Archive - Oct 22, 2012 - Story

While Tom Lee may well spit out his morning tea at yet another one of his truisms smashed  in front of his eyes, it seems that not only is the market the most net long it has been since the top in 2008, but now Barclays proprietary risk appetite index has reached extreme bullish levels - signaling contrarian-wise, consolidation at best and a more significant sell-off typically. It is oh-so-annoying when the facts get in the way of a good wall-of-worry-climbing, money-on-the-sidelines-spewing, beta-performance catch-up chasing market rally that appears to have stalled - especially when your year-end target is inexorably rising...

Presented with little comment - but we are here once again. Who will play Sylvester Stallone in this Cliffhanger?

We know it's Monday and Monday is not a day to joke around; but in light of this evening's debate and our nation's ever-decreasing educational prowess (and yet stable voting capability - i.e. everyone gets a vote!), we thought this clip (via Monty Pelerin's World) summed up perfectly how someone who seemingly sounds so well-spoken and lucid can be so utterly and completely clueless. The first minute will whet your appetite but listen on for the full logic of why deer crossings should be moved from busy highways...

Usually the Troika is held responsible for all things evil in Europe, but as Die Welt notes, the latest demand that all senior officials at the Ministry of Finance (including all current Greek tax inspectors) be fired by Friday (over corruption and incompetence concerns) has been greeted more positively by many. "The Troika is the only hope to purge this country of the gangs that plunder it - the ONLY hope!" is how one Skai TV commentator summed up the move, adding that "it would be nice if we could read one day that all presiding judges are dismissed." The plan to "collect record amounts of money in record time" involves the interviewing of 2235 new tax investigators (with no written exam!) who will be judged on how much money they bring in (with minimum quotas) and maximum tenure of one year before re-applying. The new plan is likened to 'medieval tax collectors' and the tax-collectors union, unsurprisingly upset at this new plan, added that the Troika never had to face "a destitute pensioner who cannot pay his tax bill." With rumors of government resignation and re-election, the external pressure and internal strife are coming to a head rapidly.

The U.S. has a three-and-a-half class society. According to demographer Joel Kotkin, California has become a two-and-a-half-class society, with a thin slice of "entrenched incumbents" on top (the "half class"), a dwindling middle class of public employees and private-sector professionals/technocrats, and an expanding permanent welfare class: about 40% of Californians don't pay any income tax and a quarter are on the Federal Medicaid program. I would break it down somewhat differently, into a three-and-a-half class society: the "entrenched incumbents" on top (the "half class"), the high-earners who pay most of the taxes (the first class), the working poor who pay Social Security payroll taxes and sales taxes (the second class), and State dependents who pay nothing (the third class). This class structure has political ramifications. In effect, those paying most of the tax are in a pressure cooker: the lid is sealed by the "entrenched incumbents" on top, and the fire beneath is the Central State's insatiable need for more tax revenues to support the entrenched incumbents and its growing army of dependents. Let's start our analysis of the three-and-a-half-class society by noting that the top 25% pay most of the Federal income tax, and within that "middle class" the top 10% pay the lion's share of all taxes.

European stocks closed red for the third day in a row amid what we can only assume CNBC's Simon Hobbs would call profit-taking. Spain underperformed Italy but the DAX was worst on the day -0.8%. European govvies were quiet except for Spain. Spanish 2Y yield jumped the most in a month as 10Y spreads rose 10bps. It's a little early to sound the alarms here but the trend does appear to have stalled and with 2Y Swiss at its lowest (most negative) rate in 6 weeks, risk appetite seems to be lagging in Europe as Rajoy just won't says 'Si'. EURUSD is a little stronger on the day. Credit markets were as quiet as sovereigns with equities underperforming into the close and Europe's VIX popped back above 21% for the first time in 2 weeks.

The German court of auditors (Bundesrechnungshof) has demanded that the Bundesbank undertake an audit of its gold reserves.  In an 'audit-the-fed' style effort, the court wants to ensure that the nearly 3400 tons of gold is in fact in existence - 'because stocks have never been checked for authenticity and weight'. Furthermore, the Bundesbank's gold is stored in three other vaults around the world: The Bank of England, The Bank of France, and the US Federal Reserve. The court questions the practice of relying on a written confirmation from the custodians (foreign central banks). The decision means negotiating with the three foreign central banks for physical verification but in anticipation, the Bundesbank has begun the process of shipping 50 tons per year from the Fed back to Germany for the next three years.

Jyrki Katainen, who has been a staunch supporter of the bailouts needed to save the Euro, while opposing common euro-bonds, has been attacked. 

It is unclear if the attack was politically motivated in a country in which the Euroskeptic "True Finn" group collected 19% of the vote in the last election, and in which at least 49% of the population does not want their country to fund any more European bailouts.

