Archive - Sep 4, 2012 - Story

Drought has devastated crops around the world this year. While most have focused on the extreme issues in the US, we noted two weeks ago that the Monsoon season was shaping up to add fuel to the fire of illiquidity. As the NY Times reports, there is simply not enough rain in India as the annual monsoon season is down 12%. "If this situation continues, I'll lose everything" is how one soybean farmer highlighted his plight (and no government insurance or subsidies there). Famine is not an immediate threat though as India has stockpiles of food (though we know the issue there) but critically this, as we noted here before, places inordinate pressure on central bankers (specifically the PBoC) where its citizens are already facing record high prices for staples like soybeans as the world's markets (devoid of contemplation of the plight of the average citizen - so long as my AAPL stock goes up) anticipate the free-lunch of central bank liquidity while its that non-metaphorical liquidity that could ease pressures on millions.

Several hours ago, the latest hacker group to gain prominence, AntiSec, a subset of Anonymous, disclosed that it had obtained the confidential user data contained in some some 12 million Apple units after hacking an FBI Dell Vostro notebook computer, "used by Supervisor Special Agent Christopher K. Stangl from FBI Regional Cyber Action Team and New York FBI Office Evidence Response Team was breached using the AtomicReferenceArray vulnerability on Java" which contined a file titled NCFTA_iOS_devices_intel.csv, which "turned to be a list of 12,367,232 Apple iOS devices including Unique Device Identifiers (UDID), user names, name of device, type of device, Apple Push Notification Service tokens, zipcodes, cellphone numbers, addresses, etc. the personal details fields referring to people appears many times empty leaving the whole list incompleted on many parts." In other words, the FBI had the personal data of a substantial number of Apple device users, certainly all of which had been obtained without prior permission. Naturally the question here is why on earth does the FBIO have this data, and as TNW suggests, "They published the UDID numbers to call attention to suspicions that the FBI used the information to track citizens. Much of the personal data has been trimmed, however, with the hackers claiming to have left enough for “a significant amount of users” to search for their devices." AntiSec has subsequently released one million of these UUIDs and their associated data. Find out if your device is on the list as explained below.

It’s perhaps no co-incidence that the trend towards persistent deficits started around the final collapse of the last link to a quasi-Gold standard back in August 1971. As Deutsche Bank's Jim Reid notes, in a world of the Gold Standard or equivalent, those countries loosening policy too much would have seen a rush to convert their currencies into Gold thus destabilising their economic policy framework. Multi-year (let alone multi-decade) deficits and the GFC could not have occurred under a gold standard. So with the shackles off and with nothing backing paper money, the post-1971 period has seen a uniquely long period of fiat currencies globally with a beggar-thy-neighbour rolling period of credit creation. Never before in observable history have so many countries been off a precious metal type currency system for so long. So after 41 years of global fiat currencies and an unparalleled amount of debt that is proving very difficult to shift, we really are venturing into the unknown.

On December 20, 2010, Netflix CEO Reed Hastings had one message to everyone who cared: "Cover Your Short Position. Now."

NFLX price then: $178.05...  NFLX price now: $55.40; Return: -71.20%. And they say CEOs know their companies best...

Thanks for the advice Reed. But we'll stick with our short. But hey, when the whole CEOing thing doesnt work for you, the ECB will surely hire you as it is in dire need of people who sound sophisticated, pretend they know what they are talking about just because they speak loud and with confidence, and write long-winded essays of windbaggery, that say nothing, and end up 100% wrong.

Don't look at 10Y Spanish bond yields; ignore Swiss 2Y rates dropping; it's all about the front-end of the Spanish yield curve - that's your tell that "everything's awesome." We even saw some proclaiming the 5Y Spain 'strength' as indicative that the market is 'buying it, and Draghi will deliver'. Problem is - he can't! Even if he announces a non-monetizing short-dated monetization plan, and gets it by his BuBa buddies - the market knows the problem: that without this 'temporary feature' becoming permanent (and therefore the ECB basically embarking on open-ended monetization - see Gold), the market expects Spain's short-dated cost-of-funding to more than double (to 6.5% from 3% currently) over the next three years. The steeper the curve, the more the ECB will have to buy and while thin illiquid bond markets manipulated by CB intervention are 'most' people's indicator, consider youth unemployment, capital outflows, and loan delinquencies before becoming euphoric.

When it comes to who controls Europe, the answer is simple - hint: it is not Goldman Sachs via its puppets Mario Monti or Mario Draghi. Nor is it Angela Merkel. No - the entity in charge of the continent of 300+ million is the nation-corporation known as Gazpromia, which also happens to be is the holding company of the new and somewhat improved USSR, aka Russia. Why? Because if Gazpromia decided to play the vengeful god role it is known to embrace now and then, it could simply shut down the gas pipeline to Europe and millions of people would realize that heating in deep subzero temperatures is far, far more important than having a (un)stable currency or wheelbarrows full of money. As such, it is always better to let sleeping gods lie. Oddly enough, Europe decided to not do that, and moments ago the WSJ and BBG reported that the EU has decided to bite the hand that warms it and has launched an antrust case against Gazprom.

Breaking Bad is the story of Walter White, a cash-strapped, suburban 50-year old high school chemistry teacher, who following a life-changing cancer diagnosis hooks up with his drug-dealing former student, Jesse Pinkman, to cook and sell crystal methamphetamine. Immediately thrown in at the deep end, White undergoes a vast personality change; from mild-mannered Father into the lying, murderous gangland drug lord Heisenberg;  first cooking methamphetamine wearing an apron in a winnebago, then working in a high-tech underground laboratory for the Chilean gangland kingpin Gustavo Fring — who White eventually kills — and finally amassing a multi-hundred-million-dollar pile of cash. A key dynamic in the show is White’s relationship with his brother-in-law, DEA agent Hank Schrader. It is Schrader who first introduces White to the idea that selling methamphetamine can pay — boasting of multi-hundred-thousand-dollar drug hauls, and even taking White out on a DEA raid of meth lab, where White first encounters his former student Pinkman. As White’s famously pure blue methamphetamine grows in popularity, Schrader becomes increasingly obsessed with its influx, yet spends the course of almost the entire series unaware that its source is his own brother-in-law.

