Archive - Aug 16, 2012 - Story

Legal precedent means nothing. Rule of law means nothing. Free speech means nothing. Their own treaties mean nothing. It’s unbelievable. Anyone in the west who honestly thinks he’s still living in a free society is either a fool or completely out of touch. If that seems too radical an idea, consider that ECUADOR is now the only nation which stands to defend freedom and human rights against an assault from the United States, the United Kingdom, and their spineless allies. The west has just become a giant banana republic. Have you hit your breaking point yet? If not now… when?

When real estate prices made a vertiginous ascent in the 1980s Japan the bullish refrain was that there wasn’t enough land. However, Japanese real estate prices, and even those of crowded Tokyo, have glided downwards over the subsequent two decades, accompanied by rents - interrupted by the Karate-Kid-esque 'recovery-on; recovery-off' hope that we have also started to witness in the US. Very low economic growth and a demographic headwind, despite reasonably high employment, have led to a depressed real estate market. Is this a harbinger for the West? And what defines recovery - price, volume, net equity?

The must see time lapse video below courtesy of Stone McCarthy shows the distribution across the entire curve of the US marketable debt, as it was held by either the Fed, or the private sector over the past three unconventional monetary policy programs: starting in 2003 and concluding yesterday. In one short minute, this clip demonstrates very vividly how the Fed effectively took over the US bond market.

The vital question of the moment is whether of not The Bernank will signal an intention of moving towards QE3 in his much-anticipated 'Jackson Hole' conference in two weeks. Citi's Tom Fitzpatrick believes "it would be irresponsible to do so and that we need a more 'responsible fiscal policy' which will not materialize as long as we have an 'irresponsible monetary policy' bailing policymakers out". However, what we think in this regard is totally irrelevant to this discussion for it is what we think the Fed thinks that is critical. Recent data seems to have been a little more supportive of the economy (on the face of it) and may lead the Fed to stay on hold in the near term (September meeting). This will almost certainly raise the bar extremely high for further easing as we head into the Presidential race proper. If this window closes then a move before December will be extremely unlikely barring a major financial/market/economic shock, since after the 9/13 meeting, there are no more meetings until 12/12. However this increases the danger of the Fed getting 'caught behind the curve' which must be balanced with the 'mistake' of one-monetary-step-too-far with very real inflationary consequences.

Like all systems that follow an S-curve of growth and decay, financialization cannot return to its growth phase. But there is another dynamic at play: a self-destruct sequence triggered by central bank and Central State efforts to reflate asset and credit/leverage bubbles. All central bank and State policies aimed at driving capital into risk assets boil down to reflating phantom assets purchased with debt by issuing more debt that is based on newly issued phantom assets. Phantom assets purchased with debt cannot be reflated by issuing more debt that is based on newly issued phantom assets. Piling more debt/leverage on a sandpile of phantom assets (CDS, bonds that cannot possibly be paid back, empty condos in the middle of nowhere, etc.) only heightens the probability that the unstable pile will collapse. The implicit Central Planning campaign to trigger "mild" inflation is part of the self-destruct sequence. Central planners metaphorically fight the last war, or at best the last two wars, and so they remain blind to any dynamics that did not exist in their case studies.

Over the past several years, there has been much speculation and numerous reports that America is deleveraging. It isn't. In fact, consolidated across the 5 different kinds of American debt, which takes into account not only federal, but also financial, municipal, household and non-financial, total debt as a percentage of GDP has not budged over the past 4 years and is flat at 350% of GDP. Which simply means that all of the household debt that has supposedly vaporized (at least until the next major Flow of Funds revision), all of which has taken place purely from discharges on uncollectable mortgage and credit card debt, has been replaced by federal debt, while financial debt has merely soared to take the place of the collapsing shadow debt which is imploding as the confidence in a Fed-free financial system erodes to zero. Which of course, is the worst possible outcome: instead of funding private, individual entrepreneurs, who are the true basis for America's historic growth, prosperity and success (and who, unlike the government can and will fail if they dont allocated capital efficiently) the transferred debt (from household to federal) merely goes to fund the unproductive components of the US economy: the US government which by definition produces nothing, and the financial sector, whose only product is financial innovation which serves to make the TBTFs TBTFer, and pay record bonus after record bonus, and... that's it.

"I paid taxes every single year" is how Mitt Romney retorts to Harry Reid's charge that he paid no taxes in some years. As Bloomberg reports, after review of his tax returns over the last decade, Romney always paid at least 13% of his income in taxes. Romney has released his 2010 return, which shows that he paid an effective tax rate of 13.9 percent on more than $21 million in income, most of it from capital gains and dividends. "The fascination with taxes I’ve paid I find to be very small-minded compared to the broad issues that we face," he told reporters adding that he is "waiting for Harry [Reid] to put up who it was that told him what he says they told him. I don’t believe it for a minute, by the way.”

