Archive - Aug 2014

In this first of a series of London interviews that Lars Schall conducted for Matterhorn Asset Management this summer, Lars met up with the Telegraph's Ambrose Evans-Pritchard to discuss geopolitical tensions in the world, China's challenges, threats to the global economy and the expectations for gold.

Mark Spitznagel: "Mises will ultimately be right yet again about the inevitable final collapse of the current asset boom brought about by credit expansion. The term “black swan” (the surprising, unforeseen event) used for bursting financial bubbles has been and will remain a misnomer - we can and, indeed, should expect such tumults to occur at some point as a consequence of massive central bank intervention and economic distortion."

Ron Paul: "As to the unwinding of this mess, I’m convinced that when the current expansion ends it will be abrupt, gigantic, and worldwide. The 43-year expansion of Fed credit and debt, delivered to us by a fiat dollar standard, and held together artificially by an undeserved trust will end badly."

Perhaps the only question emerging from this profile of the first document US citizen casualty fighting for the Islamic State, whose name earlier was revealed as Douglas McAuthur McCain, is whether he and John are related.

Unlike the QE-lite-driven exuberance in Chinese stocks of the last few weeks (which faded dramatically overnight), China's industrial commodities (with near-record inventories) and seeing prices collapse. This may shock some who espy PMIs and government-created trade data and proclaim, China is fixed. In fact, as JPMorgan's China Sentiment Index (JSI) shows, things are anything but bright as it fell to the lowest since June last year (at 48.3 in August). Sales and margins are tumbling - despite supposedly lower input costs. Lastly, those focused on spot Yuan movements (strength in recent weeks) have suggested this also confirms China strength - inflows - but looking out 12-months shows the market is expecting a dramatic devaluation from current levels in the Chinese currency is coming.

Hydroelectric dams are a nifty way of producing a huge amount of power, but they do not last forever. This is a tale of two dams that will fail unless they are urgently repaired, and if they fail, catastrophic suffering and loss of life will be the result.

Thanks to buybacks, multiple expansion has been the driver of equity market strength as non-economic actors know one thing - buying stocks at record highs pays better than 'investing' in Capex or growth. However, the Treasury market's yield curve is sending a message loud and clear that multiple-expansion is due to end. As Wells Fargo's Gina Martin Adams notes, "Index P/E is likely to fall," as the spread between 10Y and 2Y yields compresses. Historical data shows the P/E ratio contracted in seven out of eight periods when the curve flattened since 1975. As Bloomberg adds, Martin Adams expects the S&P to close 2014 -7.5% from here at 1850 (tied with Deutsche's David Bianco for lowest prediction among 20 strategists).

Last week’s Jackson Hole meeting helped to highlight a simple reality: unlike other parts of the world, the eurozone remains mired in a deflationary bust six years after the 2008 financial crisis. The only official solutions to this bust seem to be a) to print more money and b) to expand government debt. Nothing Mr Draghi said in his Jackson Hole speech changed this reality.

At this stage, the path of least resistance is for the eurozone, and especially France, to continue disappointing economically, for the euro to weaken, and for Europe to remain a source of, rather than a destination for, international capital.

The S&P 500 has tripled off the March 2009 lows and took a mere 65 days to go from 1900 to 2000 today. As WSJ notes, the S&P needed 11,208 trading days to reach 100 for the first time... Here’s a look at S&P 500 milestones throughout the decades... and how Bernanke predicted 2,000 in March 2013.

Despite all the massive monetary pumping over the past six years and the lowering of interest rates to almost zero most commentators have expressed disappointment with the pace of economic growth. This should not be surprising though, since, any policy, which artificially boosts demand, leads to consumption that is not backed up by a previous production of wealth. This means that monetary pumping leads to the squandering of real wealth. All this however, can be reversed by shrinking the size of the government and by the closure of all the loopholes of the monetary expansion.

With Europe and the US on one side, and Russia and China on the other, the saying, "The enemy of my enemy is my friend" could best describe the current geopolitical situation

For the last 2 weeks, the US Dollar has surged - hitting new 13-month highs today amid JPY and EUR weakness - and for the last 2 weeks, US stock and bond markets have rallied (leaving 30Y yields implying the S&P is 130 points rich or yields are 25bps too low). S&P tops 2,000, Nasdaq closed up for 10th day in a row, Russell outperformed on major short-squeeze, Trannies slid red for the week. Today saw modest Treasury weakness (30Y +2bps, 2Y -1bps) but still lower on the week; gold ($1285), silver ($19.50), and oil ($94) gained on the day - despite USD strength - as copper dropped 1%. Credit markets remain unimpressed by record-er highs in stocks. VIX decoupled from equity strength today as NASDAQ options feeds broke. Volume was an utter disaster... that is all.

While in July margin debt did dip modestly from near all time highs hit back in June when total margin debt was virtually tied with the previous record, at $464 billion, it was that other metric tracked by the NYSE, namely Investor Net Worth, calculated by subtracting margin debt from the notional represented in free credit cash accounts and credit balances in margin accounts, that was the notable highlight in the July report: at a negative $182.1 billion, a decline of $6.3 billion from the prior month, investor Net Worth has never been lower.

Presented with little comment aside to note Biotechs are up 33% from the April lows and have reached all-time record highs and have now totally ignored 2 warnings from Yellen - who just last week was heralded as omnipotent.

Roughly 60% of California right now is suffering “extreme drought” conditions. 30% of the state is in “severe drought”. And 10% of the state is only under “drought”. In other words, roughly the entire state - the 8th largest economy in the world – is facing a severe shortage of water. But if you think that’s bad, China is about to take over the spotlight yet again. A study by China’s Ministry of Water Resources found that approximately 55% of China’s 50,000 rivers that existed in the 1990s have disappeared.

A few days ago, when we looked at what is one of the last tax havens in the world, the principality of Monaco, we uncovered not only the world's most expensive Penthouse costing a whopping $400 million, but got some perspective on how far one's dollar really goes, or doesn't. Because when it comes to asset inflation there is a world for the "rest of us", where according to Janet Yellen "inflation is noisy" and any spikes should be ignored, and one for the 1%, where inflation is essentially off the charts. In fact, a world where as the following anecdote fiat prices hardly matter.