Archive - Aug 2012 - Story

The tectonic battle between a market trying to deflate its debts and the central banks attempting to reflate the impaired assets to maintain the status quo is becoming increasingly violent. In a brief clip, Santiago Capital's Brent Johnson explains the fallacy of fiat money, the dynamics of the velocity of money in a 'troubled' economy, the 'we are going to give the banks a lot of money' plans, and the inevitable 'there's no more money' moment when the inflationary and deflationary tremors come unstuck and become shock-waves. There will be no warning, no bell-ringing at the onset of the end of the monetary system itself as he notes the slate of Stability & Growth Pacts (EU) and The Recovery and Reinvestment Act (US) will inevitably be seen as the greatest unauthorized transfer of wealth in history - and being exposed to gold stored outside of the banking system, there is a protected route as the world staggers from tremor to tremor.

Putting our trust and faith in a few unelected bureaucrats and bankers, who use their obscene wealth to buy off politicians in writing the laws and regulations to favor them has proven to be a death knell for our country. The captured main stream media proclaims these men to be heroes and saviors of the world, when they are truly the villains in this episode. These are the men who unleashed the frenzy of Wall Street greed and pillaging by repealing Glass Steagall, blocking Brooksley Born’s efforts to regulate derivatives, encouraging mortgage fraud, not enforcing existing regulations, and creating speculative bubbles through excessively low interest rates and making it known they would bailout recklessness. They have created an overly complex tangled financial system so they could peddle propaganda to the math challenged American public without fear of being caught in their web of lies. Big government, big banks and big legislation like Dodd/Frank and Obamacare are designed to benefit the few at the expense of the many. The system has been captured by a plutocracy of self-serving men. They don’t care about you or your children. We are only given 80 years, or so, on this earth and our purpose should be to sustain our economic and political system in a balanced way, so our children and their children have a chance at a decent life. Do you trust that is the purpose of those in power today? Should we trust the jackals and grifters who got us into this mess, to get us out?   

Recent consolidation in Soybean prices may be susceptible to notably higher prices since JPMorgan's new Soybean Crop Condition Index suggests the crop is in much worse condition than average conditions since 1986. They see the 2012 crop faring slightly better than the 1988 crop (thanks to seed technology) but suggest this could be the third-worst crop since 1964 in terms of actual yields relative to trend. Critically, if long-term drier- and hotter-than-average weather occurs (which appears likely from forecasts with soil moisture levels so low as to make even marginal rain practically useless), there is considerable downside risk to the soybean yield forecast (and implicitly upside risk to prices).

Over the past month America's ever vigilant law enforcers have taken to task not one but two foreign (domestic bank lobbies are sufficiently large to make Congress muppets perfectly eager to look the other way as noted previously) banks: HSBC and now Standard Chartered, for money laundering. Yet, when it comes to the true elephant in the room, which is not foreign and is fully domestic, they continue to ignore events such as this one just described by the Wall Street Journal: "A Florida home that originally listed for $60 million has sold for $47 million, a record for a single-family house in Miami-Dade County. The home, in Indian Creek Village, had been on the market since early 2011, when construction was still being completed. The asking price was reduced to $52 million this year." And the punchline: "The identity of the buyer, a foreigner who purchased the home in the name of a U.S.-based limited-liability company, couldn't be learned." In other words a foreigner who may or may not have engaged in massive criminal activity and/or dealt with Iran, Afghanistan, or any other bogeyman du jour at some point in their past, and is using US real estate merely as a money-laundering front perhaps? Sadly, we will never know. Why? As explained before, it is all thanks to the National Association of Realtors - those wonderful people who bring you the existing home sales update every month (with a documented upward bias every single time) - which just so happens is the only organization that actively lobbied for and received an exemption from AML regulation compliance. In other words, unlike HSBC, the NAR is untouchable, even if it were to sell a triplex to Ahmedinejad on West 57th street.

