Archive - Sep 12, 2013

For the right answer, we look to the past....

It started early this morning as Asia really went to bed - when gold markets were temporariliy halted. Someone decided that was the perfect time to sneak a few thousand contracts through the futures market (and clearly has no fiduciary duty to a client for best execution). As the US day-session opened, it was silver's turn totake a hiding (and gold less so that time); and then into the close, with both precious metals (and copper) heading towards their lows, Silver nose-dived (now -8% on the week) and its worst day in almost 3 months. Away from precious metals, Oil surged back over $109 as Syria chatter hotted up again (from Assad this time), the USD slid further (though ended flat on the day after an opening dump), and Treasuries shrugged off early gains to close red even as stocks closed lower (despite a late-day ramp effort) - breaking the streak and stunning a few TV anchors as VIX-slam and the 'short squeeze' seems over for now.

It will likely come as no surprise but the political one-up-manship continues as the Obama White House try to rescue themselves from a face-melting Putin Op-Ed... As Politico reports, WH press secretary Jay Carney stated: “If we were to see a situation unfold where Assad were to give up his chemical weapons to international supervision that would be an enormous accomplishment ... would be due to the decisions made by the Russian leadership but also the decisions made by the United States, by the president, to take the approach he has taken in response to the horrifying use of chemical weapons on his own people." Feeling the need to make one more jab at the Russians, Carney added, "The United States, in part because it is an exceptional nation, is called upon the lead in situations like this." Indeed, that's what it felt like eh? Under control the whole time...

In the summer of 1956, Egyptian president Gamal Abdel Nasser nationalized the Suez Canal, sparking a worldwide crisis. Britain was a major stakeholder in the canal, and almost immediately, the British government put together a small coalition consisting of the UK, France, and Israel to regain Western control. Their subsequent military action, however, greatly displeased the US government. And Uncle Sam quickly asserted its new role as the world’s superpower. But to anyone paying attention, this status has waned. Asia is rising. Major centers of wealth and power have grown around the world. US finances are desolate. And its currency is now widely reviled by foreign governments. But US politicians have completely ignored this trend over the last decade. They spend and act as if US global dominance is an endless river. With Syria, though, the US may have finally reached its Suez moment.

Moments ago the Treasury reported its deficit for the month of August, which was $148 billion, slightly less than the $150 billion expected. More importantly, it was over 22% less than the deficit from August 2012 when it was $191 billion. And that, in a nutshell, is the main reason why the Fed has no choice but to taper. What the chart below shows is the cumulative deficit of the US for fiscal 2012 and 2013. What becomes immediately obvious is that with the total deficit Year to Date of $755.3 billion running 35% below the $1,165 billion from a year ago, the Fed has far less room to monetize gross issuance.

As Angela Merkel prepares for her third term - in whatever odd coalition that lurches from the election - the following four charts may surprise many that believe in the core European nations' dominance uber alles. As Bloomberg's Niraj Shah notes, Merkel may find rebalancing the German economy, as its reliance on exports increases, harder than ever. The low levels of growth, high trade balances, excepotionally low consumption and homeownership, and growing "shadow" economy all point to a European core that is far from the beacon of stability so many assume it to be.

Guess what "stabilizing" event took place almost exactly one hundred years ago, in 1913.

We are sure this conversation went very well... and now the press conference (and Q&A hopefully)...

*U.S. `GRATEFUL' FOR RUSSIA PUTTING PLAN FORWARD, KERRY SAYS
*`WE DO BELIEVE THERE IS A WAY TO GET THIS DONE,' KERRY SAYS
*U.S. HAS PUT TOGETHER ITS OWN PROPOSALS, KERRY SAYS

While Spain is the European nation making all the headlines with regard its housing market collapse, Italy has quietly been experiencing its own decline. As Bloomberg notes, however, Italy shows no sign of stopping as falling prices may not be enough to stem a decline in Italian home purchases as the country's biggest group of buyers - those aged 30 to 40 - is set to shrink until the end of the decade. As the chart below indicates, housing transactions have followed the growth and contraction of this important 'buyers group' as it has plunged by more than 1 million people since 2005 (and is set to drop to only 8.3 million by 2020) and prices are set to follow. Of course, officials proclaim that prices have dropped enough to trigger a rise in purchases (for the first time since 2006); but, this runs counter to the more-than-decade-long demographic trend. But apart from that, Europe is recovering...

As if the "developed" world did not have enough things to worry about, moments ago VOA's Steve Herman reported that the radioactive problem in Japan, the country hosting the 2020 summer olympics, continues to deteriorate uncontrollably, and citing Jiji, said that Tepco revealed tritium levels in the Fukushima groundwater have just surged to a new high.

While hardly the spectacular 10 Year reopening from yesterday, today's 30 Years reopening of the RC4 Cusip concluded the weekly issuance with solid demand for today's $13 billion in long-end paper. Printing at a yield of 3.820%, the auction priced through the 1pm When Issued of 3.83%. Perhaps a reason for this is that the yield, like yesterday, was the highest since July 2011, and while the 2.40 Bid To Cover was below the TTM average of 2.51, it was a notable improvement from the deplorable 2.11 in August. The internals saw the Directs stepping up, just like yesterday, and taking down 20.6%, above the 13.8% average, leaving 37.7% for Indirects and 41.7% for Dealers  - hardly notable.

If there’s one country in the world that you might not think would be at the top of the outsourcing list and the place to send orders to be fulfilled from the West, it would probably have to be North Korea. The world’s most closed economy, that Communist dictatorship.

USDJPY has been sliding (JPY strength) the last few days even as US equites have pushed higher. Carry-fueled exuberance has been replaced by short-squeeze and VIX (hedge) unwinds as ammo but yesterday saw VIX converge and shorts underperformance at extremes. The performance so far this moring has been weak for stocks. Very low volume is rising as we fade lower and retrace the entire late-day ramp idiocy of yesterday. USDJPY at 99.00 seems the line in the sand and with WTI pushing higher (back above $109) as Syria grows louder and more emboldened is not helping.

In the wake of President Barack Obama's change of tack from a strike on Syria, the threat of war has not dissolved (and is growing louder with Syria's seeming rebuffs this morning). The idea that this imbroglio will somehow disappear is certainly one that Obama is considering. But the Russians will not want that to happen. They do not want to let Obama off the hook and their view is that he will not act. Against this backdrop, they can appear to be the nemesis of the United States, its equal in power and its superior in cunning and diplomacy. This is the game to watch. It is not ending but still very much evolving.

Investors need to stop listening to the happy talk coming from the economists, and start focusing on what banks and other lenders are saying and doing operationally to adjust for the mortgage market of 2014 and beyond.