Yesterday's "leak" of Draghi's comments that it is not monetization if just the tip only bonds with a maturity of 3 years or less are monetized, aka, legitimate monetization does not cause inflation was so horribly handled that the ECB huffed and puffed in a desperate attempt to appear angry, even though it was absolutely delighted that it had even more ammo in its war against Germany. Today, the leakage continues only this time nobody cares that Draghi's desperation is hitting the headlines left and right. As a result, Draghi literally pulled a carbon copy of Hank Paulson, and while he did not have a three page term sheet in hand, threatened that the Euro would end unless he was allowed to monetize short-term bonds. Here's looking at your Germany. From Bloomberg: "European Central Bank President Mario Draghi said the bank’s primary mandate compels it to intervene in bond markets to wrest back control of interest rates and ensure the euro’s survival. Mounting his strongest case yet for ECB bond purchases, Draghi told lawmakers in a closed-door session at the European Parliament in Brussels yesterday that the bank has lost control of borrowing costs in the 17-nation monetary union."

Presented with an entirely unsurprised lack of comment... how long until Kindergarten?

If true, and we don't see a reason to doubt it veracity, the just leaked Troika letter sent to the Greek Labor Ministry, courtesy of The Telegraph's Bruno Waterfield, which sees the Troika demanding a 6 day work week, to wit: "Measure: Increase flexibility of work schedules: Increase the number of maximum workdays to 6 days per week for all sectors." This means that Greece is effectively out of the Eurozone, as there is no way the Greeks, no matter how much they want to be a vassal state of Brussels, will agree to this kind of treatment. Although one may expect the Syntagma square riot cam will be up and running well before the Grexit is a done deal.

NFLX is down over10%, back to two-year lows, as not even Whitney Tilson can save the 'game-changer' from the reality of surprisingly low barriers to entry. Sure, it will be spun; sure, analysts will maintain 'value' buys (7 buys and 20 holds); but Amazon's deal with Epix this morning adds a greater-than-800lb gorilla to the room in which Netflix plays...

So much for the transitory bounce in positive economic reports from August. While hopes were high that maybe, just maybe, the virtuous cycle has once again been restored and the Fed's intervention would be unneeded, the August Manufacturing ISM just printed at 49.6, down from July's 49.8, and well below expectations of 50. This was the third contraction in a row and joins the global PMI which as we reported yesterday now has 80% of the world in contractionary territory. The kicker was the Prices Paid category which soared to 54.0 from 39.5, a whopping 14.5 surge, which together with the always hollow Inventories category which rose from 49.0 to 53.0, and Employment, which dipped from 52.0 to 51.6, were the only categories in the 50+ region. Everything else is now contracting. And in other news, Construction spending (remember "housing has bottomed") plunged from 0.4% to -0.9%, on expectations of an unchanged print, which was the biggest miss in a year, and the biggest drop in also a year.

Following a brief period in which it seemed that US foodstamp recipients may have peaked, with those living in poverty maxing out at 46.514 million in December 2011, and then declining modestly for the next few months, June saw a new surge in those Americans living in poverty and thus eligible for foodstamps, with 173,600 new entrants into the system, bringing the total to a new all time high of 46.670 million and once again rising fast. Furthermore, with subsequent emergency events affecting the heartland due to the drought, the administration has made sure even more Americans will be eligible going forward. As a result expect the July and August numbers to promptly surpass 47 million on their way to the psychological resistance level of 50 million. Indicatively, the 173,600 increase in Foodstamps recipients in June was three times greater than Americans finding jobs (64,000, most of which part-time) according to the BLS. Finally, a new record was also breached for American households on foodstamps, which now hit 22.4 million, an increase of 106,298 households. The average benefit per household decline once more, this time to $276.5. Not an all time low, but just above it.

Iron ore prices, which have fallen by 24% in the past month, have been front and center in our views on the China debacle recently. Following the RBA's decision not to cut rates last night we thought Macquarie's recent insight into just how bad an impact a sustained weakness in demand could have on the Australian economy was worthwhile, as hope seems to remain that the destocking among Chinese steel mills will end at some point and demand will re-emerge phoenix-like (though we strongly suspect not). The relative resilience of the AUD suggests that most investors believe that iron ore prices will recover over the next few months. But if they don’t then this could be the 'Wile E. Coyote moment' for the AUD, as GDP drops 3ppt, unemployment rises 4ppt, and busienss investment is slashed 20% below consensus.

While hardly saying anything new, more and more pundits are waking up to the reality that faced with an environment of epic capital outflows predicated by a complete loss in the system (see Greece), Spain simply can not survive. We wrote about the record outflow in Spanish deposits last week (here and here) and the fact that with banks urgently seeking to plug liquidity holes, coupled with soaring NPL levels, in the absence of actual profits they are forced to sell all those SPG bonds they had been purchasing during the open ponzi phase, where ECB funding would be recycled by local banks to meet primary market demand. Overnight even the New York Times has finally understood this simple identity: record outflows = the end. And now, the banks begin to chime in, pointing out what is patently obvious: from Nomura - "Spain will need full-blown bailout which will include more active role of ECB in Spanish bond markets."