Archive - Aug 2014

We did this interesting experiment on the 10 minute lift to the top of the ski slopes last weekend.

Fed officials have repeatedly emphasized the importance of financial stability for monetary policy. But, as Goldman Sachs points out, knowing which financial and macroeconomic imbalances to monitor is challenging, not least because of the limited number of past crisis episodes in the US. To help The Fed, Goldman surveys a large economic literature that studies the effectiveness of "Early Warning Systems" (EWS) in detecting banking crises, costly asset price busts, and currency crises across a broad range of countries. While they suggest subtlely that the Fed is clueless with regard what to look for, they note that credit markets and asset-price run-ups (especially when they occur together) provide a statistically clear warning signal... and as we know, both are flashing red currently.

Roughly a month ago, we exposed CYNK Technology Corp. The CYNK bubble was, of course, the result of carefully planned deceit and clever promotion by a handful of people who stood to make a lot of money on the trade. But when you think about it, CYNK’s stock wasn’t really any dumber than owning US Treasuries. In the case of CYNK, it only took about a month for the bubble to inflate and burst. The Treasury bubble, on the other hand, was built on credibility earned over decades; but while previous generations earned the world’s trust, modern day politicians have blown through it. Now all they have left is their snake oil sales pitch. And a mountain of obligations that closed July 2014 at a record high $17.69 trillion.

Having torched Janet Yellen over the weakness of the so-called "living wills" of the Too-Big-To-Fail banks, it appears Elizabeth Warren's tirade struck home. As WSJ reports, in a sweeping rebuke to Wall Street, U.S. regulators said 11 of the nation's biggest banks haven't demonstrated they can collapse without causing broad, damaging economic repercussions and ordered them to show "significant" progress by July 2015. Of course, the whole 'living will' concept is a self-referential joke, but we leave it to Thomas Hoenig to sum it up: "the plans provide no credible or clear path through bankruptcy that doesn't require unrealistic assumptions and direct or indirect public support." In other words, taxpayers are still on the hook.

Today was the Dow's worst Tuesday in 3 months as yesterday's exuberant gains in stocks evaporated on heavy volume. While Polish officials may have been the catalyst, technical levels and AUDJPY weakness were the essential ingredients for today's equity weakness. It appears the pre-payrolls level was key for stocks. Treasury yields plunged back to unch on the week after the Polish Foreign Minister said the "i" world (invasion). The USD sold off but remains +0.25% on the week as gold and silver popped modestly on the headlines. VIX jumped back over 17 (but closed with a 16 handle). Credit markets leaked wider with equity weakness. So good news (macro) was bad news early and then bad news (geopolitics) was bad news later - Fed needs to print some more world peace. The Dow has not gained anything since Christmas Eve.

Did Rupert Murdoch just save the market from his top-ticking acquisition track record (or sentence it to death):

*21ST CENTURY FOX WITHDRAWS PROPOSAL TO BUY TIME WARNER
*FOXA SEES BUYBACK OF ADDED $6B SHRS COMPLETED IN NEXT 12 MONTHS

Time Warner is down over 13% after-hours.

Here is the bottom line: since Lehman, or starting in 2009, the Birth/Death adjustment alone has added over 3.5 million jobs. Or rather "jobs", because these are not actual jobs - these are BLS estimates for how many jobs newly-formed businesses have created based purely on statistical estimations and hypotheses that the US economy in 2014 is as it was in 1960. Which means that the traditional dynamics used behind the Birth and Death adjustment are now merely Dead, and US employment is overestimated by as much as three and a half million jobs!

The Fed managed to pull a rabbit out of a hat last time... by resorting to extraordinary policies. In doing so, it's used up most of its ammo. So there's no telling what will happen if we get another systemic deleveraging again.

We noted last week the coincidental surge in China's currency and stock market (bettering US equities for 2014) after they quietly unveiled QE-lite, but, as Bloomberg reports, Tom DeMark says "selling into strength is now recommended," with losses expected over the next six months. This follows his prediction from June that China's Shanghai Composite was due for a recovery, presaging a 16% rise. With last night's hint of China's credit impulse fading and CNY now recoupled with its fixing, perhaps he is right that the short-term catalysts for gains are exhausted. As DeMark concludes, "the trend is your friend until the trend is about to end."

Paying for unproductive friction with borrowed money has generated the illusion that free to me is actually free - it isn't. We all understand how friction slows our progress: flatten the tires on a bicycle and it becomes much harder to maintain speed. If a brake pad is rubbing against one wheel, it gets even harder. If we pile on additional sources of friction, eventually forward motion stops. In systemic terms, the system freezes up and collapses. We see the same systemic friction in the U.S. economy.

Yesterday, the S&P and Nasdaq bounced hard off the pre-payrolls level from Aug 1st. From the moment US cash equity markets closed yesterday, stocks have been dropping back. But now, thanks to this:

SIKORSKI: RUSSIAN UNITS POISED TO PRESSURE OR INVADE UKRAINE

The Dow, S&P and now Nasdaq have tumbled below yesterday's lows, eradicating all the post-payrolls gains in stocks. Treasury yields are tumbling (5bps off highs) and gold and silver and rising.

Over the weekend, the Ukrainian government imposed a series of “temporary” taxes to help the war effort as Ukrainian press reports several hundred solders were left without weapons or ammunition and crossed the border into Russia. The Ukrainian government is in a hurry to raise money. For the last few months, even before the turmoil began, Ukraine has been in an inflationary cycle. Both retail and asset prices were spiraling higher. Now they’ve entered a stagflationary period. The currency has gone into freefall. Unemployment is rising. The economy is contracting (6% by phony government estimates). And inflation is a whopping 19%... and rising. These people are getting abused. And the worst is yet to come.