QE-on or QE-off; Growth or No-Growth; Cleanest 'Dirty' Shirt or Un-Decoupling; none of that matters. There are divergences everywhere - intraday and long-term - but none of that matters. What matters is hope, faith, and a little Central Bank charity. That is, of course, until someone drops the bowl of global Kool-Aid (Merkel 'nein'; Bernanke 'no'; Xiaochaun 'bu') or markets believe they want Romney/Ryan. With the equity markets in general making new 2012 highs today (as we noted earlier), on a day with better-than-recent volumes and heavy average trade-size at the highs, we can do nothing but stand back and admire the year-to-date performance of bonds, stocks, commodities, and verbal diarrhea.

The issue at hand is the sense that we have entered a phase of exponential criminality and corruption. A slavering crook like Corzine who stole $200 million of clients’ funds can walk free. Meanwhile, a man who exposed evidence of serious war crimes is for that act so keenly wanted by US authorities that Britain has threatened to throw hundreds of years of diplomatic protocol and treaties into the trash and raid the embassy of another sovereign state to deliver him to a power that seems intent not only to criminalise him, but perhaps even to summarily execute him. The Obama administration, of course, has made a habit of summary extrajudicial executions of those that it suspects of terrorism, and the detention and prosecution of whistleblowers. And the ooze of large-scale financial corruption, rate-rigging, theft and fraud goes on unpunished.

Just when you thought it was safe to get back in the water of shark-infested algos; just as we hit multi-year equity index highs (with the entire interest rate complex devastatingly divergent still - despite very-recent weakness), we thought it might be at least a little instructive to remember what happened in the late 1970s as analog. These 3 simple charts of Consumer Confidence, Capacity Utilization, and Initial Jobless Claims show just what can happen when you think it's all over. While there are many 'goal-seeked' analogs, we find these extremely timely given the somewhat similar underlying conditions that the world faces; to wit, Citi notes: "A Middle East 'tinderbox' that is very susceptible to a food price shock and a likely cause of an Oil price shock (as we saw in 1973-1974 and again in 1978-1979)."

All those who were patiently waiting for the S&P futures to close at new 2012 highs as the catalyst for Bernanke to announce QE3, can now exhale (if we end here): with S&P 500 2012 year-end earnings estimates the lowest they have been all year; with corporate revenues now negative quarter-over-quarter; and with US economic output sliding and GDP back under 2%; coupled with another step backward in housing; it was only logical that the S&P would close at fresh 2012 highs. And now, it is time for the NEW QE, LTRO 3 and more RRR and Interest Rate cuts from China and all shall be well.

It must be election season because moment ago Reuters just reported that the White House is "dusting off old plans on a potential SPR release as prices rise" according to a source with knowledge of the situation. This too, just like the earlier Corzine news, should not be a surprise. Obama made it expressly clear that with the election fast approaching, he would either force the CME to hike margins, which is also coming, or would proceed with the far dumber step of an SPR release, just so China can full up its own strategic release faster and at a lower cost. The spun version, of course, has to do with Iran, and the fear of "undermining" Iran sanction success. The same sanctions which the US granted key Iran client China a compliance waiver...

There was a time when retail stock outflows were considered a bullish catalyst: after all, retail was always considered the dumb money (not "two and twenty" hedge funds which continue to underperform the stock market, and have done so for the past five years), and would pull money at the bottom and add money at the top. This is no longer the case for the simple reason that while persistent outflows from domestic equity funds continue (and as the recent shuttering of levered ETFs by Direxion shows the infatuation with synthetic mutual fund replacements is now over), for the inverse to be true there have to be inflows, which are now non-existent. In the past two years, or 106 weeks of market data, there here been 17 weeks of inflows, or 16% of the total, amounting to $31 billion. The remainder? Outflows for a total of $300 billion. In the 32 weeks of YTD 2012 money flows, there have been 5 weeks of inflows for a total of $3.6 billion (which was also equal to the outflow in the last week alone) none of which coincided with market tops, and in fact the biggest outflows occurred just as the market hit interim highs. The most recent inflow, as tiny as it may have been, curious occurred during the May lows, proving retail is if anything, the smart money now. In other words, those looking for hints about the market based on retail flows are advised to look elsewhere. What this data does show is that no matter what happens in the stock market, the outflows will persist and are unlikely to reverse direction. Because if the S&P at fresh 2012 (and multi-year) highs is unable to draw retail out of hibernation, nothing will. Where is the money flowing? Why into fixed income of course, proving that as far as the now extinct investor class is concerned, return of capital is the only thing that matters, while HFTs and prop trading desks can fight over all the return on capital scraps provided courtesy of the Chairman. Curious where the volume has gone? Now you know.

In a stunning and shocking turn of events at Lonmin's Marikana platinum mine in South Africa, Reuters shows this extremely graphic clip of police opening fire on striking miners. A Reuters cameraman says he saw at least seven bodies after the shooting, which occurred when police laying out barricades of barbed wire were outflanked by some of an estimated 3,000 miners massed on a rocky outcrop near the mine, northwest of Johannesburg. Marx is not dead. In fact, far from it.