Archive - Jan 30, 2013 - Story

As soon as the much-weaker-than-expected GDP print hit the tape this morning, precious metals began to rise. Led by Silver, it appears the physical demand of recent weeks is creeping into the reality of prices (suppressed or otherwise) as bad is good enough for moar help from Ben and his buddies. The upward move in the PMs is as good a predictor of what to expect (i.e., not even a hint of tightening) as the sell-side crew, which is expecting merely another boring FOMC statement - as Goldman notes, following the substantial policy changes announced in December - including the shift to outcome-based forward guidance and the introduction of open-ended Treasury purchases - Goldman expects the January meeting will likely be relatively uneventful with few changes to the economic assessment.

The belly of the curve got whacked in today's $29 billion 7 Year auction, when the high yield of today's debt issuance came at some 1.416% (32.5% allotted at the high), outside the 1.408% When Issued, the first tail on a 7 Year of short maturity bond in a while, and a modest cause for concern, if not quite the "massive rotation out of bonds" we have been hearing about for months. The internals were hardly indicative of a major weakness, with a 2.60 Bid To Cover, below last month's 2.72, Directs taking down 19.75%, Indirects 38.21% and Dealers holding on to 42.04%: all in line with recent results as can be seen on the chart below. The yield, however, was well above December's 1.23%, and the highest since February 2012, when as today, things were supposedly getting much better and inflation was just around the corner, when it was really just the LTRO effect and some $1.3 trillion in liquidity courtesy of Europe.

As we have been reporting over the past ten days (most extensively here and here), the one European scandal that gets virtually no coverage on this side of the Atlantic, remains the escalating fiasco involving Italy's third largest bank, Banca dei Monte Paschi, which gets worse by the day due to its extensive political implications - the bank is seen domestically as the domain of the frontrunning centre-left candidate, something Berlusconi reminds his followers at every opportunity, but also will likely ensnare the head of the ECB as we predicted a week ago when we noted the aggressive attempts by the Bank of Italy, which was headed by the former Goldmanite at the time, to wash its hands of having had anything to do with the BMPS fiasco (and thus by implication indemnify that other Goldmanite, Mario Monti). As it turns out, and as Bloomberg reports today, the Bank of Italy did know of Monte Paschi's dirty laundry as long ago as 2010, but more importantly, and hence the title, the Italian law (and we use the term loosely) is now in play: "Prosecutors in Trani, Italy, opened an investigation into the Bank of Italy and market watchdog Consob’s supervisory activity on Monte Paschi, consumer group Adusbef said in an e- mailed statement today." Adding fuel to the fire is the just blasted headline from Reuters that Monte Paschi is now under investigation in Siena under law on company responsibility for crimes committed by staff, and suddenly life for the ECB head, not to mention the "stabeeleetee" of the banking sector looks quite problematic.

Though economists might wish otherwise, economics is, at its core, behavioral. Modern economies are too complex to be reliably modeled; but put an economist in a powerful government job and provide levers that can be pulled to start the printing presses, set reserve requirements, fiddle with the Fed funds rate, expand the Fed’s balance sheet, and deliver indecipherable communiqués, and that economist will feel compelled to pull those levers. He or she, like a monkey with a typewriter, might even give us Shakespeare (or Adam Smith) on occasion. But mostly that economist will spout gibberish, a mélange of untested and potentially counterproductive measures that unleash all manner of unintended consequences.

A titanic political battle is brewing between the parasitic aristocracy, the dependent class and the two classes creating value with their labor. In the conventional view, America's socioeconomic classes are divided by income and wealth into various layers of Wealthy, Middle Class and Poor.  Extending recent analysis, we get an entirely different framework that breaks naturally into four classes: 1. Parasitic financial Aristocracy (creates no value, skims national surplus); 2. High value creation (employed, heavily taxed); 3. Low value creation (employed/informal economy, lightly taxed); and 4. No value creation (unemployed, dependent). In this context, America is filling the gap between the value we create and what we spend by borrowing $1 trillion+ a year on the Federal level and hundreds of billions more on the local-government and private-sector levels. All this debt isn't being "invested" in new value-creation; it is funding consumption and cartel skimming on a monumental scale.

Wherever you looked today in Italy, shares were halted. From Saipem to Seat and From Banco Popolare to BMPS, individual stocks fell between 5% and 45% in some cases. Spain also fell alongside its incorrigible risk-on peripheral neighbor as dividend suspensions, outlook cuts, rating downgrades, and a growing concern about the banking system's legitimacy wear on sentiment. Italian sovereign risk was largely unchanged but as the US opened it started to bleed wider - but in general bonds ignored the stress in stocks. FX markets also were un-phased as EUR continued to test higher. CHF did, however, strengthen notably (against the USD, EUR, and mostly against the JPY - up 28% in the last six months!). The CHF strength did nothing for demand for Swiss rates though as they pushed higher to 10-month highs. The big problem though lies in credit. Just as in the US, credit markets in Europe are massively divergent from stocks' exuberance - and today's surge in Europe's VIX also echoes the disconnect we are seeing evolve in the US. Things are shifting...

