Archive - Feb 18, 2014

One of the key insights from recent work in psychology is that humans tend to substitute easier problems rather than solve difficult problems. Daniel Kahneman explained this dynamic in his recent book Thinking, Fast and Slow. To "solve" a difficult problem we are unfamiliar with, we substitute a lesser problem we already know the answer to, and then declare we've "solved" the original (often knotty, complex) problem. The real problem then festers, unsolved and addressed, while the misguided "solution" only drains resources and exacerbates the real problem. An excellent example of this dynamic is higher education: the real problems are soaring costs and sharply declining yields in actual learning and in the real-world value of a diploma.

So Venezuela is collapsing, Thailand is crumbling, and Ukraine is for all intent and purpose under martial law, US macro data is dreadful (and no, it's not all the frigging weather), and German consumer confidence dumped again; and US stocks soar (8th day in a row for Nasdaq for first time since July) on the back of a BoJ move that was fully expected (and entirely under-utlized) but sprung USDJPY back above 102. S&P futures volume was 35% below average as the day-session range was extremely small. The Russell 2000 almost reached unchanged for 2014. The un-taper, QE balls-to-the-wall trade continues it would appear - Gold (and even more so silver - longest win-streak in 46 years) continue to surge; Treasury yields continue to slide; the USD slips lower (led by EUR strength); and of course, high-beta equities jump higher (as stodgy big caps underperform). Unfortunately, the EM crisis is far from over - as EM FX tumbled today. VIX also rose notably, disconnecting from stocks; and credit markets are wider today than Friday's close.

Our entire monetary system requires that we all trust the high priests of central banking and economics. Those that stray from the state’s message and spread economic heresy are cast down and vilified. Recall the case of Harvard professors Ken Rogoff and Carmen Reinhart who wrote the seminal work: 'This Time is Different: Eight Centuries of Financial Folly' highlighting dozens of shocking historical patterns where once powerful nations accumulated too much debt and entered into terminal decline. The premise of their book was very simple: debt is bad. And when nations rack up too much of it, they get into serious trouble. This message was not terribly convenient for governments that have racked up unprecedented levels of debt. Not to worry, though, the IMF has now stepped up with a work of its own to fill the void. Translation: Keep racking up that debt, boys and girls, it’s nothing but smooth sailing ahead.

The Gold market appears to be bottoming as does the Uranium market.

We noted that two US Navy ships - the guided-missile frigate USS Taylor and an amphibious command ship the USS Mount Whitney - entered the Black Sea on Feb 4th on what the Navy said was a routine deployment (following terrorist threats surrounding the Olympic Games in Sochi). 8 days later, the Navy reports, the USS Taylor is under inspection for damage (and rumored to be inoperable) after running aground as it was preparing to moor in Samsun, Turkey.

With Spanish sovereign bond yields hitting record lows - marginally above those of the US - one might be surprised to learn that unemployment is at record highs, suicide rates are at record highs, youth joblessness is at record highs, and now, to top it all off, Spanish bad loans are at record highs once again (at 13.6% of all loans). Of course, not deterred by the uncomfortable reality, Economy Minister Guindos is out in full propaganda mode:

*GUINDOS SAYS BAD LOANS RATIO SEEN MODERATING IN NEXT QTRS

However, given the 17.7% rise in the last 12 months - the most in a year - we are struggling to see signs of the turning point he is so confident of.

... Morgan Stanley's "research analyst" David Risinger, who today, February 18, 2014, a day after the WSJ broke the news yesterday around 10:30 pm that Forest Labs would be acquired by Actavis for $25 billion, decided to upgrade FRX from Equal-Weight to Overweight, and boosted his price target from "NA" to $86 or about where the stock was trading first thing this morning after the WSJ news. And that, ladies and gentlemen, is undisputed sell-side research value added.

