Archive - Jul 5, 2013

Now there's a face only a Keynesian could love...

Citi's FX Technicals group is biased to believe that the low in this correction may have been posted for Gold. Here's why...

"We are open, respectful of the right to asylum, and it is clear that if circumstances permit it, we would receive Snowden with pleasure and give him asylum here in Nicaragua," Nicaragua's Ortega said at a public event. Shortly thereafter, the new Venezuelan president Maduro also jumped on the bandwagon: "I have decided to offer humanitarian asylum to the young American, Edward Snowden, so that in the fatherland of (Simon) Bolivar and (Hugo) Chavez, he can come and live away from the imperial North American persecution."

On June 19, 2013 Ben Bernanke announced that later this year the Federal Reserve would very likely begin to print less money than what they are printing today, in effect resulting in many investors refusing to catch the bouncing ball. This pronouncement was enough to send all financial markets into a tizzy with everything declining, except for the US Dollar. Investors must understand that this is a game changer. Whether the Federal Reserve actually carries through with this plan is open to debate; but, perhaps the most important observation from the “tapering” announcement was the reaction by all financial markets to what was in reality a very small move by the Federal Reserve...

Over two years ago we highlighted just how out-of-touch with reality our central planners are when we exposed Bill Dudley's infamous inflation comments. Now it seems, Argentina is taking over the mission of totalitarian supreme command (or government gone mad). While not publicly admitting they have a problem, despite the price of bread doubling to 20 Pesos in the last year alone, Bloomberg reports the government plans to apply a 1974 law that forces holders (on penalty of fines and prison) of wheat and flour suitable for bread-making to sell it in the domestic market. This entirely un-free-market response to the dreadful reality in the nation comes on the heels of the freezing of prices on 500 goods at Supermarkets back in February and, unbelievably, suggestions that citizens combat higher prices by "baking bread at home." How long can a country plunge into a hyper-inflationary spiral before the people 'coup-like-an-Egyptian'?

This week's biggest news is not the Non-Farm Payrolls, or the European Central Bank or even Portugal's government falling. No - this week's big deal is the openness with which the Federal Reserve is preparing a major margin call on the too-big-to-fail banks in the US. This has been a long time coming since the introduction of the Dodd-Frank law back in 2010 but it is a game changer. Remember all macro paradigm shifts come from policy impulses, often mistakes. Is the Fed about to given the whole banking industry a major margin call?

On the day after celebrating its independence and with likely half the nation suffering from over-consumption, we thought it appropriate to 'celebrate' another #winning rank by the US. At an average of 181.27lbs (gender-weighted!), Bloomberg finds that the US is the 'heaviest' nation on earth.

Is the global economic downturn going to accelerate as we roll into the second half of this year?  There is turmoil in the Middle East, we are seeing things happen in the bond markets that we have not seen happen in more than 30 years, and much of Europe has already plunged into a full-blown economic depression.  Sadly, most Americans will never understand what is happening until financial disaster strikes them personally.  As long as they can go to work during the day and eat frozen pizza and watch reality television at night, most of them will consider everything to be just fine. Unfortunately, the truth is that everything is not fine.

The market remains confused. The better-than-expected headline jobs data prompted USD strength (Taper-on), gold/silver weakness (Taper-on), Homebuilder stocks drop (Taper-on), Bond yields surge (Taper-on), and credit market widening (Taper-on); but the good-old trusty US equity market was not having any of that. After dumping 25 points from its post-NFP highs, S&P 500 futures gapped and jerked up to VWAP, ran stops at the highs of the day, dropped back to VWAP, then surged into the close. The Dow ended up 150 points. Treasury yields rose the most in 2 years - an impressive 22bps. Despite a late surge, high-yield bonds had their worst day in 2 weeks. Gold and silver down 2.3% and 3.5% respectively and copper dumped 3.2% (not exactly the growth-exhibiting factor that everyone suggests is driving stocks up and bonds down). Meanwhile, WTI topped $103 for its highest close in 14 months.

The mid-1970s have been a useful template for what is possible (and even probable) in a centrally-planned world. As a reminder, the underlying backdrop was also similar (major economic downturn following the housing crashes in 1974-75 and again in 2006-2007 followed by aggressive Fed policy which was ultimately too loose for too long). It is quite clear, Citi notes, that the rally in the Dow has lasted longer than the “road map” would have suggested - at least in part driven by the ongoing expansion of the Fed’s Balance sheet - but with Taper talk increasing we wonder how long before the 70s are back in vogue.

UPDATE: Egypt Clashes Leave 10 Dead, Health Ministry Says (AP)

As we feared, the initial celebratory images have turned rapidly into running skirmishes, molotov cocktails, burning cars, and now six deaths. As the night rolls on, the clashes are escalating...

As the escalation in violence between members of the pro-Mursi Muslim Brotherhood and the military-backed victors of this week's coup gets worse with at least 6 dead now according to Al Arabiya, the US Secretary of State is busy...

a) Getting debriefed and preparing for a diplomatic statement

b) In the air between point A and point B promoting US domestic and foreign interests abroad

c) Informing Warren Buffett about the aphrodisiac benefits of ketchup

d) Spending a (second consecutive) exhausting afternoon on his sailboat.

And the correct answer is...

As we head into earnings season in the US (amid hopeful margin expansion), the big picture for earnings remains bleak. Markets are back close to highs as negative guidance is piling up and as Citi notes, their global earnings revision index is at its worst since early July 2012. If the Fed is heading towards a Taper then this fundamental fear may once again become relevant - or hope-fueled multiple expansion will fill that gap.

"In this respect the Gini coefficient had apparently reached in 2006 the previous high seen in 1929, prior to the Great Depression. This is a reminder that capitalism’s natural way of dealing with excesses is via business failure and liquidation; which is why wealth distribution would have become much less extreme as a consequence of the 2008 crisis if losses had been imposed on creditors to bust financial institutions, for example owners of bank bonds, in line with capitalist principles; as opposed to the favoured ‘bailout’ approach pursued for the most part by Washington. This means, unfortunately, not that the problem has been avoided but that the ‘great reckoning’ has been deferred to another day as the speculative classes have continued to game the system by resort to carry trades actively encouraged by the Fed and other central bankers, which is why fixed income markets freak out when they see signs of an exit."

So much for Iceland's bid as the world safe haven from government (and intellectual status quo) persecution. The tiny country that was such a vocal supporter of Julian Assange, and which originally was speculated as being the final destination of Snowden upon his departure from Hong Kong, has just opined on his request for Icelandic citizenship, and the answer is a resounding no, following the country's "parliament voted not to debate it before the summer recess" Reuters reports.