Archive - Jul 2013

The following story from Bloomberg's Jonathan Weil should be familiar to anyone who i) wanted to get rich quick; ii) wasn't too willing to read the small print, and iii) put their faith in a TBTF bank. Or simply watches South Park. Jon recounts the story of "Philip L. Ramatlhware, an immigrant from Botswana who went to a Citigroup branch in downtown Philadelphia one day five years ago to open a regular bank account. He was 48 years old at the time and disabled, after being hurt in an accident as a passenger on a Greyhound bus. In April 2008, he received $225,000 in a settlement for his injuries, part of which went to pay legal fees. He was holding the settlement check when he walked into the branch. Immediately he was referred to a broker for a “financial consultation,” according to an arbitration claim he filed against Citigroup. The broker assured him the money would be invested in “guaranteed” funds and that he could have access to them whenever the need arose, the complaint said. Ramatlhware gave him $150,000 to invest. The broker put $5,000 into a bank certificate of deposit, bought a $133,000 variable annuity and invested the rest in a series of mutual funds. Less than six months later, Ramatlhware had lost $40,000, according to the complaint."

Almost 11% of short gold positions covered in the last week according to CFTC Commitment of Traders' data. That is the largest weekly drop in net shorts for four months and the combined futures-and-options net long position jumped 13,287 contracts or an impressive 48% (the most since Nov 08). Following the ubiquitous "sell-while-Bernanke-is-speaking" dump last Wednesday gold has risen almost 4% touching $1320 this evening as Asia opens. So with Asian physical demand remaining high and COMEX vault's running dry (and JPMorgan's on fire), we wonder - now that Taper is off (according to equity market pundits) if this is the start of the long-awaited short-covering rally back to reality for the precious metal.

China is similar to Japan in the 1980s in terms of financial imbalances and challenges for the real economy, but, as JPMorgan notes, China differs in terms of its stage of economic development. Turning possibility into reality is not an easy task, especially as China’s structural slowdown is accompanied by mounting financial imbalances. In the near term, overcapacity and decline in the rate of return on investment are the major challenges to be addressed by policymakers, and rising debt in the corporate sector and local governments needs to be contained and gradually reduced. In our view, this would require reform not only on the economic front (e.g., fiscal reform, land reform, financial reform, and SOE reform), but also social reform (e.g., hukou reform) and governmental reform (e.g., changing the role of the government and de-monopolizing). The list of tasks is daunting, but policy inaction could be even more dangerous - a delay in economic restructuring in China could lead to a repeat of Japan’s experience.

Apparently, figures have just been released showing that 591 million Chinese are now on-line. That’s an increase of+10% on last year’s figure. So, the Chinese are connected.

It is so sad to watch one of America's greatest cities die a horrible death.  Once upon a time, the city of Detroit was a teeming metropolis of 1.8 million people and it had the highest per capita income in the United States.  Now it is a rotting, decaying hellhole of about 700,000 people that the rest of the world makes jokes about. Detroit is only just the beginning.  When the next major financial crisis strikes, we are going to see a wave of municipal bankruptcies unlike anything we have ever seen before. All over the nation, our economic infrastructure is being gutted, debt levels are exploding and poverty is spreading.  We are consuming far more wealth than we are producing, and our share of global GDP has been declining dramatically. We have been living way above our means for so long that we think it is "normal", but an extremely painful "adjustment" is coming and most Americans are not going to know how to handle it. So don't laugh at Detroit.  The economic pain that Detroit is experiencing will be coming to your area of the country soon enough.

The following brief video created by TheRules.org, using data sourced from this website, is the latest vivid demonstration of the most adverse (and dangerous) side effect of nearly five years, and counting, of global monetary intervention by central banks: a world in which the poor get poorer, the rich get richer, and the middle class disappears. The video's punchline "The richest 300 people on earth have as much wealth as the poorest 3 billion" is not exactly correct: in truth the situation is even worse: the richest 200 people have about $2.7 trillion, which is more than the poorest 3.5 billion people, who have only $2.2 trillion combined.

Amid the furore of Sunday morning political programming, Detroit Mayor Bing and Michigan Governor Snyder have been quite vocal. Bing made it clear that "a lot of negotiations will go into fixing our city," and when asked whether he will seek a Federal bailout, he responded, "not yet." The decisions following this huge bankruptcy are likely to be precedent-setting as Bing noted that more than 100 urban US cities "are having the same  problems we're having." As the WSJ reports, Bing warned, "We may be one of the first. We are the largest. But we absolutely will not be the last. And so we have got to set a benchmark in terms how to fix our cities." Snyder was a little more hopeful that salvation will come from above as he stated that while "I don't view that as the right answer... if the federal government wants to [bail us out], that’s their option."

The bigger question is why it's taken 5 since after the financial crisis to realize these big banks are bad market participants? 

One of the catalysts driving the Friday rally in stocks was news from the PBOC that China was pushing forward with liberalization of its "interest rate controls" by removing the lending rate floor. Back then we asked, rhetorically, that "besides optics, because China does not have a market clearing interest rate so this announcement is largely moot, will this announcement have an actual impact on Chinese lending or transmission mechanisms? Hardly." As SocGen lays out today, "Hardly" was indeed the accurate answer: "Although the step is of great significance, the near term impact is likely to be very limited."

Get It?

Overview of the investment climate.  

Late on Friday, with little fanfare, the government's Office of the Director of National Intelligence (ODNI) reported that the secret FISA court - the "legal" administrators of the NSA's assorted domestic espionage programs - would be granted an extension of its telephone surveillance program. And while so far the US public has shown a stoic resolve in its response to learning more details about how the US government spies on its day after day, things may soon be changing. As McClatchy reports, "Congress is growing increasingly wary of controversial National Security Agency domestic surveillance programs, a concern likely to erupt during legislative debate - and perhaps prod legislative action - as early as next week." Among the measures considered are legislation to make those programs less secret, and talk of denying funding and refusing to continue authority for the snooping.

Here is what is really going on down there!

As expected, Prime Minister Shinzo Abe's ruling bloc won a decisive victory in an upper house election on Sunday, setting the stage for Japan's first stable government since Koizumi left office in 2006. The Japanese people voted for moar of the same irresponsible monetary policy and this provides a three-year window without a national election and strengthens PM Abe’s hand to supposedly deliver on the promised reforms. As Reuters reports, "people wanted politics that can make decisions", and, "'Abenomics' is proceeding smoothly and people want us to ensure the benefits reach them too." So moar trickle-down wealth-creation for the Japanese, moar surging energy prices, moar currency wars, and moar leverage. There will now be a significant tradeoff among his 'three-arrows' strategy - between monetary and fiscal/reform policy - as the reform agenda may actually enable less monetary policy, increasing the chances of higher inflation in Japan without additional monetary stimulus. This may be just what Kuroda needs to save the JGB market from failure (at least in terms of jawboning if not actuality).

We get to what is perhaps the most important topic related to the end game for the Fed.  Oh, and MMT and a Sheila Bair interview too.