Archive - Jun 2013

Don't look now but Lonmin shares are pulling a "summer of 2012", following news from the South African police that two people have been shot at a Lonmin mine, one of whom has died. Expect the now usual kneejerk fireworks to hit the price of platinum as the supply of the precious/industrial metal is once more put in jeopardy. Also, look for more weakness in the ZAR, as the South African economy, already weakened by last year's interminable "wage negotiations", will hardly be able to weather a second year of constant worker strikes following a year in which all of the purported negotiated pay hikes have shown to be transitory.

• BIS lays out "simple" plan for how to handle bank failures (Reuters) - Are we still holding our breath on Basel III?
• Deficit Deal Even Less Likely - Improving U.S. Fiscal Health Eases Pressure for a 'Grand Bargain' Amid Gridlock (WSJ)
• IRS Faulted on Conference Spending (WSJ)
• Deadly MERS-CoV virus spreads to Italy (CNN)
• Turkish PM Erdogan calls for calm after days of protests (Reuters)
• Financial system ‘waiting for next crisis’ (FT)
• Russia to send nuclear submarines to southern seas (Reuters)
• China Nuclear Stockpile Grows as India Matches Pakistan Rise (BBG)

Nothing like a solid dose of schizophrenia to start the week, following Chinese PMI news which showed that once again the Chinese economy was both contracting and expanding at the same time. Sure, one can justify it by saying HSBC looks at smaller companies while the official data tracks larger SMEs but the reality is that just like in the US, so China has learned when all else fails, baffle with BS is the best strategy. As a result the media is attributing he drop in European stocks to the weaker than expected China PMI, while the green prints in US futures are due to... stronger than expected China PMI. There were no split-personalities in Japan, however, where Mrs. Watanable's revulsion with recent euphoria led the Nikkei to tumble over 500 points, to closed down another 3.72%, and is now on the verge from a 20% bear market from its May 23 multi-year highs. The fact that the USDJPY reached within 3 pips of the Abenomics "fail" zone of USDJPY 100 didn't help overnight sentiment.

Joseph Eugene Stiglitz was awarded the Nobel Prize in Economic Sciences in 2001. We have constructed the world in which we live on recognition and awards. But, they are just for giving. They are not for anything else. We take no heed of what the ones that have been recognized might have to say or declare. They can go blue in their face, we have delusions of grandeur. Who gave them the prize anyhow?

Here is what is shaping the global capital markets.

Last week, the state of California claimed that its version of Obamacare’s health insurance exchange would actually reduce premiums. But, as Forbes reports, the data that the executive director of California's 'exchange' released tells a different story: Obamacare, in fact, will increase individual-market premiums in California by as much as 146 percent. The exuberance that Peter Lee exclaimed over the 'savings' is a misleading comparison. He was comparing apples - the plans that Californians buy today for themselves in a robust individual market-and oranges - the highly regulated plans that small employers purchase for their workers as a group. If you're a 25 year old male non-smoker, buying insurance for yourself, the cheapest plan on Obamacare’s exchanges is the catastrophic plan, which costs an average of $184 a month; but in 2013, on eHealthInsurance.com, Forbes explains, the median cost of the five cheapest plans was only $92. In other words, for the typical 25-year-old male non-smoking Californian, Obamacare will drive premiums up by between 100 and 123 percent. The desperate spin of the PR disaster is incredible as talk of a 'rate shock' is now very prescient, "these extraordinary increases are up to 15 times faster than inflation and threaten to make health care unaffordable for hundreds of thousands of Californians."

The Flash PMI had already 'warned' of a contractionary print but the final May HSBC Manufacturing PMI is now the lowest in a year at 49.2. The last two months have seen this measure of the Chinese economy plunge at its fastest rate since March 2011. Of course the 'official' data still remains a handsome 50.8 (not contracting at all) but the underlying data of the HSBC/Markit index is just as awful with little in the silver-lining camp to save the day (or night). Employment dropped, new export orders and total orders fell, purchasing activity fell, with only a meager rise in output saving the index from a more precipitous decline. Output prices also plunged (but input prices dropped on the back of cheaper raw materials - particularly base metals) and inventories rose (in a lack of demand manner as opposed to 'if we build it' perspective according to HSBC). So, once again, just as in Q1 2012 (before the reality swoon) China is both expanding and contracting...

