashes. The essential feature of stable, robust systems (for example, healthy ecosystems) is their wealth of feedback loops and the low-intensity background volatility that complex feedback generates. The essential feature of unstable, crash-prone systems is monoculture, an artificial structure imposed by a central authority that eliminates or suppresses feedback in service of a simplistic goal--for example, increasing the yield on a single crop, or pushing everyone with cash into risk assets. Resistance seems futile, but the very act of suppressing feedback dooms the system to collapse.

There is energy independence, and then there are crude oil imports, which according to just released and revised Census data, amounted to 233,215 thousand barrels in April, and 914,456 thousand barrels year to date (just under 3 billion annualized). For those unaware who the most important US crude oil trading partners are, here is the updated list of the main countries that serve to fuel America's industrial infrastructure and its engines, in the off chance that the Tesla electric revolution fails to deliver.

Following April's surprising drop in crude imports which led to a multi-year low in the March trade balance (revised to -$37.1 billion), the just released April data showed an 8.5% jump in the deficit to $40.3 billion, if modestly better than the expected $41.1 billion. This was driven by a $2.2 billion increase in exports to $185.2 billion offset by a more than double sequential jump in imports by $5.4 billion, to $222.3 billion. More than all of the change was driven by a $3.2 billion increase in the goods deficit, offset by a $0.1 billion surplus in services.The Census Bureau also revised the entire historical data series, the result of which was a drop in the March deficit from $38.8 billion to $37.1 billion. In April 233,215K barrels of oil were imported, well above the 215,734K in March, and the highest since January. Furthermore, since the Q1 cumulative trade deficit has been revised from $126.9 billion to $123.7 billion, expect higher Q1 GDP revisions, offset by even more tapering of Q2 GDP tracking forecasts. And since the data is hardly as horrible as yesterday's ISM, we don't think it will be enough on its own to guarantee the 21 out of 21 Tuesday track record, so we eagerly look forward to today's POMO as the catalyst that seals the deal.

While the market itself has exhibited the exuberance we have all seen before (and never seem capable of learning from), BNP has quantified this love-panic relationship (and the news is not great for the bulls). When in 'love' mode, the average drop in stocks has been 12% in the next six months. The biggest drivers of this "love" have been investor confidence, CoT positioning, short-interest, relative trading volumes, and sectoral outperformance with fund-flows shifting away from "love" suggesting the short-term top is in. The index itself peaked a week or two back at levels of "love' not seen since pre-Lehman; not a good sign.

He knows.