Archive - Apr 18, 2012 - Story

Within the last few minutes, Bloomberg has popped up a few rather disturbing headlines - that for all intent and purpose have been totally ignored by the trading public at large (we assume WWIII is priced in). So Asia in general is in major sabre-rattling mode tonight with the following comment: South Korea’s military will firmly and thoroughly punish North Korea for any reckless provocation, Yonhap cited Shin as saying. We choose 'not to play'.

• India Test Fires Long-Range Missile Agni-V, CNN-IBN Says
• *INDIA MISSILE TEST FLIGHT `IMMACULATE,' DEFENSE MINISTRY SAYS
• S.Korea Deploys Missiles in Case of N.Korea Provocation: Yonhap 
• *N.KOREA'S KIM JONG UN CALLS FOR STRENGTHENED MILITARY, NHK SAYS

"You apparently can survive betting against bull market irrationality if you meet three conditions. First, you must allow a generous Ben Graham-like “margin of safety” and wait for a real outlier before you make a big bet. Second, you must try to stay reasonably diversified. Third, you must never use leverage."...It is the classic failing of value managers (and poker players for that matter) to get impatient and bet too hard too soon. In addition, GMO was not always optimally diversified. We are generally more cautious (or, if you prefer, “more experienced”) now than in 1998 with respect to, for example, both patience and diversification, and at least we in asset allocation always stayed away from leverage. The U.S. growth and technology bubble of 2000 was by far the biggest market  outlier event in U.S. market history; we had previously survived the 65 P/E market in Japan, which was perhaps the greatest outlier in all important equity markets anywhere and at any time. These were the most stringent tests for managers, and we were 2 to 3 years early in our calls in both cases. Yet we survived, although not without some battle scars, with the great help that we did, in the end, win these bets and by a lot. Hypothetically, resisting the temptation to invest too soon in 1931 may have been a tougher test of survival in bucking the market. Luckily we, and all value managers, were not around to be tempted by that one.

Decades of manipulation by the Federal Reserve (through its creation of paper money) and by Congress (through its taxing and spending) have pushed the US economy into a circumstance that can't be sustained but from which there is no graceful exit. With few exceptions, all of the noble souls who chose a career in "public service" and who've advanced to be voting members of Congress are committed to chronic deficits, though they deny it. For political purposes, deficits work. The people whose wishes come true through the spending side of the deficit are happy and vote to reelect. The people on the borrowing side of the deficit aren't complaining, since they willingly buy the Treasury bonds and Treasury bills that fund the deficit. And taxpayers generally tolerate deficits as a lesser evil than a tax hike. So stay up as late as you like on election night to see who wins, but the deficits aren't going to stop anytime soon. The debt mountain will keep growing. The part of it the government acknowledges is now approaching $16 trillion, which is more than the country's gross domestic product for a year. Obviously, the debt can't keep growing faster than the economy forever, but the people in charge do seem determined to find out just how far they can push things.

The global reliquification continues:

• BRAZIL CENTRAL BANK DECREASES BENCHMARK LENDING RATE TO 9.00%
• BRAZIL CEN BANK SAYS RATE CUT PART OF CONTINUED ADJUSTMENT

First India, now Brazil (even if the move was largely expected). When are Russia and China joining the fray?

The week ended April 11th is when equities finally rolled over. Which is why those curious how retail fund flows did in the past week will not be very surprised: if individual investors avoided stocks like Bernie Madoff Asset Management on the way up, there is no reason why they should change their mind on the way down. Sure enough, in the past week, $1.5 billion was withdrawn from domestic equities. Instead, cash, solely with the aim of capital preservation enter taxable bond funds, as it has for the past 3 years now. With the latest redemption, total 2012 flows to date are over $25 billion, or more than double the comparable amount in 2011. It appears that retail has seen right through the once in a lifetime opportunity, and is withdrawing money from stocks at the fastest pace ever, irrelevant of what the myth formerly known as the "market" actually does.

It has long been known that the United States Postal Service, in its current money-losing format, is unsustainable. The media has reported in the past that in order for this bloated government anachronism to be remotely competitive in the age of email and FedEx, it would need to cut hundreds of thousands of its workers. Even the USPS, via its largest union, the National Association of Letter Carriers, has admitted that the organization will need to undergo "tough sacrifices" although as the WSJ noted, "It didn't specify what concessions it would seek from members." And this is where it gets fun: because "just the tip", or even just talking about the tip, apparently is more than labor unions in this country can stomach. Enter Ron Bloom, Lazard, and the very same crew that ended up getting a taxpayer funded bailout for GM. From the WSJ: "The Postal Service's proposal to close thousands of post offices and cut back on the number of days that mail is delivered "won't work" and would accelerate the agency's decline, according to the six-page report by Ron Bloom, President Barack Obama's former auto czar, and investment bank Lazard Ltd., LAZ who were hired by the union in October." That's right: after all the huffing and puffing about "sacrifice" and austerity, the labor union took one long look at the only option... and asked what other option is there.

Muppets have received a lot of bad press since Greg Smith realized that he is not, in fact, a one-percenter.  Fortunately Elmo’s back to reclaim his rightful place in the financial world:  Making the seemingly incomprehensible  comprehensible while politely pointing out what should be obvious to everyone not in diapers.  That’s not so easy when the economic views espoused by everyone from central bankers to TV talking heads can only be accurately described as infantile.

Greece was the first country to defect from the non-default game theory regime of the European Union (a move which ultimately will be in its great benefit, as it is forced, very shortly, to default higher and higher into the 177% of GDP secured debt, until finally even the Troika's DIP loan is impaired). It has also become the first country to demonstrate that people can, contrary to apocalyptic claims otherwise by the global banker consortium which realizes oh too well it will be its death if people stop playing by the broken rules, exist under a barter regime. The video below shows how the Greek town of Volos develops its own bartering system without the aid of the euro. Yes - it can be done, especially since one is forced to produce in order to consume, and borrowing infinitely from the future becomes impossible.

