Archive - Jul 19, 2013

In the mind of a hedge fund manager...

In the classic fantasy rom-com The Princess Bride, the beautiful maid Buttercup orders the farm boy Westley to perform numerous tasks to test his servitude. No matter the magnitude of the request, Westley simply answers "As you wish" and makes it so. Buttercup eventually comes to view Wesley with similar devotion, and true love is born. Similarly, investors have fallen back in love with the capital markets, whose continual response their increasingly irrational hopes has been "As you wish." It's inconceivable!

Everything is going to be just great.  Haven't you heard?  The stock market is at an all-time high, Federal Reserve Chairman Ben Bernanke says that inflation is incredibly low, and the official unemployment rate has been steadily declining since early in Barack Obama's first term.  Of course we are being facetious, but this is the kind of talk about the economy that you will hear if you tune in to the mainstream media.  They would have us believe that those running things know exactly what they are doing and that very bright days are ahead for America.  And it would be wonderful if that was actually true. Unfortunately, as I made exceedingly clear yesterday, the U.S. economy has already been in continual decline for the past decade.

Claiming he wasn't afraid to let everyone in attendance know about "the real mess we're in," Federal Reserve chairman Ben Bernanke reportedly got drunk Tuesday and told everyone at Elwood's Corner Tavern about how absolutely fucked the U.S. economy actually is. Bernanke, who sources confirmed was "totally sloshed," arrived at the drinking establishment at approximately 5:30 p.m., ensconced himself upon a bar stool, and consumed several bottles of Miller High Life and a half-dozen shots of whiskey while loudly proclaiming to any patron who would listen that the economic outlook was "pretty goddamned awful if you want the God's honest truth." "Look, they don't want anyone except for the Washington, D.C. bigwigs to know how bad shit really is," said Bernanke, slurring his words as he spoke. "Mounting debt exacerbated—and not relieved—by unchecked consumption, spiraling interest rates, and the grim realities of an inevitable worldwide energy crisis are projected to leave our entire economy in the shitter for, like, a generation, man, I'm telling you."

Mortgage rates surging, check! Oil prices surging, check! Consumer Confidence surging, check? Equities surging, check? A funny thing happens when consumers face higher energy prices and mortgage rates - but, it seems, that this time is different (for now)...

Decades ago, John Maynard Keynes famously wrote in his book The General Theory: "If the Treasury were to fill old bottles with bank-notes, bury them at suitable depths in disused coal-mines. . . and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again. . . there need be no more unemployment." To Keynes, all that mattered was that people were employed doing something, anything. The quality of employment didn’t matter. Clearly this line of reasoning worked out well for the Soviets. So considering that the ‘quality’ of jobs doesn’t matter in this Keynesian worldview, though, we’ve come up with a simple idea.

Congress: "Is it fair to say that Wall Street has benefited more [from QE] than Main Street has?"

Bernanke: "I don't think so... I want to emphasize that we're very focused on Main Street... Our low interest rates have created a lot of ability to buy automobiles..."

The 'good-is-bad and good-is-good', or as Morgan Stanley's Adam Parker calls it, the "Hall-Pass' market is one of four regimes that investors face in the current environment. In the current world, he finds that negative economic surprises - while causing negative short-term responses in stocks - are rapidly mean-reverted into a positive return reflecting this 'good/good' response suggesting  participants now viewed tapering as the base case: good data would presumably help the post-taper economy, while bad data might lead to a delay or mitigation of the tapering. The market has been mostly in this 'Hall-Pass' mode since the start of 2013 but fell briefly into 'normal' mode when Taper talk began in May (until Bernanke and his cohorts jawboned us back from the edge). Critically though, Parker notes, while the current period is also one where the market responds favorably to both directions of economic surprises, the drift in responses is now flat to down: in the absence of large economic surprises, we would therefore expect the market to be flat to down.

