Archive - Feb 2014

Now that Ben Bernanke has handed over the keys of the Federal Reserve, there are all sorts of theoretical arguments, pro and con, concerning his bold quantitative easing (QE) programs, in which the Fed massively expanded its balance sheet. Many critics have worried that this will disrupt the proper functioning of credit markets, and threatens to severely debase the US dollar. The defenders of Bernanke have argued that he spared the US (and indeed the world) from a second Great Depression. One of the odd (more farcical) points that people raise in Bernanke’s defense is the case of Japan...  We do have historical examples of central banks ruining their economies/currencies through massive expansions of their balance sheets (Weimar Germany, Zimbabwe, etc.). To our knowledge, this has never actually worked anywhere in history...

Over 7 in 10 Obama voters, and 55% of Democrats, regret voting for President Obama's reelection in 2012, according to a new Economist/YouGov.com poll. As The Washington Examiner reports, the poll was conducted to test the media hype about a comeback by 2012 Republican presidential nominee Mitt Romney. While the poll found voters still uninspired by Romney, they are also deeply dissatisfied with Obama (though given the choice of Obama versus Romney, Obama supporters said they would stick with their guy, 79% to 10% for Romney) giving Obama, as The Examiner notes, very early lame duck status before the midterm elections.

It's getting form bad to worse in the Ukraine: either martial law will be announced any time soon or the proxy civil war becomes a real one. On the bright side, there is something to be said about having a nation's criminal cases all in paper format: once there is a revolution, everyone's slate gets wiped clean...

While there are many hopes pinned on the housing recovery as a "driver" of economic growth in 2014, the data suggests otherwise. The optimism over the housing recovery has gotten well ahead of the underlying fundamentals.  While the belief is that the current push in housing is a side-effect of a recovering economy, the reality may be a function of the speculative rush into buying rental properties for cash which created a temporary, and artificial, inventory suppression. The real driver of an economic recovery is full time employment that leads to rising wages and savings.  Unfortunately, this is something that eludes the current Administration that is focused on creating new regulations on the average of every 8 minutes, raising the cost of healthcare and increasing taxes. Call us crazy, but maybe its time to try something different.

The chart is very disturbing: it shows that as the S&P rises higher and higher (on ever declining volumes), foreigners are buying fewer and fewer US securities. In fact, on a 12 Month Moving Average basis, foreigners bought less long-term US securities than they did when Lehman crashed!  And so we have come full circle, because while, understandably, nobody had any apetite for US securities around the Lehman crash when until the Fed stepped in and singlehandedly took over the US capital markets it was unclear if there even would be a US capital markets, now that five years later the S&P has risen to a level nearly three times the March 2009 lows thanks entirely to the Fed's $4.1 trillion balance sheet backstop, the interest in US securities is... lower than it was in the days just after Lehman!

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.