Archive - Dec 2012 - Story

America may have the Octogenarian (Oracle) of Omaha but China has the Octagon of Oligarchy: an octet of the families that run the world's (still) fastest growing, marginal economy, which by extension likely makes them the eight most powerful families in the world. So powerful, that Bloomberg has just released a series not only mapping out the various linkages and profiling said families but has appropriately dubbed them the "Eight Immortals."  In doing so it has revealed "the origins of princelings, an elite class that has been able to amass wealth and influence, and exploit opportunities unavailable to most Chinese. Bloomberg tracked 103 people – descendants including children, grandchildren and great grandchildren, and their respective spouses. The Immortals, now all dead, are revered in communist lore as revolutionary fighters who led China’s economic opening after Mao Zedong’s death.

When Tim Geithner announced an hour ago that the US debt ceiling will officially be "risen above" on December 31, he stated that there are approximately two months in which the Treasury can take emergency measures to delay the actual debt ceiling breach, a moment in time which we believe will take place some time in March. Upon further reflection, with the automatic spending cuts and tax hikes that will take place on January 1, the irony is that the debt ceiling extension may last materially longer due to a substantial reduction in the US budget deficit, potentially pushing the final threshold to as late April or even May which means the political theater is going to last for even longer than we expected - something which both parties now appear set to capitalize on as much as possible. So the question now is what are the options before Tim Geithner and what are the "emergency measures" the Treasury take to delay the inevitable moment when one of three things happens: i) the US hikes its ceiling, ii) the US begins living within its means, iii) the US defaults on its debt. Since the third, and certainly second are impossible, and since the debt ceiling theater is something we all lived through as recently as 2011, here is the article we penned in January 2011, when that long ago debt ceiling of a mere $14.3 trillion was about to be breached, and whose ultimate rise required a 20% market plunge together with an S&P downgrade of the then pristine US AAA rating (an event which Tim Geithner had said shortly prior there is no risk of ever occuring), answering precisely this question.

Not surprisingly when wages and salaries are growing at a slower rate there is a corresponding weakness in the level of retail sales.  The peak in wages and salaries occurred in early 2011 with the subsequent growth rate trending weaker.  This corresponds with the economy which has continued to muddle along at a very anemic pace.  While it may be likely that the damage from Hurricane Sandy may have soured some sales, particularly in the North East, it is unlikely to have had much of an effect on the retail sales nation wide.   For majority of America the "fiscal cliff" debate largely goes unnoticed as it remains a battle between the White House and the "rich" - for the rest the country it is more of a distraction from the things that matter like "Honey Boo Boo" and "Housewives Of Whereever".   What does matter though, as stated above, are incomes.  The decline in incomes, which can be seen in the roughly 1.2 million person increase in food stamp participation from June to September, is why retail "holiday" spending is weaker.  With credit limits reduced, incomes stagnant and real costs of living on the rise - it is not surprising that retail sales are far weaker than the NRF's holiday season predictions.

Just because the Fiscal Cliff was not enough...

• GEITHNER SAYS U.S. WILL REACH STATUTORY DEBT LIMIT ON DEC. 31
  
• GEITHNER: WILL USE `EXTRAORDINARY MEASURES' TO AVOID DEBT LIMIT
  
• TREASURY: SPECIAL MEASURES TO MAKE $200 BLN  ROOM UNDER LIMIT
  
• GEITHNER: $200 BLN TO LAST TWO MONTHS IN `NORMAL CIRCUMSTANCES'
  
• GEITHNER: TAX, SPENDING `UNCERTAINTY' MAKES DURATION NOT CLEAR
  
• GEITHNER SAYS ALL MEASURES HAVE BEEN USED IN PRIOR IMPASSES
  
• GEITHNER OUTLINES PLANS IN LETTER TO SENATE MAJORITY LEADER

So since America's dysfunctional congress failed to "rise above" the Fiscal Cliff, it at least succeeded to "rise above" the debt ceiling. One out of two is not too bad...

Despite the fact that Europe was closed today, the algos were not to be put off as the day broke beautifully into two pieces with a linear sell-off across assets into 1130ET and then a de-correlated nothing-burger all afternoon amid volumes lower than a CNBC anchor's IQ. Makes perfect sense right? The market dribbled higher off the lows into the close and then we got a little discombobulated in the last few minutes as Boehner rumors hit and ETFs (notably bonds - TLT) went a little jiggy. VIX remains bid (as we have been so clear to explain why) and while stocks weakened today, risk-assets in general were just not moving much - thanks generally to Oil's 2.75% gain offsetting Treasuries modest risk-off view. HYG (the high-yield bond ETF) went vertical into the close (following TLT's lead) but between negligible volumes and desparate attempts to pull any and every lever (EUR early and HYG late) to get things going, VIX's message is stay hedged into the new year (at 5-month highs with biggest 5-day jump in 7 months). S&P 500 futures closed the day-session at the low-end of the channel post last week's flash crash.

Spoiler alert: no compromise here. But at least there are 3 more trading days left... including December 31.

Presented with little comment but it seems that 2012 is no ordinary year for Japan... God knows what the people in this Department Store in Osaka were thinking when they came up with this advertising slogan.

Perhaps one of the most startling and telling charts of the New Normal, one which few talk about, is the soaring difference between bank loans - traditionally the source of growth for banks, at least in their Old Normal business model which did not envision all of them becoming glorified, Too Big To Fail hedge funds, ala the Goldman Sachs "Bank Holding Company" model; and deposits - traditionally the source of capital banks use to fund said loans. Historically, and logically, the relationship between the two time series has been virtually one to one. However, ever since the advent of actively managed Central Planning by the Fed, as a result of which Ben Bernanke dumped nearly $2 trillion in excess deposits on banks to facilitate their risk taking even more, the traditional correlation between loans and deposits has broken down. It is time to once again start talking about this chart as for the first time ever the difference between deposits and loans has hit a record $2 trillion! But that's just the beginning - the rabbit hole goes so much deeper...

