Archive - Oct 3, 2012 - Story

Despite being told again and again by any-and-every commission-taker and newsletter-vendor that sentiment is terrible, managers will need to high-beta performance-chase, and the 'money-on-the-sidelines' is just around the corner; it appears that reality is different. The Net Long Interest in S&P 500 Futures (the most liquid equity trading vehicle in the world) is now at its highest since December 2008. The last time investors were this 'net long', the S&P 500 fell over 25% in the next two months.

Those who rally behind the modern concept of America rally behind a façade — an empty shell devoid of the heart and soul that gave life to this once great experiment. It is time for us to decide what kind of Americans we wish to be: the deluded rah-rah puppets of a desiccated totalitarian society, or the watchmen on the wall. Will we be the keepers and protectors of the vital core of the American identity, or will we be fly-by-night consumers of the flavor-of-the-day political carnival, eating every tainted sample from the elitist platter in an insane attempt to replace our free heritage with a sleek, sexy, rehashed form of top-down feudalism?

Following this morning's reported shelling of a Turkish town (from Syrian lands):

• *NINE INJURED AS SHELL FROM SYRIA LANDS IN TURKISH TOWN: NTV

The Turkish foreign ministry has held emergency talks and, according to Zaman, Turkey has now begun firing 'warning' shots into Syria and 'the bombardment continues to be heavy'.

• *TURKISH ARTILLERY BOMBARDS SYRIA IN WARNING, ZAMAN REPORTS

And it would appear things are escalating:

• *TURKISH FOREIGN MINISTER CALLS NATO AFTER SYRIA BORDER SHELLING

Hayman Capital's Kyle Bass is back and cutting through the caustic bullshit that surrounds every waking moment in this kick-the-can world. Dispelling the myth of our 'deleveraging' virtue, with global debt having grown from $80tn to over $200tn in the last ten years alone (a 10.7% CAGR) and the frightening reality of central bank balance sheet growth of 16% per annum, Bass concludes (rightly) that "you can't do this for very long" as governments infinitely leverage and central banks have begun the endgame of open-ended money-printing. Addressing the question of timing, Bass notes that while Europe and Japan are 'perceived' to be 'staying together' there are in fact devastating losses occurring (ask Greek bond-holders) and he firmly believes that "Germany will never go joint-and-several with the rest of Europe." The world sits at a place it has never been before in peace-time - as far as global debt balances and deficits - and that is why the global investing playbook is so hard. He goes on to address hyper-levered economies, delayed inflationary outcomes, and worries that the cost-push (lower GDP, higher CPI) prints are just beginning in Europe. As a fiduciary, and something all investors should consider, Bass states "Given what we see coming, our job is not to lose money!"

As we patiently await tonight's much-anticipated debate - and its zinger-ful diatribe of tax, spend, save, borrow, jobs, jobs, jobs word bingo - we thought this perfectly succinct clip dismissing the myth of how government stimulus leads to economic growth was particularly pertinent. Professor Antony Davies provides evidence, via empirical data from 1955, that there is no connection between federal spending and economic improvement - and as we have repeatedly noted - it merely adds to government debt. From the 'magic' of the Keynesian multiplier to the eyes-wide-shut view of spending creating jobs while ignoring the taxing-borrowing-printing nature of that spending. Government doesn't create jobs, it 'moves' jobs; as three years of stimulus spending has left us with ~8% unemployment and $4.6tn more debt.

Even as the media desperately tries to whip everyone into a buying frenzy in an attempt to rekindle the second housing bubble, the marginal, and less than pretty truth, is finally starting to emerge. Over the weekend we presented the first major red flag about the state of the housing market - in this case commercial - when we exposed that "New York's Ultraluxury Office Vacancy Rate Jumps To Two Year High As Financial Firms Brace For Impact." What is left unsaid here is that if demand for rents is low, then, well, demand for rents is low: hardly the stuff housing market recoveries are made of. Today, on the residential side, CNBC's Diana Olick adds to this bleak picture with "Apartment Demand Ebbs as ‘Avalanche’ of New Units Open." In other words rental demand for both commercial and resi properties is imploding. But at least there is always owning. Well, no. As we have shown, the foreclosure, aka distressed, market is dead, courtesy of the complete collapse in the foreclosure pipeline as banks are effectively subsidizing the upper end of the housing market by keeping all the low end inventory on their books (who doesn't love the smell of $1.6 trillion in fungible excess reserves to plug capital holes in the morning. It smells like crony capitalism). But at least the ultra luxury, aka money laundering market was chugging along at a healthy pace. After all there are billions in freefloating dollars that need to be grounded in the US, courtesy of the NAR which is always happy to look the other way, another issue we discussed this weekend. Now even that market appears to be cracking, following the purchase of a duplex in New York's most iconic property: 740 Park, by, who else but a former Goldman partner, at a whopping 45% off the original asking price.

