Archive - 2012 - Story

The man who singlehandedly fought the administration over the idea of converting Fannie and Freddie into the latest taxpayer-funded handout machine, FHFA head Ed DeMarco, and refused to write down Fannie and Freddie home loans in yet another Geithner-conceived debt forgiveness scheme, whose cost like any other non-free lunch will simply end being footed again by yet more taxpayers (what little is left of them), appears to have lost the war, and with the second coming of Obama appears set to be replaced as head of the FHFA. The WSJ reports that "The White House has begun preparations to nominate a new director to lead the agency that oversees Fannie Mae and Freddie Mac as soon as early next year, according to people familiar with the discussions. This would pave the way for President Barack Obama to fill what has become one of the most important economic policy positions in Washington." And so the impetus for as many as possible to default on their mortgage in a wholesale scramble to obtain debt forgiveness, will soon take the nation by storm, while the contingent liability will be transferred to those who still believe that taking out debt should be a prudent activity and one that takes into account future cash flows. In other words, the solvent middle class - those who were prudent stupid enough to save when they should have simply be doing what the government does and spend like a drunken sailor, preferably on credit, will soon be punished once more. And like it. Because according to the new broke normal "it's only fair."

A week ago, Mark Carney was announced as the BoE’s next Governor amid much fanfare. This week, Japan’s election could herald a new more aggressive approach from the BoJ. 2013 will then see speculation mount about Bernanke’s successor and also likely see the operation of the ECB landmark OMT program. It will also mark the 100 years of the Fed and probably much reflection on their impact on the US/Global financial system. So, as Deutsche's Jim Reid notes, central banks will remain in the spotlight for 2013. However whilst their actions to date have certainly minimized the tail-risk post-GFC, they have yet to lift real GDP above their 2007/2008 peak in most countries and virtually every developed economy is operating well below what is perceived to be trend growth. QE would have been seen as highly unorthodox four years ago - and unique for most central banks stretching back through their history. However fast forward to today, that old unorthodoxy has become the new orthodoxy. But what have the world’s central banks got left to offer a world that at some point might be hungry for more?  as the world economy peers into the future and sees a growing threat of a recurring recessions and below target inflation, radical monetary policy may become increasingly appealing as elected politicians stuck in gridlock turn to (relatively) politically unconstrained central bankers to save them from their failings and get their economies racing again. For better or for worse.

It seems that there are more than just tin-foil-hat-wearing fringe blogs that have decided to take up the truthiness hunt as CNBC's Rick Santelli exposes the 'fibbing' in statistics that has become more than mainstream thinking. From the 35% 'untruth' of the Clinton-era tax cuts and wage rates (with no explcit wealth assessment and a total ignorance of inflation) to the 75% 'untruth' of the millionaires-and-billionaires tax when it's really on salaries opver $250k; Santelli's blood pressure reaches mercurial levels as he exclaims that Middle Class America should pay attention: How do we expect honesty in negotiation when they're fibbing about truths to such an extent, "all they're after isn't fixing the economy, it's your bucks!" A refreshing three-minute glimpse of reality on a quiet day...

"They say this is not massive money printing, but first they are wrong; and second, monetary authorities in the United States did not see the crash coming and the unsoundness of the financial system. In fact, right up until the crash they were saying that nothing like what happened could ever happen... This monetary policy, $3 trillion of bond buying in the United States, $3 trillion in Europe and another $2.5 trillion to $3 trillion in Japan, is unprecedented. ... If and when people lose confidence in paper money because of repeated bouts of quantitative easing and zero-percent interest rates—it could happen suddenly and in a ferocious manner in the commodity markets, in gold, possibly in real estate—interest rates could go up at the long end by hundreds of basis points in a very short time. I’m quite concerned as a money manager that we have to manage money, not just for the boundaries of what’s in front of our faces—maybe we’ll have a little tax increase or not, the fiscal cliff, or the stock market might go up or down 10% or 15%—but for a basic shift. The thing that scares me most is significant inflation, which could destroy our society."

One thing that has undergone hyperinflation in recent years is the length of financial regulations. Big, messy legislation leaves legal loopholes that clever and highly-paid lawyers and (non-) compliance officers can cut through. Bigger and more extensive regulation can make a system less well-regulated. We propose that this is what the big banks will use Dodd-Frank to accomplish. We predict that the regulatory hyperinflation will make the financial industry and the wider economy much more fragile.

Since the crisis first began in 2006, developed world equities are still lower, real GDP has struggled to grow above its pre-crisis peak in most countries, core bond yields are sharply lower with peripheral yields higher and with credit yields generally performing well albeit it with fairly extreme volatility. Credit has been helped by the fact that the authorities way of dealing with this crisis to date has been through money printing and liquidity facilities to help prevent mass defaults which, as is is clear in the chart below, has led to a weakening in the normal relationship between GDP and defaults. Just as one of the features of the last 20 years in Japan’s post-bubble adjustment and lost growth period is that defaults have remained very low; it appears as long as money printing props up the debt market, defaults are likely to be much lower than the underlying economic environment suggests they should be. However, as we noted previously, the mark-to-market volatility on the way may just become too much to bear for all but the most long-term bond rotators.

