Archive - Aug 2013

Following yet another rout in Asia overnight, which since shifted over to Europe, US equity futures have stabilized as a result of a modest buying/short-covering spree in the 10 Year which after threatening to blow out in the 2.90% range and above, instead fell back to 2.81%. Yet algos appear confused by the seeming USD weakness in the past few hours (EURUSD just briefly rose over 1.34) and instead of ploughing head first into stock futures have only modestly bid them up and are keeping the DJIA futs just above the sacred to the vacuum tube world 15,000 mark. A lower USDJPY (heavily correlated to the ES) did not help, after it was pushed south by more comments out of Japan that a sales tax hike is inevitable which then also means a lower budget deficit, less monetization, less Japanese QE and all the other waterfall effect the US Fed is slogging through. Keep an eye on the 10 Year and on the USD: which signal wins out will determine whether equities rise or fall, and with speculation about what tomorrow's minutes bring rife, it is anybody's bet whether we get the 10th red close out of 12 in the S&P500.

Numbers, Numbers Everywhere...are any true?

UPDATE 2: India's Sensex -20.3% YTD in USD terms (bear market)

UPDATE 1: USDINR breaks above 64.00 (20% devaluation in 3 months)

Hot money outflows continue to crush most of Asia's currencies this evening led by Indonesia's Rupiah (-1.7%) and Indian Rupee (-1% to a new record low). From the Won to the Ringgit, the USD is bid and now trades at its strongest relative to Asian FX in 13 months. Equity markets are not faring any better as that leveraged carry is eliminated. Indonesia's Jakarta stock index is down 4.66% today (-12.4% From Thursday's close); India's Sensex is -1.6% today (-7.2% From Thursday's close) with Thailand and China's Hang Seng close behind with losses over 1.5% on the day. Even the Nikkei (in spite of JPY weakness) has given back all its early gains (after getting back to even from US day session futures losses). JGBs are modestly bid but EM bonds are getting slammed (India's 10Y +23bps to new 12-year high yield of 9.47%). But apart from all that, the markets are fine...

Thanks to more documents leaked by Edward Snowden, this time to the Washington Post, we learned last week that a secret May 2012 internal audit by the NSA revealed 2,776 incidents of “unauthorized” collection of information on American citizens over the previous 12 months. They are routinely breaking their own rules and covering it up. However, although the numbers of Americans who have had their information intercepted in violation of NSA’s own rules seems large, it is actually miniscule compared to the huge volume of our communications they intercept in total! Though it made for a sensational headline last week, the fact is these 2,776 “violations” over the course of one year are completely irrelevant. The millions and millions of “authorized” intercepts of our communications are all illegal -- except for the very few carried out in pursuit of a validly-issued search warrant in accordance with the Fourth Amendment. That is the real story.

The story of the German Finance Ministry stating Bitcoin is essentially “legal tender” has been making the rounds all over the virtual currency and technology world this morning and for good reason. This is a very, very big deal. Not just because some bureaucrat seemingly “legitimizes” the crypto-currency, but because it is the first commonsense approach from a major economy to-date. While the U.S. government runs around like a chicken with its head cut off, issuing subpoenas and launching Senate investigations on Bitcoin, Germany is merely accepting the obvious. A lot of people will state this is merely a veiled move of support in order to make sure the government can install a system of taxation on Bitcoin. While that is no doubt part of it, do not underestimate Mr. Schaeffler quoting Hayek. More than anything else, we believe this represents a psychological and cultural step change toward the realities of the future. A more decentralized and freer world.

It's sad to see that Fascism 101 is alive and well in the UK. And that free speech is about to be dead and buried everywhere.

While it appears to be increasingly likely (odds) that the Fed will Sept-Taper (desperate to use economic data to cover the fact that they are cornered due to deficits, sentiment, and technicals), in the lead-up to the next FOMC meeting on September 17-18, as Stone McCarthy notes, there are some significant developments regarding the outlook for the Fed and monetary policy between then and and now that everyone should be paying attention to...

“We have to turn the page on the bubble-and-bust mentality that created this mess,” President Obama stated authoritatively in his weekend radio address... but do not get too excited by the possibility of a real end to the Keynesian experiment and a return to 'free' markets for the President, in his oh-so-not-trying-to-start-a-class-warfare-battle way, blames bubbles not on Central banks (who have done "an outstanding job") but on the skewed distribution of income. As Bloomberg reports, Obama states “When wealth concentrates at the very top, it can inflate unstable bubbles that threaten the economy." The problem with his way of thinking is best described by the status quo defender Sarah Bloom Raskin who offered up this insight into what the manipulation of market interest rates gives us, "asset bubbles are a feature of our financial landscape." So there it is, a feature (not a bug) that the President wants to get rid of (and yet wants to maintain the illusion that unrealized profit (and debt) is wealth).

