Archive - Mar 2014

Inequality – long ignored – is now centre stage in debate about economic policy around the globe. As Tony Atkinson and Salvatore Morelli note, the 2007-2008 collapse of the global financial system and the subsequent economic downturn/debt crises have acted as a catalyst for growing anxiety around the increasing dispersion of incomes within most advanced economies. In an effort to show that "we are not 'all in it together'", the two professors have created The Chartbook of Income Inequality.

Could the U.S. unleash a flood of oil from the strategic petroleum reserve that would drive down prices in order to punish Russia? While the idea has been kicked around over the last few weeks – most recently by George Soros – it has also been dismissed as not a serious option. Some say the impact of an oil sale, if it actually succeeded in lower prices, would be temporary. Saudi Arabia could cut back on production to keep oil prices at their current levels. Others decried the idea as contrary to the objective of the SPR, which has been setup to be used only in cases of emergency. However, any collusion would be a problem since the Saudi King is convinced the U.S. is “unreliable,” and relations between the two countries hit a low point after Obama’s back and forth over air strikes on Syria last year.

Hot on the heels of what S&P said was not a "politically motivated" shift to rating watch, Moody's (who did not downgrade the USA and are not currently in a lawsuit over such terrible misrepresentations) has decided now is the time to put Russia on rating downgrade watch. The decision was triggered by 3 key factors: the weakening of Russia's economic strength, potential shifts in investor sentiment, and susceptibility to event risk. Full report below...

In a TV address to his divided nation, Ukraine's PM Yatsenyuk stunned the people by first suggesting heating prices would rise gradually, then confirming a plan that will see prices rise 100% in the next 2 years (and almost 200% by 2017) as the cost of imported Russian gas is expected to be around $500 (up from the current $84). This standard of living crushing move was then followed by tougher capital controls, restricting cash purchases to around $1300 per person per day after the Central bank basically admitted "amid a tense situation in the money markets" it was broke. And all of this comes on the heels of what can only be described as a vague pro-forma comment by US and EU governments over the riots by the "Right Sector" ultranationalists that clearly did not want to upset the state-sponsored thugs too much.

Since the crisis, and more likely decades before, we (the people) have been apparently 'happy' to have a small group of people in charge of picking winners and losers. "While free markets may have their hiccups," CNBC's Rick Santelli notes, when it comes to allocating resources, "the aggregate behavior of the marketplace is better than individuals." Crucially, Santelli blasts, if you're a saver, you understand now that you weren't picked as winner." In fact, some might even say the 'saver' is the enemy of the recovery, but according to the Central Banks, as Rick rages, it is deflation that is the enemy. Bankers and governments love inflation because "if you owe a lot of people a lot of money, there's nothing better than to pay it back with cheaper money."

As we noted earlier this week, the Fed is growing increasingly concerned of a bubble forming in the financial markets. Previously we noted that Janet Yellen was issued warnings regarding this.

Howard Marks once wrote that being a "contrarian" is a lonely profession. However, as investors, it is the downside that is far more damaging to our financial health than potentially missing out on a short term opportunity. Opportunities come and go, but replacing lost capital is a difficult and time consuming proposition. So, the question that we will "ponder" this weekend is whether the current consolidation is another in a long series of "buy the dip" opportunities, or does "something wicked this way come?" Here are some "words of caution" worth considering in trying to answer that question.

'Growth' continues to underperform 'Value' as once again today's early gains - used by many to indicate that the worst is over - were decimated rather quickly especially in the Biotechs (new cycle lows) and momos (NFLX & FB ugly). KING's failed IPO persists (-4% today) and now down over 17% from its IPO day highs. The S&P held miraculously above the red-line year-to-date but Nasdaq, and Russell joined the Dow in negative territory as growth is now underperforming for the year. The USD index ended the week unchanged (with weakness in JPY offset by strength in AUD and CAD) but the JPY-carry trade decoupled from stocks in the late-day today rather ominously. Bonds flattened on the week (30y -6bps, 5Y +3.5bps) with some profit-taking on flatteners today. 'Growth' commodities rallied with oil and copper up 2 and 3% respectively as PMs dropped 3% as Emerging Markets had their best week in almost 7 months.

Late last night we presented a scathing report highlighting the extensive downside case why a college education may be best described as a "waste of time and money." But surely it can't be all "cons" - after all, with student debt now well over an all time high $1 trillion (ignoring that a substantial amount of that notional is used for anything but) there must be a reason why year after year record amounts of young adults scramble into the warm embrace and soothing promises about the future of a college education... which has never cost more.  Why? In order to present a balanced view, on the chart below we show the conventional wisdom about the "pros" of higher learning.

While it is easy to blame western sanctions for the recent tribulations at the world's largest aluminum company, Oleg Deripaska's Rusal, the reality is that the industry specific issues plaguing aluminum makers, certainly including former Dow Jones Industrial Average member Alcoa, which involve a fair share of manipulation of physical inventories at assorted global warehouses are much more responsible than some theatrical rhetoric flaring up between the West and East in the past month. Regardless of the cause, as FT reports, Rusal just announced it is on the verge of insolvency after it warned of "material uncertainty" about its future, and that it has asked its creditors to delay repayment on a maturity from its $10 billion debt pile due next month.

"They can't make up facts," Governor Christie blasts in his press conference, "read the report!" It seems the chairman of the Port Authority of New York and New Jersey, David Samson, did not need to read it all and gave his resignation to Christie before the ongoing news conference - effective immediately. Mr. Samson, as WSJ reports, was a strong ally of Christie and had been under intense scrutiny for weeks, after investigations into the lane closures led the media, legislators and federal prosecutors to examine the intersection of Mr. Samson's private business interests and his leadership of the bistate authority. Fall guy?

French auctioneers are disappointed (but the elites may not be). Having sold for 193,000 Euros in 2011 (but unable to be shipped to its Russian buyer due to export license issues) this 'slightly used' Second Empire guillotine failed to reach its minimum bid of 40,000 Euros in an auction today in Nantes, France. Perhaps one glance at the glaring divergence in the following chart... will raise the demand for guillotines once again.

Nowhere is the 'get-rich-quick', 'fundamentals-are-for-suckers', new normal 'idiot' market more apparent than in the "mistakes" investors have made in Twitter's IPO (TWTRQ), Google's NEST acquisition (NEST), and now Facebook's Oculus purchase (OCLS & OVZT). Peak stupidity?

We recently noted the soaring cost of US foodstuffs this quarter (handily outperforming stocks) but without a doubt it is lean hogs that are the best performer - up a stunning 51% in Q1. As Bloomberg reports, the reasons are varied and, fair warning, sometimes disgusting: The same Ukraine story that is helping to keep a lid on equities is fueling a rally in wheat on concerns about Russian crops; the pigs in China are gobbling up U.S. soy, while the hog supply in the U.S. is being hurt by a nasty case of “porcine epidemic diarrhea virus.” The bottom line - Q1 has been the quarter of food inflation and financial asset deflation.

Should we be surprised?