Archive - Jan 16, 2014

While manufacturing and services PMIs disappointed, the big problem in big China remains that of an out-of-control credit creation process that is blowing up. As we previously noted, instead of crushing credit creation, the PBOC's liquidity rationing has forced distressed companies into high-interest-cost products in the shadow-banking world. Investors on the other side of "troubled shadow banking products" had assumed that 'someone' would bail them out but this evening Reuters reports that ICBC has confirmed that it will not rescue holders of the "Credit Equals Gold #1 Collective Trust Product", due to mature Jan 31st with $492 million outstanding. The anxiety from contagion concerns of the first shadow-banking default has pushed the Shanghai Composite back near 2,000 for the first time since July - and to its narrowest spread to the S&P 500 in almost 8 years.

With the Q4 earnings season beginning, ConvergEx's Nick Colas reminds that the top of the income statement matters more than the bottom line if we expect further upside to domestic equities in 2014.  Revenue growth has been in short supply over the last four quarters, with the companies of the Dow only able to average a 0.6% top line growth rate over the last year.  If 2013 was all about multiple expansion in equity markets, then, Colas warns this will be the year when revenue growth must fulfill the promise of a U.S. stock market so near all-time highs. Analysts have been perennial over-optimists on revenues every month since early 2012. Maybe they finally have it right, but that is purely a matter of faith at this point; their track record on this count is not good.

But U.S. Is Still Calling for Regime Change ... Because the "Facts" Are Being Fixed Around the Policy

2013 was a brutal year for precious metals investors. Santiago Capital's Brent Johnson begins his excellent presentation "#$1%!k##!!***#$$" with a mea culpa for the worst year in a dozen even as Santiago topped the list of precious metals funds. But crucially, Brent points out, "it is only half-time" in this fight and "if gold investors will stick with the fundamentals - which is very hard to do sometimes - the second half could be very rewarding." Simply put, he notes, the only reason the level of water in our economic bucket has increased slightly is not because the holes are fixed... but because we are pumping dollars in quicker than they are leaking out. "Excess Reserves are a ticking time bomb," Johnson adds, and the second half of this monetary game will be very different from the first.

People often ask me about the inefficient markets of tomorrow. Think about it: that’s an oxymoron. It’s like asking, “What is there that hasn’t been discovered yet?” The markets are greatly changed from 25, 35 or 45 years ago. The bottom line today is that there’s little that people don’t know about, understand and embrace. How, then, do I expect to find inefficiency? My answer is that while few markets demonstrate great structural inefficiency today, many exhibit a great deal of cyclical inefficiency from time to time. Just five years ago, there were lots of things people wouldn’t touch with a ten-foot pole, and as a result they offered absurdly high returns. Most of those opportunities are gone today, but I’m sure they’ll be back the next time investors turn tail and run. Markets will be permanently efficient when investors are permanently objective and unemotional. In other words, never. Unless that unlikely day comes, skill and luck will both continue to play very important roles.

Yesterday, when the Treasury released its TIC data early by mistake, the update that China's holdings rose to a record $1.317 trillion caused a stir. This was confusing, since while China, which as we reported yesterday, now has a record $3.8 trillion in reserves having grown by $500 billion in 2013, has barely invested in US paper, and in fact going back to 2010, its holdings were a solid $1.2 trillion. In other words, its Treasury holdings have increased by a modest $100 billion in three years. Hardly anything to write home about. And certainly nothing to write home about when one considers the soaring Treasury held by the largest holder of US paper... everyone knows who that is. For those few who don't, and for everyone else too, here is the most recent breakdown of the top holders of US paper.

A glimpse at the wordcloud of Bernanke's farewell speech this morning tells you all you need to know about the Fed's extraordinary policies - the two most-used words are "think" and "know". From "hoping" the Fed did the right thing to explaining how Main Street "needs to understand what they did was necessary," Bernanke admits that they still have no idea how QE works "QE is at least somewhat effective... works in practice but not in theory," and almost admitted that the Fed's new plan 'forward guidance' worked in theory but not in practice. The "populist reactions" around the world to central bank interventions are "probably not avoidable," he adds, also noting in his awkward 'don't pin me down' manner that stocks are not in a bubble, but "in historical ranges."

You can reflate a credit bubble in which spending rises briefly... But at the end of the day, all this does is set the stage for another economic collapse when people once again default on their credit card payments/ mortgage payments.

People often ask today: if the Fed has created so much new money, why hasn’t it produced more inflation?

Moments ago The Hill reported that what many thought was absolutely impossible, may in fact become a reality: President Obama is considering issuing an executive order (#394,039,993,837?) to raise the minimum wage for Federal Workers... and in the process - with the help of that other central planner par excellence Bern-ellen - lap all those other Banana republics that everyone so enjoys making fun of.

Remember when banks were exposed manipulating virtually everything except precious metals, because obviously nobody ever manipulates the price of gold and silver? After all, the biggest "conspiracy theory" of all is that crazy gold bugs blame every move against them on some vile manipulator. It may be time to shift yet another conspiracy "theory" into the "fact" bin, thanks to Elke Koenig, the president of Germany's top financial regulator, Bafin, which apparently is not as corrupt, complicit and clueless as its US equivalent, and who said that in addition to currency rates, manipulation of precious metals "is worse than the Libor-rigging scandal." Hear that Bart Chilton and friends from the CFTC?

The infamous 'scourge on insider-traders everywhere' Preet Bharara has taken a day off from Wall Street duties to focus on what could be considerably more of a concern. The NY Attorney General just disclosed that  Daniel Wilson - the Chemistry Manager at the Indian Point Nuclear Power plant - falsified and fabricated test results for diesel fuel contamination used to power emergency generators.. in order that the plant would not have to be shut down. Have no fear though US public... especially those who live near White Plains, Bharara's punishment for this potentially disastrous 'deliberate misconduct' - a $500 fine and 18 months probation. Well that will teach him, eh?

Forensic Asia, a Hong-Kong-based reserch firm issued a "sell" recommendation on HSBC on the basis of "questionable assets" on its balance sheet. As The Telegraph reports the analysts involved actually worked at HSBC for 15 years and suggest the ginat bank could have overstated its assets by more than £50bn and ultimately need a capital injection of close to £70bn before the end of this decade. "HSBC has not made the necessary adjustments, during the quantitative easing reprieve...The result has been extreme earnings overstatement, causing HSBC to become one of the largest practitioners of capital forebearance globally... This charade appears to be ending."

You really can't make this shit up. From the funniest person on financial comedy TV (whose most memorable TV appearance will always be roaring that Bear Stearns is fine days before its collapse), here is his "opinion" on Best Sell Buy, entirely in his own words.

Nature is full of unpleasant parasites which cause their hosts to engage in irrational, destructive, or even suicidal behavior. Of course, they exist for humans too... especially for investors. In fact probably the number one parasite which affects investors is a very peculiar emotion: fear. Specifically, it’s the fear of missing out that drives so much irrational investment behavior. Nobody wants to miss a big boom, no matter how baseless the fundamentals. Ironically, this fear of missing out is stronger than the fear of loss. Following the crowd is a great way to lose a lot of money.