If you want to track how close we are to the next financial collapse, there is one number that you need to be watching above all others.  The number that we are talking about is the yield on 10 year U.S. Treasuries, because it affects thousands of other interest rates in our financial system.  When the yield on 10 year U.S. Treasuries goes up, that is bad for the U.S. economy because it pushes long-term interest rates up.  When interest rates rise, it constricts the flow of credit, and a healthy flow of credit is absolutely essential to the debt-based system that we live in. 

With the Fed set to begin tapering its "credit creation" or rather enabling, through monetization, of public debt, one would think that US commercial banks, after four years of QE, are finally ready to pick up the pieces and open the lending spigots. One would be wrong.

Everbright Securities - already banned from raising fresh funds due to ongoing investigations - has 'scapegoated' a system malfunction for its causing a 5.6% instantaneous spike in the Chinese stock market on Friday morning. However, while they assure investors that this was 'not' human error, the FT notes, analysts said the trading error was a sign of the industry’s shortcomings as it tried to shift from its old model of managing IPOs and retail sales towards more sophisticated operations such as ETFs, "they don't really have the talent pools or the systems to deal with this new, innovative type of business." However, it didn't take long for the brokerage to screw up yet again by apologizing Monday for 'mistakenly' selling 10Y Chinese government bonds at 25bps above market yields. But apart from that, Everbright seems tip-top, though one analyst familiar with the sector summed it up perfectly we suspect - "the whole system is still pretty incapable."

Over the weekend we posted an in-depth narrative of what may happen in a theoretical worst case scenario in Fukushima, one in which the government continues to do nothing and pretends all is well, and where the end casualties are millions of innocent Japanese (and other) citizens, whose only crime is believing their government. Sadly, with every passing day the theoretical is becoming all too real, and moments ago reality struck again, when the Nikkei newspaper reported that readings of tritium in seawater taken from the bay near the crippled Fukushima nuclear plant has shown 4700 becquerels per liter. This was the highest tritium level in the measurement history. It gets better: Earlier, Tepco admitted that an estimated 20 to 40 trillion becquerels of tritium may have flowed into the Pacific Ocean since the nuclear disaster.

On July 30, when FERC announced that it had agreed to resolve it allegations of JPMorgan manipulation of the energy market for a $410 million fine, with the bank neither admitting nor denying guilt, we posited that the only question on Jamie Dimon's mind was whether to pay the fine from petty cash or just to charge it on his corporate Amex. Three weeks later he may have some other questions swirling in his head, such as "whose Christmas lobbying stocking did I not fill with campaign donations?" after the WSJ reported that it is no longer FERC, but the DOJ itself, led by Preet Bharara, which is investigating whether JPM manipulated energy markets. Ironically, this is a deja vu of the SAC take down by the same Bharara, when a few months after SAC settled with the SEC it was shocked to be crushed by the Department of Justice which pulled an "Arthur Anderson" on it and for all intents and purposes shut it down (although with nobody sent to prison). It remains to be seen if Bharara will have the balls to take this prosecution to the next level and whether after he made SAC into Arthur Anderson, he will make JPMorgan into the New Normal's Enron and whether Jamie Dimon or Blythe Masters will be the next Lay and/or Skilling. One can hope.

With Greek haircuts likely (or Cyprus-style bail-ins), Merkel elections (and the potential for less positive coalitions and post-election 'sternness'), and the possibility for the German court to curtail plans for OMT; there is plenty to  remove the 'magic' that is supporting Europe's market 'recovery'. However one topic not often discussed is the ongoing surge in people seeking refuge in EU countries from North Africa and the Middle East. Countries such as Greece or Italy that make up the European Union's southern border have long struggled to deal with flows of refugees from across the Mediterranean. The issue, as Stratfor notes, has been magnified by high unemployment rates in destination countries, where social security systems are strained and anti-immigrant sentiment is high. However, the combination of continued northern flows of European migrants, the increase in asylum applications and the spread of the European economic crisis appears primed to weaken some of the achievements Europe has seen in integration.

So let's pretend for the moment that the Federal Reserve gets everything it has stated it wants.  And even further: that Washington, D.C. gets everything it wants, too. The credit markets are repaired, and massive new loan growth flows out the door.  Loans are made to businesses that hire gobs of new people.  Consumers borrow and borrow some more to go to school and buy homes, cars, and gadgets. Inflation remains low and job growth explodes.  Tax receipts climb and the deficit falls.  The stock market goes higher and higher, gold falls and then falls some more, as confidence in the system, its masters, and its institutions grows. The Fed wins and D.C. wins. But in reality, we all lose. It's all just a matter of timing (and un-sustainability).