Archive - Sep 27, 2013

During a recent round-table discussion (accessible below), Marc Faber explained his asset allocation strategy and his incredulity at what the Fed is doing.

"I have around 25% in gold... and it's my insurance policy. It is important that one day when the so-called shit hits the fan - and I think the Fed is well on its way to creating that situation - you have access to your gold, that it is not taken away."

Faber goes on to discuss his lack of surprise at the Fed's un-Taper, the wealth in-equality impacts, and Asia's growing lack of faith in the USD.

Financial volatility since Federal Reserve Chairman Ben Bernanke’s announcement in May that the Fed would “taper” its monthly purchases of long-term assets has raised a global cry: “Please, Mr. Bernanke, consider conditions in our (non-US) economies when you determine when to end your quantitative-easing policy.” That is not going to happen. The Fed will decide on monetary policy for the United States based primarily on US conditions. Economic policymakers elsewhere should understand this and get ready.  All of this is just hard reality. The best way to prepare is to limit the use of credit in boom times, prevent individuals and companies from borrowing too much, and set high capital requirements for all banks and other financial institutions. The Fed surprised markets last week by deciding to maintain its quantitative-easing policy. But that underscores a larger point for non-US economies: You never know when the Fed will tighten. Get ready.

You know it's getting troubling when everyone's favorite hopium-providing financial-advisor-pitchfest channel is unable to find a silver-lining upon which to place your BTHFATH 401(k) bets. Steve Liesman unveiled the CNBC All-American Economic Survey and it was not pretty. In a nutshell, optimism is plunging and pessimism is surging as 61% are downbeat on the current state of the economy and pessimistic for the economic future.

Here are six things to ponder this weekend:

1. Inflation Debate Continues
2. The Obamacare Nightmare
3. The Disconnect Between "Main Street" and "Wall Street"
4. Payroll Number Become Even More Manipulated
5. Congress Living The High Life At The Taxpayers Expense
6. What If The "Fear Trade" Bubbles Up?

Earlier in the week we noted the spike in the cost of protecting against a technical default on US Treasuries. While well below "record" wides of 2011, a very interesting event has occurred. The cost of 1Y protection has surged higher than the 5Y protection - something we have only seen in the summer of 2011. However, this time it's different as the inversion is even greater than in 2011 - although not the most liquid instrument in the world - implying a greater chance (albeit a small probability) of a postponed payment in US Treasuries. As we noted previously, there is a way to trade this away from CDS-land.

With President Obama now on closer talking terms with Iran's President Rouhani than the Republicans, we thought the "major geopolitical shift," that this is supposed to be should be offset with a glance at the 'known' nuclear facilities that Iran possesses as the White House proceeds along its "difficult" path to "resolution" - not not regime change...

Everyone knows that politicians are merely muppets, controlled by financial and corporate interests, injected into an anachronistic legacy represenational system designed to give the person on the street some sense of nominal control over day-to-day events. And while bankers control the flow, production and cost of money, without some means of converting labor (someone else's) into capital (their own), all the money in the world would be for nothing (and the myth that debt is wealth would be extinguished). Which leaves one true controlling agent: Corporations, or as they are better known by the Supreme Court: "people." Which is why, for all those curious who really calls the shots, below we list the top 10 corporations by market cap over the past 20 years. While the landscape has changed at the very top, the premise has not. Looking to find who has been truly in control over the past two decades? Look no further.

The recent drop in WTI crude oil prices has brought out the ubiquitous "well, that's a tax cut for the US consumer" recency-biased talking-heads always looking for a silver-lining to justify something. What they fail to notice, is at $103.57, this is the highest price WTI crude oil has ever been at the end of September. The reason timing is important is the annual cycle of oil prices means comparing Summer with Winter and so on is misleading. So is the highest price ever for oil in the Fall still a positive for the economy?

With government shutdown day (now in 3-D IMAX) just four days away, some are unsure what the latest developments are in the fluid and rapidly shifting landscape of Capitol Hill. For their benefit, here is a pithy but comprehensive summary of where we stand currently.

This objective report concisely summarizes important macro events over the past week. It is not geared to push an agenda. Impartiality is necessary to avoid costly psychological traps, which all investors are prone to, such as confirmation, conservatism, and endowment biases.

Despite the late-day shenanigans that usually occur on a Friday (especially in light of the end-of-month proximity), the S&P closed red with its worst 6 day run in 5 weeks. The Nasdaq and the Russell managed to cling to unchanged as the Dow, Trannies, and S&P slid 1.3% or so on the week. Treasury yields fell for the 3rd week in a row with 5Y yields plunging 36% in that time - the biggest drop in 25 months. The USD fell 0.2% on the week with GBP and JPY strength the biggest drags. Silver and Copper ended unch after a very volatile week, gold the winner +1% and WTI -2% on the week. VIX was well bid, up 1.5 vols as the term structure cracked to the flattest in 4 months... and JCP is 'Breaking Bad'.

3:30 pm on a Friday, check. 4 days away before a possible government shutdown, check. Epic disagreement in the House over everything and anything, check. A president who can read but not really lead, check ("to you, Mr. Yellen"). So what comes next? The president takes the teleprompted podium, of course, and is about to do what he does best: blame the republicans. The only unknown: will the "middle class" people on the podium behind Obama be representative of the (non) deadbeat class whose credit cards have been cut off too?

In a world in which everyone has become an ultra-short term pathological gambler, and every outcome is a zero-sum prop bet, it was only a matter of time before someone tried to quantify the probability of the event that the market (for some inexplicable reason) is so transfixed on: the government shutdown (inexplicable, because anything more than a few day shutdown risks a full blown mutiny by the tens of millions of government workers). So without further ado, here is Nomura, with its "estimate" of a government shutdown on October 1: 40%.

As the state borrows trillions of dollars to support its Aristocracy and dependents, its debt skyrockets. The political Aristocracy expects the tax donkeys will carry a heavier burden without revolting, and the 60% "tyranny of the majority" who pay little but collect enough to get by will be wary of risking their benefits by resisting the existing political-financial kleptocracy. In terms of democracy, the tax donkeys are trapped; they can't match the tens of millions in political contributions of the top .5%, and the 60% below them will support the status quo out of fear that the alternative could be even worse. Politically, the system is unbreakable. Financially, it is unsustainable.

The perfect analogy.