Archive - Aug 2011 - Story

Zero Hedge has been among the most vocal critics of Keynesian economics, and specifically the misinterpretation by modern governments of the core approach of the "Keynesian revolution", which essentially gave them a carte blanche to drown society in preemptively failed stimulus after stimulus, funded with a relentless tsunami of public debt, which, while some believe will never be "called", others, who actually base their opinions on real world empirical evidence and not textbooks, realize all too well that such debt is ultimately unsustainable, reserve currency or not. Which is why we were amused to read today in a letter by Pimco's Tony Crescenzi, the core gist of our argument, repeated so often through the years, namely finally "Saying no to Keynes and fiscal folly." The key paragraph from Pimco: "Politicians and the beneficiaries of their fiscal illusions for the past 80 years abused the Keynesian philosophy, relentlessly and dangerously pursuing the use of debt for self-aggrandizement. Today, the citizens of indebted nations bear a heavy burden and must begin repaying the debts. It is a herculean task, because the debts are mountainous. Yet, there is no choice, because investors have become intolerant of fiscal follies. They are saying no to Keynes, in other words." This also explains why during Bernanke's Jackson Hole speech the Chairman basically threw the ball back in Congress' court. Unfortunately he will soon realize that absolutely nothing will come out of this, and it will be up to him to once again guarantee that Wall Street generates yet another year of record bonuses.

Ron Paul has released the following extended rhetorical inquiry on what the utility of the recent expansion (through very military means) of US and European interests in Libya has been, which more than anything exposes US hypocricy when it comes to foreign national interests. To wit: "Gaddafi may well have been a tyrant, but as such he was no worse than many others that we support and count as allies. Disturbingly, we see a pattern of relatively secular leaders in the Arab world being targeted for regime change with the resulting power vacuum being filled by much more radical elements.  Iraq, post-Saddam, is certainly far closer to Iran than before the US invasion.  Will Libya be any different?" And he follows up: " With the big Western scramble to grab Libya's oil reserves amid domestic political chaos and violence, does anyone doubt that NATO ground troops are not being prepared for yet another occupation?" Unfortunately, we will get the answer to this question quite soon, especially if a counter revolution in Libya, as many expect, does occur.

With today's market session merely a continuation of what happened on Friday, here is David Rosenberg's explanation of the market move seen following the initial dip on Friday, followed by the latest surge in stocks. Rosie's summary on what has been driving stocks higher over the past 48 trading hours? Simple - " the markets were responding to something and they were. It's called hope, and Ben gave them some." If indeed stocks are correct about QE3, look for Brent, WTI, Gold, and everything else to resume the upward climb, completely ignoring anything and everything that the CME decides to do with "speculative" margins levels.

The ES to Contextual Risk spread presented on Friday, at which point the ES was 15 rich to "underlying" fair value (first red circle from the left on the chart) continues to make new wides. After collapsing to 30% of the original spread level shortly after presenting, (first green circle) the spread returned to almost inception levels, and has since continued to blow out wider. At last check, ES appears to be nearly 25 points rich to fair value. Whether this means that correlation traders have taken an extended vacation, or that once again the purchasing capacity of those who "wag the dog" of actual underlying risk expression is impaired due to lack of actual capital, is unclear. It is also unclear how much wider the last 24 hours of irrational exuberance can send this spread before it reverts to fair levels. If the recent move in ES is predicated by self-fulfilling expectations of the Fed announcing QE3 on September 21, it is quite likely this may blow out to historic wides as the Bernanke Put, as presented here and which impacts primarily stocks in the early part of the easing regime, continues to be priced in over the next 3 weeks.

Italy's brief flirt with Austerity, disclosed on August 12, lasted all of 2 weeks. As Reuters reports, following a 7 hour meeting between FinMin Tremonti who has been portrayed by the media as the primary reason why Italy has recently become the target of bond vigilantes, and which in turn was forced to establish some token measures of austerity, and PM Berlusconi, the most provocative measure of the "austerity" packet have been dropped, namely the solidarity tax, which would see new taxes on high earners, as well as austerity imposed on local budgets, and instead will be replaced with new 'tax evasion' avoidance schemes. Surely this massive watering down of Italian austerity will work: just ask Greece how effective the whole crack down on tax avoidance was. At least the Piazza Navona strike cam can be dropped for now... or at least until bond vigilantes strike in Rome again, and the country does the whole austerity charade again.

Some observations from SocGen, which presents us with three charts explaining why those who believe in the Japanese scenario should "be afraid, be very afraid - If we accept the idea of a three-stage crisis (taking as our starting points 2000/01 + 2007/08 + 2011), we have probably reached a situation similar to Japan’s lost decade of the 1990s. A Japanese-style scenario for the US could gain traction, particularly if there is no real estate recovery in the US, high unemployment levels persist, and economic sentiment remains depressed. Such a configuration would suggest that, in June 2011, we exit a bear market rally, which was fuelled by restocking and QE2. Another 20% drop in the equity indices could then be observed in the coming months if this scenario were to materialise."

