Archive - Jul 7, 2013

Tonight out of Bloomberg: ": "China’s money-market cash squeeze is likely to reduce credit growth this year by 750 billion yuan ($122 billion), an amount equivalent to the size of Vietnam’s economy, according to a Bloomberg News survey. The number is the median estimate of 15 analysts, whose projections last week ranged from cuts of 20 billion yuan to 3 trillion yuan"... Two weeks ago from Zero Hedge: "The country is about to undergo an unprecedented deleveraging that could amount to over CNY1 trillion in order to force reallocate capital in a more efficient basis. That's right: a massive deleveraging coming dead ahead in China just in time to shock the market still reeling from the threat of the Fed's tapering." And here is the reason why.

After updating their precious metals' company cost curve, Citi's ominous warning that, "a combination of rising unit costs (15% yoy), sustained high capital budgets and a falling gold price have resulted in a fast contraction in margins - so much that no gold company under our coverage will generate Free Cash Flow at spot gold."

Spying: The Big Picture

And now a few words from Cognitive Dissonance's better half on creating a lifestyle change we can live with.

Just over a month ago, global earnings revisions were on the upswing (admittedly off markedly low levels); since then they have turned sharply lower to the worst levels in a year (based on Citi's Global Earnings Revision index - ERI). Critically though, as 'hope' is pinned on a steepening term structure as indicative of 'growth' and happy times ahead for stocks, the ERI has dramatically diverged from the yield curve. As Citi notes, it is evident that analysts are not at all convinced about the improvement in the growth outlook that this steeper curve has historically suggested. What is perhaps more worrisome for the "it's different this time" crowd is that the last time we saw this kind of dramatic divergence between global earnings and the US term structure was in the run-up to Lehman - and that did not end well...

Before the current turmoil began, Ben Bernanke's hope was that rising asset prices would lead to a "wealth effect" that would encourage the American consumer to start spending again, and thus help the American economy finally leave the "Great Recession" behind. However, the empirical data does not support this notion and equally the economy isn't booming sufficiently to make the reverse case that the economy drives the stock market. So what is causing the markets to boom right now? Steve Keen notes that during the period from 1890 to 1950, there was no sustained divergence between stock prices and CPI, and that almost all of the growth of share prices relative to consumer prices appeared to have occurred since 1980; and then, boom! - what must certainly be the biggest bubble in stock prices in human history took off - and it went hyper-exponential in 1995. So are stocks in a bubble? Yes - and they have been in it since 1982. It has grown so big that - without a long term perspective - it isn't even visible to us. It has almost burst on two occasions - in 2000 and 2008 - but even these declines, as precipitous as they felt at the time, reached apogees that exceeded the previous perigees in1929 and 1968.

Presented with little comment aside to note that US equities are once again resurgent near all-time highs fully supported by err... umm... fundamentals.

Still confused how Asiana Airlines Flight 214 crashed yesterday, leading to the first fatalities associated with a Boeing 777 airplane? The following just released video from CNN should answer all lingering questions, and also explain why all airport landing systems should always be turned on (especially to assist those who apparently are clueless when it comes to operating without computer assistance, such as 9 out of 10 modern equity "traders").

Earlier today, among other lies statements to New Democracy party supporters in Athens, Greek Prime Minister Antonis Samaras said (with a straight face) that the country is now the only oasis of stability in wider region, in contrast to the past. Which, in addition to the obvious, is ironic for the following rather amusing reason.

Professor Art Carden has developed some exceptionally silly walks and is seeking payment for his work. Since he cannot find anyone to pay him voluntarily, perhaps he should apply for a government subsidy for producing silly walks. But while silly walks may benefit society, the fact that people will not pay for their development voluntarily indicates that people do not value silly walks as much as other things people would pay him to do. Are some subsidies valid, though? What about for food? Or for education? How about subsidies for clean energy? Is government assistance definitely better for society?

At an incredible $9.98 per gallon, Turkey has the most expensive gasoline in the world - almost triple that of the US - closely followed by Norway at $9.97. In fact, as Bloomberg notes, the US can celebrate its good fortune at being only the 51st most expensive country in the world for gasoline. So why is it then that so much is made of a rising gas price in the US? Why do we fear $3.80 when Turkey shows us things could be a lot worse? The simple answer lies in the chart below. The US spends the 7th most in the world on gasoline as a percentage of income and is by far the largest among developed economies as a percentage of income. At 3.06% of income, and being that the US is a consumption-based, low-quality-job, unaffordable-housing-means-driving-to-work nation, the possibility of $4 gas in the not-too-distant future (as Egyptian instability leaks into WTI prices) has a far greater impact on the US than any other of the world's large economies. But then again, we are sure it is all transitory.

Trying to find a job in America today can be an incredibly frustrating experience.  Most of the jobs that are available seem to pay very little, and there is intense competition for just about any job that is open.  But it wasn't always like this. Our economy simply does not produce enough jobs for everyone anymore, and the percentage of "good jobs" continues to decline.  That means that it is getting really hard to find a job that will enable you to support a family, and a lot of people end up doing jobs that they are massively overqualified for.  But when times are tough, people are going to do what they have to do in order to survive. Once upon a time, just about any adult that was willing to work hard in America could go out and find a good paying job that would support a middle class lifestyle. Now those days are gone forever.

This week's events placed in a broader context.