Archive - May 2014

Crunch time will hit in Spring 2016 according to some economists in the UK. That’s the time when the British will suffer the consequences of the rising annual house-price rate in the country standing at 17% per year. Oh, the people are rejoicing that their houses are worth hundreds of thousands and increasing every year.

Has the next major economic downturn already started? The way that you would answer that question would probably depend on where you live. If you live in New York City, or the suburbs of Washington D.C., or you work for one of the big tech firms in the San Francisco area, you would probably respond to such a question by saying of course not. In those areas, the economy is doing great and prices for high end homes are still booming. But in most of the rest of the nation, evidence continues to mount that the next recession has already begun for the poor and the middle class.

With tear-gas flying in the streets of Turkey, Ukraine's civil-war raging in the south and east, US drones based in Japan to oversee the South China Sea, and Europe's extremist parties gaining significant traction, today we get one more piece of considerably worrisome geopolitical news that global stock markets must ignore. The Sunday Times reports that Israel is to deploy three submarines equipped with nuclear cruise missiles in the Persian Gulf that are meant to act as a deterrent, gather intelligence and potentially to land Mossad agents. Iran is not happy, warning that "anyone who wishes to do an evil act in the Persian Gulf will receive a forceful response from us."

As the U.S. Greater Depression progresses, depicted most vividly in the collapse in the “civilian participation rate” (the number of people working in the economy) and the “velocity of money” (the heartbeat of the economy) - indicating an economy which is not merely in decline, but rather is being sucked downward in a terminal (and accelerating) death-spiral. There is another even more concerning statistic: U.S. “gasoline consumption” – as measured by the U.S. EIA itself – has plummeted by nearly 75%, from its all-time peak in July of 1998. A near-75% collapse in U.S. gasoline consumption has occurred in little more than 15 years... "recovery"

In the immortal words of Cher - "Do you believe in life after QE; I can feel something inside me say, "I really don't think you're strong enough, Now."

Did you hear the one about the Vegas gambler, the Pro golfer, and the Wall Street insider? Straight off the pages of some Hollywood script, the Wall Street Journal reports that Federal investigators are pursuing a major insider-trading probe involving finance, gambling and sports, examining the trading of investor Carl Icahn, golfer Phil Mickelson and Las Vegas bettor William "Billy" Walters. All three men have denied any investigations or "no comment"-ed about "well timed" stock trades in Clorox in 2011 - around the time Icahn made a $10.2bn bid for the company. Mr. Walters and Mr. Mickelson, 43, play golf together; and rather comedically, Mr. Icahn said he didn't know who Mr. Mickelson was...?

The overwhelming majority of global fresh water is locked up as ice or permanent snow cover, making it inaccessible and severely limiting our readily available supply. The average American uses 65 to 78 gallons of water per day, while the average person in the Republic of Gambia, Africa, uses just 1.17 gallons, barely above the minimum amount needed to survive.

Four years after its passage, Obamacare has now been largely implemented, and millions have had their coverage disrupted. For years, the administration has propagated a number of myths about Obamacare. Some have already crumbled, and others will fall as Obamacare continues to change the American health system.

One of the most important, but difficult to measure, concepts in macroeconomics is the natural or equilibrium real interest rate. This is the rate of interest consistent with full employment and stable inflation. The last few weeks have seen bond yields tumble and a rising cacophony of market participants questioning both the Fed's central tendency of terminal or natural rates (around 4%) and the market's perception of how fast we get there. SF Fed Williams models see a 1.8% natural rate, BofA also believes it is between 1.5 and 2%; and now Citi admits, "fair value of long-term rates may be lower than we and other market participants judged them to be."

"Good luck in your next gig.. you too Jay"

"...the West, on the other hand, is full of debt and consumption. America’s greatest exports are now infinite quantities of paper currency, drone attacks, and arrogant regulations like FATCA. It doesn’t take a rocket scientist to see where this is going. The West is running out of steam, and the Social Contract subtext is breaking down. Parents are no longer able to provide a better life for their children."

Recently we showed that in order to goose its fading all-important housing market (to China housing is like the stock market to the US: both mission-critical bubbles designed to give a sense of comfort nd boost the "wealth effect"), China has first resorted to zero money down mortgages across various markets, and secondly to such gimmicks as "buy one floor, get one free." However, that's only part of the story. Even worse is what is not being disclosed to the general public: such as the true state of the housing market in China. Because according to a recent report on Sina, quoted on Investing In Chinese Stocks, when it comes to revealing just how bad things are domestically, Chinese developers are simply pulling a page out of biotech ETF playbooks, and simply not reporting price drops greater than 15%!

As we wrap up a holiday shortened trading week, there are several things to ponder this weekend.  Will the breakout of the S&P 500 of the trading range it has been stuck in since February hold? Is the negative print of GDP in the first quarter simply a weather related anomaly, or something else?  Is the decline in interest rates telling us something important? Are the currently high levels of complacency and bullishness in the markets a warning sign?  Or, is this just a continuation of the bull market cycle that started over five years ago with plenty of room left to run. "I always thought that record would stand until it was broken?" - Yogi Berra

It must be technicals, right? As we discussed here, there are numerous reasons for rates to be low and going lower but the world of talking-heads will have us all believe that this is simple positioning and the rally is 'short covering'. In the interests of helping to dismiss that myth, here is CFTC's 10Y Treasury Futures Total Shorts... showing the 'dramatic' short covering that occurred this week...

Dow Transports were the best performing US equity index in May, rising 5.5% - the best May in 23 years (and best month since Oct 2013). The Dow and Russell 2000 also managed to scrape out gains for May. May also saw bond-buying (the best month since Jan) and gold-selling (worst month since Dec). Treasuries flattened for the 3rd month in a row as 2s30s dropped to 1 year lows. On the week, stocks soared (as "most shorted" were squeezed to death - best 2-weeks in 2014) but VIX has its best week in the last 5, bond yields tumbled and the curve flattened (10Y -8bps, 2Y +2.5bps), gold and silver were clubbed (down 3-4%) for the worst week in 8 months. Amid all this angst the USD ended unch. The S&P overtook gold YTD today but bonds remain 2014's best performer.