Archive - Sep 15, 2013

Of course, everyone knows that one of these is a speculative asset that people will buy (and not sell) no matter how high the price on the basis that The Fed will continue to print money and subsidize 'valuations' and the other is a long-term asset to preserve wealth. But which of these assets would one expect to react to a considerably hotter-than-expected inflation print and dramatically worse-than-expected retail sales print? The answer (for all those efficient market, hyperbolic discounting types) may surprise...

Just four short months ago, the Saudi religious police said "anyone using social media sites – and especially Twitter – “has lost this world and his afterlife." This followed Saudi Arabia’s grand mufti, the kingdom’s most senior Muslim cleric, dismissing Twitter users as "fools". So it is perhaps odd that Saudi Prince Alwaleed bin Talal (who previously noted that "ethics to me are very important") announced his vociferous support ahead of its IPO as he has invested $300 million in Twitter. "With the 300 million customers they have and half a billion tweets a day, the growth potential is tremendous," Alwaleed excitedly commented adding that, he's "totally against anybody who tries to control or censor Twitter or any other social media, even if it is governments. It's a losing war." Which seems a little strange given the imam of the Grand Mosque's public TV appearance warning the Saudi people that "Twitter was a threat to national unity."

With the NSA already tracking and recording every form of communication and electronic data exchange, it would hardly come as a surprise that the final piece of the puzzle was also actively being intercepted and collected by General Keith Alexander's superspy army: money, or rather tracking the global flow thereof. Which is why we were not surprised to learn just this, following the latest report from Germany's Spiegel that "The National Security Agency (NSA) widely monitors international payments, banking and credit card transactions" and has even created an internal branch titled appropriately enough "Follow The Money" (FTM). Once collected, the data then flows into the NSA's own financial databank, called "Tracfin," which in 2011 contained 180 million records. Some 84 percent of the data is from credit card transactions. But while collecting credit card data was to be expected, what is even worse is that the NSA has also secretly planted itself in the nexus of the entire global USD-intermediated financial transactions system courtesy of SWIFT.  In other words, America's unsupervised uber spies, when not checking in on their former significant others, spend the bulk of their time tracking who is buying what, where, and with whose money.

There was good and bad news for Angela Merkel as today's exit polls from the Bavaria (GDP of $619 billion, bigger than the output of Poland or Austria) state elections - the bellwether vote ahead of next weekend's federal elections (previewed here) - were released. On one hand, the CDU's sister party, the Christian Social Union or CSU, was set to win a majority in Bavarian state elections (where the CDU does not contest the ballot), giving the incumbent a boost as she heads into the final week of her campaign before a national vote Bloomberg reports.  But the surprise of the day was the strong showing of the The Free Voters, who want Greece to exit the euro, oppose euro-area bailouts and want to trim the power of the European Union, won 8.5 percent, the ZDF projection showed. It is precisely the ascent of anti-Euro powers that could upset the final election "arithmetic" in jeopardy. As Reuters reports, "a new anti-euro party could enter Germany's national parliament after an election next week, pollsters said on Sunday, potentially upsetting Chancellor Angela Merkel's hopes of returning to power with her current coalition partner."

US Fed's exit plan poses a critical dilemma and underscores important contradictions.  The calendar says Europe should be talking about exits too--as aid packages for Spanish banks, and Ireland and Portugal are to wind down in the coming year--yet more rather than less assistance may be neeed.  

The froth is back. As we noted yesterday, corporate leverage has never been higher - higher now than when the Fed warned of froth, and as the BIS (following their "party's over" rant 3 months ago) former chief economist now warns, "this looks like to me like 2007 all over again, but even worse." The share of "leveraged loans" or extreme forms of credit risk, used by the poorest corporate borrowers, has soared to an all-time high of 45% - 10 percentage points higher than at the peak of the crisis in 2007. As The Telegraph reports, ex-BIS Chief Economist William White exclaims, "All the previous imbalances are still there. Total public and private debt levels are 30pc higher as a share of GDP in the advanced economies than they were then, and we have added a whole new problem with bubbles in emerging markets that are ending in a boom-bust cycle." Crucially, the BIS warns, nobody knows how far global borrowing costs will rise as the Fed tightens or “how disorderly the process might be... the challenge is to be prepared." This means, in their view, "avoiding the tempatation to believe the market will remain liquid under stress - the illusion of liquidity."

Recent problems in Asia ex-Japan appear solvable. But the time for reform is now if the region's to take the next leap forward in its economic development.

Confused why despite numerous rounds of bailouts, a sovereign debt restructuring, an imminent bail-in, and years of so-called austerity, Greek debt is once again "Rising At Its Fastest Rate Since March 2010"? Maybe anecdotes such as the following will put the big picture in context: as reported by the BBC, Greek civil servants will no longer have an additional six days of extra holidays each year. What was the reason for the nearly full week of vacation time? Why using a computer. "The privilege was granted in 1989 to all who worked on a computer for more than five hours a day. However, Reform Minister Kyriakos Mitsotakis, speaking on Greek TV, said the custom "belonged to another era." What is shocking is that nearly four years after the first Greek bailout of May 2010, this custom from "another era" was still active and public workers were happy to partake in its generosity. Ironically, since now the perks from using a computer are no longer there, watch the Greek economy flounder even faster as instead of playing solitaire, Greek finmin workers migrate to playing tic-tac-toe on paper, not to mention using an Abacus to calculate just how much better than the IMF expectations, Greek 2022 debt/GDP will end up being.

While Obama and Kerry were both backpedalling furiously even as they were taking full credit for pulling Syria from the brink of war where they took it, it was Syria who was rejoicing: Syria's Minister for National Reconciliation said on Sunday that the chemical weapons agreement between Russia and the United States was a "victory" for Damascus, won by its Russian allies, and had taken away the pretext for war. U.S. Secretary of State John Kerry and Russian Foreign Minister Sergei Lavrov called on Saturday in Geneva on Syrian President Bashar al-Assad to account for his chemical weapons within a week. The deal may avert U.S. military strikes.

With global trigger-finger tensions still running on full blast following the recent Syrian near-war episode, the last thing the jittery world needed is yet another "test fire" of a very lethal weapon, yet that is precisely what it got just after 8:40 am on Sunday when India test fired a nuclear-capable missile, with a range of 5,000 km, capable of reaching Beijing and Europe, bringing it a step closer to production of a nuclear deterrence agent. Why is India doing this now is unclear, although it has been suggested that India is merely trying to keep up with China's growth military strength and "wants to have a viable deterrent against its larger nuclear-armed neighbor." It is also a move targeting the rapidly growing nuclear arsenal of Pakistan, which has been increasing its inventory of nuclear warheads and developing short-range, tactical nuclear weapons, raising concern about an escalating South Asian arms race, the International Institute for Strategic Studies said on Thursday. The think-tank said in a report the race with Pakistan was increasing the risk of a nuclear exchange during a conventional conflict, perhaps sparked by an act of terrorism. Or a false flag act perhaps?