Archive - Jun 2014

Over a year ago we were the first to bring the topic of China's shadow banking system's problematic rehypothecation issues to the general trading public. In "The Bronze Swan Arrives: Is The End Of Copper Financing China's "Lehman Event"?" we explained how the Chinese commodity financing deals (CCFDs) worked and how they would inevitably be a systemic event for the nation so dependent on the shadow banking system for its credit (and its "growth"). The day has arrived when the Bronze Swan is landing (and it's unlikely to be soft). As we have discussed recently, the probe into 'missing' collateral (or multiple-used collateral) at China's Qingdao warehouse is a major problem... and now Goldman confirms, the Qingdao situation likely to continue ongoing CCFD unwind and has the potential to leave foreign banks with undercollateralized loans and/or losses.

FRB open caption contest...

“Excessively low interest rates are inflationary because they mean that bonds, stocks, real estate and unincorporated businesses are capitalized at excessively high rates, and will fall in value even though the annual income they pay remains the same, if interest rates rise.” If interest rates were artificially low, it would follow that prevailing investment values are artificially high. I contend that they are, and you may or may not agree. Natural interest rates — free-range, organic, sustainable — are what we need. Hot-house interest rates — the government’s puny, genetically modified kind — are the ones we have.

As each of the following seven towns from history around the world boomed on the back of resource-hungry bubbles, no one could have foreseen (or even believed) that it would ever end... but as the following dismal images show - end it did. Is this the future for North Dakota or Texas? or Silicon Valley? (of course not stupid... it's different this time).

Yes, the nonfarm payroll clocked in at 138.5 million jobs and thereby retraced for the first time the point at which it stood 77 months ago in December 2007. This predictably elicited another “milestone of progress” squeal from the mainstream media. So you have to wonder. Did these people skip history class? Do they understand the vital idea of “context”? So if you want to try a little “context” absurdity recall this. So far we have created a trifling 100k “new” jobs since the last cyclical peak. During the equivalent 77 months in the Reagan era the US economy actually generated 150 times more jobs!

We are sure it's just an oversight... but given Abe's increasingly nationalist banter (and an economy set to plunge in Q2 after Q1's pre-tax-hike surge), it is certainly worth noting that, as The Japan Times reports, Japan failed to include 640 kg of unused plutonium in its annual reports to the International Atomic Energy Agency in 2012 and 2013, in what experts are terming an "inappropriate omission." The unreported amount is enough to make about 80 nuclear bombs. reassuringly, officials noted "there is no problem in terms of security against nuclear terrorism," but as another pointed out, "should make efforts to improve" its reporting. Well, yeah, especially given that Japan possesses the largest amount of plutonium among nonnuclear weaponized nations.

Because we are living in the Golden Age of Central Bankers, and that wreaks havoc on the fundamental nature of market expectations data....

1. the VIX is not a reliable measure of market complacency.
2. the wisdom of crowds is nonexistent.
3. fundamental risk/reward calculations for directional exposure to any security are problematic on anything other than a VERY long time horizon.
4. I’d rather be reactive and right in my portfolio than proactive and wrong.

The Golden Age of the Central Banker is a time for survivors, not heroes. And that’s the real moral of this story.

No, It Was NOT All Bush and Cheney's Fault ... Even Back THEN

"The challenges of managing student loan debt can lead some borrowers to fall behind on their loan payments and in some cases even default on their debt obligation," notes the always astute White House... and so it's time to do something about that... by bailing the bad debtors out with US taxpayers money. As we have been vociferously warning, not only has the student loan debt bubble expanded massively (as the easiest credit substitute for real-world working and unemployment) but delinquencies on the 'easily available' credit is soaring with "consequences such as a damaged credit rating, losing their tax refund, or garnished wages." Consequences, as we have been taught now, are not acceptable for this administration and so President Barack Obama will issue an executive action on Monday aimed at making it easier for young people to avoid trouble repaying student loans.

We have had The Great Depression, The Great Moderation, and The Great Recession... but now, thanks to central banks around the world, we have The Great Insanity. Nowhere is the disconnect between market rates and fundamental realities more evident than in European peripheral bond yields. While it is easy to look at the last decade and wonder how it is possible that such heavily indebted (and increasingly indebted) nations could have seen bond yields collapse... but as Deutsche Bank's Jim Reid explains, a glance at France, Italy, and Spain bond yields over the last 200 years shows that this really is a unique time in history (and not in a good way).

Having spent the last few years blowing away the importance of the unemployment rate propaganda as participation rates have now become mainstream media discussion points, we were not surprised when the Fed admitted that it uses a "dashboard" of various employment measures (even if the world watches payrolls data as if there life depended upon it). As The Fed's Jim Bullard shows in his latest presentation, there are 13 variables the Fed follows. As the following chart shows, the surge in temporary help services hardly supports the great news that Friday's jobs data appeared to be (given stock market reactions).

If it looks like insanity, smells like insanity, tastes like insanity, feels like insanity and struts about barking, “This is insanity”, then perhaps it might just be insanity.

As we pondered the new normal and the disappointed anchors on CNBC this evening noting that we did not hit S&P 2,000 or Dow 17,000 (but there's always tomorrow); two headlines crept across the Bloomberg feed that could not have been more perfectly timed representatives of the new normal record highs in stocks:

• *COVANTA CUTTING JOBS
• *COVANTA TO BOOST CASH DIV TO 25C-SHR FROM 18C, EST. 18C

Here's a tip for management: as a cost-cutting initiative, maybe don't spend 'cash' on buybacks at record highs and invest in productive assets, instead. Of course, that's silly-talk in the world where work is punished; as CVA's stock is jumping after-hours.

Bail-ins or deposit confiscation can now be used in the UK, EU, U.S. and G20 countries. Investors and savers best get prepared for the coming bail-in era. After Cyprus, which country will be the next to suffer bail-ins?

After last night's tumble in copper and surge in CNY during Asia, Europe steadied the ship with more plunging yields (especially the front-end) but the US was all about USDJPY ignition at the open to blast the S&P through 1,950 comfortably and decouple stocks once again from reality. VIX was higher and credit markets were not as exuberant and by the time Europe closed and POMO was done, stocks crumbled back to unchish (apart from the Russell - lifted by another epic short squeeze from the Biotech sector this time). This is the best 4-day swing in the Russell 2000 since Jan 2013 (led by Biotechs today) Gold, silver, and copper ended almost unch as Oil surged 1.7% to over $104 (biggest day in 2 months). Treasury yields bear flattened (5Y +4bps, 30Y +1bps). The USD rose 0.3% - its best day in a month - as EUR closed at 4-month lows.