Archive - Nov 2012 - Story

The schizophrenia in US equity markets (and by correlation all risk markets) is nowhere better highlighted than the last 24 hours of 2% swings in the S&P 500 on nothing more than boiler-plate comments from DC. However, as BofAML's Ethan Harris notes, "the year-end fiscal challenges in the US are more like an 'obstacle course' than a 'cliff' - politicians must navigate about 10 major policy decisions before year-end." We continue to expect a messy multistage deal on the cliff - with some wishy-washy  partial deal late December and more complete resolution (as it will be called) late Spring. We agree with BoFAML's view that until then, we suggest that investors fade the likely “press fakes” of an imminent deal, and brace for downside volatility. It seems to us that the negotiations remains stuck at square one.

The BRICS (Brazil, Russia, India, China and South Africa) bloc has begun planning its own development bank and a new bailout fund which would be created by pooling together an estimated $240 billion in foreign exchange reserves, according to diplomatic sources. To get a sense of how significant the proposed fund would be, the fund would be larger than the combined Gross Domestic Product (GDP) of about 150 countries, according to Russia and India Report. Many believe the BRICS countries are interested in creating these institutions because they are increasingly dissatisfied by Western dominated institutions like the World Bank and the International Monetary Fund (IMF).

This morning, Goldman announced their 10 Themes for the year. The succinct summation of them (which we will discuss later in more depth) is that: there'll be some volatility on the way but in the end it will all be unicorns and faeries (our translation). In line with these global forecasts, everyone's favorite contrarian FX strategist updated his short- and long-term FX projections. So presented with little comment are Tom Stolper's guide to stop-hunting and fading the crowd. High conviction ideas such as AUD weakness, JPY stability, and a 1.40 EURUSD stood out to us.

Politics and economics, or the better term, political economics, for the most part rules our lives: the political activity of the nation as a collective of economic groups and super- wealthy individuals, whatever the defining orthodoxy turns out to be. As the United States enters the final days in the much-hoped resolution of its “fiscal cliff,” there are a number of prominent individuals from both present and past – politicians, economists and business leaders – who regale us with their two-cent worth of admonition and advice.  For the most part, that’s what the value is really worth. Meantime, here is the American citizenry reverting to their pre-recession days, with the highest confidence level in four and a half years, starting to spend beyond their capacity to produce thanks to that misplaced confidence, the resurgence of home equity loans, and the promise of governing politicians that things are on the mend... when they really are not, and the job market continues to decay for jobs with a living wage.

A glimpse at stock prices, sovereign bond prices, and credit spreads and you could be forgiven for believing that (a la Juncker) Europe has turned the corner. The dismal reality is that one by one, market-based signals have been decoupled from reality by repression or plain old jawboning and squeezing. The picture of real fundamentals is considerably worse as these three charts from Bloomberg Briefs show. The Good (financial conditions index at multi-year highs) is merely a reflection of the ECB's transfer of risk and support (and is obviously hindered by the acknowledged failure of transmission mechanisms; which leads to the bad - both consumer and business confidence has decoupled (in a bad way) from markets. All this market-based hope is predicated on eventual joint-and-several-ness and an ECB backstop that seems more promise than premise; the ugly is that Germany (cash-money for the rest of the Euro-slaves) has seen six months in a row of manufacturing orders plunge and nine of the last eleven. Markets aside, fundamental realities suggest yet another hope-based rally due to be faded.

While we are very far gone at the moment as a society, never forget there are millions of people out there fighting for what is right and we will succeed in ushering in a new and more positive era for life on earth.  These 11 minutes are well worth your time.

Equity indices bounced off re-coupled gold performance after Boehner's 'nothing'  led into European close pump which was supported by Obama's 'nothing' then pumped for one last stop-run over recent highs thanks to another 'nothing' from WSJ's Hilsenrath. Remarkable! A 2% rise off the day's lows moved us well above the recent Reid-top. Risk assets in general were far less exuberant as stocks really stepped up the decoupling after around 1300ET. AAPL ended red, bumped up against its closing VWAP and sold off every time; VIX traded from 17% highs to 15.5% at the close; and HYG plunged into the close to end the day unchanged (on huge volume). Today appeared very much a catch-up day for stocks to a number of asset-classes that were not sold hard yesterday - the recoupling is complete now.