When thinking of Australia, one traditionally imagines a country that is nothing but a secondary derivative of China's trade surplus, and an unpegged currency that allows for more trading flexibility than the Yuan. As a result, recurring calls warning of a housing weakness in the country are often ignored as there always appears enough liquidity to mask the issue just long enough. That may all soon be changing. Earlier today, insurance company Genworth Financial pulled the IPO of its Australian unit, sending its shares plunging by over 20% and its default risk soaring. Unfortunately for GNW, and soon for the entire Australian financial sector, instead of merely blaming market conditions, in the IPO, which was supposed to take public up to 40% of the company's Australian mortgage business, and has instead been delayed to 2013, GNW laid out a far more nuanced, and detailed explanation of what is happening. Alas, it also may be the canary in the coalmine that has been so long overdue in yet another regional, bubblelicious housing market.

The following sentence captures, better than anything, the sheer sociopathology, and the epic unprecedented delusions of a failing central planning bureaucrat:

• Angela Merkel is not happy that financial markets have not made any contribution to resolving the financial crisis -RTRS
  

Yes, this is precisely the same as the dealer complaining that the junkie not only demands more, but refuses to get clean. Here's a hint: "financial markets", crowded out entirely by central planners such as you, now rely exclusively on you, dear Angie, to "solve" the financial crisis. And will do so more and more, the higher this particular chart goes (danke Bundesbank).

We discussed Bob Janjuah's must-read perspective of the market just over a week ago and his appearance on Bloomberg TV this morning reiterates that strongly held view that we are in midst of central bank anarchy and the rules of the game continue to change. While earnestly admitting his miss in Q1, on the back of under-estimation of just how incredibly un-independent central banks are (and will be proved to be in an election year), the bearded bear goes on to confirm his view of short term 10% correction in the S&P 500, a mid-year recovery on Bernanke's bowing to Obama's pressure, and ultimately back to S&P 500 in the 800pt range (and Dow/Gold to hit 1). Dismissing the don't-fight-the-Fed argument with analogies from 2007's 'you have to dance while the music is playing' and the tick-tick-boom carry trades that so many funds and investors follow now, he reminds the interviewer and the audience of how quickly all the trickle of carry gains are lost and then some when the music stops. Must watch to comprehend how smart money is comprehending the ultimate game theory of today's central bank largesse and the clear non-self-sustaining recoveries in global economies.

According to the latest OPEC data, Saudi Arabia, which in its own view, is some endless pool of easily retrievable crude, yet which Phibro's Andy Hall, as well as leaked confidential docs, claim is nothing but one big lie, pumped a record 9.834 million barrels per day, an increase of just 24K barrels from February's total (based on secondary market data, not direct communication). While we salute Saudi's peak production, which has never crossed over the 10 MMBPD level, we wonder, just how and where will Saudi get the 25% extra spare crude capacity needed to fully replace Iran's embargoed oil, which however continues to flow. Or it does at least according to Iran - oil production rose in February and March, if just redirected: India and certainly China (which is currently adding to its strategic reserves as pointed out here some time ago) are delighted to buy excess Iran production. Based on secondary market sources, Iran production has declined from 3.46MM BPD to 3.35MM BPD: hardly much of an "embargo" impact.

It appears that after months of abuse for their water-is-wet economic insights, the San Francisco Fed may have stumbled on to the cold harsh reality that this post-great-recession world finds itself in. The crux of the matter, that will come as no surprise to any of our readers, is credit and "its central role to understanding the business cycle". Oscar Jorda then concludes, in a refreshingly honest and shocking manner that "Any forecast that assumes the recovery from the Great Recession will resemble previous post-World War II recoveries runs the risk of overstating future economic growth, lending activity, interest rates, investment, and inflation." His analysis, which Minsky-ites (and Reinhart and Rogoff) will appreciate - and perhaps our neo-classical brethren will embrace - is that the Great Recession upended the paradigm that modern macro-economic models omitted banks and finance and this time it really is different in that the 'achilles heel' of economic modeling - credit - cannot be considered a secondary effect. His analysis points to considerably slower GDP growth and lower inflation expectations as he compares the current 'recovery' to post-WWII recoveries across 14 advanced economies - a sad picture is painted as he notes "Today employment is about 10% and investment 30% below where they were on average at similar points after other postwar recessions."

Back in early February, long before anyone was too worried that French socialist candidate Hollande may win the French presidential election (after all the market was soaring on the fumes of a still ramping LTRO 1+2 effect, so why worry), UBS George Magnus penned a must read analysis of the macro implications what a Sarkozy loss would mean for Europe in "As Falls Sarkozy, So Falls Europe: The Full Story Behind The Upcoming French Election" which with 4 days to go until the first round of the French presidential election, is certainly worth a refresh (especially for Frau Merkel who will be roundly humiliated after backing the losing horse). And yes, it is only 4 days as UBS is kind enough to remind us. UBS also reminds us that, as strategist Stephane Deo believes Hollande has a 75% chance of winning, the french equity market is at substantial risk, as a Hollande victory is not priced in, even as noted earlier, it is starting to seep into the credit market where French CDS jumped over 200 bps for the first time in 4 months. To wit: "The bond market may force the government’s hand if they don’t start walking the walk on debt  reduction. Plus, while we don’t think that France is as troubled as Spain, it’s not priced for election disruption." But that is the big picture. Below we present a summary matrix which breaks down the various Hollande proposals that may propel him to become the next French president (and think that if it wasn't for a certain hotel maid, DSK would be days away from the French presidency), as well as their implications on various micro items.