Six charts tell the story of financialization and the diminishing returns of credit.

Expanding base money pushes the price of oil up to stall speed, while expanding credit has a diminishing effect on the real economy. It does however handsomely boost bank assets.

One of the constant and consistent themes found in Europe is the lack of acknowledgement of what is there and not there. It is a pervasive infection that has gripped the Continent as this manner of doing business clouds the reality of what is at hand and pushes consequences out to some date in the future. After the first Greek bailout both the IMF and the EU informed us, in no uncertain terms, that the new measures would bring the debt to GDP ratio of Greece to 120% by 2020; today we hear a new, new number that the debt to GDP ratio for Greece is 190% and that the country will have a primary surplus in the next few years. These statements have all of the truth to them as Lithuania is part of the United States or that penguins can be found in the Amazon. The problem then, in believing this kind of nonsense is also exactly what we are facing now; Greece cannot pay her bills, the PSI card has already been played and someone is going to have to pay the piper and no one wants to pay him. Whatever remains of some coalition between the EU and the IMF is now in tatters as neither entity wants to take the hit. In fact, neither entity can afford the hit without devastating consequences and yet the hit is going to be taken, of that much I can assure you, because there is nothing left to do.

It is apparent, according to Jim Grant in this excellent discussion on CNBC, that we are living in a world where only PhDs know what is best for us all. As the Fed hides behind the political cover of its dual mandate to centrally-plan our lives, the Fed-fighter notes "we are off the common-sense-mandate and in a PhD-Standard." In the brief and wonderfully erudite segment Grant guides the erstwhile CNBC Fed-cheerleaders to a new reality of inflation not being what they think it is (i.e. not the PCE Deflator but more prosaically too much money chasing too few products exemplified in bloated real estate prices in the past and now equity prices), of a '32-inch' yard, and of a dream-like world where we "return to capitalism", and markets are finally "allowed to clear." As ever, Grant is worth the price of admission as he explains how the 'monetary mandarins' have interjected themselves between us and the public price mechanism as the Fed's 'influence' has grown exponentially since its inception.

The ISM stunners continue. After two days ago we got a manufacturing ISM number which was not cooroborated in any other data points, and which was the biggest beat of expectations in years, we now get the Services ISM, which did a double down on the manufacturing report and rose to 55.1, from 53.7, on expectations of a decline to 53.4. And while the headline number was better than expected, the reason why futures are completely unimpressed is that the Employment index declined from 53.8 to 51.5, refuting any good ADP news, while the stagflationary specter to the economy rose, with Prices spiking from 64.3 to 68.1 - the highest since February, and leading to the biggest 3 month surge in Prices Paid since September 2005. Finally, in terms of Q3 GDP drivers, Inventory which is an input into the GDP bean count declined below 50, meaning Q3 GDP will likely be revised lower yet again, even as Backlogs dropped also to just over 50.

While we have been predicting that the South African miner strike, which started 2 months ago, and which despite (or rather due to) a one-off concession by Lonmin to hike worker pay by 22% is more entrenched now than ever, would spread to other countries, we failed to anticipate that it could also move to other domestic industries. Which is precisely what has happened as 20,000 truck drivers in the South African country decided to go on strike following the example of their miner brethren, demanding a 12% wage hike, and in the process crippling the South African economy, bringing virtually every industry to a halt. Why did they take the risk? Because they suddenly realized that they have all the leverage in a globalized society in which as we explained in "Trade-Off: A Study In Global Systemic Collapse", even a several hour complete trade paralysis can and likely will lead to total social de-evolution: an outcome which the status quo which determines wages paid to workers, would seek to avoid at all costs. Next up: the second global worker revolution. Marx would be proud.

