Archive - Sep 24, 2012 - Story

Never try to teach a pig to sing, advised Robert Heinlein. It wastes your time and it annoys the pig. Similarly, never try to convince a central banker that his policies are destructive. After five years of enduring crisis, market prices are no longer determined by the considered assessment of independent investors acting rationally (if indeed they ever were), but simply by expectations of further monetary stimulus. So far, those expectations have not been disappointed. The Fed, the ECB and lately even the BoJ have gone “all- in” in their fight to ensure that after a grotesque explosion in credit, insolvent governments and private sector banks will be defended to the very last taxpayer. Conventional wisdom is that such moves are justified during this period of economic slowdown, as everyone agrees that the market is ’deleveraging’.  But as the consistently excellent Doug Noland points out, this idea of deleveraging (i.e. reduction of available credit) in the US is a myth.

In a little under four minutes, CNBC's Gary Kaminsky provides a voice of reason amid the 'Gold-and-Bonds-are-in-a-bubble-but-Apple-is-awesome' meme. Reflecting on some of the mind-blowingly crazy statistics of this market's recent inexorable rise, central bank balance sheet eruptions, and valuations; Kaminsky (an ex-PM as opposed to 'reporter') provides six clarifying words: "We know this will end ugly!" From the lack of credibility of any Fed exit, to the explosion of the monetary base, Gary moves back and forth from Japan as an ever-more-obvious template for our path past the Keynesian endpoint. Finally, he concludes that: "Bernanke is a kamikaze pilot... experimenting [in monetary policy] and is destined to fail."

Global economic fundamentals are awful, bearish divergences are occurring everywhere, investor sentiment is nearing bullish extremes, political risks remain high and last week's market performance can be summed up in four words - 'lack of follow through'. As Gluskin Sheff's David Rosenberg explains, more than two-thirds of the rally points the stock market has enjoyed since the summer-time lows occurred around central bank policy announcements. So the market is really a one-trick pony here, breathing in the fumes of central bank liquidity. What was supposed to happen, as the elites told us, was that the lagging hedge funds were going to throw in the towel and chase this market. Everyone expects this to be a major source of buying power. At the same time, what if the bulls who lucked out this year because they hung onto Ben Bernanke's arm decide to take profits or at the least lock in their gains? CRitically, as Rosie details, QE3 is occurring at a different point in the cycle this time and insomuch as it helps invogorate already rising 'animal spirits' we suspect it has missed the baot.

While the stock market in the US continues to surge (if not so much in China where the composite is back to 2009 lows) as the relentless liquidity tsunami makes its way into stocks, and other Fed frontrunning instruments, and only there, reality for everyone else refuses to wait. Last week we saw reality striking in Greece, where a section of Athens literally shut down after it ran out of all cash. Today, reality comes to the US, and specifically its poorest city, Camden, which is a twofer, doubling down also as America's deadliest city. It turns out Camden is about to become even deadliest-er, as its police force is set to be disbanded following a budget crisis in this effectively insolvent city.

"We have decided to focus on return... we need a certain level of return no matter how the market condition is" is how the general manager of Japan's Teachers' Mutual Aid pension fund justifies their plan to push JPY100bn (of their JPY600bn) into riskier assets from J-REITs to hedge funds. As Bloomberg notes, the firm is adopting a new strategy designed to counter a decline in the value of traditional equity and bond asset classes. Notably, following last week's Illinois pension-fund target return markdown, the Japanese fund targets only 3-5% thanks to QE8 and two decades of repression and stumble through. Even achieving these targets means throwing out the 'risk' side of the equation as they push into foreign bonds (cue next European sovereign bond rumor) and chase momentum in Tokyo real estate (TSEREIT up 19% YTD). Haven't we seen this picture before - and it didn't end well?

In a system that depends on lies and the credulity of the citizenry, the greatest lie is that the Federal Reserve's "quantitative easing" bailouts of the banks somehow help our citizens and communities. To clarify this, ask yourself this question: what else could we have bought with the $29 trillion the Fed loaned or backstopped to the banks?  If you enjoy quibbling about the total sum of Fed support, be my guest; the Levy Institute came up with $29 trillion after poring over all the data, while the Government Accountability Office’s (GAO) tally topped $16 trillion. That's 100% of the nation's GDP and roughly 100% of the $16 trillion national debt. While we're asking about opportunity costs, let's ask what else we could have bought with the $10 trillion that the Federal government has borrowed and blown in the past 11.7 years. The national debt was $5.727 trillion when G.W. Bush was sworn into office on January 20, 2001. It had risen to $10.626 trillion when President Obama was sworn into office in January, 2009. It is now $16.016 trillion, an increase of $5 trillion in less than four years in "debt held by the public" (i.e. the Chinese central bank, the Japanese central bank, the Federal Reserve, etc.)

Curious what geopolitical developments traders are looking at? Here is a complete summary, in under 30 seconds, courtesy of the Chairman of the Fermentation committee.

In the spirit of the European Bank Stress Tests and in the continuum of the Ring around the Rosie concocted by Brussels we are about to be handed another slew of numbers that will show that Spain is fine, prospering and running along just with no difficulties at all; thank you. This data is being prepared by the German firm Oliver Wyman, the German consulting firm. You may recall that we were supposed to have audited financials by the end of September, which was promised by Spain, however that was apparently canceled and there is no such audit underway. So much for the promises of Spain. We can tell you now, with surety, that the evaluation that we will be handed by Oliver Wyman will have all of the value of the paper found in the 'banos' of any restaurant in Madrid.

