Archive - Aug 2014

If We Stop Arming, Funding and Training Terrorists, then Maybe We Won’t Have to Bomb Them Later

Jackson Hole - that magical place where the world's greatest monetary central planners gather once a year to yarn long into the night about how they are printing money, crushing the middle-class, monetizing debt, and ramping asset prices; all in the name of economic progress and saving the world from the c-word... "counterfactual" that is. The last few years, Jackson Hole has also been a guaranteed Buy-The-Rumor and Buy-The-News moment for the smartest traders in the world... except this time something just changed. Did the Fed's magic just run out?

It appears China is as happy as Russia to show just how little respect it has for the US' superpower 'hegemony' status. In May China flew close to Japan's airforce; in June, Russia flew nose-to-nose with the US; and now The Pentagon reports a Chinese fighter plane came within 30 feet of a US Navy Poseidon 8 plane. The 'Top-Gun' move came after several passes across the nose of the P-8 about 220km east of China's Hainan Island. The US has registered "strong concerns" with the Chinese government about "unsafe and unprofessional" conduct and The White House called the incident a "provocative action."

As a reminder, this kind of market action is neither normal or healthy longer term and has only seen near historical major market peaks. Of course, timing is everything. With the current influx of liquidity coming to an end in October, combined with a plan to start to increasing interest rates in 2015, the Fed has clearly begun to signal the end of 5 years of ultra-accommodative policies. The question that remains to be answered is whether or not the economy is actually strong enough to be removed from "life support?" This weekend's "Things To Ponder" is just a smattering of interesting articles cover a wide range of topics that I hope you will find interesting, informative and contemplative.

US equity markets were led by the stodgy old low-beta Dow this week - not the high-flying muppetry of the Russell or Nasdaq - as stocks enjoyed the best week in 4 months amidst escalation of geopolitical time-bombs in Israel, Iraq, and Ukraine. Dow and Trannies gained 2% by the close as today's disappointment in Yellen and Draghi took the exuberant shine off an otherwise bottom-left-to-top-right Birinyi ruler-based market. The USDollar gained 1.1% on the week - its best week since November - closing at one-year highs. Gold was slapped almost 2% lower (worst week in almost 3 months) as did WTI (back at $1280 and $93.50 respectively). Copper surged 3.2% on the week (2nd best week in a year) on China restocking chatter. Treasuries were a mixed bag with dramatic flattening on the week (30Y +2bps, 5Y +12bps) to 2009 flat. Credit markets cratered on the day - ignoring equity's relative shrug.

With Lake Mead water levels at record lows, the obstinate drought in California is showing no signs of letting up, and is now being compared to the last major drought which took place during 1976 and 1977. However, the current drought may get much trickier if we don’t see a sharp reversal in rainfall patterns soon, as 'there is a conflict brewing...'

UPDATE: Official Russian denial - no YouTube - *CHURKIN: NO PROOF OF RUSSIAN ARTILLERY IN UKRAINE

The Russian military has moved artillery units manned by Russian personnel inside Ukrainian territory in recent days and is using them to fire at Ukrainian forces, New York Times reported, citing NATO officials. The Russian move, NYTimes reports, represents a significant escalation of the Kremlin’s involvement in the fighting there and comes as a convoy of Russian trucks with humanitarian provisions has crossed into Ukrainian territory without Kiev’s permission. The US is now getting involved, as WSJ reports,

• Pentagon calls on Russia to 'Remove Vehicles Immediately' From Ukraine
• Kirby says "very concerned" by Russian convoy in Ukraine.

Ukrainian Security Service chief Valentyn Nalyvaichenko said the move amounted to a "direct invasion," and The Pentagon has warned "failure to [remove its vehicles] will result in further costs and isolation."

Two weeks ago today, on Friday, August 8, the "market" seemingly desperate for any excuse to soar, did just that when Russia, tongue-in-cheek, announced that a Russian military drill, which everyone knew in advance would end that day, and which "worried the US department of state" finished. So by that logic the announcement of a new, and even more massive, military drill by Russia should send stocks crashing, right? We are joking of course: there is no news in this world that could possibly send stocks lower as good news is great but bad news only means even more intervention of various central banks, however Russia did indeedannounce that it will take part in counter- terrorism exercise called Peace Mission in China. All this is happening as Russia is currently taking part in a third exercise, called Interaction-2014, located in Kazakhstan with members of the Collective Security Treaty Organization. The purpose of this particular drill: "seek to contain armed conflict in imaginary state."

Presented with no comment...

With Yellen's speech a bit of a letdown for the doves - she did not go full-dovish - markets anxiously await Mario Draghi to promise whetever for ever and ever... While financial markets don’t expect bombshells, his speech is an opportunity to underscore that ECB policy will stay looser for longer than that of the Fed and the Bank of England.

DRAGHI SAYS HE'S 'CONFIDENT' JUNE STIMULUS WILL BOOST DEMAND, SEES 'REAL RISK' MONETARY POLICY LOSES EFFECTIVENESS

Last night it was SecDef Chuck Hagel who warned ISIS was a bigger threat to America than 9/11 and primed the narrative for the next round of defense-spending (and this deficit-boosting, QE-enabling money printing). Today it is Senate Armed Services Committee member Jim Inhofe who told Fox that "we're in the most dangerous position we've ever been in as a nation." While that seems a little bit of stretch (oh and hasn't the Senator seen stocks?) he adds - rather ominously, "they're crazy out there and they're rapidly developing a method of blowing up a major U.S. city and people just can't believe that's happening." But then again, when have we ever needed to 'believe' anything anyway (especially without YouTube clips to prove it).

In a historic first, three days ago, South Africa's Rand Merchant Bank, a division of FirstRand Bank Limited, announced it would issue the FirstRand Gold Bond, or a bond denominated in South African Krugerrand gold coins. In other words, for the first time "holding" gold will pay a dividend (or in this case, interest). Sound odd? Maybe because it is.

Apple hits all time highs on new product speculation as its new products hit production snafus, delaying them while competitors launch major products anyway. This is how to monetize your position!