Archive - Jan 28, 2014

Mr. Speaker, Mr. Vice President, members of Congress, fellow citizens:

...Make no mistake: the consequences of our actions are here. And the days of the United States as the world's dominant superpower are finished.

...No, this may not be the country that you all grew up in. But it is the state of our union... whatever remains of it.

Yesterday we covered the supply side of the gold market from the perspective of global mints, which were kind enough to advise that they "can’t meet the demand, even if we work overtime." Today, courtesy of Bloomberg, we take a closer look at the demand aspect of the physical gold market, which as most know by now can be described with just one word: China.

The topic of China's real estate bubble, its ghost cities, and its emerging middle class - who now have enough money to invest and have piled into houses not stocks - and have been dubbed "fang nu" or housing slaves (a reference to the lifetime of work needed to pay off their debts); is not a new one here but, as Bloomberg reports, the latest report from economist Gan Li shows China’s households are massively exposed to an oversupplied property market.

President Obama will proclaim that all is well but more is to be done tonight (we suspect) and lay out his agenda for fixing it all now (which we are sure will be different from the fixes of the last 5 years). However, as The WSJ reports, he faces a nation increasingly worried about his abilities, dissatisfied with the economy and fearful of the economy's future. Since the rise of modern polling in the 1930s, only George W. Bush has begun his sixth year in the White House on rockier ground than Mr. Obama. 59% are uncertain, worried, or pessimistic about the rest of Obama's term; 63% believe the US in on the wrong track; and, despite record high stock prices and 'wealth', 71% expressed some level of dissatisfaction with the broader economy.

BANZAI7 FOOD AND BEVERAGE WARNING...

People have a strange habit of ridiculing economics for its assumptions and [benchmark] models of optimality. While modern mathematical economics (i.e., professional mathturbation) admittedly rely on sometimes outrageous assumptions that make most of the resulting predictions irrelevant, there is nothing ridiculous or unscientific about economic reasoning. This is the problem of relying on induction, and while it might work well in the natural sciences, and is less reliable but likely more beneficial than not in applied natural science (such as medicine), it is impossible in the social sciences.

The President will do his best to put a positive spin on the current economic environment and the success of his policies to date when he gives his speech tonight.  However, how you define the current environment may have much to do with where you fall in current income distribution.  This was a point made by Mr. Boyer: "In 2012, the richest 10 percent of Americans earned their largest share of income since 1917, said Emmanuel Saez, an economist at the University of California at Berkeley. Meanwhile, Census Bureau statistics showed that real average income among the poorest 20 percent of families continued to fall each year from 2009 to 2011." As with all things - it is the lens from which you view the world that defines what you see.  In the end, it will be whether we choose to "see" the issues that currently weigh on economic prosperity and take action, or continue to look the other way.  History is replete with examples of the demise of empires that have done the latter.

Can American States Rein In An Out-Of-Control Federal Spy Agency?

Below is a chart which flags the highest external risk among the 10 most prominent EMs broken down by liquidity (reserves over near-term maturities) on the X-axis and capital flows (current account as % of GDP) on the Y-axis. It should come as no surprise, that Turkey is worst, followed by South Africa, India and Indonesia. China, Korea and Russia have current account surpluses and strong coverage of short-term debt by reserves. Brazil also has high reserve coverage of short-term debt. Mexico and Poland have small current account deficits and healthy reserve coverage, in addition to their IMF Flexible Credit Lines. As for Argentina, forgetabout it.

So, who was right this time, me or Carl Icahn? Don't always fall for those big name brand investors...

Indicators of US balance-sheet repair hardly signal the onset of the more vigorous cyclical revival that many believe is at hand. Optimists see it differently. Encouraged by sharp reductions in households’ debt-service costs and a surprisingly steep fall in unemployment, they argue that the long nightmare has finally ended. That may be wishful thinking. Notwithstanding the Fed’s claims that its unconventional policies have been the elixir of economic renewal in the US, the healing process still has years to go. This should not be surprising.  Far too many US households made enormous bets on the property bubble, believing that their paper gains were permanent substitutes for stagnant labor income... and appear to be doing the same again.

"In general, this morning’s confidence data bode well for current quarter consumption and likely reflect the ongoing massive improvement in household balance sheets that we have been highlighting for some time now as a key catalyst for growth in the coming quarters." - Joe LaVorgna

As the investing world waits with baited breath for the outcome of the Turkish Central Bank's emergency meeting (released at 2200GMT) to see if they hike rates 300, 400, or 500bps and finally manage to persuade Erdogan that raising rates are essential; the Turkish stock market investors are voting (and selling). The Istanbul 100 index has plunged to its lowest level since July 2012 (and the Lira strength from spike lows has stabilized - just two days shy of record lows).

Who said Bitcoin Has No Intrinsic Value? What Is The Value Of Ability To Sidestep The Money Center Banks, The Federal Reserve & The ECB? Here are cogent, coherent, intellectual answers debugging the arguments of pop economists and new media pundits.