For anyone wondering why the biggest drivers of intraday moves in the stock market are furious short covering squeezes which have led the S&P to have daily fluctuations that make a mockery of the Fed's prerogative for "price stability", here is your answer. On August 15, short interest in the NYSE soared by over 1 billion shares compared to the end of July: this is the highest gross short interest since June 15, 2010, and the biggest increase biweekly increase in NYSE short interest since the S&P's plunge to 666 in March of 2009. If the central planners pull something out of their sleeve, and the short interest plunges to recent averages in the mid 13 billion share level, expect some even more furious short covering sprees to send the S&P much higher on an intraday basis.

A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.

Market Recaps to help improve your Trading and Global knowledge

The explosive rise and global impact of technological innovation has persuaded us that technology is the ultimate solution to all our problems. This assumption is rarely questioned; it has become like the air, unseen and unexamined. The notion that technological innovation is intrinsically incapable of "fixing" our problems is not just alien to our collective mindset, it is essentially sacreligious. In the current cargo-cult of technology worship, the basic assumption is better engineering can solve every problem. Thus we have two powerful cargo-cults influencing the American economy, society and government: the Keynesian "monetary easing," borrow-and-spend your way to permanent prosperity Cult of the Fed and its Keynesian priesthood, and the cult of technological innovation as the fount of all solutions. The idea that both these cults are the equivalent of the Mayan priesthoods which oversaw the decline and implosion of the Mayan Empire is not just an outlier--it is heresy of the first order. Ironically, perhaps, it is glaringly obvious that both cults will fail because they do not understand the problems and are automatically applying tools that cannot possibly fix what is broken: the three basic principles undergirding the American economy and society are crumbling, though that devolution is mostly hidden from view.

Even as the policy instrument that is the US stock market does its robotic levitation thing on days when it is not plunging (i.e. volume is bigger than average), other, more rational indicators continue to paint a less rosy picture in terms of risk inflection points. The latest of these is CMBS, which as we speculated two weeks ago, has continued to be sold off across all vintages and as of today, the super duper AAA tranche has just hit its widest spreads since June of 2010. The charts below show the spread comparison from two weeks ago for AAA and AJs and the subsequent widening to date.

Time for some more rotation of the titanic's deck chairs with the Princeton labor economist taking over Goolsbee. Unfortunately with Geithner still around, there is no risk America will change its current path heading straight into a Double Dip iceberg.

The second economic disappointment of the day comes from the Dallas Fed, which dropped from -2.0 to -11.4 on expectations of -9.0- this was the 4th consecutive negative print month. The report was, in a word, horrible, with just 2 of the 15 constituent indices posting an increase, and the bulk solidly in the red, led by Unfilled and New Orders which dropped 16.8 and 11.2, respectively: not good for economic growth. On the employment side there was nothing good either, with both employment and hours worked declining by -6.7 and -10.1, respectively. The only components rising were materials Inventories (must.restock.always), and CapEx, up 10.7. The most critical Production index declined by 9.7, just barely positive at 1.1, and the second lowest in 2011, with a worse number before that printing all the way back in 2009. Yet the most descriptive are the responses from the survey respondents themselves: two words "peak gloom." And why not: the ISM will print in the mid 40s and the NFP could well be negative. Which of course will send stocks soaring even higher on QE3 being priced in for the 666th time.

Perhaps it is time to redefine the term "distribution." And somehow everyone has forgotten to bash High Frequency Trading on days when it is the primary bidder of a levitating stock market.

The NAR just reported that pending home sales, yet another metric of that long-forgotten housing market, dropped 1.3% in July, on expectations of -1.0%, and down from 2.4% in June. Market reaction is none, because this metric does not matter: all that matters is who and what else petrodollars can bail out next. From the report: "The Pending Home Sales Index,* a forward-looking indicator based on contract signings, slipped 1.3 percent to 89.7 in July from 90.9 in June but is 14.4 percent above the 78.4 index in July 2010. The data reflects contracts but not closings." And the soundbite from the always hilarious and massively discredited and conflicted Larry Yun: "The market can easily move into a healthy expansion if mortgage underwriting standards return to normalcy,” he said. “We also need to be mindful that not all sales contracts are leading to closed existing-home sales. Other market frictions need to be addressed, such as assuring that proper comparables are used in appraisal valuations, and streamlining the short sales process." Ah yes, mortgage underwriting standards, in other words if banks were to actually do something about mortgage that are delinquent by nearly 2 years. Those standards?

Nobody could have seen this coming. From Reuters: "Zynga, the social games maker may delay its plans for an initial public offering until November because of poor market conditions, the New York Post newspaper reported late on Sunday. The New York Post, citing two sources with knowledge of Zynga's plans, said the company hoped its shares would be listed as soon as possible but is "no longer in a rush because of the rocky stock markets." Another source close to the company said its public debut could be delayed until November but the company will know more after Labor Day, the newspaper said." Maybe Zynga can just find some of those sophisticated buyers of Sino Forest stock who were betting on a dead cat bounce, or all of those distressed funds who were bidding up the bonds at 50. If that fail, it can just approach the Sovereign Wealth Funds which bailed out the biggest (pro forma) Greek and American bank for a few days.