Archive - Nov 2012 - Story

We are at an historic point of convergence. Firstly, we have reached the limit in the credit backing of our financial, monetary and banking system. We are at the same time hitting profoundly destabilizing ecological limits preeminent at this time is that we are almost certainly at the peak of global oil and food production. Put another way, we are at the limits of the system of trust and solvency that underpins the trade upon which we depend. We are at the limits of the least substitutable energy source that, by the laws of physics, is necessary for economic maintenance and growth. We are at the limits of our most fundamental human sustenance. They are the three most critical structural pillars of the globalized economy. Like a three-legged stool, the whole system can become destabilized by the buckling of just one. Must Read!

The questions of who are the 1% and what level of income demarcates the fat cats from the rest of Americans are likely to become more and more polarizing in the coming weeks. What is perhaps the most intriguing is the apparent dichotomy between the demographics (youth - who face considerably worse employment trends) and state-wealth who voted for Obama. As ConvergEx's Nick Colas notes, of all the U.S. states with an above-average incidence of their citizens earning over $200,000 (14 in total), all but one (Alaska) went for President Obama in last week’s election.  At the other end of the income spectrum, only 2 states in the bottom 10 for +$200K earners (Maine and Iowa) had a majority of voters who sided with the President. The central irony of this straightforward math is that any increase in income taxes on the “Wealthy” will be disproportionately borne by the states which secured the President’s reelection. Perhaps, just an intriguing is the fact that - if you look at the GINI Index – a measure of income inequality – Republican leaning states enjoy more equality on these terms than the citizens of traditionally Democratic areas of the country.

Shining a little reality light on the otherwise pollyanna-like dearth of pragmatism that is the mainstream media's guest-list, Ron Paul provided Bloomberg TV's Trish Regan a little more than we suspect she bargained for when asked if he had any hope that we avoid the fiscal cliff. The constant "delaying-of-the-inevitable" enables our politicians to avoid facing up to the serious consequences of our reality and as Representative Paul notes the chances of a grand bargain are "probably zero... that's why I think we're over the cliff [already]." Just like the handling of the debt ceiling debacle, Paul notes they will "pretend they are going to do it" until we get a total crash of the dollar and the entire financial system (which he notes is what will occur if we continue the status quo). "We are at a point of no return" unless certain things change, since "we are not the productive nation we used to be."

UBS’ Larry Hatheway — who once issued some fairly sane advice when he recommended the purchase of tinned goods and small calibre firearms in the case of a Euro collapse — thinks 1000% inflation could be beneficial. This is fairly typical mistake for an economist. In an imaginary economic model, it is possible to assume that inflation is stable, and that it is predictable, and to draw conclusions based on those (absurd) assumptions. There are no empirical examples of such high rates of inflation being tolerated, because at every stage in history such effects have been intolerable... Getting to a 1000% inflation rate is an inherently volatile path, historically one which has resulted in panics, crashes and breakdowns.

Earmuffs time for Europe's carefully sculpted theater of goodwill, solidarity and cohesion. Because this has to be some sort of record. Hours after Greece got its much desired two year bailout extension of Deutsche Bank from Germany Europe, Greece is already in breach of the terms it, and Europe, all "fought so hard" for. From Kathimerini: "A planned 25 percent increase in the price of public transport tickets next March is to be postponed until October, the general secretary of the Development Ministry, Nikos Stathopoulos, said on Tuesday. The increase originally demanded by the troika would have pushed the price of a ticket for all modes of public transport to 1.75 euros from 1.40." Instead the Troika's demand is overruled, and in its place is a promise that some efficiency has been extracted elsewhere, until of course, said promise is probed and uncovered to have also been a lie.

The first 13-Fs are rolling in and among them, that of iconic hedge fund Baupost and its legendary head Seth Klarman. Legendary because until now he was largely percevied as unable to lose on a trade. Ever. And then Hewlett Packard came: Klarman decided the stock was a value play just over a year ago, when he disclosed that as of September 30, 2011 he had accumulated an over 20 million share position when the HPQ price was over $20/share. The holding had gradually declined until Q1 2012, then hear nearly doubled down to a total of 27 million shares. Then the stock collapsed. And like not only a good investor, but trader, Klarman decided to book a loss and dump nearly half his HPQ position, holding just over 14 million shares as of September 30, a stake we are confident is likely zero by now. There goes the bull "alphaclone" case for the company that is not "off its lows."

Leveraging EUR strength (USD weakness) in the US-open-to-EU-close to ramp stocks to highs was rapidly followed by a collapse back to reality in US equities from EU-close-to-US-close. Just remarkable. Treasuries and FX markets were much less exuberant over the entire lack of news that drive the S&P up over 20 points from open to EU close and sure enough - helped by the obvious desperation of a 'failed' Yellen-threat - equities retraced it all; ending the day back near the recent lows. Stocks once again tested the bottom of Draghi's Dream and rejected it; commodities were mixed and very dispersed with Copper and Silver swinging wildly (up on the day) even as the USD ended the day practically unchanged. Tech and financials are the losers still on the week as AAPL clawed its way back to marginally green by the close with the magical $545 level now critical four days in a row.