Three months ago many were angry and surprised (or not at all, as realistically this was a perfectly logical move), when Bernard Arnault, head of LVMH and the richest man in socialist France, decided he had had enough, and would move to Belgium to avoid Hollande's punitive taxes on France's wealthiest. The indignant media's mocking response in France was fast and furious, with many delighted to see the billionaire leave. We wonder how the media will respond as more and more wealthy Frenchmen decide, now that the seal has been broken, to do just that and leave France to its grassroots movement where it is only "fair" that those who have more income and/or wealth, pay more than everyone else to keep the myth of the ponzi scheme formerly known as the welfare state alive and well. Such as one of France's most popular actors, Gerard Depardieu, who is the latest high profile departure to leave his native country and go to Belgium to avoid the second coming of the "fairness doctrine" (the first one of course, doing less than spectacularly with that whole USSR thing).

Everyone interested in real estate is asking the same question: Is the bottom in, or is this just another "green shoots" recovery that will soon wilt? Let’s start by reviewing the fundamental forces currently affecting real estate valuations. ZIRP has created a "crowded trade" in low-risk investments with attractive yields such as corporate bonds, dividend stocks, and real estate, which is being fueled by a self-reinforcing perception that "the bottom is in." The question now is will these forces continue pushing prices higher? If these forces deteriorate or lose their effectiveness, then the “green shoots” of investor interest may wither as the U.S. economy joins Europe and Japan by re-entering recession.

"It’s all about Politicians, Central Bankers and Growth for 2013" is how Deutsche Bank's Jim Reid perfectly sums up the year ahead. While he notes that Central bankers have increasingly eliminated the immediate tail-risk across the globe, he adds that they have not yet found the solution to weak/negative growth and how to successfully de-lever over indebted economies. This argues for a risk-off (periodic growth disappointments), risk-on world (liquidity injections) to continue as far as the eye can see. We tend to agree that the biggest risk to this comes from politicians. The fiscal cliff is the near-term risk but the Italian elections also loom and execution risk in Spain must be closely watched. It could be a decent year for markets but with huge risk off moments. If politicians drop the ball and renege on promises or get forced by the electorate to embark on a different path against the wishes of the EU/ECB then huge risk aversion could still easily occur.

It's all good. That's what Monti says about the political 'vacuum' being left behind. Sure enough those cagey bond chaps did not like the news and with Italian and Spanish bond spreads now wider by 40-50bps in the last 4 days, and Italy seeing its worse 5-day run in over 6 months, one could be forgiven for believing some semblance of sanity was returning to pricing in Europe. But no. Stocks, on average, ended the day nicely green - buoyed by a surge in the US into the European close. Spain and Italy's stock markets did drop but regained a lot of the loss by the close. Credit markets (IG, HY, and financials) remain notable underperformers - just unable to muster the enthusiasm of equity holders into year-end. Europe's VIX rose to 17.4% - breaking back north of the US VIX (after recoupling last week). EURUSD is going out unchanged from Friday's close - having traded 50 pips lower early last night.

A oft-mentioned paradox in the markets the last few days has been the seeming strength in broad equity indices, even as the very core of most managers' holdings - AAPL - goes entirely pear-shaped. We suspect this chart will go a long way to solving the paradox. It appears a major aspect of the S&P 500 strength is unwinds of AAPL longs hedged against market shorts (as managers attempted to segregate AAPL's strength - trying to transform high beta in their alpha). AAPL's weight in the index and in manager's portfolios certainly provides enough ammunition for algos to see momentum and extend any real-money forced 'buying' in the index from this effect - and so we levitate. How much further can it go? It is unclear for sure; but the divergence will become more and more painful for those that have yet to unwind...

Excessive monetary stimulus and low interest rates create financial bubbles. Seymour Pierce's Thunder Road report notes that central banks are creating the ultimate bubble in money itself, as they fight the downward leg in this Long Wave cycle. This is the biggest debt bubble in history. Each time deflationary forces re-assert themselves, offsetting inflationary forces (monetary stimulus in some form) have to be correspondingly more aggressive to keep systemic failure at bay. The avoidance of a typical deflationary resolution of this Long Wave is incubating a coming wave of inflation. This will not be the conventional “demand pull” inflation understood by most economists. The end game is an inflationary/currency crisis, dislocation across credit and derivative markets, and the transition to a new monetary system , with a new reserve currency replacing the dollar. This makes gold and silver the “go-to” assets for capital preservation.

Nothing but smiles today in Europe's ivory tower...

Need a quick and amusing pick up to start off another dreary, centrally-planned week? Well... "You asked for miracles, Theo, I give you the full of pomp and circumstance ceremony of the European Union receiving the Nobel Peace Prize."

If anyone needs a definitive confirmation that when it comes to predicting the future, "expert economists" are not only completely clueless but always approach the future with a baseline of endless and unquestioned bullishness, which in the past decade has ended up being humiliatingly wrong, we present the following charts from Deutsche's Jim Reid, showing the jawdropping cumulative error rate in GDP forecasts in the past decade among those countries that make the headline news every day. What do the charts show: in the 9 years since the first forecast in October 2003, these 6 countries are 20.5% (Italy), 16.9% (Spain), 10.4% (France), 3.7% (Germany), 11.3% (UK), and 15.8% (US) behind on a cumulative basis what economists forecast back in 2003! This forecasting error has become more severe since the crisis begun. Since October 2007 (i.e. for the 5 years between 2008-2012) we are 16.4% behind cumulative forecasts in Italy, 18.1% in Spain, 10.6% in France, 7.0% in Germany, 14.7% in the UK and 10.6% in the US.