Five years ago, every American would have considered a trillion-dollar budget deficit a national tragedy.  If you believe the CNBC parrot show, NOT having a trillion-dollar deficit is now a sure sign of the Apocalypse.  I speak of course of the cleverly dubbed “Fiscal Cliff,” which panicked CNBC apologists are required to mention no less than 5,000 times a day. Creating the illusion of economic growth is easy if you can print money.  It’s a prank you can play on an entire country.  Cut the value of the currency in half and the economy’s size will appear to double.  If it doesn’t, you’re in recession (whether you know it or not).   Cavemen probably understood this concept better than America’s best economic minds.

In the pre-market this morning, Gold had outperformed the S&P 500 by over 200bps for the month. By the close today (month-end settlement T-3) - given how synchronized gold and stocks have become - Gold and the S&P 500 will be perfectly unchanged for the month. Whether this morning's plunge in Gold (and rip in stocks) was the unwind of a major hedged position (or vice versa) is unclear - but the coincident reaction around the election suggests today's Gold move (and stock move) had a lot to do with each other - no matter how much they are blamed on cliff schizophrenia...

"A great civilization is not conquered from without, until it has destroyed itself from within. The essential causes of Rome's decline lay in her people, her morals, her class struggle, her failing trade, her bureaucratic despotism, her stifling taxes, her consuming wars." A number of sources list this as a quote, but it is a synthesis of the Epilogue "Why Rome Fell". It is valid then as well as now. America as we know it won't collapse, but Americans have been unusually successful in dealing with "bureaucratic despotism". They will be successful again. Bankruptcy of another experiment in bureaucratic despotism will prompt a refreshing turn to reform of bullying politics. What we have now is an 'Ineptocracy'.

Bankers in London, Europe's trading hub, are bracing themselves for significantly lower bonuses (and salary cuts) especially so relative to their New York counterparts. As Bloomberg Businessweek notes in the brief clip below, investment bankers and traders should expect a 15% pay cut compared to unchanged in the US and while hope is that these are temporary, many believe this shift is structural and reflects "US regulators [not having] the same obsession with pay structures that European regulators have." As is evident from the chart below, there are winners and losers (and we bet you can guess who the winner is).

While Nassim Taleb sees Switzerland as the poster-child for what Europe should become, the quote above from SNB's Jordan begs the question - which scenario does include the Euro Collapse (and remember, as he tells us, the Franc cap is 'not' currency manipulation).

On November 16, and again today, one person boldly went where so many have gone before, and made sure that Nancy Pelosi's alleged SPY calls don't expire worthless, and by uttering a few words widely misinterpreted by the headline scanning, market-making algos both then, and today, preserved all confidence in the centrally-planned monetary policy farce formerly known as "the market." Who is this unmasked crusader against the evils of efficient markets, and for the unquestioned glory of authoritarian Economist PhD's in charge of the Fed's trading desk? This man:

There are 1.1 government dependents for every full-time worker in the U.S. In our analysis, there has been a Grand Bargain reached by the 3.5 classes in the U.S.  The Grand Bargain was this: we at the top will pay significant taxes as long as we get to control the levers of financial and political power. We in the top 19% will pay much of the taxes as long as we and our children can continue to live well and accumulate wealth. We in the "middle class" will continue to work hard as long as we have hope of bettering our lifestyle and the lives of our children. We in the bottom 50% and retirees agree not to threaten the top .5%'s power and the wealth of the top 19% as long as we can get by on our government transfers. This Grand Bargain is now fraying as the promises made to everyone cannot possibly be met. That which is unsustainable will be replaced by another more sustainable arrangement. It's a partnership of "Tyranny of the Majority" and "entrenched incumbents Elites."

Reid's sell-off has been entirely retraced by a Boehner-Obama double-act in which they didn't spit, scratch, and gnaw at each other. The algos have it now and so stop-runs in stocks are all that counts. Equities are in a world of their own as they decouple from everything from high yield credit to Treasuries and from oil to the USD. Correlations have dropped as we approach Reid's top - we wonder if reality will sink back in shortly. It would seem, once again, that EURUSD is the most-leveragable vehicle of the day once again... and of course this ramp enabled AAPL to get back to yesterday's VWAP.