UPDATE: PCLN -12.5% AH (and DIS missed)

Admittedly slightly higher than yesterday's year-to-date lows in volume, today was not much better as S&P 500 e-mini futures (ES) pushed up over 1400, back to three month highs, on decent average trade size (following yesterday's low average trade size). Treasuries tracked stocks (higher in yield) but Gold and the USD disconnected (from stocks) into the US open and never really recovered. ES rolled off its highs late on and reverted perfectly to VWAP once again and rather coincidentally the 'correction' occurred just as ES priced in Gold hit the year's highs (which intriguingly is a critical cliff's edge level from a year ago). Oil's surge (and Treasury's weakness) were the main risk drivers which pushed CONTEXT to lead stocks higher as FX, credit, and PMs trod water largely. Interestingly, in ETF-land, our capital structure models were flashing red with HYG down notably and credit underperforming broadly, along with VIX (and VXX having an outside up-close day) not playing along with the rally. With VIX bouncing off 4-month lows, closing back over 16% (and up on the day), the pull to VWAP into the close on decent average trade size, the plunge in short-interest, and the underperformance broadly of credit markets (especially the ever-reliable-for-a-pump-job HYG); we'd be a little nervous up here (especially after Europe's sovereign and credit weakness today).

Just like every other aspect of the global economy and capital markets, the sudden, rapid moves in every times series are becoming increasingly more pronounced: today's case in point - consumer credit. Instead of rising by the expected $10.25 billion in June, following the whopper of a May bounce when it grew by $17 billion, in June, credit rose by only $6.46 billion. On the surface this was not a big miss and was the 10th consecutive increase in a row, driven exclusively by non-revolving credit - i.e. student and GM subprime loans. However, looking below the surface shows that following May's biggest monthly surge in revolving credit since November 2007 (+$7.5 billion), consumers have again expressed a revulsion to credit, with revolving credit sliding by $3.7 billion: this was the biggest monthly contraction in revolving credit since April 2011, and before that since February 2009. Did Americans developed a sudden taste for credit funded consumption in May, only to puke it all up and then some in June? It sure appears that way based on recent retail sales numbers. The July retail sales number will simply confirm if the re-icing of US consumers has continued for another month.

The global printer-in-chief is about to address educators in Washington DC (via the video conference stream below) focusing on the need for personal financial education in the wake of the financial crisis. We suggested a name for the plan: The 'Complete Re-education And Positivism' Plan but given the audience was K-12 educators of economics, the C-R-A-P Plan just did not seem appropriate. Perhaps his proposal is the BTFD Plan?

And so the fly in the ointment arrives as beggars are not only choosers but have completely lost their minds. As we explained very, very clearly over the weekend in "In Order To Be Saved, Spain And Italy Must First Be Destroyed", the market, courtesy of its primary function of discounting being completely and utter distorted and destroyed thanks to central planning, "priced in" the fact that Spain will be bailed out in the only possible way: by making a Spanish bailout next to impossible, sending its bonds so much higher that Rajoy could not possibly see any need in demanding a bailout (something which as Art Cashin explained further today will very much infuriate Obama). Well, as often happens, we may have been ahead of the market by a few days. And reality as well: because as of minutes ago Spain's PM confirmed precisely what we warned against - that by frontrunning Spain's destruction, and hence rescue, it has doomed Spain to a fate far worse. From France24:  Spain will not seek eurozone financial aid beyond an agreed rescue for its banks if more conditions than those already agreed for recapitalising lenders are attached, an EU source said Tuesday." The problem is that if and when the inevitable bailout demand comes, not only will there be more conditions, but Spain will effectively cede sovereignty to the Troika explicitly, and to Germany implicitly (for the full breakdown see here). Which again begs the question: which came first - the market frontruning the bailout or the government refusing to request a bailout on the market frontrunning the bailout and so ad inf.

In the aftermath of the most recent mass shooting incident in Colorado, which in turn is merely the latest in a long series of tragic mass killings, the question of weapon propagation has once again come to the forefront, if not as much in the presidential race. This of course excludes the fact that for centuries the military industrial complex has long been the staple manufacturing core of many economies, and has competed only with banking when it comes to making a disproportionately small group of people disproportionately rich (even if it has "boosted" numerous economies alive in times of Krugmanian GDP stimulus need). Which is why we present the following interactive infographic from chrome experiments as a quick and dirty guide on who the biggest sources of arms trade (either imports or exports) in the world are. We doubt there will be many surprises over the usual suspects.

