Archive - Jul 2013

The aging 'me' generation is still putting itself first...

Presented with little comment aside to hope that it is clear just what this 'recovery' is all about...

Federal Reserve Chairman Ben Bernanke said this week that inflation in the United States needs to be higher. It almost seems as if Bernanke is trying to purposely hurt the middle class. But what Bernanke will never admit is that the official inflation rate is a total sham.  The way that inflation is calculated has changed more than 20 times since 1978, and each time it has been changed the goal has been to make it appear to be lower than it actually is. If the rate of inflation was still calculated the way that it was back in 1980, it would be about 8 percent right now and everyone would be screaming about the fact that inflation is way too high...

"Even one cigarette is enough to trigger a smoking wage differential," is among the findings of a new (Federal Reserve sponsored) research study that shows smokers on average earn 19% less than non-smokers ($13.101 vs $16.261). Perhaps most interestingly, the researchers note that once you have been a smoker, you may as well smoke a pack a day as the differential is little affected by frequency. Once again, taxpayer money well-spent by the researchers at the Fed... Given these findings (and PhD logic) we suspect the Fed will introduce Quantitative Wheezing - aimed at 'rebalancing' the smoking imbalances... and boosting smokers' income by 24%...

Those always on the lookout for alternative indicators of economic activity may be in luck.

In the years 2006 and 2007, the underlying stability of the global economy and the U.S. credit base in particular was experiencing intense scrutiny by alternative economic analysts. A crash was coming, it was coming soon, and most of our society was either too stupid to recognize the problem or too frightened to accept the reality they knew was just over the horizon. Why did 2008 creep up on so many people? Weren’t there plenty of economists out there “preaching to the choir” at that time? Weren’t there plenty of signals? Weren’t there plenty of practical conclusions being made about the future? And yet, the world was left stunned. The truth is, human beings have a nasty habit of ignoring the cold hard facts of the present in the hopes of using apathy as a magical elixir for future prosperity. They want to believe that disaster is a mindset, that it is a boogeyman under their bed that can be defeated through blind optimism. Collapse, from a historical perspective, seems to occur when the searchlights of the individual mind are dimmest, when the threat is the greatest, and when we are most comfortable in our ignorance.

Ramp the futures for a green cash close in the Dow Jones... then pull the rug on the futures.

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

Even with duelling Fed members today (Bullard vs Plosser) the message from 'the man' led markets on a one-way street all week. Even though Boeing impacted the Dow (and Trannies):

• S&P managed its best week in 6 months (+2.6%);
• Gold's best week in almost 8 months (+5.1% or $62);
• Treasuries' best week in 13 months (10Y -14.5bps);
  
• High Yield bonds best week in 20 months (+3%); and the
• USD's equal worst week in 21 months (-1.8%).

VIX remains modestly bid and IG credit spreads are underperforming. Market breadth today was weak as S&P volume was very low and the intraday range the lowest in 5 months. The 330ET Ramp was 10 minutes late but just as effective in its goal of running stops to a green Dow as Bullard's words seemed magical.

Much has ben written lately about the fact that the Federal Reserve is beginning to realize that they are caught in a "liquidity trap."  However, what exactly is a "liquidity trap?" And perhaps more importantly how did we end up in it - and how do we get out?

The final item of note from today's JPM release is perhaps also the most important one, and once again serves as evidence of all that is broken with the US financial system. To wit: deposits held by JPM rose modestly to a new all time high of $1,202,950 million, or $1.2 trillion. This compares to $970 billion in Q3 2008 at the time Lehman failed. What about the flip side of this key bank liability: loans. As of June 30, 2013, total JPM loans declined from $729 billion to $726 billion, the lowest since September 2012. But more disturbing, this number is $35 billion less than the $761 billion at September 2008. It means that JPM's excess deposits have now risen to a new all time high of $477 billion, up from $474 billion last quarter.

Serf's Up...

"If you think it is going to rise, you may as well double your return," is the risk-schmisk perspective one Japanese strategist notes, that appears to permeate every aspect of investing nowadays. If ever the herding recency-bias-based mentality was evident it is Japanese ETFs (which as everywhere in the world have become the primary liquidity driver - along with futures - of the underlying stocks on every exchange in the world). The double-levered Nikkei 225 ETF in Japan has seen trading activity rise an incredible 1158% year-to-date (while the broad Topix index has only seen a more 'normal' 17% rise in the same period). While institutional volume still dominates, individual investors (enamored of the crack-up boom in equities this year) have piled in like never before with 28% of Japan's trading volume now retail. This won't end well.

The move is very reminiscent of the 2007 top where we had a top, a brief collapse and then a final burst higher to a new high. Within a few months however, the markets had begun to descend into what would ultimately be the worst Crisis in 100 years.

Thanks to some algo-based low-volume jiggery-pokery Boeing's stock managed to bounce off its 50DMA and get back up to VWAP (surprise). In the meantime, the overall volume has exploded to its highest since December 1998 - when Boeing was under a probe from Europe for price-collusion with Airbus (likely will be highest ever). The Dow recovered on this bounce too - until it was confirmed that a second Boeing 787 issue was confirmed by Thomson Airways in the UK.