Archive - Sep 2013

The cardinal rule of investing – and life, frankly – is, according to ConvergEx's Nick Colas, "When the facts change, you have to change your point of view."  The Fed’s decision to maintain its current pace of bond buying at yesterday’s FOMC meeting is one of those fact-changing events.  Markets were primed for a reduction, and along with a host of other flashing yellow lights that was enough to make plenty of market watchers cautious.  Yes, the Fed will eventually cut the QE tow rope if/when labor markets improve, but for now, Colas notes, they seem content to keep toting the barge and lifting the bale.  That leaves markets free to head to the bar, hopefully avoiding incarceration along the way.  Remember 1999 though, he warns, when markets ripped through Q4 because so many investors had bided their time waiting for the dot-com bubble to collapse earlier in the year?  Cue the music, because this is beginning to look like the same market setup.

When it comes to discombobulated people, IceCap's Keith Dicker notes the financial World has a bunch of them. Leading the pack during the roaring 1990s was the King of Confusion himself – Alan Greenspan. His money reign at the US Federal Reserve was highlighted by bailing out Wall Street’s biggest hedge fund, which planted the seed for the dot-com bubble. Unfortunately for the market, only the combination of retirement and hindsight allowed Mr. Greenspan to become less confused when he admitted he had found a “flaw” in his economic philosophy. Next up on the baffle scale has to be the Eurozone. The decision in 1995 to create a common currency was actually brilliant. The final watered down product - not so much. For now, as markets roll into the fall, investors, politicians, and central bankers remain just as discombobulated as ever... And if you think you are confused... Try being Ben Bernanke for a day.

Following the Fed's decision to not Taper, Turkish stocks were the world's best performing asset overnight. Jumping almost 8% today, the main Turkish stock index is now up over 26% in the last 3 weeks, back above its 200DMA and in bull-market territory as BAML notes "the Fed decision amounts to a bailout for Turkey." While the fundamental adjustment in current account imbalances remains unfinished, in the near term gross bearish positioning and the dovish FOMC decision are likely to support Turkey bonds... once again removing any pressure for a politician to make any hard decision anywhere in the world. How do you say "thank-you, Ben" in Turkish? (or Indonesian, Indian, Malaysian, or Thai?)

The Fed’s decision not to taper surprised the financial world as many believed some token amount of tapering would have been announced. Recent declines in Federal deficits afforded the Fed discretionary room. For the first time in several years it was possible to taper without infringing on the government’s ability to pay its bills. Perhaps the economy is worse than the Administration wants to let on (and it certainly is). The Fed may have felt it necessary to come out of the closet regarding this latter charade, trying to prevent another economic downturn. Just as the economy no longer responds to Fed stimulus, financial markets will eventually reach this point. Whether that occurs sooner or later is anyone’s guess, but the fraud of overvalued financial assets becomes more apparent with each injection of liquidity. Market participants should be aware of the game that is being played.

This is The System Of The World. It lays out in logical frankness how the various layers of the facade we call “democracy” and “free markets” interoperate and together create a grotesque caricature of the ideals they purport to serve and keep us all enslaved. Join us on a trip through The System.

Japan’s core CPI (which excludes perishables) surged 0.7% y/y in July, but the upturn is largely due to higher prices for energy that reflect rising import prices due the yen’s weakness. Despite global exuberance at Abe's "progress", BNP notes that there are still no signs of price growth for rent and service prices, factors behind Japan’s protracted deflation. Crucially, BNP believes that Abenomics could lead to four possible medium-term outcomes: (1) Continued deflation (35% probability), (2) Financial repression (40%), (3) High inflation (15%), and(4) Happy end to deflation via revived trend growth (10%). Furthermore, even if this happy ending scenario were to unfold, that does not mean that structural problems, like the swelling public debt and insolvent social welfare, will be headed for resolution.

When people think failed or busted Treasury bond auction, they usually imagine something out of Brazil or Russia where the government was selling obligations and nobody showed up. Of course, in the US, courtesy of the Primary Dealer system and more importantly, of a multi-trillion shadow banking system, where bonds are cash equivalent following rehypothecation and pledging for cash-equivalents with virtually no haircut, there is no risk of an auction failing in the conventional sense, at least not until Bernanke finally manages to irrevocably erode the Dollar's reserve currency status. However, that does not mean that auction's can't "fail" in a purely technical sense. Which is exactly what happened during last week's sale of 3 month Bills, when due to a "glitch" in the system not only was a key Primary Dealer locked out of the auction, forcing the US Treasury to arbitrarily reassign allotment in the parallel 6 month auction, but leading to a wild intraday mispricing in the already collateral-scarce, short term bond market.

