Archive - Aug 6, 2013

Mainstream media is blaming the weakness in gold on the fact that a "slew of positive data" from the EU 'proves' there is no crisis. However, if that data is so positive - and proclaimed so by EU's Ollie Rehn, then why did European stocks drop the most in a month. JPY strength continues to a six-week high against the USD and testing recent highs against the EUR as we posit that equity (and credit) weakness is much more about Tapering on the US deficit than any other fundamental reason. Of course, EU bonds managed small gains (illiquidity is extreme this week) even as EU stocks dropped almost across the board.

I fully expect that tens of thousands of young Americans will be visiting Yemen in the near future.

In January, the Pew Charitable Trusts published a study showing that 61 U.S. cities have an aggregate pension funding gap of $99 billion and an additional shortfall of $118 billion for retiree health benefits. These figures were widely cited by the media in the aftermath of Detroit’s bankruptcy filing. They refer to fiscal year 2009, which was the latest year with a full data set. Unfortunately, Pew’s analysis is ridiculously optimistic.

In April, according to JOLTS, there were 108K job additions. According to the NFP data, the job gain was 199K or 84% more than per JOLTS
In May, according to JOLTS, there were 109K jobs additions. According to the NFP data, the job gain was 176K or 62% more than per JOLTS
In June, according to JOLTS, there were 120K jobs additions. According to the NFP data, the job gain was 188K or 57% more than per JOLTS
Adding across for all of 2013, JOLTS would have us know that only 837K jobs were added (or 140K per month average). Compare this to the 1,185K new jobs according to the Establishment Survey (198K per month average).

-> A 42% difference!

With the better-than-expected trade deficit confirming Taper is closer and IBM (following Credit Suisse downgrade) weighing on the Dow (knocking 32 points off), US equity markets are struggling this morning. Treasuries are leaking higher in yield and gold, silver, and oil are all sliding quckly post the data this morning. Perhaps most interesting is the deja vu underperformance of the high-yield credit and Japanese stock markets recently as JPY carry unwinds (a la Taper tantrum) re-emerge (and US equities - as they did the last time - are the last to get the joke).

Better to engineer a mini-crisis while you're still in control than let a crisis you can't control run away from you. One of the most widespread misconceptions about the Federal Reserve is that its policies are based solely on economic data and models. This misconception is not accidental but the result of carefully managed public relations: The Fed fosters a public image of dispassionate experts working econometric magic that mere mortals (i.e. non-PhDs in Economics) cannot possibly understand. The reality is the Fed is as much a political and PR machine as it is a financial institution.

Embassy evacuations are so last week. In an apparent escalation of the threat level to some unspecified color, earlier today the U.S. Air Force flew some American personnel out of Sanaa, Yemen, the Pentagon said, as the United States told its citizens to leave the country and ordered the evacuation of non-essential government staff "because of a terror threat." Reuters quotes Pentagon spokesman George Little who said in a statement  that "in response to a request from the U.S. State Department, early this morning the U.S. Air Force transported personnel out of Sanaa, Yemen, as part of a reduction in emergency personnel."  He did not specify which types of personnel were involved or where they were taken. "The U.S. Department of Defense continues to have personnel on the ground in Yemen to support the U.S. State Department and monitor the security situation," the statement said.

With Italy's sovereign bond yields hovering at 3 year lows, one could be forgiven for falling for the constant stream of gibberish from EU leaders that the worst is over. However, aside from the 'promised' OMT foot on the wind-pipe of non-domestic bond vigilantes (fighting an inexorable demand from self-referential banks and pension funds bidding for BTPs), the situation remains bad at best and in terms of debt-to-GDP, the worst since 1925 when Mussoilini was proclaimed fascist dictator. With Letta and his allies forming the 64th cabinet since WWII (and 27th since 1980) his lifespan seems limited to change anything and with Italy accounting for 16.5% of the EU's GDP (and forecast to contract 1.9% next year) - the current real GDP is smaller now than in 2001. Attempts to revive growth are about to be thrown into tumult once again as Berlusconi's party threatens mass resignation. As we noted last night, do not be fooled by the apparent tranquility in Europe.

