Archive - 2013

The last week or two has seen Citi's economic 'surprise' indicator (ECO) take a decided turn for the worse. At Friday's close, the index that tracks not just absolute performance of the major macro prints but their relative performance to expectations, had hit a three-month low. Since the top in the S&P 500 in late 2007, the 3-month rate-of-change has shifted significantly negative four times - and each of these times has been followed by a significant downturn (or change of trend) in the S&P 500. As of Friday's close, the ECO index's rate-of-change shifted negative (its most negative in 5 months) and has signaled a quite intriguingly divergent lower high (from Q4 2011' previous peak) compared to the S&P 500's higher high. Is the short-term drop in ECO due to 'cliff' indecision? Or will earnings season be the market's catalyst to realize the changing macro landscape?

Reuters is reporting that many of America’s major brands have been quietly tweaking their coffee blends. While most coffee companies consider their blends trade secrets, and are loath to disclose exactly what goes into them, both circumstantial and direct evidence suggests they’re now substituting lower-grade Robusta beans for some of their pricier Arabica, and degrading the quality of our coffee. Research out of agricultural bank Rabobank confirms that demand for Arabica beans among coffee buyers “has fallen 27% year-to-date, while Robusta [demand] is 25% higher.” This seems to confirm a widespread alteration of the bean mix. Why the switcheroo? Prepare to not be shocked. The answer is: price. 

Presented with little comment, aside to note that 32-year-old Indian Datta Phuge, thought this $25,000 solid gold shirt would be just right to attract female attention: "I know I am not the best looking man in the world but surely no woman could fail to be dazzled by this shirt?" So much for the yellow metal being a barbarous relic.

Big Bucks: the initial step alone costs ¥650 billion

2013's biggest Grey Swan might be not China's slowdown or Euro area's continued debt crisis (although both are pretty much still on the books, although the former is less likely than the latter). It might not even be the Japanese economic implosion (albeit Japan is sick beyond any repair)... oh, no... the real Grey Swan of 2013 might be the markets starting to take a closer look at the US. This might sound bizarre during the weekend following Friday, when the VIX index collapsed 39.1% - more than in any other trading day in its history, and when the US markets have ended the first week of the year with total gains almost equivalent to what some are projecting for the entire 2013... and yet... as some would say: "Houston, we've got a problem!" The problem is best illustrated in the following three sets of chart, all comparing US fiscal performance to the peers.

There was a time when everyone (who was anyone) wanted a Swiss bank account, as much as an offshore cash parking vehicle as for its hushed prestige, whispered to a select few during Hamptons' cocktail parties. Those days are now gone, with the last remaining anonymous offshore private banking bastion left being Singapore, if even that. So in a world in which country after country is scrambling to hike income (and soon financial wealth and asset) taxes on the superrich, is this, paradoxically, what the new "Swiss bank account" is going to look like? And with the Obelix case study officially in the books, who will be the next to take advantage of the former KGB spy's taxation generosity?

Back in July, when news of what we dubbed the French "Fairness Doctrine" first emerged, i.e., the new socialist government's intent to tax the evil millionaires at a 75% tax rate, we had two observations: i) that "we are rotating our secular long thesis away from Belgian caterers and into tax offshoring advisors, now that nobody in the 1% will pay any taxes ever again" and, somewhat contradicting the above, ii) that "The good news is that with the entire world set to adopt 100%+ taxes on "wealthy" individuals as defined arbitrarily by Ph.Ds, there will be no place to hide." Well, the US promptly followed France into a lite-version of the Fairness Doctrine, which proved us half right, yet one place that has refused to increase its tax rate for the poor or rich, keeping it at the flat 13% for individuals is Russia, which explains why following last week's news that Russia had granted famous French expat millionaire Gerard Depardieu citizenship, the actor best known as Obelix and Rasputin, eagerly rushed to accept his new red passport in Sochi following a bearhug from none other than Vladimir Putin. 

The term "invasive species" has been used to describe new types of plants or animals that have been introduced to a new area, whereupon they change the local biosystem. The sudden appearance of new lifeforms in an environment can cause rapid losses in some of the species present prior to this appearance. On occasion, however, the new players can overwhelm the stabilizing factors in the system, which undergoes dramatic changes, eventually stabilizing in a new configuration that is highly detrimental to many of the original players in the system. Which brings me to today's invasive species. Many of the characteristics of successful invasive species are shared by HFT algorithms. This is driving the retail investor to extinction, through the erosion in their margins brought about by HFT. In the presence of HFT, the unsophisticated investor pays a higher price on the buy and receives a lower price on the sell than would be the case otherwise. The professional traders manage to maintain their margins--the losses of the unsophisticated are the profits of the algos.