While some of us grow weary of the incessant optimism among our economist elite - and their error-prone forecasts and Birinyi-ruler extrapolations, the Brits have decided enough is enough. The leisure industry is suing the weather-forecasters for coming up with "such pessimistic forecasts predicting rain." In some of the most perfect analogies for our woeful economists, The Telegraph notes that "The Met Office forecasters need to realize that everything they say has an impact on whether people go on holiday or go for a day out."  But the weather service admitted (unlike our overpaid extrapolators) "No weather forecaster is going to get it 100 per cent right all the time. We have to tell the weather as it is that's what our job is." Of course, we have nothing to fear but rain itself and so the industry offers this little gem of honesty: "We're not asking them to bend the truth, but just to be more careful with phrasing." Perhaps we will soon hear this from our esteemed ivory tower academics: While we may have global thermonuclear warfare, it will generate a modest GDP bounce in several countries as a result of more than expected broken windows. All of this simply confirms that 'we can't handle the truth.'

In a post entitled 'Mugabenomics: Inflation in UK Higher than in Zimbabwe,' Guido Fawkes points out how the Liberal Democrats Vince Cable once warned that Quantitative Easing (QE) was “Mugabenomics.” This was prior to coming to power and a swift u-turn which would make even the most slippery politician proud. Remember when Vince Cable warned that Quantitative Easing (QE) was “Mugabenomics”? Vince flip-flopped on that even before he joined the coalition.  Guido Fawkes then reminds its readers about the time when George Osborne said “Printing money is the last resort of desperate governments when all other policies have failed.”  Alas as the blog rightly warns, "In government Osborne has overseen the printing of more money than any other Chancellor in British history. A quarter of the national debt – all this government’s overspending – has been bought by the Bank of England via QE."  “So it is not a shock that inflation in Zimbabwe (3.63%) is now lower than inflation in the UK (3.66%, August 2011-July 2012).” Those who have been warning about this monetary madness for some years are gradually being proved right

"It will surely take at least a decade... for the world economy to get back to decent shape" is the somewhat shockingly honest (and at the same time hopeful that ECOpocalypse does not happen before) outlook that the IMF's Olivier Blanchard offers in a recent interview with Hungary's Portfolio.ru via Reuters. His diatribe of expectations that Germany would have to accept higher inflation, the US had to fix its fiscal problem, "Japan is facing a very difficult fiscal adjustment too" is more an understatement of facts than a forecast but on the bright-side he thinks China has turned the corner on its asset boom (but faces slower growth ahead). The reality is that, as he also notes, debt reduction (via default or deleveraging) is unavoidable and while he believes that this can be done without stifling growth in this credit-fueled world in which we have lived (though no mention of the tooth fairy). Dismissing the idea of inflation-targeting, he warns "You can have an economy in which inflation is stable and low, but behind the scenes the composition of the output is wrong, and the financial system accumulates risks." It seems the IMF is waking to the new reality - perhaps as evidenced by their actual disagreement with Greece over fantasy GDP data - though we fear what another decade of this will do to global instability.

Yesterday we brought you the news that US debt quietly soared by $90 billion overnight to celebrate the new fiscal year end, reaching $16.2 trillion and sending total US debt to GDP to 103%. Needless to say, this comes at an exciting time, with the first Wall Street muppet presidential debate in about 12 hours, where the US debt crisis will be a front and center topic because in about 2 months, the US debt ceiling will again be breached adding to the Fiscal Cliff fiasco, resulting in a flashback to August 2011 when the market had to tumble by nearly 20% for Congress to get the hint that first and foremost its job is to make sure the money on Wall Street keeps flowing, all else secondary. And while it has become fashionable to say that US debt rose by this much under that president, the truth is that the Presidency is merely one of three institutions that are responsible for the shape of the US debt-to-GDP line (which is now going from the lower left to the upper right by default). The other two are, of course, Congress and the Senate. Luckily, to simply things substantially, we have a handy graphic from today's Bloomberg Brief which conveniently plots not only the political affiliation of the presidency, but of the House and Senate, in the chronology of the US debt crisis.