Back in 2011, BlackRock's Larry Fink revealed one of the great unspoken truths of capital markets, namely that "markets like totalitarian governments." They also like authoritarian socialism, sprinkled in with a healthy dose of nationalization, because as Bloomberg reports, one of the biggest beneficiaries of over ten years of the "glorious socialist revolution" in Venezuela, coupled with over 1000 nationalizations by the bed-ridden and roughly 15 times deceased Hugo Chavez (if one believes all the rumors), is none other than Goldman Sachs, which generated some 681% in returns due to "aligning its interests" with those of the unshakable Venezuelan ruler.

One risk factor for the economic outlook is the exchange rate. The trade-weighted Euro has appreciated by 2.5% since the beginning of this year and by almost 5% since the announcement of the OMT in September - though the Euro TWI is still more than 1% below its average since 2008. So far, based on PMIs, there is no indication that the exchange rate is putting the 'gradual recovery' scenario at risk. But a further strengthening at a similar same pace to what we have observed in recent months would eventually weigh more meaningfully on the economy, and this in turn, Goldman believes, would lead to a change in the" medium-term outlook for price stability". The ECB, Goldman thinks, would react in this case by cutting rates, in an attempt to slow the upward momentum of the exchange rate. And while they believe that deposit shifts have begun to 'normalize', fragmentation remains and lending to corporates continues to decline, with the Governing Council 'believing' that it will simply take more time for the improvement in funding conditions for banks to be passed on - leaving the ECB in 'wait-and-see' mode.

RIM is now Blackberry but it would appear the charisma-less Heins promise of a "personal internet of things" with no Home button is not going down so well with shareholders... thinner, lighter, stronger, camera, keyboard, touch-screen, replaceable battery, social media hub, blah blah blah... No Pony? Two words - 'catch' 'up'.

While everyone knows that devastation and cataclysm are wildly bullish in a broken-window-fally-based Keynesian world where everything is incrementally positive and bad is good. It would appear that China has taken that 'fallacy' one step too far as a giant sinkhole is 'gobbling' up buildings across Guangzhou. We assume this sinkhole was unleashed to help maintain GDP amid the now factual decline in labor force that we discussed yesterday.

While US equity futures knee-jerked lower on the dismal reality of this morning's GDP print, that dip was rapidly bought pushing equities up near their highs as the day-session opened. However, it appears US gains are Europe's losses as Spanish (and even more so Italian) stocks are plunging today. From Monti Paschi shenanigans to Fiat's dividend (and comments on ongoing EU uncertainty) and from Saipem's slashing their outlook to Seat's rating downgrade - the chart below suggests this is more than just 'fundamental' as Italy's MIB syncs up perfectly with Spain's IBEX and they both start to fall. Spanish and Italian bond markets are unreactive as EUR strengthens... but we haven't seen European stocks and US stocks decouple to this extent this year so far... is the flow becoming fragmented?

As the world awaits the launch of the iBlackberry 10 this morning, we thought some reflection on the hope that is priced into RIMM's shares in comparison to the reality on the ground. The trends below will need violent distortion if the new BustBerry is to win and Thorsten Heins dreams come true... if you build it? Though, as Bloomberg notes, IDC estimates that RIMM will only have 4.1% of the market by 2016 - little changed from today..."The low-hanging fruit is the BlackBerry faithful, after that, they bump up against the Android and  Apple users out there."

Previously, when calculating debt/GDP metrics for the US, we naturally assumed some GDP growth in Q4. Following today's GDP data we now know what Q4 GDP is. We also know that, at least on a preliminary basis, it posted a decline on an annualized basis. This means that we now have an official print for US Debt/GDP as of December 31, 2012. The numerator, or debt: $16.432 trillion, or the debt ceiling, which as we know was breached on the same day, and which has yet to be formally raised. The denominator, or GDP: $15.829 trillion. This means that the formal debt/GDP is now 103.8% and growing fast.

Following today's 3-sigma miss in GDP by the greatest and goodest economists of the world, we thought David McWilliams brief 'Punk Economics' clip on "why economists get things wrong" was particularly appropriate. With Mark Zandi's "this didn't really happen" comment this morning on GDP, McWilliams starts by warning of the most dangerous of economic soothsayers - the overconfident and over-optimistic forecaster. Perhaps, he notes, the Queen was on to something when she asked (about the crisis), "why didn't you see this coming? ...and why should I listen to you now?" The key fact driving economists' inability to predict the future is a lack of understanding of the present thanks to the "complete and utter nonsense" that economists see the world as rational - which, he shows, we certainly are not. There is no economics for emotions, exuberances, impulses, or frenzies (as is all too clear currently). We simply don't learn from our mistakes and always believe this time will be different. Indeed...

What was it about the law of diminishing Fed stimulus returns again? But don't worry: "the market is up." Because if $165 billion in Q4 stimulus could not even generate a positive GDP return, at least it sent the Russell 2000 soaring.