Archive - Aug 2013

"When things are going well people become greedy and enthusiastic, and when times are troubled, people become fearful and reticent. That’s just the wrong thing to do. Another mistake that people often make is that they compare themselves with others who are making more money than they are and conclude that they should emulate the others’ actions ... after they’ve worked. This is the source of the herd behaviour that so often gets them into trouble... As long as human nature is part of the investment environment, which it always will be, we’ll experience bubbles and crashes.... People talk about the wisdom of the free market – of the invisible hand – but there’s no free market in money today. Interest rates are not natural. They are where they are because the governments have set them at that level. Free markets optimise the allocation of resources in the long run, and administered markets distort the allocation of resources. This is not a good thing..." - Howard Marks

"The latest numbers that we have received, in particular from Germany, are encouraging, whether it's manufacturing, whether it's service activity, whether it's exports. That is heading in the right direction, but it needs to be sustained over time. And I'm crossing fingers for the eurozone..."

"Without realistic figures, a real debate on fiscal reform can’t begin”

Aren't you LOVINT it?

Russia may reinforce naval grouping in Mediterranean in response to U.S. buildup - expert http://t.co/gtOai0LqqU #Russia #interfax #news

— Interfax News (IFAX) (@IFAXnews) August 24, 2013

The 10Y Treasury yield has jumped nearly 130bp from its low point in early May. Given the tight ranges and low volatility of yields during the most of QE era, this kind of move in just over 3 months seemed stunning to some investors. Consequently, the question that has come up often recently is: what has been driving Treasury yields? As UBS' Boris Rjavinski notes, several years ago a rate strategist would give you a straightforward and predictable answer: inflationary expectations, economic growth projections, and current and future monetary policy. But now, as Rjavinksi notes, central banks and politics in the driver seat. Volatility will remain elevated as we await key messages from the Fed in September, and U.S. political calendar will start to heat up as we approach the “drop-dead” dates to fund the government and extent the dent ceiling.

Remember when Obama said it is impossible for the NSA to spy to American citizens? Well, at least one guy didn't get the memo. As AP reports, two U.S. officials said one analyst was disciplined in years past for using NSA resources to track a former spouse. The officials spoke on condition of anonymity because they were not authorized to speak publicly. Not that we blame him of course: if one has every capability to spy on anyone, certainly including exes, and there are absolutely no checks and balances to any violating behavior, then why not? Which of course goes to the root of the problem. And the other problem: if one guy has done it, all others have done it too. They just haven't been caught yet.

The challenge to the world's credit cycle comes from both ends. An increasingly sluggish growth outlook creates downward pressures on earnings and internal cash generation. The slowdown is fairly widespread. In addition, the cost of funding is on the rise. Downside skews begin to emerge in the later stages of a cycle when leverage has already increased and the cycle turns more adverse, and that is happening in Asia right now.  This is critical in our current benign default environment because the combination of highly leveraged firms, slowing GDP and rising real rates was exactly what created the spike in defaults in 2007-2009 (that only the largest monetary policy bailout in history was capable of kicking down the road).

How long will it take for the Black side of the taper to come back home?

Quick, dispassionate overview of the fx market.

Preliminary Evidence Indicates that the Syrian Government Did NOT Launch a Chemical Weapon Attack Against Its People

BREAKING. @CBSNews has learned that the Pentagon is making the initial preparations for a Cruise missile attack on Syrian government forces

— Charlie Kaye (@CharlieKayeCBS) August 23, 2013

Detroit may be on its way to becoming a ghost town, but the disappearance of homo sapiens from the streets just means the largest US bankrupt city is about to have a new master - man's formerly best friend, in the form of tens of thousands of stray dogs most of which happen to be a particularly vicious breed of pit bulls. Step aside Motown, and say hello to Dogtown.

According to the Fed, QE's aim was to drive down interest rates to unattractive levels by purchasing bonds in the market, thus encouraging participants to purchase riskier (and higher-yielding) securities. As Cornerstone's Ronnie Spence notes, this risk-seeking behavior in theory boosts asset prices (and increases the 'wealth effect'). However, when one examines what has actually happened under QE, only stock prices have followed the QE theory. In fact interest rates have only declined in periods when the Fed stopped QE. Spence points out, that the drop in rates in response to QE likely results from the plunge in equity prices that has resulted when the Fed has looked to end their QE programs. Put another way, "Taper" is a false narrative for higher rates when in fact all the 'taper' risk is in stocks (and historically traders haven't priced it in until the money actually stops flowing).

Chinese society is on the verge of a structural transformation even more profound than the long and painful project of economic rebalancing, which the Communist Party is anxiously beginning to undertake. As we recently discussed, Stratfor warns China's population is aging more rapidly than it is getting rich, giving rise to a great demographic imbalance with important implications for the Party's efforts to transform the Chinese economy and preserve its own power in the coming decade. In fact, as BofAML notes, China's working-age population peaked last year (3 years ahead of demographers' schedule) representing a major turning  point for the world's economy.