This morning's catastrophic drop in the National Association of Hope Home Builders sentiment index has rapidly been spun as due to the weather... of course, makes perfect sense, right? What would happen if these drops were actually real fundamentals? If the status quo, the "common knowledge" was shown to be full of shit (once again). Well, riddle us this Batman... if weather was to blame, then why did the "West" region plunge the most? In fact, why did The West plunge the most on record? Too much sunny dry weather not good for sales? In fact, even the entirely indpendent provider of real estate research Trulia said that weather is not to blame...

While the bulk of the quantity data contained in the Fed's quarterly Household Debt and Credit Report is known in advance courtesy of the Fed's monthly tracking of household revolving and non-revolving debt, the quality components always provide a welcome insight into the state of the US household. It is there that we find that the most disturbing trend in recent years: the encumbering of students with record amounts of loans continues. In fact, as of December 31, the total amount of non-dischargeable (for now) student loans hit a new all time high of $1.08 trillion an increase of $53 billion in the quarter. By comparison, total credit card debt as of the same period was "only" $683 billion. At this rate, total student loans will be double the size of all credit card debt within 2-3 years. What's worse, while the 90+ day student debt delinquency rate did post a tiny decline from 11.8% to 11.5% in Q4, on a total notional basis due to the increase in outstanding balances, as of this moment the amount of heavily delinquent student loans has just hit a fresh record high of $124.3 billion, up from $121.5 billion in the prior quarter.

Annual global investment in bars and coins reached 1,654 tonnes, up from 1,289 tonnes in 2012, a rise of 28%. Check out GoldCore's webinar with Gerald Celente, this Thursday, February 20th.

Despite all the hoop-la of the UK economic recovery - and Mark Carney's credibility-sapping dynamic forward guidance "we'll know it when we see it" perspective - billions in QE has failed to spark enough 'inflation' to break the Bank of England's oh so critical 2% inflation target. For the first time since November 2009, UK CPI fell below the 2% 'threshold' in January (must be the weather) as Japan's deflation exporting (what goes up there must go down everywhere else) spreads from the US to the UK. Of course, the silver lining for equity markets is that this provides Carney just the right ammo to keep rates lower for longer at their record lows; but price pressures are building...

As was expected, President Maduro's forces have detained Leopoldo Lopez - the leader of the anti-government protesters. Having earlier stated, "I present myself here, willing for my arrest to wake up Venezuelans," it appears Venezuelan authorities have stepped in...

*VENEZUELA'S LOPEZ SAYS HE HAS NOTHING TO BE AFRAID ABOUT
*VENEZUELA'S LOPEZ DETAINED BY NATIONAL GUARD IN CHACAITO

Despite the ongoing proclamations of "absolute calm" the streets (below) appear anything but with hundreds of thousands on the streets... and protesters are blocking the National Guard van that holds Lopez.

Independence Square Is Ablaze

Days after Kazakhstan broke out is tanks post-devaluation, the promise to "Restore order by all means envisaged" is under way in Ukraine as military vehicles are being mobilized into the city center. As Martin Armstrong so eloquently noted recently, "the Western powers represented by the EU and the US have nothing to stand on to protect Ukraine and can only offer lip-service at best. So once again, it appears that Ukraine is doomed and the best one can hope for there, is that Russia will allow the West to leave. The countdown goes forward and the political and economic crisis is indicative of what we see with the first shot across the bow in the rising trend of the Cycle of War." The US has 'demanded' an end to the violence...

Thailand's Government Savings Bank (GSB) president admitted that clients withdrew 30bn Baht (around $1bn) in a single-day last week and Bank for Agriculture and Agricultural Cooperatives (BAAC) and Krungthai Bank (KTB), although of a much smaller magnitude, have also seen withdrawal spikes of similar magnitude according to The Bangkok Post. The 'bank run' comes after speculation that cash at the state-run banks are being used by the government (which is in turmoil) to fund farmers (who have not received their 'promised' rice subsidies of over 130 bn Baht). Withdrawal requests are met with banks warning that there were insufficient funds at the time due to many depositors withdrawing cash. One depositor, rather ironically summed it up, "I started to feel concerned that my money may become only paper."