There was a time when bears looked on with dread as a Fed Permadove and vice chair Janet Yellen cleared her throat in advance of delivering prepared remarks, knowing well the algos would go full liftathon retard as soon as the flashing red highlights hit the screen. Well, Yellen did just that in a speech titled "Revolution and Evolution in Central Bank Communications" (link here). Some of the highlights:

• YELLEN SAYS FED SHOULD LINK LOW-RATE OUTLOOK TO ECONOMIC GOALS
• YELLEN FAVORS ELIMINATING CALENDAR-DATE COMMITMENT TO EASING
• YELLEN WOULD LINK STIMULUS EXIT TO INFLATION, JOBS THRESHOLDS
• YELLEN SAYS 2% INFLATION SHOULDN'T BE CONSIDERED A CEILING
• YELLEN SAYS OPTIMAL POLICY FOR BALANCED APPROACH INVOLVES KEEPING ZIRP UNTIL EARLY 2016

And... nothing. In fact, worse than nothing - selloff! We have now gotten to a point where the Fed implicitly promising it may keep ZIRP until even longer than previously promised, or 2016, results in a coordinated dump.

Now that The Show is over, we are left with the equivalent of a Sunday morning hangover following a binge of promises and lies. After the Supreme Court upheld the PPACA, a spate of mergers rippled through the managed health care realm, to ostensibly cope with smaller profit margins and  ‘compliance costs.’  But really, it’s because each firm wants to corner as much as possible of the market, in as many states as it can, to garner more premiums and control more disbursements and prices at the upcoming insurance ‘exchanges.’ Meanwhile the more hospitals are viewed as profit centers, the more their Chairmen will cut costs to maximize returns, and not care quality. They will seeks ways to sell underperforming assets, programs or services and reduce the number of nonessential employees, burdening those that remain. And if insurance companies can manage doctors directly, they can control not just costs, but treatment – our treatment. It’s not an imaginary government takeover anyone should fear; but a very real, here-and-now insurance company takeover, to which no one in Washington is paying attention.

Because anything the US can do, China can copycat, if not better, then certainly cheaper.

Moments ago the MTS released the final October budget report. It was not pretty, although those who read our report on how much debt was added - $195 billion to be precise - in the first month of the 2013 Fiscal Year will know where this is going. The US budget deficit was expected to soar after the September surplus of $75 billion, driven entirely by calendar shifts and pre-election propaganda, to -$113 billion. That was optimistic: the total amount of overspending in October was $120 billion. What is distressing is that this was well above the $98.5 billion deficit from a year ago, and confirms that the long-term trendline of ever greater spending continues. This was also the fourth largest October deficit in history. And looking merely at the spending side of the ledger, the US government's outlays in October alone were $304 billion. This is the third biggest October monthly spend for the government ever, and just why of the all time high $320.4 billion record in October 2008, when everything imploded after Lehman failure and Hank Paulson was literally dousing the monetary flames with brand new Benjamins.

Whenever the case is made for a stronger U.S. dollar (USD), the feedback can be sorted into three basic reasons why the dollar will continue declining in value:

1. The USD may gain relative to other currencies, but since all fiat currencies are declining against gold, it doesn’t mean that the USD is actually gaining value; in fact, all paper money is losing value.
2. When the global financial system finally crashes, won’t that include the dollar?
3. The Federal Reserve is “printing” (creating) money, and that will continue eroding the purchasing power of the USD. Lowering interest rates to zero has dropped the yield paid on Treasury bonds, which also weakens the dollar.

All of these objections are well-grounded. However, the price of gold is not consistently correlated to the monetary base, the trade-weighted dollar, or interest rates. We have seen interest rates leap to 16% and fall to near-zero; gold collapse, stagnate, and then quadruple; and the dollar gain and lose 30% of its trade-weighted value in a few years. None of these huge swings had any correlation to broad measures of domestic activity such as GDP. Clearly, interest rates occasionally (but not always) affect the value of the trade-weighted dollar, and the monetary base occasionally (but not always) affects the price of gold, but these appear to have little correlation to productivity, earnings, etc., or to each other. Gold appears to march to an independent drummer.

As the government and Bank of Japan constantly survey the marketplace for speculation while intervening en masse with ever-decreasing levels of effectiveness, we thought the following charts would highlight the impact of the relative strength of the JPY. Of course, in the past, at least the trade surplus (thanks to these legacy companies) used to provide incremental capital into the country but now even that is gone. As Credit Suisse notes, "the TWI of the JPY has appreciated by more than 40% post crisis – even more than the CHF! But it is the relative strength versus the KRW that is really hurting Japanese firms. The Won plummeted sharply post crisis and has recovered nowhere near pre-crisis levels. Some of this shift in relative competitiveness may be reflected in the market cap of Samsung versus that of major Japanese tech firms. Samsung is more than three times the size of Japan’s top technology firms."

Whether greed-prone, fear-stricken, or full-prepper; the post-election performance of both gun-and-ammo 'makers' and gun-and-ammo 'searches' on-line has been remarkable...

Over the past several days there had been concerns that even if Greece managed to roll its maturing €5 billion in Bills with a new Bill issuance (which it did earlier today), it would be unable to actually obtain cash for this worthless paper, through a repo with the European Central Bank. The reason being that last week the ECB allowed a temporary extension in Greek ELA collateral eligibility to expire, enacted on August 2, which in turn reduced the amount of repoable T-Bills from €7 billion to just €3.5 billion, in the process reducing the amount of cash Greece can obtain in half from the Bill roll. And while there had been lots of speculation and rumors that the ECB would, as in the case of Spain, either make a "mistake" or extend the collateral pool exemption once more, this did not occur. Instead, as we have just learned, the ECB has allowed Greek banks to use "asset-backed" securities to plug the collateral gap. Needless to say, one can only conceive just what unencumbered assets still can be found on Greek bank balance sheets (here is one artist's impression) but it was largely expected that in the race to debase its currency, the ECB would once again admit that when it comes to perpetuating the Ponzi, especially at a marginal cost of a token €3.5 billion, anything goes (just don't tell Germany). And so, Greece kicks the can once again.