Archive - Jan 2014

Even before Abe was elected prime minister on December 26, 2012, Chinese media were warning that he would be overly nationalistic. Upon Abe’s election, major Chinese news outlets expressed dismay over the future of China-Japan relations. It seems that the visit to Yasukuni Shrine was the last straw for Chinese leaders in their dealings with Abe. Hua said that Abe’s decision to visit the Shrine “severely damages the political foundations of China-Japan relations.” Simply put, “There’s no domestic political room for China to ease its attitude toward Japan on the issues of the Diaoyu Islands and the Yasukuni Shrine.” When one or both reaps a domestic advantage from stoking the fire, forget about easing tensions —avoiding actual conflict is the best case scenario. Under the circumstances, the only hope for a reset of China-Japan ties is if Abe is ousted as prime minister.

A record 21 million applications were run through the National Instant Criminal Background Check System (NICS) last year - an 8% increase over 2012 and, as The Washington Times reports, the 11th straight year that the number has risen. Background checks serve as a proxy for the number of gun sales, which soared in the months immediately after Sandy Hook (but notably fell in the last 2 months of 2013 as the Newtown and 'fear of Obama' effect wore off). "2013 was the best year for firearm sales (commercial, domestic) in history — period!" notes the president of the independent firearm owners association, adding that "Ammunition will still be very strong in 2014 as it hasn’t caught up nationally with the demand." This could become a problem since, in what many believe was an attempt to 'crowd out' private buyers, the Homeland Security Department bought 1.6 billion rounds alone.

"Eventually (un-manipulated) asset prices always return to their fundamental value, which is why bubbles always pop. The FOMC has backed itself into a corner. Current changes in policy are being designed around efforts to manage the unwind process seamlessly. Central bank (and government official’s) micro-management appears based on a belief that they can exert an all-encompassing central control over markets and peoples’ lives. Those in power have come to believe that policies have a precise effect that can be defined and managed. This is highly unlikely."

With manufacturing and non-manufacturing PMIs disappointing, and the nation's banking system still stuck in the thralls of a liquidity crisis (each time the PBOC removes the punchbowl), Michael Pettis' warnings are becoming increasingly likely (even though consensus remains that China will save the world somehow - as it transitions 'smoothly' to a consumer-based economy). Ironically, he notes, GDP growth rates of 7% or more, on the other hand, will suggest that credit is still rising too quickly and that China has otherwise been unable to implement the reforms, in which case China is likely to reach debt capacity constraints more quickly. Growth of 7% for the next few years, in other words, is almost prima facie evidence that China is not adjusting.

Truth is instantly recognizable for its self evident nature. The difficulty isn’t in knowing what to do; the difficulty lay in doing what needs to be done.

Remember when the Fed got its Series 7 and Series 63, and was solely engaged in the business of advising on stock valuation? Neiter do we. But that doesn't prevent it from now openly opining on what it thinks is the fair value of stocks:

• FED'S WILLIAMS SAYS U.S. STOCKS AREN'T OVERVALUED

So, the implication is one should buy stock then? And if the market craters tomorrow, the Fed will surely make everyone who listened to this non-voting moron who has made a complete mockery of the Fed's inflation and full employment mandates and replaced them with the "fair stock value" mandate, whole at the expense of all the other taxpayers, right? Finally, since the market is not overvalued here, what is the Fed's price target on the S&P 500, oh unregistered financial advisors-cum-Princeton academics of the Marriner Eccles building.

One of the biggest mistakes we can make, Saxo Bank's CEO warns, is to assume that rationality will prevail, that just through superior economic performance, freedom will capture enough peoples' hearts in a democracy to win the day. In the last of his three-part series (part 1 and part 2), Lars Seier Christensen focuses on the broader relevance of Ayn Rand in society today, noting that she remains among the few that recognised with crystal clarity, that we will not win the battle through just proving that freedom and capitalism works. This, he warns, creates a major problem for those of us that like to argue rationally, rather than emotionally.

JPMorgan: "[t]here are various elements in the story that could make us nervous," including the fund managers "apparent fear of Madoff, where no one dares to ask any serious questions as long as the performance is good.... personnel at one feeder fund seem[ed] very defensive and almost scared of Madoff... They seem unwilling to ask him any difficult questions and seem to be considering his 'interests' before those of the investors. It's almost a cult he seems to have fostered."

With Russian, Chinese, and Argentinian (with a record low in the blue dollar today) money washing ashore (in USD or Bitcoin) under the Status of Liberty, the 'prices' of upscale apartments in New York City have simply exploded. We thought some context for this apparent 'price' vs 'value' discrepancy was useful... presenting 6 castles that cost less than an apartment in NYC (and given the number of bedrooms, not to mention moats, dungeons, vineyards, ramparts and drawbridges - dramatically less in terms of per-capita spend).

Hayek knew that avoiding the credit-created boom prevents the associated malinvestments and over-consumption while boom-bust cycles will be avoided through prevention or significant reductions in credit creation. Keynes, however, thought differently. Current Fed policy is a policy of illusion, or better yet, of delusion.

With Washington fighting over whether to stop emergency unemployment benefits in the US, the Saudi Arabian government has re-written their economic textbooks with some wonderful new logic. In an effort to encourage its citizens to seek jobs in private companies (as opposed to the majority in government jobs - which the IMF sees as unsustainable), the Saudis are introducing compulsory unemployment insurance for all citizens with jobs. As Reuters reports, "It may not be the most cost effective solution in the near term but if it helps normalise the labour market it is a price worth paying." With unemployment at 12%, and only 30-40% labor force participation, the costs could be significant.

We have been reading quite a few articles, as of late, regarding the resurgence of corporate fixed investment in 2014 that will provide a much needed boost to the economy.  However, is that really the case? Given the data, it is far more likely that we are closer to the next recession versus the middle of an economic cycle.  The fact that productivity growth is approaching zero is likely due to the reality that businesses have already extracted the majority of the benefits from their ongoing cost cutting and productivity measures. A resurgence of capital investment would certainly help stabilize the economy and potentially lift it to a level that would stimulate stronger employment and consumer demand.  However, when it comes to managing investment risk, "hope" is not an investment strategy that works long term.

Despite the best day in the S&P (+0.6%) since the Taper (12/18), this remains the worst start to a year since 2005. The Dow stands out as the best of the bad bunch ( down only 0.25% from 2013 close highs) while Trannies remain the worst. Homebuilders tumbled back to recouple with Financials post-Taper. Treasuries decided to ignore the equity strength and rallied once again (with 10Y now -10bps on the year) even as the USD was well bid back to unch on the week (once again all the vol in the US open to EU close period) with notable CAD weakness to its lowest since May 2010. USDJPY was on-and-off in charge with stocks staying in sync until the EU close, reconnecting briefly in the afternoon, then taking off again. VIX dropped back under 13% (but stocks were relatively outperforming). Precious metals remained in the headlines, this time with weakness, but from the early spike down, they recovered half the losses.

Yesterday's chart of the day was the stunning prevalence of poverty in Greece, which soaring to 44%, up from 14% a year ago, was too mindboggling to even comment on. Today, courtesy of the Census Bureau, we get a glance at a just as disturbing aspect of poverty not in some country in depressed Europe, but in the US itself. The bad news: in the period from 2009 to 2011, 31.6% of Americans were in poverty for at least two months, "a 4.5 percentage point increase over the prerecession period of 2005 to 2007.