"... equity markets were quick to shrug off the uncertainty and extended their gains as investors expected poor fundamentals to be followed by further policy easing."

Despite a pre-open dump in JPY to try and spark some momentum, things are not going according to Abe's wealth-creation plan in Japan right now. The Nikkei 225 is down over 300 points (over 16% from its highs a week ago) and the broader-based TOPIX is down over 2.1% from Friday's close (down 14% from its highs). Topix Bank and Real Estates indices continue to suffer from high-beta-itis (-3%) but the Oil & Gas sector is now being dragged into the mess too (-3.2%). JGBs are rallying only modestly (yields lower by 1-2bps) in light of this decent selloff in stocks. JPY is now at its highs of the day testing 100.4 and JGB implied volatility is on the rise once again. All things considered... not good.

Because when your primary stated goal is achieving "price stability" through unprecedented intervention, and instead you break the markets (both bonds and stocks) it may be time to reevaluate. As a reminder: "The Bank of Japan, as the central bank of Japan, decides and implements monetary policy with the aim of maintaining price stability. The Bank of Japan Act states that the Bank's monetary policy should be aimed at achieving price stability, thereby contributing to the sound development of the national economy." Instead, you get this...

After giving the world, or at least 99.4% of it (i.e., those non 0.6% who control $87.4 trillion of global assets), hell for the past 8 years, this is Ben Bernanke's conclusion of his speech during the baccalaureate ceremony at Princeton earlier today.

Congratulations, graduates. Give 'em hell.

Straight from the Chairsatan's mouth... Because it wasn't enough for once Princeton economist who has never traded a security in his life to take over the bond (and stock) market, crush the market's primary discounting function, and make an absolute mockery of price discovery for the 5th year running, here comes an entire graduating class of up and coming Chairsatans to perpetuate Bernanke's legacy. One couldn't make this up.

While the divergences and WTF charts of the past few weeks may have intrigued many by their unprecedented nature, we thought the correlation between the following three assets was too good to pass off as merely spurious. The last six months have seen the ratio of palladium-to-gold track incredibly closely with the S&P 500. Fundamentally, this may make some sense. As Citi notes, given gold’s strictly limited supply and zero coupon, it had been a major beneficiary in a ZIRP world where easy money seemingly had no end, whereas given its industrial uses, palladium behaves more like a risk asset than a precious metal. Its biggest source of demand stems from gasoline based catalytic converters, hence it is tied to the strength of the US economy/ risk appetite. We bring it up as we suspect this week's equity market behavior may have many concerned that 'bubbles' do exist - no matter what they are told - and perhaps, as a way to hedge the exuberance, buying gold and selling palladium is a less pernicious method than unwinding the entire market all at once.

Neil Macdonald of the CBC recently did an investigative piece on central bankers and what they’re doing to the world’s economies. Mark Carney was featured heavily. He told Macdonald, “there is no secret cabal orchestrating things,” despite CBC’s own findings earlier in the program. Central bankers around the world meet in Basel, Switzerland for secretive meetings. Of course, central banks have – and have always had – enormous power that remained more-or-less hidden until 2008. A paradigm shift is occurring where a large number of people (particularly young people) are questioning their assumptions. Some of them are even beginning to read economists like Ludwig von Mises and Murray Rothbard. The “economics” of central bankers can now be revealed for what it truly is: statistical propaganda. Not only is the “Keynesian school” of economics unsound – the entire social science is bunk. Only the Austrian tradition can explain economic phenomena in such a way that makes common sense, scientific. Carney is asking us to trust him. This cannot be done. He is not speaking truth; he is speaking nonsense.