Archive - Feb 7, 2014

Today, the pundits are a-buzz making sense of the latest jobs report. But most of us care more about the state of one particular job: our own. How relevant is this latest bit of data to that? Not very. So, to better understand the trends in the work environment most likely impact our own paychecks, it will help to look at another bellwether similar to our fuzzy groundhog friend: AOL. AOL, a once-important pioneer in the transition to the 'digital economy', is once again showing us where the future of work is headed. Unfortunately, like the health of AOL's business over the past decade, it's not a pretty picture. As we've transitioned to an economy in which corporate profitability -- and thereby, stock prices -- is THE metric for success, the employer-employee relationship has become much more superficial than in past generations; and the encroachment of automation remove income options for those temporarily out of work, but it's increasingly limiting the options for the large pool of unskilled labor with few other alternatives

Plain vanilla bank runs are as old as fractional reserve banking itself, and usually happen just before or during an economic and financial collapse, when all trust (i.e. credit) in counterparties disappears and it is every man, woman and child, and what meager savings they may have, for themselves. However, when it comes to shadow bank runs, which take place when institutions are so mismatched in interest, credit and/or maturity exposure that something just snaps as it did in the hours after the Lehman collapse, that due to the sheer size of their funding exposure that they promptly grind the system to a halt even before conventional banks can open their doors to the general public, the conventional wisdom is that this is a novel development (and one which is largely misunderstood). It isn't.

Today, we got the credit side of the "savings debit" ledger with the December consumer credit report, in which we learned that in addition to the now traditional draw of Car and Student loans, which came out to $13.8 billion, or exactly in line with the 12 month average draw, sending the total notional to a record $2.24 trillion, it was revolving credit, i.e., credit cards, which saw a substantial $5 billion increase in outstandings - the most since May 2013 - bringing total revolving credit to $862 billion if still far below the nearly $1.1 trillion in student loans outstanding. So just as the US consumer was tapped out, and saw their personal income remain unchanged from November and real disposable income cratered, as a result having to draw down on their savings, the remainder of all purchases was funded through the use of credit cards, which may or may not be repaid in 2014. There is always hope that this time will be different and incomes finally pick up.

Whether driven by real supply-demand issues, concerns over terrorism (sparked by the Sochi plane debacle), or hopes a renewed un-tapered QE on the basis of 2 piss-poor jobs reports in a row is unclear. What is clear is that WTI crude is having its best day in over 2 months - now at its highest in 2014, back above $100 a barrel and its most expensive in history for this time of year.

As natural gas prices climb, reaching over $5/mcf again on 4 February, and with an unseasonably cold winter, local utilities say that natural gas customers’ bills are 30-40% higher now than last winter.

Is it any wonder Mario Draghi didn't lift a quantitative-easing finger this week? Despite record unemployment, record (and disastrous youth unemployment), record suicide rates, record non-performing loans, and an inextricably-linked banking system facing $3 trillion in exposure to emerging markets... Spanish bond yields have collapsed to their lowest since 2006 (and Italian close behind). With an entirely broken transmission mechanism of monetary policy, it seems the "market" for European bonds knows no bounds as spreads on the riskiest sovereigns drop to pre-crisis levels and 10Y Spain yields are now lower than 30Y US Treasuries.

Pretty simple stuff!

Three days ago it was S&P that opened the can of Puerto Rico junk worms. Moments ago it was Moody's turn to downgrade the General Obligation rating of the Commonwealth from Baa3 to Ba2, aka junk status. We note this just in case someone is confused what the catalyst was that just sent stock to a new intraday high in the aftermath of today's disappointing jobs number which until this moment barely managed to push the S&P higher by 1%. From the report: "While some economic indicators point to a preliminary stabilization, we do not see evidence of economic growth sufficient to reverse the commonwealth's negative financial trends. Without an economic revival, the commonwealth will face difficult decisions in coming years, as its debt and pension costs rise. The negative outlook signals the remaining challenges facing the commonwealth."

Trinkets and Ads trump global energy provision...

I vividly remember how low interest rates and the Fed Model were used as propaganda tool in the late ’90s to justify the stock market’s “this time is different” sky-high valuation

One look at the chart below from the NYT, and a pattern emerges...

Turkey scrambled an F-16 fighter jet following a bomb-threat aboard a Ukraine-outbound plane. A passenger, among 110 on the plane, made a bomb threat and demanded the plane be diverted to Sochi. The plane eventually landed in Istanbul - after crew calmed down the man who had reportedly been drinking. This threat follows the US' warning of "toothpaste" bombs.

Having benefited from the earlier QE-un-taper hope, the Turkish Lira is dropping rapidly following the move by S&P to put Turky on negative outlook:

• *TURKEY'S OUTLOOK TO NEGATIVE FROM STABLE BY S&P
• *S&P SEES RISKS OF HARD ECONOMIC LANDING IN TURKEY

Furthermore, the ratings agency raising questions over the Central Bank:

• *TURKEY SUFFERING EROSION OF GOVERNANCE STANDARDS, S&P SAYS
• *TURKEY SUFFERING EROSION OF CHECKS AND BALANCES, S&P SAYS
• *CONSTRAINTS ON TURKEY CENBANK INDEPENDENCE: S&P.

EM Un-fixed.

The problem for the state is that its success in imposing exorbitant fees and taxes will simply drive low-income people scratching out a minimal living in the gray market to other networks that do not even have a corporate structure to tax. To wit: "The more you tighten your grip, the more systems will slip through your fingers." Phantom economies tend to give rise to gray and black markets in proportion to the deviance of the phantom economy from reality.

Mt.Gox, the largest exchange for the online digital currency, was forced to halt withdrawals (but not trading) this morning. Due to an increase in withdrawal requests the exchange's systems had technical problems and in order "to understand the issue thoroughly, the system must be in static state," they reported. The exchange said it would resolve the problem as soon as possible and "apologize[d] for the sudden short notice." Interestingly this seemed to rapidly remove Mt.Gox's modest premium to the other exchanges and bring them all back inline around $700 as the price recovered.