Archive - Aug 30, 2012 - Story

With a price hovering around $1,600 an ounce and the prospect of "additional monetary accommodation" hinted to in the latest meeting of the FOMC, gold is once again becoming a hot topic of discussion. Krugman, praising 'The Atlantic's recent blustering anti-Gold-standard riff, points to gold's volatility, its relationship with interest rates (and general levels of asset prices - which we discussed here), and the number of 'financial panics' that occurred during gold-standards. These criticisms, while containing empirical data, are grossly deceptive.  The information provided doesn’t support Krugman’s assertions whatsoever.  Instead of utilizing sound economic theory as an interpreter of the data, Krugman and his Keynesian colleagues use it to prove their claims.  Their methodological positivism has lead them to fallacious conclusions which just so happen to support their favored policies of state domination over money.  The reality is that not only has gold held its value over time, those panics which Krugman refers to occurred because of government intervention; not the gold standard. Keynes himself was contemptuous of the middle class throughout his professional career.  This is perhaps why he held such disdain for gold.

Sometimes a picture can paint a thousand words; in the case of these two charts from Nanex, it paints more as it is abundantly clear that since Reg NMS, the 'noise' in our daily trading markets has risen exponentially as the apparent price we pay for the 'liquidity-providing' machines is up to 15-times more normalized 'price-changes' - or put another 'smoothed' way: averaged over a 20-day period, intraday volatility has doubled since HFT began (and was six times larger during the flash crash). How's your mean-variance efficient-frontier look now? Or your delta/gamma hedging program?

Expectations for tomorrow's J-Hole speech by the venerable Ben Bernanke vary from the mundane "things-we-can-still-do; monitoring-situation" to the exuberant "we'll-print-our-way-out-of-this-mess-no-matter-what-and-I've-got-your-back-for-anything-more-than-a-1%-drop-in-the-Russell". We suspect, like Morgan Stanley's Vince Reinhart that a lot of people are going to be grossly disappointed  as the FOMC (C for Committee) meeting is so close and the election being just around the corner means playing-down any miracle-making. Instead we suspect it will be more of the same - disappointment in economic performance, could do better, closely monitoring, Fed-has-tools; i.e. a replay of most of his recent speeches in tone. Reinhart does see some room for surprise though - especially on conditional policy rules (and the potential problems with over-reaching their mandate).

The average American spends 9 hours, 12 minutes, and 36 seconds 'Working & Commuting' on an average workday. Wonder what they do with the rest of their precious 'unproductive and non-tax-providing' day?

In November 2008, President Barack Obama won the popular election for President by 9.5 million votes.  A burgeoning financial crisis and weakening economy helped his candidacy at the time, but four years on the sluggish pace of economic recovery is a headwind to his re-election.  Consider, for example, that there are currently 12.8 million people unemployed in the U.S., or that an estimated 8 million adults entered the SNAP (Food Stamp) program since November 2008 (total increase in enrollment: 15.6 million).  Presidential elections are won in the Electoral College, of course, so in today’s note ConvergEx's Nick Colas parses out this employment/food security economic stress for the key “Battleground” states.

Seven of the 8 swing states this election year are more economically stressed than the national average in terms of unemployment and/or food stamps, while 2 of the 3 states “leaning” toward Obama are worse off than the national average.  Romney, behind in the electoral vote count by most analysts’ figures, theoretically stands to gain from a weak national economy, but he’ll have to earn the vote of an estimated 4 million Americans in 14 key battleground states to have a shot at the White House.

It will come as no surprise to many but everyone's favorite enemy #1, the US banker, decided to give himself a well-earned pay-rise in 2011 - according to data from Moody's Analytics (via Crain's). What is perhaps a little more surprising is the sheer gall of it given that the financial industry profits plunged over 70% from $27.6bn in 2010 to a mere $7.7bn in 2011. While the rise in salaries is not large, and the average man on the street actually saw a bigger rise, the critical point is that for two years in a row - from 2009 to 2010, and now from 2010 to 2011 - banking industry profits have dropped like a stone but the average salary of those oh-so-deserving 'Wall-Street'ers has risen.

This evening, as many boomers on the verge of stepping into the golden hue of retirement sit down for dinner and watch the news, they will be perplexed at their next move. The Dow closed at 13000.71 (just in the realm of the Fed's 3rd mandate to enable retirement) but stunningly the S&P 500 closed at 1399.48 (below the dreaded 1400 level that gives everyone a green-light to retire). Volume was average for the recent lows and despite the S&P 500 e-mini's 'tickle-algo' efforts to get back up to the day-session opening levels (cutting half the day's losses), the last few minutes of the day saw a plunged back down to the lows. AAPL fell over 1.5% - its worst day in five weeks - enabling NASDAQ to catch-down to the S&P in performance terms since the 8/21 highs (down ~1.2%) while the Dow Transports is down 3.8% in the same period. Healthcare and Staples outperformed (though all sectors were red today) as Energy and Tech were the biggest losers. A strong 7Y auction sent TSYs bid to the week's low yields this afternoon but the early comments from Europe were the driver of USD strength (EUR weakness) and Treasury strength - which implicitly dragged commodities (though mixed) and stocks lower. VIX traded over 18% just before the European close, fell back and then rose once again into the close up 0.75 vols to its highest in a month. As everyone holds their breath for tomorrow, the after-hours crack lower in S&P futures - to end at the lows of the day - suggests some urgency to cover longs (as opposed to hedge - as VIX did not keep pace).