Bill Gross has become quite the expert at explaining the Fed's flawed, ruinous and destructive "policies" in 140 characters or less. Today is no exception.

Gross: Fed merry-go-round: inflate stocks til 2000. Then inflate housing til 2007. Then inflate stocks til 2012. Now inflate housing again.

— PIMCO (@PIMCO) October 22, 2012

By now everyone knows, even the mainstream media, that in Europe if one is a member of the oligarchy, "when it becomes serious, you have to lie" as the unelected viceroy of neofeudal Europe Jean-Claude Juncker said once upon a time, back when Greece and Spain were still "fine." Everyone also knows that judging by politican commentary and statement, in Europe it has been very serious for the past 3 years, as the lies have not ended. In fact, the more insolvent a country, the more serious it got, and the more gruesome and unbelievable the lies emanating thereof were. The one place where lying was at least somewhat contained was Europe's paymaster, Germany, which now is actively vying to not only not cede banking supervision to the ECB, but is seeking to displace the central bank in the budget and FX central planning category with a push to be elected budget commissioner and FX tsar. Eventually it will get its wish, but more when we cross to that bridge. Which is why it is surprising that today, German financial magazine Spiegel calls out none other than German FinMin Wolfi Schauble for doing precisely what Juncker was caught doing 2 years ago. Lying.

With over a third of the S&P 500's market cap having reported, results have been mixed. Aggregate earnings are tracking ahead of expectations but this miracle is driven almost entirely by financials (which account for 85% of the beat) as lower expenses and higher reserve bleeds offset contracting NIMs (combined with a lack of MtM) to enable a total manufacturing of what S&P 500 EPS is. As Morgan Stanley's Adam Parker notes, the quality of the beats has been low, with companies benefiting from a mix of lower operating costs and lower taxes. Revenues are missing estimates (hurt by a stronger USD and macro weakness) and Tech has been particularly weak. More importantly, for all the hope-driven, recovery-is-around-the-corner, 'fiscal-cliff'-won't-happen believers, the majority of forward guidance has been negative resulting in the highest negative-to-positive ratio since 1Q07 but this is not priced in as top-down 4Q12 estimates have hardly budged.

No, it is not a glitch in the matrix: we previously used the same title about a month ago when showing the relative imports of crude in the US vs China. This time the topic is slightly different, but the players are the same. The premise: "Japan, US call off joint drill to 'retake' disputed islands fearing backlash from China." At least it is now clear who calls the shots from not only a tactical (see China starts drilling for crude in a US-protected Afghanistan yesterday), but strategic standpoint as well.

"Preservation of Capital" must be the watchword in this market; in all markets. Any mistake made is now magnified by our very low interest rates so that any error is compounded by the ability to make back the loss. In America we are facing our national elections. In Europe we are facing a hardening of positions where the divisions between the North and the South, with France lining up with the Socialist South, are edging closer to some nation or another refusing to fund. The scheme of diversion can last only so long as real decisions with real consequences are about to be forced upon the Continent as funding must come or not come.

Hardly news to anyone who has not been living in a Santorini limestone cave over the past 4 years, but as was reported overnight, official Euroarea debt to GDP (excluding trillions in contingent liabilities of course: these will only be considered in due course) rose in 2011 to a record 87.3% from 85.4% in 2010. What was also announced without much fanfare, yet oddly was not swept under the Friday 5 pm rug, was the news that Greek 2011 government debt/GDP was revised to 170.6% from 165.3%. That the number deteriorated in retrospect is no surprise: the issue is that increasingly all official economic recordkeeping in Europe has fallen under a Heisenberg blur: the second you spot a number it is no longer what it was a picosecond ago. The one agency that still does believe European numbers, a key reason why it has become a laughing stock even among "serious people", is the IMF. As the chart below shows, even the IMF expects 2012 debt/GDP to keep rising into 2013, at which point it will gradually decline. Hint - it won't, as the sovereign is now the only source of incremental leverage in a world that has run out of money good assets, and in which the consumers and corporations are receiving ever less real cashflows that can be levered on an unsecured basis (thanks to the Fed's own real money dilutive policies).

The International Monetary Fund’s paper, “The Chicago Plan Revisited” by Jaromir Benes and Michael Kumhof highlighted a means to wipe out debt by legislation by using state created money to replace the private banking system and was commented on in The Telegraph by journalist Ambrose Evans-Prichard. The full paper can be read here. In sum, the paper illuminates on a plan created in 1936 by professors Henry Simons and Irving Fisher during the aftermath of the US Depression. It examines how money  created by credit cycles leads to a damaging creation of wealth.   Authors, Benes and Kumhof argue that credit-cycle trauma - caused by private money creation – has been around forever and lies at the root of debt catastrophes as far back as ancient Mesopotia and the Middle East. They claim that not only harvest cycles lead to defaults but rather the concentration of wealth in the hands of lenders would have augmented the outcome.