If there was any doubt that the taper would take place shortly, it can be wiped out following the just released June international trade data, which showed a surge in exports to a record high $191.2 billion, an increase of $4.1 billion compared to May, even as imports declined by $5.8 billion to $225.4 billion, resulting in a trade deficit of just $34.2 billion, or 22.5% lower compared to the $44.1 billion in May, which is the lowest trade deficit since October 2009.  It is also the biggest beat to expectations of -$43.5 billion since March 2005. Whether this plunge in the deficit was the result of the new GDP methodology is unknown, however the resulting surge in revised Q2 GDP following this bean-counting addition to the last month of Q2, means that the economy grew even more than expected and that the Fed's tapering course is now assured. It also means Q3 GDP based on July trade data will be dragged down as there is no way this surge in the collapsing deficit can be sustained.

Bilderberg Approved!

The chart below, showing the distinct seasonal pattern in American exercise activity, with a summer (May-September) peak among those who train for 30 minutes at least 3 times per week, is not surprising. What is surprising is the near uniform 1% decline in working out Americans in 2013 compared to 2012. Why the pervasive behavioral change? Has the Fed's QE 3 launch in December 2012, in addition to once again locking up markets in a centrally-planned vice, also imposed a regime of quantitative eating, as more Americans focus on their E-Trade accounts with the associated sedentary lifestyle, instead of being engaged in healthy activities? Is Bernanke to blame for the next health crisis? Inquiring minds want to know.

Frequent readers are aware that one of our favorite topics is forensic market evidence confirming early release of market moving data to select "buyers" of said data, who then can trade ahead of the crowd and make illegal profits. The most recent example of just this took place last Friday when someone or something was leaked the non-farm payroll data as much as three second early. But while various third party profit-seeking intermediaries such as Deutsche Boerse's MNI, UMichigan consumer confidence and others have acknowledged to presell early dissemination of specialized data to subscribers such as well-paying high frequency traders, at least government data was said to be exempt from such a profit motive. At least until now: the WSJ reports that the FBI "has discovered vulnerabilities in the government's system for preventing market-moving economic reports from leaking to traders before public release. Law-enforcement officials found "a number of operational vulnerabilities" involving "black boxes" used by several departments to control the release of sensitive economic data such as the monthly unemployment rate, according to a report by the inspector general at the Commerce Department."

• Washington Post Company Chairman and CEO Donald Graham talks about the sale, what it means for the future of The Post (WaPo)
• Private-equity firms are adding debt to companies they own to fund payouts to themselves at a record pace (WSJ)
• U.S., U.K. Urge Citizens to Leave Yemen (WSJ)
• India Names Rajan Central Bank Governor as Rupee Plunges (BBG)
• Family Offices Chasing Wealthy’s $46 Trillion in Assets (BBG)
• UK 'bad bank' repays $2.9 billion to taxpayers in first half (Reuters)
• Sony rebuffs Daniel Loeb’s push for entertainment spin-off (FT)
• Public Pensions Up 12% Get Most in 2 Years as Stocks Soar (BBG)
• Hidden Billionaire Found With Food Fortune in California (BBG)
• Fonterra under fire over milk scare; more product recalls (Reuters)
• Crédit Agricole Profit Rises After Greek  (WSJ)

Bullish on one, no so much on the other. 

The summer doldrums continue. Overnight news included an expected 25 bps rate cut in Australia to a new record low of 2.50%, although the statement surprised by not retaining its expected dovish outlook. Perhaps this is due to the PBOC finally folding and despite raging for weeks that it was dead serious about its tightening experiment, injected another CNY12 billion in its banks via 7-day reverse repos at 4.0% compared to the previous, July 30 CNY14 billion 7 day injection at 4.40%. The Chinese central bank came, saw, and didn't like what it found in the Chinese interbank liquidity situation. Whether and how this will change the Politburo's reform agenda, and whether the provided liquidity will do much if anything, remains to be seen. Elsewhere, in Europe, German factory orders soared 3.8% on expectations of +1.0%, however all driven by Paris airshow orders which boosted bulk orders, and without which orders would have fallen -0.7%. The UK upward momentum continues with Industrial Production's turn now to soar to the highest since January 2011, while Italian GDP declined less than expected, dropping -0.2%, on expectations of a -0.4% slide. In other words Europe continues to rep and warrant that it does not need any assistance from the ECB despite a complete lock up in private lending and credit creation. Good luck with all that.