Archive - Aug 8, 2013

As the Greek Prime Minister, Antonis Samaras, visits the US to promote his nation as a "bastion of stability" in the eastern Mediterranean, things appear to be going from worst to worster in his nation. While 65% youth unemployment is a large and scary enough data point, and Greeks are in open revolt against tax collectors, the uproar over Troika's current demands to lift a ban prohibiting banks from confiscating homes is growing. From the people to the politicians, anger is brewing over the lifting of the ban but the banks (already mired in 27% default rates) are behind the decision to help recapitalize themselves (and are refusing to restructure loans). However, given that Greece has already used 75% of its bank bailout fund and that repossessing and auctioning homes (potentially based on 'social criteria') could cut home prices 12 to 21%... not exactly going to help bank balance sheets; and it would seem Greece will need more caves.

The confused looks on traders faces is the "Taper-On" reaction in stocks (after celeberating last night's false Chinese trade data) as the USD loses steam. Critically, the USD weakness (more usually associated with Taper-off (print-moar-on) is indicative of the ongoing collapse in the JPY-carry trade once again that is gaining momentum as data (and technicals) prompt a Taper sooner than later. US equities are starting to catch down to foreign stocks (and domestic credit), Treasuries are bid (but the Taper?) on safe-haven buying, and gold and silver are spiking as the USD comes under attack.

There is literally no evidence that printing money creates jobs. Look at Japan, they have and continue to maintain QE efforts equal to 40+% of their GDP and unemployment hasn’t budged in 20 years. The UK has engaged in QE equal to over 20% of GDP with no success.

For 50 years, equity markets exuberantly rose relative to Federal Reserve Assets. As post-WWII 'monopoly' production and credit expansion started to ebb (and bubbles were blown) so equity markets began to oscillate at 15 to 20 times their relative value from 1950. However, as the chart below shows, the entire 60 years of history preceding the 2008/9 collapse has been erased as a regime with the very clear picture that the Federal Reserve and the so-called 'US Equity Market' now tied at the hip. No matter how cognitively dissonant one remains that correlation is not causation; and no matter how many BTFATH newsletters one has to sell; after 60 years of moving from the lower-left-to-the-upper-right, something 'changed' when the Fed started printing money.

There is a reason why Italy keeps bailing out Monte Paschi, Italy's third largest, most scandal-ridden and most insolvent bank not to mention the oldest in the world, again and again and again, and which is currently demanding yet another bailout. The reason is presented in the chart below which shows the amount of Italian bonds held by the Italian bank. According to yesterday's earnings release, BMPS' Italian bond holdings just hit an all time high with Monte Paschi buying over €3 billion in Italian sovereign bonds in Q2 alone.

President Obama recently stopped in Phoenix to deliver his latest diatribe on how he is going to fix the economy.  Yes, that is correct, another round of "campaign speeches" that, as has been the hallmark of this Administration to date, have generally wound up mired in an abyss of a broken congressional system.  What really struck me, however, was his comprehensive plan designed to further boost the housing market. Another housing bailout program is the last thing we need. It's time to stop trying to fix what is broken by trying to cure the symptoms rather than the disease.

While the likes of PIMCO, BlackRock, DoubleLine, and Wells Fargo are major RMBS holders, their reasons for seeking a court order to block Richmond, California's Eminent Domain seizure of mortgages are applicable (and should be worrisome) for all US citizens. As we have noted previously, the asset managers warn that the Mortgage Resolution Partners actions will "seriously harm average Americans, including pension members, other retirees and individual savers through a brazen scheme to abuse government powers for its own profit." While the Richmond Mayor stands by her decision, the investors argue that this plan is unconstitutional and discriminatory - sounds just about right in our new normal.

While the utility of initial claims data in a regime dominated by 70% retention of part-time workers and in which even the Fed says the distortion of the labor force participation rate makes unemployment numbers skewed to the downside, those who follow the weekly claims number will be happy (or maybe sad) to learn that there were 333K new initial claims filed in the week ended August 3, just 2K below expectations and 5K above last week's upward revised 328K (from 326K). No states claims were estimated in the past week the DOL reported. The good news: the four-week average fell to the lowest since November 2007. The bad news: this number is hardly horrible enough to send futures soaring.

RIP Greekovery.

From Bill Gross: "Capitalism depends on the successful offering and capture of carry in its multiple forms. If capitalism is faltering (recession) in developed/developing economies and yields are close to the zero bound, then portfolios should have less carry than before. If prospects are mediocre, portfolios should be overweight carry. If prospects are very bright, they should again be underweight bond carry. If we can be mindful of this, and accurately forecast it, we will be successful. This may be the most important conceptual change I have ever written about in an Investment Outlook. Readers who have stuck with this Outlook at least to this point have a scoop, if not a magic feather."

• Fukushima: "300 metric tons of contaminated water were likely leaking into the ocean daily" (WSJ)
• Unexpected strength in China trade data eases some gloom (Reuters) - actually, perfectly expected data fakery
• Pimco, BlackRock Seek to Bar California Mortgage Seizures (BBG)
• How will Amazon's Bezos change The Washington Post? (Reuters)
• Montreal Maine Railway Files for Bankruptcy After Crash (BBG)
• Fed Belongs to Everybody as Public Says It’s Our Money in Crisis (BBG)
• Local Russian TV channel broadcasts rare critical segment about Putin (Reuters)
• Loeb’s Reinsurer With No U.S. Staff Gains From Obama’s Jobs Act (BBG)
• As Berlusconi star fades, daughter Marina tipped as new leader (Reuters)
• Detroit Rattles Muni Market (WSJ)

Overnight, just as Japan was threatening to roll risk over even more (at the end of the day, or rather night, it did, sliding over 200 point bringing the two day total plunge to nearly 800 points) China reported trade numbers which were "better than expected" even though the net GDP contribution from the overall surplus was actually less than expected at $17.8 vs $27.1, which in turn pushed US futures solidly into the green. Ironically, while the China data was enough to give the US a solid green momentum it was not enough to give the China market a green close. Recall that this is the same data that forced Goldman to admit in January that "China is cooking the books"... the same data that prompted a Bank of America report analyzing the Chinese data to say the following: "One important question in investors' mind is whether we can trust the quality of these trade statistics because they seemed to be significantly distorted between October 2012 and April 2013.... we believe the quality of trade data was improved a lot. Using our adjustment method for fake trade..." Of course BofA "believes it", and it is only fitting: fake Chinese trade data to push the fake US stock market higher.