Shortly after posting the latest "balance sheet" of the US consumer we received requests to show how this looks in a global context, in other words, what do the balance sheets of the global households outside of the US look like. We show what this look like below, courtesy of the Bank of Japan, which presents the distribution of household financial assets in context then (5 years ago) and now. It also shows why whereas to Joe Sixpack the level of the S&P is the most important, with 32% of total assets in stocks, in Japan and in Europe, the average person could not care less where the stock market is, with just 6.5% and 14.7% of assets held in equities. The US E-Trade baby: keeping the Ponzi dream alive.

While Nomura's Bob Janjuah remains 100% correct in his diagnosis and prognosis of the current 'grossest misallocation and mispricing of capital in the history of mankind', his tactical short was stopped out last week. The modest loss on the position though provided clarity on the importance of the 1450 level for the S&P 500 and he remains confident that on a multi-month timeframe he expects 800 to be hit with only a muted 10% possible upside in global equities due to underlying growth, debt and policy-maker concerns. Critically, he suggests it is premature to go aggressively short risk at this precise moment, urges traders to stay nimble, and warns "...risk assets are in a bubble which of course can extend, but which can reverse sharply and suddenly. Up here, 'valuation metrics' are not going to help much... this bubble could extend for maybe a few months and by up to 10%, ...but that we could see global equity markets 10/15% lower in virtually a 'heartbeat'."

There was much riding on the Apple update for the first weekend sales from the new iPhone 5 and here they are.

• APPLE SAYS IPHONE 5 FIRST WEEKEND SALES TOP 5M.

This number would be great if only it wasn't 50% off the highest whisper estimate of up to 10 million sales in the weekend. It is also the reason why the stock is now sliding down well over 2%, threatening to light the AAPL hedge fund hotel on fire.

Confirming the dismal picture of advanced economy import and export declines we discussed yesterday, the following chart provides everything you need to know about the world's economic quagmire but were afraid to ask. Of course, all the time the central-printers of the world are willing to debauch themselves there will be momentum-chasing monkeys to maintain the blue-pill illusion of a healthy stock market as indicative of a healthy economy - but should you choose to swallow the red pill, this chart of a plunging global trade volume may raise anxiety levels a little above their current multi-year lows.

Ray Dalio, founder and co-chief investment officer of Bridgewater Associates, L.P. and one of the most successful hedge fund managers of all time told Maria Bartiromo last week that he owns gold and that he sees no “sensible reason not to own gold”. The interview was part of the Council on Foreign Relations (CFR) Corporate Program's CEO Speaker Series, which provides a forum for leading global CEOs to share their priorities and insights before a high-level audience of wealthy and influential CFR members.  The respected hedge fund manager suggested that a depression and not a recession was likely and warned of social unrest and the risk of radical politics as was seen with Hitler and the Nazis in the Depression of the 1930’s. Dalio spoke about how “gold is a currency” and when asked by Bartiromo “do you own gold?”, he smiled and said “Oh yeah, I do.” The admission elicited a laugh from the CFR audience. Dalio’s interview is important as it again indicates how slowly but surely gold is moving from a fringe asset of a few hard money advocates and risk averse individuals to a mainstream asset. Wealthier people and some of the wealthiest and most influential people in the world are slowly realising the importance of gold as financial insurance in an investment portfolio and as money. This will result in sizeable flows into the gold market in the coming months which should push prices above the inflation adjusted high of 1980 - $2,500/oz. The interview section where Dalio is asked about gold by an audience member begins in the 43rd minute and can be seen here.

Just when we thought Europe has already used the kitchen sink and then some in its arsenal of bailout ideas, here comes Spain proving there is always "something else." Bloomberg reports that the insolvent country which is not really insolvent as long as people keep buying its bonds on hopes it is insolvent, is launching "lottery bonds". To wit: Spain to sell bonds through state-run lottery operator to fund regional bailouts, two people familiar with the matter told Bloomberg’s Esteban Duarte and Ben Sills. The issue is part of €6 billion financing through Sociedad Estatal Loterias & Apuestas del Estado which is raising syndicated loan. Loterias official said financing details haven’t been completed. In other words, the national lottery, which as in Spain so everywhere else, is nothing but an added tax on a country's poor population but one which provides at least a tiny hope of a substantial repayment (which never happens for the vast, vast majority of players) so few actually complain about paying it, is about to shift the bailout cost to the nation's poorest. Who benefits? Why Spiderman towel makers of course. And insolvent banks.

Risk-averse sentiment dominated the first half of the session today, as market participants digested yet another disappointing macro economic data release from Europe (German IFO), which fell for a fifth consecutive month. In addition to that, EU’s Van Rompuy said that he sees tendency of losing the sense of urgency, likely pointing the finger at Spain which is yet to request monetary assistance to prevent another speculative attack. It remains unclear when the official request will be made, but there is a risk that the application will only take place after regional elections in late October or even after the Eurogroup meeting in November. Finally, German finance ministry spokesman said that leveraging the ESM to EUR 2trl, as reported by Der Spiegel over the weekend, is not realistic and called the report completely illusionary. As a result, peripheral bond yield spreads are wider, with Italian bonds underperforming as markets prepare for this week’s supply from the Treasury. Heading towards the North American cross over, EUR/USD is seen lower by around 75pips and is trading in close proximity to the 1.2900 level, with bids said to be placed below. Talk of dividend related buying in GBP/USD, as well as EU budget related selling in EUR/GBP by two different UK clearers helped support GBP/USD. Going forward, there are no major economic releases set for the second half of the session, but the BoE will conduct its latest APF and the Fed will buy between USD 1.5-2bln in its latest POMO.