To understand this endgame, we need to start with the financial and political basics of wealth and power in the U.S. Put these nine structural dynamics together and the endgame becomes clearly visible: Politically, a Tyranny of the Majority comprised of those who draw direct transfers/benefits from the Federal government, is ruled by the top half-of-1% financial aristocracy who own the majority of income-generating assets.  The minority, who pay most of the taxes (the 24.5% between the majority and aristocracy), will see their taxes rise as the aristocracy buys loopholes and exclusions while the bottom 50% pay no income tax. Financially, the Federal government’s spending has outrun the tax revenues being collected.  Structurally, Federal expenditures for entitlements (Medicare, Medicaid, Social Security, Veterans Administration, etc.) will rise as Baby Boomers retire en masse over the next 15 years, while tax revenues will stagnate along with earned income. There is no way to square these circles. What few dare admit, much less state publicly, is that the Constitutional limits on the financial Aristocracy and the Tyranny of the Majority have failed.

Just as we warned in our previous discussion, the Brits, concerned that the dreaded Piers Morgan may be forcefully removed from the USA, have now lodged their own petition. With over half the signatures required, the counter-petition to Home Secretary Theresa May begs her to: Stop Piers Morgan From Being Deported Back To The UK From America... "We got rid of him once and why should we have to suffer again. The Americans wanted him so they should put up with him. We washed our hands of him a long time ago." They do have a point. We hear Belize has a quietly-used compound going cheap?

On this lackluster Boxing Day dominated by illiquid moves in every asset class, we thought a few succinct minutes spent comprehending the US and European government policies of social welfare and their outcomes was time well spent. Canadian MP Pierre Poilievre delivers a rather epic speech destroying the myths of US and European 'wealth' noting that "Once the US citizen is in debt, the US government encourages them to stay in debt," noting that "the US government encouraged millions of Americans to spend money they did not have on homes they could not afford using loans they could never repay and then gave them a tax incentive never to repay it." His message, delivered seamlessly, notes the inordinate rise in the cost of all this borrowing, adding that "through debt interest alone, soon the US taxpayer will be funding 100% of the Chinese Military complex." From Dependence to Debt to the Welfare State and back to Dependence, this presentation puts incredible context on the false hope so many believe in the US and Europe. Everyone takes, nobody makes, work doesn't pay, indulgence doesn't cost, money is free, and money is worthless. Must watch.

Over the last few years, and at an increasing pace as of more recently, unions have become more and more confident of their ability to effect change and taken much more aggressive activist positions against the capitalist oppressors. The most recent examples range from California cities to Twinkies-maker Hostess Brands, and each time the stance from the unions appears to have been far more aggressive (and M.A.D. prone) than in the past. The question is why? Perhaps, as we tweeted following Hostess' liquidation:

Will the broke PBGC step in and fund Hostess' 18,000 workers suddenly vaporized pensions?

— zerohedge (@zerohedge) November 16, 2012

...It is the confidence of an all-powerful government at their back with the US Pension Benefit Guarantee Corporation, which is the backstop for private sector plans, providing cover. The problem is, as UBS explains, the PBGC has a huge deficit and is cashflow negative. This leads us to the uncomfortable expectation of further USD government support (bailout) or a more direct monetization by the Fed. PBGC could be impacted severely if a few large firms terminate their pensions. In this case, UBS expects PBGC to sell equities and buy long duration fixed income.

Slowly but surely, USDJPY has moved back above 85.50 to its highest (weakest JPY) in 27 months as the threat promise of central bank intervention has once again created more front-running. With the market attempting to price in Abe's extravagance, we wonder just how much bang for the buck his 'actions' will create when words are not enough. Will Abe 2.0 be the same as OMT, QE3, and QE4 with the event actually constituting the 'top' or peak impact? Critically though, once Japan actually formalizes what it will do, which will be limited by how much rates can rise on bonds before all government revenue is used to fund cash interest, JPY will spike again, facilitated by the record short-interest (per CoT data). More curious is which Goldman alum will be appointed as the head of the BoJ once Shirakawa's term expires in March. As Bloomberg noted this morning, Japan’s Chief Cabinet Secretary Yoshihide Suga said, during a speech in Tokyo this morning, the "next BoJ Governor will be a person who shares Abe’s views."

By the Deceptive means of Misinformation and Manipulation of economic data the Federal Reserve has set the stage for broad based moral hazard. Through Distortions caused by Malpractice and Malfeasance, a raft of Unintended Consequences have now changed the economic and financial fabric of America likely forever. The Federal Reserve policies of Quantitative Easing and Negative real interest rates, across the entire yield curve, have been allowed to go on so long that Mispricing and Malinvestment has reached the level that markets are effectively Delusional. Markets have become Dysfunctional concerning the pricing of risk and risk adjusted valuations. Fund Managers can no longer use even the Fed's own Valuation Model which is openly acknowledged to be broken.

UPDATE: ES tumbling (down 12 from opening highs) through post-crash lows.

In early trading the USD is being sold in favor of the Euro and real assets such as Oil (Middle-East tensions) and Gold are bid. Stocks are tailing lower - stable at around unchanged for now - but following the slow risk-off leak of Treasury yields. Volume is what you would expect on Boxing Day but EURUSD wins the craziest market of the day award for behaving like a gap-heavy penny stock when its the largest currency pair in the world... though USDJPY is starting to push higher (JPY weaker). In stocks, AAPL -1.5% and HLF +6%.