Year-to-date, before the decimation that the Knight x1000 Algo wreaked upon the market, volumes had trended lower YoY but had not cratered. As the charts below suggest - in somewhat stunning technicolor - that since the Knight-algo was put-to-death, NYSE volumes have coincidentally plunged by 40%! Today's run-rate with an hour to go was the lowest of the year. For those that hang on the consideration that this is due to high-priced stocks and USD-volumes are stable - err, wrong answer - futures volumes cracked in half also (and that is a stable USD volume); The summer doldrums explains it - err, wrong answer - we are 20 percentage points below a normal summer-drop-off. The simple fact of the matter is, with retail suddenly the smart-money and exiting stage left (unable to trade this ridiculous market), it seems that losing one market-maker algo has almost halved trading volumes; what happens if GETCO ever goes down?

Think massive intellectual CTRL-C -> CTRL-V'ing occurs only in the highly rarefied air of smartphonism? Think again (via Bloomberg):

• HARVARD PLAGIARISM PROBE UNDER WAY FOR ABOUT 125 CLASSMATES
• STUDENTS UNDER INVESTIGATION FOR COPYING ON FINAL EXAM
• THOSE FOUND TO HAVE PLAGIARIZED MAY FACE 1-YEAR WITHDRAWAL
• MOST WIDESPREAD CHEATING SCANDAL IN LIVING MEMORY

We are confident that as soon as said 125 classmates threaten to take down the "highly intellectual" world with them and expose all the other plagiarists if they go down, there will be a congressional hearing on the matter asap. Perhaps it is time for Harvard to change its motto from Veritas to Copytas?

Finally, is it Crimson, or Crime-son? Or do the entitled not care about the difference?

"Don't underestimate how close the Court verdict is" is the warning that Morgan Stanley's European Research group sends out in a note today. In their view, there is a non-negligible risk that the German Constitutional Court will voice concerns about the ESM and, potentially, also the fiscal compact on September 12. Given that the EFSF is still in operation, given that the Court views the scope of the German constitution as being exploited already, and given its record of voicing concerns about European integration, MS sees a 40% chance that the Court bans Germany from ratifying the ESM treaty (with major repercussions for financial markets), at least for now, and while their base case is for ratification of both treaties, they believe the market is not priced appropriately for the downside tail-risk of a possible 'no' verdict (and the asymmetric scenarios below).

"Fix it Yourself" or "We've got Your Back"; "Crisis not done in three years" or "Euro is not in crisis";
"Market is pricing in Breakup of Euro" or "Portugal Yields Back at Pre-Bailout Levels" Is it any wonder that EURUSD just blipped up 10 pips, on ECB Executive member Asmussen's confusing diatribe, and fell back now stranded like an upside down beetle. Of course, the key factor in the non-crisis is that

• *ASMUSSEN SAYS SPECULATION OF EURO AREA EXITS HINDERS ECB POLICY

but if there is a crisis - he pushes all-in back to Rajoy:

• *ASMUSSEN SAYS STATES MUST SEEK EFSF HELP BEFORE ECB HELPS
• *ASMUSSEN SAYS THERE HAS TO BE CONDITIONALITY

We guess Europe is indeed back from vacation and the real jaw-boning can begin.

The high-pitched happy Hungarian is back - and this time he is serious. Laszlo Birinyi, the guru of gurus, who (back in January 2011 - as we noted here) forecast the S&P 500 to be at 2854 by September 2013, now sees the S&P 500 at 1500 by year-end (which looks mysteriously like yet another of his famous ruler-applications). What is fascinating about this oh-so-valuable prediction is that it implies Birinyi believes 2013 is the year of all years - a 90% rally in the first 9 months according to the newsletter-peddler - or a 160% annualized return. Trade accordingly.

A few weeks ago, western governments' war on productive people took an interesting twist when US immigration authorities detained two teenage children of an asset manager based here in Switzerland. The kids were traveling through the United States by themselves to visit extended family, and they were interrogated for six hours about their father's business and whereabouts. During the six-hour ordeal, the children were not allowed to contact family members who were waiting for them, nor any sort of attorney or advisor. This 'guilty until proven innocent' approach is the same sort of special treatment reserved for suspected terrorists. The only difference is that you don't end up in Guantanamo. Free societies do not treat people this way. Hell, most criminal networks don't even treat people this way. And while it may raise a few bucks in the short run, in the long run it's counterproductive. People adapt. They create underground, cash-based economies. They leave. Foreign investors stay away.

As Bernanke and Draghi carefully try to centrally-plan navigate us mere mortals through this dismal period of market and economic reality, we thought this clip was a perfect analogy for the 'heavy-lifting' job they are doing... and the likely outcome.