Archive - Nov 26, 2013 - Story

If indeed the topic of Obama's speech today from Glendale, CA is "the state of the economy", then it should be a short speech.

In order to offset the lack of loan creation by commercial banks, the "Big 4" central banks - Fed, ECB, BOJ and BOE - have had no choice but the open the liquidity spigots to the max. This has resulted in a total developed world "Big 4" central bank balance of just under $10 trillion, of which the bulk of asset additions has taken place since the Lehman collapse. How does this compare to what China has done? As can be seen on the chart below, in just the past 5 years alone, Chinese bank assets (and by implication liabilities) have grown by an astounding $15 trillion, bringing the total to over $24 trillion. In other words, China has expaneded its financial balance sheet by 50% more than the assets of all global central banks combined!

As we noted previously (here and here), the exuberance over 'lower' gas prices is a little overdone. Perhaps more worrying though, as Bloomberg's Jo Brusuelas notes, wholesale gasoline futures are pointing to about a 5% rise in gasoline prices during the next few weeks. This would essentially erase the entire decline in gas prices seen since Sept. 1. As Brusuelas warns, because recent gains in inflation-adjusted personal disposable income on a per capita basis can be directly tied to falling gasoline prices, rising prices may come at an inopportune time for many larger retailers.

"Black Friday is America's most honest holiday. It is immediately preceded by Thanksgiving, which is when Americans of all races, except the native kind, get together and exchange a mutual wink and a nod that they're giving thanks for the majestic land that God inexplicably bestowed upon them and then have a turkey dinner. But Black Friday actually embodies the pioneer spirit that carried smallpox riddled settlers from one coast to the other. Like raiders in the night, shoppers drunk on red wine and diabetes crouch before the gates of the enemy's castle, or Best Buy, waiting to storm through the breach and rape and pillage and ask if this can be returned if it turns out your sister already has one..."

A week after spiking above $900, before dropping 50% in the following 48 hours amid last week's Senate hearings, Bitcoin has recovered the losses (i.e. doubled) and is now trading at record high levels against the USD - $930on Mt.Gox. Notably, in China, Bitcoin remains well off its record highs (5200 vs 6989 highs).

With the JPY's recent breakout back into its weakening trend, hedge funds are betting that this run of weakness continues. While 'economists' are less convinced that the JPY will weaken further, and even the Japanese officials somewhat jawboning the currency's stability now, futures traders have pushed 'net shorts' - bets against the JPY - to their highest since July 2007. Between the possibility of a Fed taper (stronger USD) and fading economic gains (more BoJ QQE), it would appear that Japan's $70bn per month buying program is not going to shrink anytime soon. While the world has grown accustomed in recent months to 'hating' gold - despite the ECB and BoJ rumors of more money-printing and an inevitable un-taper by the Fed - for now, the 'dislike' of the JPY has exploded.

While US Thanksgiving week tends to thin out trade, there are some takeaways based on historical seasonal trends. Most are aware of the positive bias for US stocks, but as the following chart from Barclays shows there are notable biases in USDJPY, Canadian government bonds, Brent crude, Japanese government bonds, Gold, and German stocks...

If yesterday's 2 Year Auction showed a substantial pick up in Bids to Cover in recent months, then today's 5 Year, while sold in terms of end demand with the high yield pricing at 1.340%, through the 1.344% when issued, did not confirm this trend for at least the next longer maturity. The sale of $35 billion in 5 Years came at a 2.61 Bid to Cover, below last month's 2.65, and below the TTM average of 2.69. More importantly as can be seen on the chart below, the trendline is lower if one sets aside such "one-time" spooking events as debt ceilings and government shutdowns. Indirect demand picked up notably, taking down precisely 50% of the auction, leaving 10.8% to Directs, and just 39.2% to Dealers: the lowest PD takedown since the 37.8% in July. Overall, nothing to write home about as total US debt, contrary to all fabulations about a plunging deficit, continues on its relentless ramp every higher, at last check printing over $17.2 trillion.

Summer optimism on euro area recovery has faded to grey winter skies. Looking ahead we see continue weak growth in the region with a very gradual recovery only. For the 2007 to 2018, we expect GDP per capita to be essentially flat, marking a lost decade of growth for the region. We blame much of this weak performance on a slow policy response in tackling both the sovereign and banking crisis, and the still too slow pace of structural reform. The fear is now that the euro area is on the verge of deflation.

Economics should not not try to effect human behavior, but to explain it. It does, however understand how incentives and disincentives affect behavior. All political visions involve the improvement of man and/or society by changing the nature of man. Social planners want to “improve” and “perfect” matters according to their ideas of what these terms imply. Little commonality exists regarding utopian visions. One commonality between these utopian ideas does exist — the universal failure of all such schemes. There is no better way to understand the wisdom “the perfect is the enemy of the good” than to study the historical wreckage that has resulted from trying to “perfect” society.

One of the notable developments in the neverending China-Japan territorial sovereignty dispute over various rock formations (and potential massive natural resources located beneath them) in the East China Sea, has been China's launch of an "air defense zone" over said disputed islands. As AP reported previously, Beijing on Saturday issued a map of the zone — which includes a cluster of islands controlled by Japan but also claimed by China — and a set of rules that say all aircraft entering the area must notify Chinese authorities and are subject to emergency military measures if they do not identify themselves or obey Beijing's orders. Various Japanese airlines responded in a confused manner overnight, with neither JAL nor ANA sure whether or not to comply with China's new demand which is merely the latest territorial escalation.

The Greek stock market - seemingly unbreakable in its animal spirits that recovery is right around the corner for the increasingly depressed nation - has collapsed over 4% today, its largest plunge in 5 months. Being relatively illiquid, it is not clear what the catalyst is (one hedge fund exiting?) but the tensions growing in the fragile Greek coalition (over Venezuela-style controls on medicine prices) perhaps raise the specter of the worst possible scenario - political uncertainty. Also, quietly and behind the scenes, the extremely illiquid Greek bond market has seen prices drop to 6-week lows (yields 90bps higher in the last 3 weeks).

... According to the BLS, US jewerly imports in the month of October inexplicably just posted their biggest annual drop. On record.

"The silliness of it all is that the original price from which the discount is computed is often specious to begin with," sums up the seemingly obvious "retail theater" that plays out every Black Friday in mall after mall across America. As the WSJ reports, the common assumption is that retailers stock up on goods and then mark down the ones that don't sell, taking a hit to their profits. But that isn't typically how it plays out. Instead, big retailers work backward with their suppliers to set starting prices that, after all the markdowns, will yield the profit margins they want. Buyers don't seem to mind. What they are after, especially in such a lackluster economy, is the feeling they got a deal, "I don't even get excited unless its 40% off." The manufactured nature of most discounts raises questions about the wisdom of standing in line for the promotional frenzy that kicks off the holiday shopping season. It also explains how retailers have been able to ramp up the bargains without giving away the store - until now.

No matter what measure of confidence, sentiment, or animal spirits one uses, the consumer is not encouraged by the record-er and record-er highs in the US equity market. The Conference Board's consumer confidence data missed for the 2nd month in a row - its biggest miss in 8 months - as it seems in October consumers were un-confident due to the government shutdown... but in November they are un-confident-er due to its reopening. As we have noted in the past a 10 point drop in confidence has historically led to a 2x multiple compression in stocks (which suggests the Fed will need to un-Taper some more to keep the dream alive). Ironically, more respondents believe stocks will rise of stay the same over the next 12 months even as the 'expectations' sub-index collapsed to its lowest in 8 months.