Archive - Jun 2013

Let's discuss what an increase in rates, even a slight nominal blip, really means for those of us in the EU and the US.

It's almost as if the manic-depressive market has gotten exhausted with the script of surging overnight volatility, and following a week of breathless global "taper tantrumed" trading, tonight's gentle ramp seems modest by comparison to recent violent swings. With no incremental news out of China, the Shanghai composite ended just modestly lower, the Nikkei rushed higher to catch up to the USDJPY implied value, Europe has been largely muted despite better than expected news out of Germany on the unemployment front. This however was offset by a decline in Europe's May M3 (from 3.2% to 2.9%) while bank lending to NFCs and households simply imploded, confirming that there is no hope for a Keynesian, insolvent Europe in which there isn't any credit creation either by commercial banks or by the central bank (and in fact there is ongoing deleveraging across the board). US futures are rangebound with ES just shy of 1,500. We will need some truly ugly data in today's economic docket which includes claims, personal income/spending and pending home sales to push stocks that next leg higher. To think the S&P could have been higher by triple digits yesterday if the final Q1 GDP has just printed red. Failing that, the Fed's doves jawboning may be sufficient for a 100+ DJIA points today with Dudley, Lockhart and Powell all set to speak later today.

Turns out that for Europe, Cyprus was a "bail-in" template after all, and following an agreement reached early this morning, Europe now has a joint failed-bank resolution mechanism. Several hours ago, EU finance ministers announced that they had reached agreement on the principles governing the imposition of losses on creditors in bank 'bail ins'. Having already agreed to establish "depositor preference" in the pecking order of creditors at risk, the stumbling block to agreement was the availability of flexibility at the national level to complement the bail in with injections of funds from other sources. Under the compromise achieved overnight, once a bail in equivalent to 8% of total liabilities has been implemented, support from other sources can be used (up to 5% of total liabilities) with approval from Brussels. So investors (i.e. yield chasers) will foot the cost of bank bailouts? Maybe on paper. In reality, last night's agreement is the usual fluid melange of semi-rigid rules filled with loopholes designed to benefit large banks whose impairment may be detrimental to "systemic stability". To wit, from the FT: "While a minimum bail-in amounting to 8 per cent of total liabilities is mandatory before resolution funds can be used, countries are given more leeway to shield certain creditors from losses in defined circumstances." In other words, here is the bail in regime... which we may decide to ignore under "defined circumstances."

Gold miners hedged by selling their production forward during the bear market. Later, when the price was rising, they bought back their hedges at great expense (Barick alone wasted $6B). There is a better way.

The People's Bank of China (PBOC) released an official statement addressing directly the latest liquidity conditions in the banking system and indicating that the central bank intends to maintain sufficient liquidity conditions in the interbank market. As Goldman notes, this clear communication of policy intentions is highly important to guide market expectations, avoid liquidity hoarding, and contain excessive volatility of market. While they hope this calms markets in coming days, Goldman notes that the interbank rates are likely to settle back to a level higher than before to rein in leverage growth. However, in a helpful prompt for more jawboning, the squid notes, continued communications on policy intentions and actions will be helpful to further ease market uncertainties, given the extreme volatility in recent weeks; though we note the tightening bias will remain as the new leadership appears to prefer to take their pain early (and blame previous parties) than wait.

It’s not mere anecdotal evidence: Visibly melting sea ice is the best evidence that the planet is warming. So prospecting for oil in the Arctic is a tricky endeavor that must be undertaken slowly and with extreme caution. So just how hot is it going to get? Hotter than we can handle if we fail to reduce greenhouse gas emissions significantly...

Wild swings in asset prices have produced two recessions in the last 15 years - and, we suspect, FOMC members are keen not to see a repeat of the collapses of the last decade. As the following chart shows, measured relative to an equally nominally inflated USD-based disposable income, the wealth effect is nothing like as strong as some suggest and indeed it should be clear that time after time in the last 20 years we have seen the artificially blown 'wealth-effect-creating' bubbles implode back to what was an old-normal level of 'sustainable' wealth (and in fact the Fed is having to work harder to keep us from that level).

