Archive - Sep 2013

Spanish bad loans rose for the fourth month in a row, surging to a new all-time high at 11.97% of total loans outstanding. With the total loans outstanding falling (as credit demand collapses in Spain's supposed 'recovery') and delinquent loans rising, the picture is set to to get worse - even as the Bank of Spain's rescue plan for real estate market is under way. Crucially though, as the chart below suggests, the spread of Spanish sovereign debt - which by now is so symbiotically-linked with the domestic financial system as to be almost inseparable - has collapsed on the back of OMT promises. Our question is - at what point does the marginal buyer of Spanish sovereign debt (i.e. Spanish banks) run out of 'cover' to soak up Spain's supply and force Draghi's hand - exposing the fallacy that OMT is?

The chart below summarizes what can only be described as an epic collapse in Jefferies' fixed-income trading revenue, which imploded by an unprecedented 88% Y/Y, and 84.5% from later quarter, to $33.1 million - the lowest since the same quarter in 2011 when the European collapse dragged everyone down, and sent Jefferies stock into the single digits over concerns about its European exposure, forcing Dick Handler to release a CUSIP by CUSIP disclosure of its European holdings.

• Fed likely to reduce bond buying, pass policy milestone (Reuters)
• Fall in Home Loans Pushing Fed Away From Taper in Mortgage Bonds (BBG)
• Russia says U.N. report on Syria attack preconceived, political (Reuters)
• China House Price Surge Raises Prospect of Steps to Cool Market (FT)
• Cyprus Plans to Complete End of All Capital Controls... some time in 2014 (FT)
• GOP Reworks Budget Terms (WSJ)
• U.S. Navy was warned that Washington shooter 'heard voices' (Reuters)
• Berlusconi Impeachment Vote Looms (WSJ)
• Ageing could weaken central banks, spur rate volatility (Reuters)

The day when the Fed will begin the unwind of its latest QE program (for the fourth time) has finally arrived (as has the day when an impeachment committee will vote whether to ban Berlusconi from public office, but understandably that is getting far less press). In a few short hours the answer to all those questions of whether and how much of the taper was priced in, will be revealed. But while the Taper discussions will dominate the airwaves, as they have for the past five months, there actually were some news in the world that had nothing to do with the US Politburo in charge of capital markets and the US economy, located in the Marriner Eccles building. Here is a brief summary.

The article below from the LA Times is both extremely interesting as well as depressing from a cultural standpoint. For four decades now, the General Social Survey has asked Americans how they identify themselves from a class perspective. While it was always quite common for less fortunate folks to identify themselves as “working class,” there has always been a reluctance to identify as “lower class.” Until last year that is, when a record amount of Americans identified as such.

Beginning with how Kissinger and Nixon enabled the USD as the world's de facto reserve currency through oil, Canadian Billionaire Ned Goodman explains in the brief but far-reaching clip how it is both inevitable (and rapidly approaching) that the rest of the world will turn its back on the dollar. With China and Russia (among many others that we have detailed in the past) agreeing on non-USD swap terms for energy, the cracks are starting to show and as Goodman details, "in the 1930s, everyone wanted USD (backed by silver)," but today, backed by nothing, "everyone wants to get rid of them." Buying hard assets is crucial (he has never been more bullish of gold) as we head into a period of stagflation or even high inflation; and as Goodman previously commented "the world is totally upside down right now - it's completely crazy," in fact, he adds, "I'm keen on anything that's going to live with higher inflationary numbers, because I can't see the world getting out of the problems that it's in."

Do you think the Fourth Amendment, which prohibits warrants without probable cause and limits them to specific places, times, and people, is important today? Prof. James Otteson suggests that this protection is incredibly important. Without this limitation on warrants, officials could look for wrongdoing at will. Where there are witch hunts, witches will be found; where there are inquisitions, blasphemers will be found; and officials with unlimited authority to seek out wrong doing are going to find it. People who choose to pursue happiness in unconventional ways or ways that differ from the majority should be free to do those things.

Deflation - A derangement of money or credit, a symptom of which is falling prices. Not to be confused with a benign, i.e., downward shift in the composite supply curve, a symptom of which is also falling prices. In a genuine deflation, banks stop lending. Prices tumble because overextended businesses and consumers confront the necessity of selling assets in order to raise cash. When prices fall because efficient producers are competing to deliver lower-priced goods and services to the marketplace, that is called “progress.”  In 2013, central bankers the world over define deflation as a fall in prices, no matter what the cause. Nowadays, to forestall what is popularly called deflation, the world’s monetary authorities are seemingly prepared to pull out every radical policy stop. Where it all ends is one of the great questions of contemporary finance.

While Chinese stocks are underperforming their Japanese neighbors', the decision of which Asian language to learn (in order to potentially better your future) is clear. As Hurun Research notes, half of the richest women in the world (with assets in excess of $1 billion) are from China - including 3 from the Top 5 and 6 of the Top 10. Asia was home to the highest number of billionaires this year with most of them operating in real estate sector.  The total wealth of the 1453 billionaires amounted to a staggering US$5.5 trillion, the equivalent of China’s GDP and the so-called 'Ten-Zero-Club' - individuals with over USD10bn - grew by 25 to 108 people. The USA still ranks #1 (exceptionally) for the country with the most billionaires - at 409!

Will the history books record these past couple of weeks as the point when the tide finally turned against our interventionist foreign policy? The American people have spoken out against war. Many more are now asking what we have been asking for quite some time: why is it always our business when there is civil strife somewhere overseas? Why do we always have to be the ones to solve the world's problems?

Gold prices just legged down $15 as Japan opened, breaking bad below $1,300 for the first time in 6 weeks. No news (obviously). It seems the 'early' gold price rally when Summers stepped away was too much to bear... Equities and bonds rally because moar of the same dovish idiocy will remain at the Fed... and gold falls out of bed? It would appear Mikael has been a busy boy once again (in early we note by his Bloomberg status)

The Euro area is no longer the centre of all the stress... EM countries are! Despite their significant correction in recent months, SocGen notes that valuations remain far more extreme (or cheap) and outflows are dominating (despite a 24% discount on a price-to-book basis across EM stocks, they reain rich historically). Significant structural issues like balance of payments, deficit or inflation may lead to further turmoil in emerging markets, potentially destabilising the underlying economies. Simply put, SocGen warns, valuations have further to fall; do not catch the falling knife (yet).

The bodies of the casualties from yesterday's latest mass shooting incident have not been buried yet, but already the president, fresh from his embarrassing foreign relations defeat with Russia and not to mention the ongoing NSA snafu, is back in 'distract em with a campaign-cum-crusade mode' after calling, once again, for Congress to pass gun control legislation this time in an interview with Noticias Telemundo. One can only assume the president was himself too distracted by all his recent scandals and/or was just spying too hard on the American people to recall that it was only in April that the Democratically-controlled Senate killed an amendment to a Democratic gun control bill, which was the first and biggest slap in the face of the freshly re-elected president so far in 2013 (little did we know it was only downhill from there), and made a mockery of Obama's crusade to enact gun control.

On the back of our detailed discussion of the inner workings of the German election (here and here), it appears that we are no nearer understanding the two major political narratives that appear dominant currently. As Reuters reports, Angela Merkel's center-right coalition and Germany's combined opposition are running neck and neck, a poll showed on Tuesday, five days before the national election. Crucially, if the figures are repeated in Sunday's election, Merkel will lack the support to renew her coalition with the FDP and Germany will most likely end up with a 'grand coalition' of conservatives and SPD, like the one Merkel led in 2005-2009.