Archive - Apr 2014

In recent years a good part of the monetary debate has become a simple war of words, with much of the conflict focused on the definition for the word "inflation." Whereas economists up until the 1960's or 1970's mostly defined inflation as an expansion of the money supply, the vast majority now see it as simply rising prices. Since then the "experts" have gone further and devised variations on the word "inflation" (such as "deflation," "disinflation," and "stagflation"). And while past central banking policy usually focused on "inflation fighting," now bankers talk about "inflation ceilings" and more recently "inflation targets".  The latest front in this campaign came this week when Bloomberg News unveiled a brand new word: "lowflation" which it defines as a situation where prices are rising, but not fast enough to offer the economic benefits that are apparently delivered by higher inflation. Although the article was printed on April Fool's Day, sadly we do not believe it was meant as a joke.

"I must confess to you that I was an ardent proponent of bringing technology to trading and brokerage. Unfortunately, I only saw the good sides. I saw how electronic trading and record-keeping could be used to force people to be more honest, to make the process more efficient, to lower transaction costs and to bring liquidity to the markets. I did not see the forces of fragmentation and the opportunity for people to use technology to keep to the letter but avoid the spirit of the rules -- creating the current crisis....  Technology, market structure, and new products have evolved more quickly than our capacity to understand or control them. ... To the public the financial markets may increasingly seem like a casino, except that the casino is more transparent and simpler to understand.... The result has been a series of crises over the past few years that have caused many investors to lose confidence or to think that the whole system is a rigged game."

Investors are shocked at the current sell-off as hope/hype growth expectations fade rapidly, momentum junkies question their guru-ness, and earnings all of a sudden matter. In the hopes of shining a little light on that "reality" we suspect the the following chart - ahead of Q1 earnings data - will clarify just how much hope is out there.

The fragility of our debt financed oil dependent just in time global supply chain system is beyond the comprehension of the average zombie American. They are too distracted by mass consuming the products dependent on that very same fragile scheme. They are clueless zombie-like dupes who believe $20 bills magically appear in ATMs, Funyuns and Cheetos miraculously materialize on Wal-Mart shelves, gasoline endlessly bubbles up from the ground into the hose they stick in their $40,000 monster SUVs “bought” with a 0% seven year loan from Ally Financial, and that enchanted plastic card with a magnetic strip empowers them to fulfill every craving like a zombie feeding on a dead carcass. However, the cracks in this delusionary foundation are visible for all to see.

What is there in this world that is transparent? Is there anything left? You just need to take a look around you. The growing number of corruption cases, the people that embezzle, fraudulently take, borrow, beg and steal at whim.

Early hope faded into middle-of-the-day-despair which was rescued (briefly) on a sea of JPY carry (which dragged the S&P all the way to VWAP) then crashed and burned on the shores of dismal reality into the close. USDJPY was in charge and 103 was the magic number that kept the S&P 500 from breaking its 50DMA (for now). The Nasdaq and Russell were ugly as Biotechs' early ripfest gave way. This is the biggest 2-day swing lower in the Nasdaq since Oct2011. Treasuries rallied modestly on the day (-2bps) as the USD weakened 0.25% led by EUR strength. Copper rallied from an overnight dump low but gold (~$1300), silver (~$20), and oil (~$100) all clustered around -0.5%. VIX tested up to 16 intraday but was rammed lower as the 330 ramp too early to hold and merely enabled VWAP sellers out... and we closed near the lows...

“George Osborne is facing a backlash over plans to give his government unprecedented powers to dip into taxpayers’ bank accounts to seize unpaid tax debts.” The surreptitious and somewhat underhand manner in which the legislation was slipped in should give pause for concern. In that way, the measures are similar to the developing bail-in legislation in the UK which is gradually coming into place without any public debate or informed discussion.

As Yves St. Laurent might have said, "Algos fade, this stylish HFT-shirt is eternal."

The blog posts and defenses of high frequency trading in the past week have come with dizzying high frequency. Flash Boys has struck many a nerve; the truth can be a bitter pill at times. And of course, the pro-HFT defenses are all made by many who are very, very staked in the status quo of our market structure. Now, bloggers using twitter is one thing; conflicted insiders using television to make their HFT defenses are another. 

Putting this in context, in the past 12 months, a record 98% of all credit - $162 billion - has gone into non-revolving debt, i.e., student and car loans. How much has been added to credit card balances? An absolutely meaningless $4 billion, or 2% of total. Shown below, the "consumer recovery" is the bar chart on the left.

Over the weekend, Nigeria’s government made an accounting adjustment in how it calculates its GDP statistics. By changing the base-year in GDP calculations from 1990 to 2010, Nigeria increased the reported size of its economy by 89% over the weekend. So with a stroke of a pen, the West African nation leapfrogged South Africa to become the continent’s largest economy. And in doing so the country’s debt-to-GDP ratio fell below 20%. Of course, the US government does exactly the same thing… often conveniently leaving out huge portions of its total debt such as the non-marketable securities it owes to the Social Security trust funds. It’s all about maintaining a false sense of confidence at all costs, no matter what lies they have to fabricate, no matter what fraud they have to commit.

While the Fed's official 'mandate' is do no evil maximize employment with stable prices, it is perhaps better understood (in recent decades) as pump credit, create bubbles, hope for job creation, and hope that inflation does not get out of control. So the following two charts from Citi suggest the Fed, no matter how much Taper or un-Taper they do, face some serious demographic headwinds from rising inflation and plunging stock valuations.

In what would likely get her a daily (armed) drone surveillance package with blanket NSA supervision, if not outright burned at the stake in the US, Leonie Ki - who is the new head of Hong Kong's government campaign to alleviate poverty - dared to suggest what is the absolute anathema to any nanny state such as the US: instead of relying on the government for everything, people should achieve prosperity by their own hard work. Surely in the US words such as these would result in her being tar and feathered by at least half the population for daring to suggest something so loathsome to a nation which is increasingly convinced personal prosperity comes courtesy of government handouts of everything: from Obamaphones to Obamacare and, coming soon, Obamafood.

Guess what? There is none. Rather, the Federal Reserve practice of Delphically divulging its intentions ought to be understood as the master pretense of US economic life — the delusion that wise persons are actually in control of anything. The result of this guidance continues to be the mis-pricing of everything, especially the cost of money as represented in the operations of debt, and hence the value of everything denominated in money. One thing we really do know, as good old Herb Stein put it, is that things go on until they can’t, and then they don’t.