Succinctly summarizing the positive and negative news, data, and market events of the week...

For over a month, JPMorgan managed to mysteriously avoid matching up the gold held in its (world's largest) vault with the Comex delivery notice update. However, as of today, that particular can will be kicked no more. Starting yesterday, JPM reported that just under 12,000 ounces of Eligible gold (the same Registered gold that two days earlier saw its warrants detached and convert to eligible) were withdrawn from its warehouse 100 feet below CMP 1. But it was today's move that was the kicker, as a whopping 90,311 ounces of eligible gold were withdrawn, accounting for a massive 66% of the firm's entire inventory of non-Registered gold, and leaving a token 46K ounces, or a little over 1 tonne in JPM's possession.

Between Detroit's bankruptcy, Microsoft's miss and worst drop in over 13 years, and GOOG's miss (latter gobbled back by the BTFD'ers), it is no surprise that stocks rallied (thanks to GE's explosion higher and Trannies surging). Mixed bag overall in stocks with the Nasdaq -1.4% on the week and TRAN +2.2% (with the S&P and Dow around 0.6%). Treasuries 'outperformed' stocks relatively speaking with a 11-12bps compression in the belly and 6bps at the long-end on the week - ending today at the low yields of the week. As an aside, AAA muni spreads pushed to their highest in 13 months as yield remain notably elevated as Treasuries rallied. Despite a 1% weakening of the JPY, the USD ended the week down around 0.4% driven by EUR (and AUD) strength. Despite USD weakness, Silver lost 2.2% on the week while gold gained 0.7%. WTI crossed above $109 and Brent today gaining 2.25% on the week (off today's highs). VIX dumped back to 2 months lows under 13%, volume was dismal all week (worst today), but new highs all around for stocks (amid another idiotic Friday closing ramp) so we must be doing great?

The grotesque days of the first housing bubble are now being flatly trounced by the surreal second coming of the housing bubble, where courtesy of RealtyTrac we find that the old gross maximum profit potential of 63% realized in Orlando, FL house flipping, has two short months been eclipsed by flipping a house in Daytona Beach, generating a mindblowing 82% "flip that house" return! In brief: in the first half of 2013 there were 136,184 single family home flips — where a home is purchased and subsequently sold again within six months — in the first half of 2013, up 19 percent from a year ago and up 74 percent from the first half of 2011. Real estate investors made an average gross profit of $18,391 on single family home flips in the first half of the year, a 9 percent gross return on the initial purchase price. That was up 246 percent from an average gross return of $5,321 in the first half of 2012 and an average loss of -$13,206 in the first half of 2011.

It's a strange and terrible tragedy when a culture forgets its own history and identity. It is even more tragic when that culture becomes deluded enough to think it can replace its heritage from scratch; that it can conjure political and social reformations out of thin air, and abandon the centuries upon centuries of accomplishment and failures of generations past. To think that one can live without the lessons and principles of one's ancestors is a disease – a mental disorder of the highest caliber. It is an insanity that leads to terrifying catastrophe. Loyalty is not and never has been unconditional - loyalty to government most of all. Loyalty to the system is dependent upon the nature of the system and the people who sit at its apex. For those within government today, this could mean a legacy of desperation and sadness, or a legacy of strength, truth, and enduring peace. Time is running out.

While Ben Bernanke remains unable to value the precious metal, it seems the Arabs are very capable of discerning at least one relative value. In a fascinating effort to reign in Dubai's growing obesity epidemic, the government is willing to pay its citizens (in gold) for losing weight. For each kilo of excess that is lost, the government will pay 1 gram of gold (around $42). There is no discernment - apparently - in the "Your Weight In Gold" initiative that the weight loss be 'fat' which make us wonder how many would 'give their right arm' for a few ounces of gold?

The multi-bubble machine called the Fed is at it again. This time they managed to create a gigantic bond bubble which will dwarf both the dot-com- and the housing bubble combined.