Archive - Sep 2013

Over the past year, India has unleashed the most unprecedented series of gold "capital controls" ever seen in a modern nation, shy of confiscation (and even that may be imminent). Today, India added yet another more measure to its list of prohibitions that seek to minimize the size of the gold market available to citizens, yet which will only result in even more interest and demand in the yellow metal. As Reuters reports, India increased its import duty on gold jewellery from 10 percent to 15 percent, setting it higher than the duty on raw gold in a move to protect the domestic jewellery industry. Why is the government doing this? Simple: "To protect the interests of small artisans, the customs duty on articles of jewellery ... is being increased," the ministry said.

While the White House is trying to play this down currently in the press conference, Brazil's President Rousseff has issued a statement postponing her trip to the US due to the illegal espionage of the Americans:

• *BRAZIL SAYS U.S. HASN'T PROVIDED ADEQUATE EXPLANATION ON SPYING
• *BRAZIL'S SAYS IT NEEDS U.S. EXPLANATION BEFORE STATE VISIT
• *BRAZIL SAYS U.S. ILLEGAL MONITORING OF GOVT, COS. IS 'SERIOUS'
• *BRAZIL PRESIDENT ROUSSEFF POSTPONES STATE VISIT TO THE U.S.

According to AP, Obama spoke to Rouseff on the phone but that didn't do it as the Brazilian President demanded a full public apology.

Today's TIC data showed something disturbing: for the fourth month in a row, foreigners were net sellers of US Treasury paper in July , as total foreign holdings declined from $5.600 trillion to $5.590 trillion which represents 49% of total marketable debt (including the debt owned by the Fed of course). In other words, since peaking at $5.724 trillion in March, foreign-held debt has declined by $134 billion, at a time when yields have surged on fears the Fed's tapering of its own purchases of bonds will mean less Fed frontrunning opportunities. However, it is only when broken down by gross purchaser, that we see just who is to thank for this surge in buying of Treasury paper in the month of July. One look at the chart below should explain it...

Plowed $2 trillion of their Japanese deposit base into investments overseas then wondered why the economy at home languished

Equity markets were quietly confident that no matter what the mortgage market did, the Fed would save them in 2007. Bond markets had already got a little nervous as collateral squeezes and forced liquidations had led to a large jump in bond risk relative to equity risk - but again this was eschewed by any number of equity long-only managers and their non-money-managing partners-in-crime - the sell-side strategist - who confirmed that any dip should be bought and the increased risk in bonds was exactly the catalyst to rotate to stocks for the long-term. Fast-forward $8 trillion and five years and the patterns of bond and equity risk look awfully similar - as does the echo chamber of status quo opinion at the 'events' facing the market. History may not repeat, but we suspect it will at least rhyme here...

With spending habits waning amid soaring interestrates and rising gas prices, it is perhaps useful to note the trends in the stickiest of spending habits - tobacco, alcohol, and fast food...

Volume is worst (pro rata) than yesterday in equities; AAPL is up though (but gold is down oddly). In fact US equities are on their own heading into tomorrow's angst... the USD is lower, Treasuries are flat, oil, gold, and silver are all down, VIX is staying signficantly higher and HY credit spreads are notably wider...

While the issue of whether they will or won't taper is certainly still not clear, the WSJ's John Hilsenrath notes that the other dilemma facing the Fed is whether to reduce their purchases of Treasurys, mortgage-backed securities or both. According to officials, Hilsenrath notes, there were two lines of thinking at the Fed on how to structure a pullback from the bond programs and the issue would be discussed at the meeting. Goldman's Jan Hatzius has posited that "Fed leadership probably views MBS purchases as more effective in boosting economic activity than Treasury purchases," but as Hilsenrath notes, some Fed officials prefer a simpler-to-communicate strategy of proportional cutbacks to both MBS and Treasuries. The fact that Hilsy is reporting this suggests that a Taper is somewhat inevitable - as we have noted since the Fed remains cornered. On average, the market expects a $6bn taper on Treasuries and $3 billion for MBS.

A very soon tomorrow will bring the decision of the Fed concerning tapering into focus. Ok, a kind of fuzzy, hard to see and wispy focus. The one thing that we can assure you of is that whatever is to come our way it will not be a singular event. You will hear from the imbibers of Cool Aid and other mischievous reality altering drinks that it could be a one-off event. Tomorrow a process will be started, it will probably go in fits and starts but do not blind yourself; it will be the beginning of the journey to cut back on the propping up of the markets by the Fed.

The U.S. Census Bureau announced today that in 2012, real median household income and the poverty rate were not statistically different from the previous year.  The 88-page report (found here) contains a plethora of statistical data, slicing and dicing income and poverty data by race, gender, and so on but in order to see through the haze, the following three charts sum it all up perfectly (sadly). The poverty rate in the US is stable at 15% - practically the highest since the mid 1960s and real household incomes are stagnant at 1997 levels. Spot the cyclical recovery...

The July statement from the FOMC presented the following snapshot of the economy, "Information received since the Federal Open Market Committee met in June suggests that economic activity expanded at a modest pace during the first half of the year. Labor market conditions have shown further improvement in recent months..." but as Stone McCarthy notes, tomorrow's FOMC post-meeting statement could well be less upbeat in tone, with hints of a slowing in the pace of improvements in the labor market, housing, consumer and business spending, and inflation remaining well below the 2% goal. A look at the housing and spending data certainly raises eyebrows but it is clear that the Fed remains cornered by deficits, sentiment, technicals, and international ire.

Prospective buyer traffic rose in all regions but the National Association of Homebuilders key sentiment index missed Bloomberg median expectations by the most since April. Future single-family home sales expectations dropped notably and this is the first time since April that the index has not risen. One data point does not make a trend change but given mortgage rates, mortgage apps, and home sales, and now the expectations for future sales, it will be hard for many to keep the housing recovery dream alive... even if the Fed rolls back all their Taper talk and doubles-down on QE...

The U.S. Federal Reserve is insolvent and has liabilities of over $3.2 trillion and yet has capital of just $60 billion. Therefore, it is leveraged by fifty to one, akin to a highly leveraged hedge fund. 

A snapshot of the top Bloomberg news from five years ago shows something very unusual - an entire screen of negative headlines. Of course, back then, bad news was indeed bad news... in our new normal, a smorgasbord of cataclysmic event, terrorism, and systemic risk possibilities would likely be reason to BTFATH as it guarantees the Fed will come to the rescue... (just as they did eventually last time).

Perhaps confirming the collapse in consumer confidence we saw last week - that the market shrugged off on the back of Summers - ShopperTrak, which measures store traffic in 60,000 locations world-wide expects retail sales in November and December to rise by only 2.4%. As the WSJ reports, this will be the worst holiday season since 2009 (which last Friday's dismal +0.1% ex-Autos rise in retail sales for August supports). Retailers are clearly anxious with Kmart already airing its first holiday ad - 105 days before Christmas. As ShopperTrak notes, consumers are worried about a host of issues including rising interest rates that has "got people feeling more tenuous about the holiday season."