The dance is a poem, of which each movement is a bailout...

In a tight 217-210 vote, The House voted this evening to 'taper' food stamps by $39 billion over the next decade. This bill - setting up a showdown with Senate Democrats - cuts nearly twice as much as a bill that was rejected in June, and, as USA Today reports, dramatically larger than the $4.5 billion 'trim' that was passed by the Senate earlier in the year. The bill would cause 3 million people to lose benefits while another 850,000 would see their benefits cut, according to the non-partisan Congressional Budget Office. Republicans argued that the bill would restore the program's original eligibility limits and preserve the safety net for the truly needy. The White House threatened Wednesday to veto the bill, calling food stamps one of the "nation's strongest defenses against hunger and poverty." Of course, as long as the Dow is trading at all-time highs, it doesn't really matter... since the number of people on Food stamps in the US is already greater than the population of Spain!

Just when you thought the situation in Syria was stabilizing (despite dueling op-eds), last week saw a new battle begin - dubbed "Expunging Filth". In spite of the catchy name, as the WSJ reports, an al-Qaeda spinoff (a jihadist group known as ISIS) is seizing territory across Syria from the US-backed Free Syrian Army and the Government. "It's a three-front war," a U.S. official said of the FSA rebels' fight: They face the Assad regime, forces from its Lebanese ally Hezbollah, and now the multinational jihadist ranks of ISIS. As WSJ notes, the spread of ISIS illustrates the failure of Western-backed Syrian moderates to establish authority in opposition-held parts of Syria, some of which have been under rebel control for over a year. "It's still the case that a majority of Syrians are not up for Talibanization," but given the spread of ISIS, their choices may become increasingly limited.

On Sept. 15, the last operational nuclear reactor in Japan was shut down for routine maintenance, which may leave Japan without nuclear power for the remainder of 2013. In all likelihood, restarting nuclear power will be a long, gradual process that will have only limited, regionalized impacts at first. In the meantime, Tokyo will continue to rely heavily on more expensive thermal power. The difference has meant that several utility companies have been forced to increase rates over the past several months, which are certainly impacting Abe's ability to hike taxes any further.

Speaking at Georgetown University's Business School alongside his best-bailed-out buddy BofA's CEO Brian Moynihan, Warren Buffett has some rules (or goals) for the "wealthy" that are summed up perfectly in this quote:

• *BUFFETT: RICH MUST LEARN TO LIVE ON $500 MILLION, DONATE REST
• *BUFFETT SAYS WE HAVEN'T LEARNED WELL ENOUGH HOW TO SHARE WEALTH
• *BUFFETT SAYS PEOPLE WILL CONTINUE TO MAKE MISTAKE OF GREED
• *BUFFETT: SOCIETY MUST ENSURE PEOPLE DON'T FALL TOO FAR BEHIND

We suspect more than a few of the "rich" will be calling for Mr. Bernanke to get back to work (which ironically is exactly what Buffett himself just did - calling for another term for the printer-in-chief) so they can 'share the wealth' from the poor just a little longer.

If you start at 4.2% and end at 2.1%, is that a 100% error, or "only" 50%?

Imagine for a second you're a terrorist intent on inflicting unimaginable harm on your enemy. Now let's further imagine that your enemy is the United States...

Are you ready for Janet Yellen?  Wall Street wants her, the mainstream media wants her and it appears that her confirmation would be a slam dunk.  She would be the first woman ever to chair the Federal Reserve, and her philosophy is that a little bit of inflation is actually good for an economy.  She was reportedly the architect for many of the unprecedented monetary decisions that Ben Bernanke made during his tenure, and that has many on Wall Street and in the media very excited.  Noting that we "already know that Yellen is on board with Bernanke's easy money policies", CNN recently even went so far as to publish a rabidly pro-Yellen article with this stunning headline: "Dear Mr. President: Name Yellen now!"  But after watching what a disaster Bernanke has been, do we really want more of the same?  It doesn't really matter whether she is a woman, a man, a giant lizard or a robot, the question is whether or not she is going to continue to take us down the path to ruin that Bernanke has taken us.