Archive - Sep 2013

Policy officials believe that growth and inflation would fix the problem of large debts, but growth fueled by public spending that is financed by debt or central banks is not sustainable.  Like most Ponzi schemes, it doesn’t end well.  Reducing total debt was always a better solution, but it would have resulted in even slower economic activity and lower living standards. However, in the long run, the system would have been purged of unsustainable excesses. ‘Short term pain’ for ‘long term gain’ is often shunned for fear of electoral defeat and lobby group pressure. Now, we are stuck with financial repression. Investment is being directed toward funding the public sector.  Policy rewards debtors over creditors. Such policy cannot go on forever.  In reality, “unlimited” rarely means unlimited, because imbalances become too great.  The Fed’s current quagmire has aspects resembling the Triffin Dilemma. The recent adverse spillover from Fed policies in emerging market economies and currencies may be the first hint of cracks in the global monetary system.  At a minimum, foreign central banks have deviated from good policy in order to prevent sharp destabilizing fluctuations in the value of their currencies and to arrest volatile inflows and outflows of capital.

"Not only was it a civil war, an effort by a people who had for years been seeking their liberation from any colonial influence whatsoever, but also we found that the Vietnamese whom we had enthusiastically molded after our own image were hard put to take up the fight against the threat we were supposedly saving them from. We found most people didn't even know the difference between communism and democracy. They only wanted to work in rice paddies without helicopters strafing them and bombs with napalm burning their villages and tearing their country apart. They wanted everything to do with the war, particularly with this foreign presence of the United States of America, to leave them alone in peace..."

Presented with little comment aside to ask just how levered the market is when a 'twitch' lower in VIX smashes the entire S&P 500 index up by 0.3% in 15 minutes...

AAPL's demise was shrugged off by a broader market as VIX was slammed lower once again to 14.00% stirring the S&P to its 7th green day in a row and best run in 2 months. The Dow outperformed on the day (absent the AAPL drag) but stocks tyraded amid very low volumes once again and weakened into the close. Treasuries were well bid (along with stocks) as a very healthy 10Y auction and some negative chatter over Syria saw a modest safety bid. The USD was monkey-hammered against all the majors - EUR most notably but JPY strength was entirely ignored by stocks (as we point out once again - it was VIX that drove us). So bonds bid, stocks bid, USD offered, oil and gold modestly bid, and VIX offered - smells a lot like a market that is absolutely not pricing in a Taper. It appears that VIX 'war-hedges' have now been fully unwound - where's the ammo for the next leg higher?

While the unemployment rate has been falling, currently at 7.3%, it has not been because of a strongly increasing workforce.  Rather it has been a function of people leaving the workforce.  This, of course, brings up the obvious question of how these people are live if they aren't working.  A recent trip to Walmart answered that question...

"I estimate the US fiscal gap at US$200 tn, 17 times the reported US$12 tn in official debt in the hands of the public.... Our country is broke. It’s not broke in 50 years or 30 years or 10 years. It’s broke today. Six decades of take as you go has led us to a precipice. That’s why almost the entire economics profession is talking as one at www.theinformact.org. Economists from all political persuasions are collectively sending our government a warning about what is, effectively, a nuclear economic bomb. I’ve been around economics for a long time. I’ve never seen such a strong response to a proposed Congressional bill. This is the profession sending a statement to the President and Congress that’s not unlike the warning physicists sent via Einstein to Roosevelt about the bomb." Larry Kotlikoff

Perhaps Obama's 'Pause' in Syria is to give the US enough time to raise the required 'war' start-up funds... here is the "kickstarter" pitch... from "The Americans for Whatever Barack Obama Wants, did you know he's friends with Jay-Z?" society...

Hamilton Says Americans Should Be More Outraged About Spying Abuses

10 years ago last month, Detroit (along with most of the North-East) suffered a major blackout. It seems, in an awkward anniversary remembrance, two main electrical lines have failed in downtown Detroit. As WXYZ reports, some of Detroit’s municipal buildings as well as downtown traffic lights and the People Mover are without power. Parts of the Wayne State University campus in midtown also have no electricity. Power went out just after 1:00 p.m. Only a few more hours until dark... just beware the packs of rabid dogs...

While the Syria conflict appears headed into the sunset, the state department reminds once again that it wants more:

• U.S., RUSSIA AGREE END GOAL FOR SYRIA IS POLITICAL ACCORD:PSAKI
• RUSSIA PLAN FOR SYRIA MORE 'IDEAS' THAN 'LENGTHY PACKET': PSAKI
• U.S. HAS LARGER SYRIA STRATGY BEYOND CHEMICAL ARMS: PSAKI

And the punchline:

• WE STILL FEEL ASSAD NEEDS TO BE REMOVED FROM POWER: PSAKI

Apple is down over 5% - no worries. The 10Y auction was very well bid and rates are surging lower - sounds good. The USD is collapsing - well that's great news. And sure enough stocks are up for the 7th day in a row (even as Oil rises - not falls - following Obama's 'pause'). We are sure it all makes sense somewhere - even as JPY carry is unwinding... for now it seems VIX is the lever being used to crank on stocks.

The markets seem to sense that all of this. In the US we’re putting in what looks like a lower high. The market appears to be forming a Head and Shoulders pattern.

For the last few days we have been bombarded with words that appear 'peaceful' and problem-solving from Russia with love. Of course, 'no change' benefits mother Russia the most as his government's gas revenues (and political power) will continue to flow from Europe (a quarter of Russian government income comes from being Europe's gas supplier). So it will come as no surprise that amid the Mother Theresa acts, The Telegraph reports that Putin is readying delivery of more S-300 air-defense missile systems to Iran and will continue to discuss "working together in the nuclear energy spehere." Combine that with experts' views that Russia's plan to dismantle Syria's stockpiles of mustard gas, sarin, VX nerve agents is a long shot; initially "sounding attractive, but very quickly, operational problems could derail obtaining international control, much less actually destroying the arsenal." It would appear, despite all the chatter, that Putin is increasing his power-base in the region.

Whether it was out of spite, or for whatever reason, it seems that whoever did not get their requested allocation in today's Verizone deal decided to dump all that cash in today's just concluded $21 billion 10 Year TSY Reopening, which was the first reduction in nominal size since the Treasury announced the gradual tapering of bond issuance (to precede the actual Tapering by the Fed), down from last month's $24 billion. Pricing at 2.946%, this was the highest yield since June 2011, however it was nearly 3 bps through the 2.975% When Issued, indicating a surge in demand for paper, and confirmed by the Bid To Cover of 2.86: the highest since March 2013's 3.19, but above the last 12 month average of 2.78. Curiously, Directs which latest have been fleeing from the long end, could not get enough of today's Reopening, taking down a whopping 29.%, double last month's 15.2%. Indirects took home 36.6% of the bond, while Dealers were left with just 33.8%, the lowest since April. Overall, any concern that primary demand may be disappearing with the Fed set to announce a reduction in QE a week from today, those fears were blown away, of only for this month.