The ascent of the Democratic Party of Japan marked the end of Japan's one-party state, dominated by the Liberal Democratic Party since the 1955.  However, the DPJ was unable to address the challenges Japan faced, was internally unstable, as illustrated by the revolving door in the prime minister's office, and spent scarce political clout to support a controversial retail sales tax increase.  

The LDP has returned to power.  Its ascent is a victory for the old elite.  Reports suggest that half of the cabinet positions were given to members of parliament who had inherited their Diet seats from their families.    The LDP's program, or Abenomics as it has been dubbed, seeks to strengthen the domestic economy and enhance Japan's ability to project its power internationally. 

Welfare recipients took out cash at bars, liquor stores, X-rated video shops, hookah parlors and even strip club - where they presumably spent their taxpayer money on lap dances rather than diapers, a NY Post investigation found. From Bronx strip clubs to gay dive bars in the East Village, US taxpayer-sponsored EBT cards have been inserted into ATMs and food stamp 'cash' has presumably been used to feed another need. The Post found dozens of pubs, nightclubs and tobacco shops where welfare dough was dispensed - and presumably spent. We should not worry too much though as Hilda Solis put us straight on how many millions of jobs these EBT-card fund recipients are creating and while we pass no judgment on those receiving and using the funds in whatever they see most fit, Cato's Michael Tanner summed it quite succinctly: "This is morally scandalous, I have nothing against strip clubs, but that’s not what benefits are for. I don’t blame [recipients]. If you are poor, it’s a crummy life and you want to have a drink or see a naked woman. I blame the people who are in charge of this." 32oz sodas made us gulp; rare steak tough to swallow; but take away the strippers and liquor - anarchy.

Apart from the slight uptick from the bottom in the housing market, the rest of the economy is just not robust enough to produce earning`s growth.

Several hours ago, Syrian president delivered his first public speech in months, addressing the internal military conflict that has gripped his country, and whose key excerpts can be found here. In it he called for a "full national mobilisation" to fight against rebels he described as al Qaeda terrorists. "We meet today and suffering is overwhelming Syrian land. There is no place for joy while security and stability are absent on the streets of our country," Assad said in a speech at the opera house in central Damascus. "The nation is for all and we all must protect it." Assad once again blamed the west for provoking and "facilitating" the rebellion, which even the NYT admits is being orchestrated by Al Qaeda, which naturally begs the question: just what is Al Qaeda to the US and to its intelligence agencies - foe or ally? But while providing fodder for the pundits, the speech was largely irrelevant. What does merit attention is the follow up to the story from two weeks ago the Russia sent two squadrons of ship to Syria in mid-December. It appears they have arrived, and just in time to offset the positioning of NATO Patriot missiles along the Turkish-Syria border.

In the eyes of those who run financial markets - not just in the US but all over the world - a “dysfunctional” government is one which puts any impediments whatsoever on unlimited credit creation. Given the $US hundreds of TRILLIONS of “derivatives” extant, any such “limits” or even the thought that there ARE any limits is dangerous in the extreme. These same “markets” get awfully nervous when there is any discussion about “limits” to the issuance of US Treasury debt because that same debt is the ONLY underpinning for the US Dollar which is in turn the ONLY underpinning for the global financial system.

People are talking about the Trilion Dollar Tuna idea to save the economy...

Why must the debt grow every year? To keep the debt-servitude paradigm going. To increase economic activity in a country operating in this type of system, you need to increase the level of credit and thus debt grows in tandem. This is self serving: if debt is the “fuel” to increase economic activity, interest payments will become larger and larger, until eventually it reaches a point where debt can no longer be increased. This point is known as the Minsky moment–when there is no net benefit to extra debt. So there we have it, in our “creditopia” world, if debt does not expand, the economy cannot grow and jobs cannot be created. In order to increase debt, foreigners have to continually finance the ever growing debt by purchasing government bonds and selling consumer products to the US. In turn, the US must increase the level of consumption, decrease savings, and eliminate the threat of any nation posing a risk to the US dollar hegemony. Is this a symbiotic or a parasitic relationship? Is is certainly a relationship that cannot grow forever. It poses an economic risk for ALL nations due to the interconnectedness of the global economy.