Archive - Aug 2013

As the disconnect between payroll data and GDP grows, and the schrodinger reality of a non-farm-payroll print and JOLTs data increases; it will not come as a total surprise to Zero Hedge readers that Goldman Sachs has finally been forced to admit that investors have been fooled by the relative importance of jobs data. While the payrolls data has the largest financial market effect of all economic indicators (by a large margin), Jan Hatzius finds that neither payrolls (or Advance GDP) provide any incremental information about the broad strength of the economy.

Next month promises to be more volatile than this month.  Consensus views are unlikely to be challenged by the data in the week ahead.  

Nearly a month after Egypt underwent a truly embarrassing, if mostly for the US department of state, coup and days after international "mediator" US Deputy Secretary of State William Burns left Cairo, having made no headway in finding a compromise between the army-installed government and supporters of deposed Islamist president Mohammed Morsi, it appears that the catalyst to push the already unstable social situation into a state of borderline civil war, is about to be unleashed following a Reuters report that "Egyptian police are expected to start taking action early on Monday against supporters of deposed President Mohamed Mursi who are gathered in protest camps in Cairo, security and government sources said on Sunday, a move which could trigger more bloodshed."

The origin of today’s monetary policy of course lies in Keynesian economics, and Keynes was quite explicit that monetary authorities should intentionally use deception as a primary tool. He spoke of the need to gull workers into thinking that wages were going up even if net of inflation they were going down. At least he had a sense of humor about it, calling a central bank a "green cheese factory" that would persuade the public to accept "green cheese" (newly created money) as the real thing.

As demonstrated previously, there is a direct correlation between the excess reserves created by the Fed, and the cash holdings of domestic and foreign banks (operating in the US) disclosed by the Fed's weekly H.8 statement. So with the Fed's reserves reaching new all time highs with every week courtesy of the $85 billion in monthly flow injected by the Fed some wonder where is this cash ending up. The answer: in the week ended July 31, a record $1,157 billion was parked with foreign banks in the US, while "just" $1,112 of the Fed's created reserves was allocated to US banks.

Back in April 2012, Zero Hedge pointed out something rather disturbing for the European banking sector and defenders of the European monetary myth: the "aggregate shortfall of required stable funding Is €2.78 trillion" which was the number estimated by the BIS' Basel III rules needed to return to some semblance of balance sheet stability in Europe. More importantly, this was a number so big, it was obvious that there was only one way to deal with it: cover it up deeply under the rug and pray it never reemerged. What happened next was inevitable: Basel III's implementation was delayed as there was no way Europe's banks could satisfy their deleveraging requirements, while the actual capital shortfall hole became bigger and bigger. Today, 16 months later, the FT discovers what Zero Hedge readers knew long ago in "Eurozone banks need to shed €3.2tn in assets to meet Basel III." In other words, not only has Europe not fixed anything in the past year, but the liquidity tsunami injected by the central banks merely taped over the epic capital shortfall that just got epic-er, increasing from €2.8 trillion to €3.2 trillion, an increase of half a trillion to over $4 trillion in one short year.

While Janet Yellen's chances of becoming the next head of the Fed are plunging, those of Larry Summers are soaring, and it may be all due to a simple Freudian slip by the president. For those who missed, below is the full transcript of Obama's Friday's Q&A on the topic of who will succeed Ben Bernanke. Perhaps the most notable component: the president's pre-slipped reference to Janet Yellen's gender. Because if "he" occupies so little of Obama's attention, then what really are "his" chances of becoming the most important woman in the history of the world? To wit: "I have a range of outstanding candidates. You've mentioned two of them — Mr. Summers and Mr. Yellen — Ms. Yellen. And they're both terrific people."

The UK economy is recovery at its best rate since 2010 today with figures that are released by the British government via the Office for National Statistics (ONS).

Just too many coincidences.

I would be concerned too...

No one can predict accurately at what point slower growth will start producing political turmoil on a scale that’s unprecedented in the China that Deng made, what the magic number is, or even whether there’s an iron connection between economic and political crises. Yet the increase in capital flight from China and soaring applications for American and European residential visas by well-heeled Chinese suggest that the elite is hedging its bets. Some may be overstating things, but the rebalancing camp is too sanguine.This much is certain: China’s leaders are in uncharted waters, and because of the diminishing utility of the established formula for rapid growth their maps may be of questionable value.

Last week we witnessed the almost unprecedented veto intervention in the Apple-Samsung patent debate. Last night, after the market had closed, the hits kept coming for the South Korean company as the Cupertino crushed showed the ITC that Samsung's infringements should mean a sales and import ban in the US. As Reuters reports, the decision is likely to inflame passions in the long-running dispute since the decision will now - once again - go to President Barack Obama, who has 60 days to review them and decide whether to side with the American company that 'donated' $16.5mm to his campaign or the South Korean market-share 'stealer' that only gave $3.7 million in offerings at the altar of hope-and-change. While some are calling foul so soon after the veto, with South Korean government officials 'observing' closely, even the US Trade Representative is against the proposed Samsung ban, citing "competitive conditions and the effect on the US consumer."

There is a known tendency for JPY to appreciate in August. As Citi's FX Technicals group notes, this tendency is particularly strong when the differential between Japanese and US policy rates is less than 2%, and given the current rate gap, JPY is highly likely to rise again this August. USD selling for JPY by Japanese exporters puts larger downward pressure on USD in August than usual, partly since trading is thin because market players are on vacation. However, in recent years the income account surplus has had a larger impact and along with the major Treasury auctions (interest payments and redemptions) there is an appreciable fundamental flow. In addition, the much-watched technicals (considerably more widely followed in Asian FX markets than the US) are not supportive (of either JPY weakness of Nikkei strength) and given the massively crowded trade, for a foreigner who has purchased the Nikkei on a hedged basis (Long Nikkei and Long USD JPY) this trade could become very painful.

In what is as close to saying 'trust us, we're from the government,' as it gets; President Obama's traitor-identifying, blame-pointing, cover-your-assing speech on Friday has done nothing to end the supposedly "critical NSA counter-terrorism tool," from being used on American citizens. People of America should be relieved, as the President stated unequivocally that he is "comfortable that the program is not being abused." If only American citizens were able to see all the moving pieces, Obama implied, they would say "you know what? These [government] folks are following the law," but because the program remains classified, it remains impossible to know what is really going on. Reassuring rhetoric aside, as the AP notes, Obama offered these inspiring words regarding the ongoing concerns that law-abiding citizens may still have beyond his assurances: "I would be worried too, if I weren't inside the government." Another teleprompter-less glimpse of what he really thinks? Perhaps; but for now, the NSA will continue to sweep phone records of all Americans with the possibility of creating similar databases of credit card transactions, hotel records, and Internet searches.

The Department of Justice’s (DOJ) latest civil suit against Bank of America (B of A) is an embarrassment of tragic proportions on multiple dimensions. We're "only" going to explore seven of its epic fails here.  The two most obvious fails (except to most of the media, which failed to mention either) are that the DOJ has once again refused to prosecute either the elite bankers or bank that committed what the DOJ describes as massive frauds and that the DOJ has refused to bring even a civil suit against the senior officers of the banks despite filing a complaint that alleges facts showing that those officers committed multiple felonies that made them wealthy by causing massive harm to others.  Those two fails should have been the lead in every article about the civil suit. There are many more...