The Japanese stereotype of excessive courtesy is being confirmed by the actions of prime minster Shinzo Abe who is giving the world a free and timely lesson on the dangers of overly accommodative monetary policy. Whether or not we benefit from the tutorial (Japan will surely not) depends on our ability to understand what is currently happening there. This time around investors in the Japanese market were similarly deluded by fairy tales. Leading economists told them that Japan could cheapen its currency to improve trade, use inflation to create real growth, increase prices to encourage spending, and drastically increase inflation without raising interest rates. In short, monetary policy was seen as substitute for an actual economy.

The Supreme Court struck down the 1996 Defense of Marriage Act (as we noted here), leaving states to decide on the legality of same-sex marriage. As the infographic below from Bloomberg shows, laws ban same-sex-marriage in 35 states, with five of those allowing civil union or domestic partnerships.

There may come a day soon where the markets sell off if one of the whiskers in Big Ben's beard is out of place. Or perhaps if his tie is a bit crooked. Or maybe we end up with Janet Yellen as the next puppet in charge over at the local banking cabal and we fret about her hairdo. I don't know, but one thing that is for certain is that this central bank so wants to be loved and we are so under psychological attack with all of this QE nonsense that it isn't even funny. QE is the endgame. ZIRP was only the beginning. QE, or monetization (which they'll never call it because of the negative connotations), is the heroic measure applied to an already dead system. Our system, for all intent and purposes, died in 2008. It ceased to exist. The investing, economic, and business paradigm that has existed since is drastically different than its predecessor despite all the efforts being made to convince everyone, including Humpty Dumpty, that it is in fact 2005 all over again.

The Federal Reserve has had $1.2 million swiped from a flight somewhere between Switzerland, the land of secret banking, and New York City. Now, in the ranking of thefts that have taken place in history, this one seems like it is rather untimely! Has anybody seen Ben Bernanke lately?

Now that even the media world is once again looking closely at the impact of wild bond swings on bank balance sheets, and especially the P&L impact of their Available For Sale portfolios, it makes sense to take a quick glance at just which banks are considered the most overlevered in the world. Luckily, Goldman did just that, and the results are below. Some advice to our French readers: you may want to turn away. If the ongoing bond volatility continues, Credit Agricole and Natixis may be the first two banks that the French socialist president will proudly be forced to nationalize to avoid a collapse of the country's banking sector.

Imagine a football coach who hasn’t caught onto the game’s complexities and continues to run the same play - call it a fullback dive - over and over. When we read calls for more monetary stimulus, we feel as though we're listening to that coach’s brethren in the economist community. These economists argue that the Fed should simply ramp the money supply higher and higher for as long as some economic statistic - GDP is a popular one - remains below a targeted outcome. Dive, dive, dive, punt and repeat. There’s an important difference between football and economics, though. One-dimensional approaches are quickly exposed in football, whereas economies don’t yield clear and timely verdicts on whether policies are effective. There are far too many moving parts to prove cause and effect in a way that everyone can understand and agree. Therefore, bad economic policies persist for a long time before they’re finally found out, and this may be the best way to describe the last 100 years or so of America’s economic history.

Chinese investors are holding their collective breaths to see if the banking crisis predicted two years ago by renowned Chinese economist Li Zuojun will come to fruition in the next couple of months. Li's astounding accuracy in predicting China's economy has led to him earning the nickname "China's most successful doomsayer." Though far from perfect, a lot of what he said here rings true, but the interesting insight is that he forecasts that the incoming regime will want to take its lumps early, in 2013, so as to minimize blame ("it was the old crew’s fault") and maximize praise for subsequent recovery... He notes three other drivers (aside from this political one) including external flows and credit expansion and fears social instability should the status quo be maintained.

It should be obvious by now that the old adage– study hard, get good grades, go to a good school, get a great job, and work your way up the ladder– really doesn’t apply anymore. And it’s time to re-invent the model. Based on the eight reasons below, it’s no wonder they call them the “Boomerang Generation”, and that 45% of college grads aged 18-24 in the United States were still living with Mom and Dad...