While all eyes are on the absurdist tragicomedy playing out in Europe, Japan is quietly circling a financial black hole as its export economy is destroyed by its strong currency and the global recession. There is a terrible irony in export-dependent nations being viewed as "safe havens." Their safe haven status pushes their currencies higher, which then crushes their export sector, which then weakens their entire economy and stability, undermining the very factors that created their safe haven status.

Two weeks ago we noted the transmission channels that Mr. Draghi had pointed out having become broken, clearly enunciating the chasm that is developing in the interbank market. Goldman's Huw Pill takes this a step further and notes a 'red line'  - running along the Pyrenees and the Alps - that has descended with banks south of this line having difficulty accessing Euro interbank markets, whereas banks north of that line remain better integrated and retain market access. This is the exact segmentation that Draghi worries is interfering with policy transmission (and thus affecting macroeconomic outcomes - in his view). Banks in the periphery have been 'red-lined' and while last week's ECB announcements initiated a policy response to this segmentation, the obvious (to anyone who actually comprehends the situation) reality is that ECB purchases of government bonds does not eliminate this 'red line'; only convincing markets through fundamental adjustment (fiscal consolidation, structural reform, and institutional building) will the red-line be lifted. This is highly improbable in the short-term and means an expectation of more direct intervention in bank funding markets (with all its encumbrance) will occur soon enough (and perhaps that is why European financial credit is underperforming).

Moments ago, members of the Greek government, which likely won't last long once the thorny issue of "math" returns and not even selling Bills to local banks (which promptly repo said Bills back to the Greek central bank) so the country can fund its payment to the ECB via an ECB guaranteed ELA payment from a Greek central Bank (confused yet) satisfies the New Normal ponzi math, made a strong statement: the country will not let any more public workers go:

• VENIZELOS SAYS STICKS TO PLEDGE NO LAYOFFS IN PUBLIC SECTOR
• KOUVELIS SAYS CAN'T ADD MORE UNEMPLOYED TO RANKS

The reason for this pledge is obvious: the last thing the country's new rulers need is more anger in the ranks as people demand a new government, which in turn will bring back Drachma redenomination risk. So what is the Greek solution instead? Simple: enter the labor pool, or the Greek version of the Permanent Paid Vacation, or akin to America's 99 weeks of unemployment benefits.

Expansionary monetary policy constitutes a transfer of purchasing power away from those who hold old money to whoever gets new money. This is known as the Cantillon Effect, after 18th Century economist Richard Cantillon who first proposed it. In the immediate term, as more dollars are created, each one translates to a smaller slice of all goods and services produced. How we measure this phenomenon and its size depends how we define money....  What is clear is that the dramatic expansion of the monetary base that we saw after 2008 is merely catching up with the more gradual growth of debt that took place in the 90s and 00s. While it is my hunch that overblown credit bubbles are better liquidated than reflated (not least because the reflation of a corrupt and dysfunctional financial sector entails huge moral hazard), it is true the Fed’s efforts to inflate the money supply have so far prevented a default cascade. We should expect that such initiatives will continue, not least because Bernanke has a deep intellectual investment in reflationism.

It's happening again. The euphoria is fading in the critical fulcrum security markets but stocks remain oblivious in their momentum-heavy liquidity-less way. Spanish and Italian sovereign bonds ended weaker - quite notably weaker in the case of Spain with the curve flattening significantly as the much-heralded front-end started to give some back and 10Y spain leaked back up towards 7% yields. Compared to post Draghi-'believe' (and post-Draghi 'reality') the Spanish and Italian stock markets are cock-a-hoop - massively outperforming. European equity markets in general are now the Usain Bolt compared with the Derek Redmond of European credit markets as once again stock holders are either last to get the joke or first to be ignorant enough to play the ECB's game of chicken. Spain's IBEX is now +13% from Thursday's close, followed by Italy +10% - but Italy and Spain 10Y bonds are still wide of the pre-Draghi 'reality' trough in spreads. German and Swiss rates increased modestly today but the latter remains negative out to 6Y.