Archive - Apr 2014

Japan is where the Keynesian economic model rubber hit the road. And it's proven that QE is ultimately an economic dead end.

In her first public speech on monetary policy, Janet Yellen made it clear that the Fed intends to pursue a more rules-based, less discretionary policy. This is good news. The bad news, however, is that Yellen focused only on employment and inflation. In that same speech, not a single word was said about attending to speculative risks or financial instability (which are inherent in Fed-induced, yield-seeking speculation). Without attending to that third leg, the Fed is resting the fate of the U.S. economy on a two-legged stool.  The problem is this. In viewing the Fed’s mandate as a tradeoff only between inflation and unemployment, Chair Yellen seems to overlook the feature of economic dynamics that has been most punishing for the U.S. economy over the past decade. That feature is repeated malinvestment, yield-seeking speculation, and ultimately financial instability, largely enabled by the Federal Reserve’s own actions.

With a multitude of equity valuation dreams hinging on the success of Alibaba's forthcoming IPO, the following chart is likely the most frightening one for many VC companies currently. As Bloomberg notes, it's becoming much harder for companies to close IPOs successfully with only 2 companies last week raising money at an amount within the expected range. On average,  the eight companies from last week priced their offerings 12% below the mid-point of their range. As one analyst noted, "investors have more or less said "enough"."

Going to Cuba is like going back in time. The country lacks basic products and services, many of which we consider staples in modern life. All of this stems from a system of central planning in which government essentially owns and controls… everything. Businesses. Property. Medical services. Anything larger than a bicycle. Teams of bureaucrats lord over the Cuban economy trying to manipulate and control every possible variable. They dole out housing allowances. They set manufacturing quotas. They control prices of goods and services. Nevermind that any high school economics student understands why price controls don’t work… and typically lead to shortages. That’s precisely what’s happening right now. Condoms are now at critically low levels in Cuba. And the government’s solution is to sell expired condoms from two years ago. It’s genius.

One of the recurring themes the western media regurgitates at every opportunity is that while the western "diplomatic" sanctions against Russia are clearly a joke, one thing that will severely cripple the economy is the capital market embargo that has struck Russian companies, which are facing $115 billion of debt due over the next 12 months. Surely there is no way Russia can afford to let its major corporations - the nexus of its petroleum trade - go insolvent, which is why Putin will have to restrain himself and beg western investors to come back and chase appetiziing Russian yields (with other people's money of course). Turns out this line of thought is completely wrong.

In case you were wondering where the ammunition for today's rally in US equities came from on a day of de minimus volume and no real support from JPY carry...

With revenues meeting estimates to the dot, and with largely meaningless non-GAAP EPS (because after all NFLX is valued on a 2024 foward basis), Netflix is choppy after hours as algos try to determine what is more important for them:the miss in domestic subs, which rose 2.25 million on expectations of a 2.31 million increase, of the beat in international (and very much money-losing although now expected to be profitable in 2014) subs, which rose 1.75MM vs estimates of 1.64MM.

With Europe still on holiday, US equity market volumes were in a word, abysmal (S&P futures only around 30% of average) but VIX saw action as volume was healthy and the machines were in charge of the action from start to finish. The Dow's intraday range (and volume) was the lowest of the year. This is the first time since Oct2013 that the S&P 500 has had 5 positive closes in a row just as we predicted this morning. Between VIX slams and JPY crosses, today's action was clearly unrigged as Biotechs pumped, dumped, then ripped 2.5% off the lows as April's largest POMO sent markets scurrying. The USD rose 0.1% (on modest EUR weakness) and commodities slid lower led by silver, gold, and copper respectively. VIX closed at 13.25% - new cycle lows.

"It's impossible to work your way through college nowadays"...is the hard-to-swallow (but not entirely surprising) conclusion of Randal Olson's research into just how extreme national tuition costs have become in the US. As The Atlantic notes, the economic cards are stacked such that today’s average college student, without support from financial aid and family resources, would need to complete at least 48 hours of minimum-wage work a week to pay for his courses.

There’s been some buzz recently about a pick-up in business lending. Unlike some pundits, though, we’re not convinced that a surge in business credit is such a good thing. We don’t doubt that more lending to small businesses, in particular, might do some good if it doesn’t go too far. Lending to large corporations, on the other hand, is a different story. Corporations are already borrowing at a pace that’s only before been seen near cyclical peaks...

What a better way to celebrate the rigged markets that are telegraphing a "durable" recovery, than with a Credit Suisse report showing, beyond a reasonable doubt, that when it comes to traditional bricks and mortar retailers, who have now closed more stores, or over 2,400 units, so far in 2014 and well double the total amount of storefront closures in 2013, this year has been the worst year for conventional discretionary spending since the start of the great financial crisis!

"Janet, we have a problem," is the resoundingly loud message from the latest Gallup poll of Americans preference (and relative enjoyment) of "saving" vs. "spending". It seems, despite all the hoop-la and exuberance about an 'economic recovery' that is pent-up due to weather but about to break out to escape velocity, the majority of Americans continue to enjoy saving money more than spending it, by 62% to 34%. The 2014 saving-spending gap is the one of the widest since Gallup began tracking Americans' preferences in 2001. How long before a discussion of negative rates re-appears as the rich and powerful Oz-ians contemplate the latest effort to 'change' people's mass psychology...

Despite tumbling volumes overall as the rally of the last few days progresses, today's terrible equity market volume is absolutely not evident in VIX - which has already traded more volume than an average day in 2014... "unrigged"

Now that everyone is breathing down the PBOC's neck to finally reveal - with a five year delay - just how much gold it does hold, the Chinese central bank has done a U-turn on its indirect transparency and, as Reuters reports, has begun allowing gold imports through its capital Beijing, sources familiar with the matter said, "in a move that would help keep purchases by the world's top bullion buyer discreet at a time when it might be boosting official reserves."

As we warned numerous times in the last few days since the "de-escalation deal" was reached over Ukraine (sparking an instantaneous risk-on short-squeeze in stocks), the de-escalation has not happened. It seems even John Kerry has faced up to that reality now:

• *KERRY SAYS GENEVA ACCORD ONLY 'PIECE OF PAPER' WITHOUT ACTION

So now what? More red-lines? More sanctions? Just don't tell the headline-buying algos... Of course, he blames the Russians for the worthlessness of the deal.