Archive - Nov 2013 - Story

The root cancer at the core of the U.S., and indeed global economy, is cronyism and an absence of the rule of law when it comes to oligarchs. In the U.S., this cronyism is best described as an insidious relationship between large multi-national corporations and big government to funnel all of the wealth and resources of the nation to themselves at the expense of everyone else. In a genuine free market defined by heightened competition and governed by an equal application of the rule of law to all, the 0.1% does not aggregate all of a nation’s wealth. This sort of thing only happens in crony capitalism, which is basically nothing more than complete and total insider deals to aggregate newly created money into the hands of the few. The following profile of Washington D.C.’s so-called “boom” from the St. Louis Post-Dispatch pretty much tells you all you need to know.

Overnight repo rates are spiking once again in early trading as the typically smaller banks that are more desperate bid aggressively for whetever liquidity they can find. 5Y Chinese swap rates have also reached a record high as the Yuan reaches its highest since Feb 2005. Chinese authorities are clearly stepping up the rhetoric:

• *CHINA SHADOW-FINANCE RISKS WILL SPREAD TO BANKS, FANG SAYS
• *VERY BIG CHANCE ONE OR TWO SMALL CHINA BANKS WILL FAIL: FANG
• *SOME CHINA TRUST INVESTMENT FIRMS MAY FAIL, SELL ASSETS: FANG
• *CHINA MUST PLAN FOR BANK-FAIL SCENARIOS TO MANAGE RISKS: FANG
• *CHINA NEEDS TO PAY MORE ATTENTION TO CORPORATE LEVERAGE: HU

The gambit between the PBOC's liqudity provision and the growing dependence on their "spice" is clear - the question is, of course, will banks send a message (via the markets) to the PBOC or will they self-select (on first-mover's advantage) eradicating the weakest.

My personal guess is that the U.S. market, especially the non-blue chips, will work its way higher, perhaps by 20% to 30% in the next year or, more likely, two years, with the rest of the world including emerging market equities covering even more ground in at least a partial catch-up. And then we will have the third in the series of serious market busts since 1999 and presumably Greenspan, Bernanke, Yellen, et al. will rest happy, for surely they must expect something like this outcome given their experience. And we the people, of course, will get what we deserve. We acclaimed the original perpetrator of this ill-fated plan – Greenspan – to be the great Maestro, in a general orgy of boot licking. His faithful acolyte, Bernanke, was reappointed by a democratic president and generally lauded for doing (I admit) a perfectly serviceable job of rallying the troops in a crash that absolutely would not have occurred without the dangerous experiments in deregulation and no regulation (of the subprime instruments, for example) of his and his predecessor’s policy. At this rate, one day we will praise Yellen (or a similar successor) for helping out adequately in the wreckage of the next utterly unnecessary financial and asset class failure. In the meantime investors should be aware that the U.S. market is already badly overpriced.  This market is already no exception, but speculation can hurt prudence much more and probably will. Ah, that’s life. And with a Fed like ours it’s probably what we deserve.

The operative model of "growth" in America: rapid expansion/overbuilding in pursuit of poaching customers from existing competitors, a strategy that leads to massive overcapacity/redundancy and declining profits that then leads to mergers and shuttering hundreds of redundant outlets. Why has this doomed model of overbuilding and poaching sales become so dominant? Look no farther than the cheap-money policies of the Federal Reserve.

Jim Rogers hope-driven wish is that the politicians were smart enough at some point to say (to the central bankers), "we've got to stop this, this is going to be bad." He adds, on the incoming QEeen, "she’s not going to stop it, first of all she doesn't believe in stopping it, she thinks printing money is good." However, Rogers warns in this excellent interview with Birch Gold, "eventually the markets will just say, "We're not going to play this game anymore", and we'll have a serious collapse." The world is blinded by central bank liquidity, and as Rogers somewhat mockingly notes "if everybody says the sky is blue, I urge you to look out the window and see if it's blue because I have found that most people won't even bother to look out the window..." Rogers concludes, "everybody should own some precious metals as an insurance policy," because as he ominously warns, when 'it' collapses, "there will be big change.

USDJPY and Nikkei futures don't know what to make of tonight's data. Is it bad enough that we buy stocks (sell JPY) on the basis that Abe and Kuroda will have to do more or is it so bad that it 'proves' no matter what they do, the gig is up. It seems, by the reaction the latter as Japan's trade balance collapses to the 3rd worst on record. Exports rose 18.6% (more than expected) but it is the imports that soared higher (26.1% vs 19.0% expectations) on the back of surging fuel costs. So, Abe got his inflation - on the cost push side (crushing margins) and not the animal-spirit-competitive exuberance demand-pull side. Perhaps it is time to rename it Abe-wrong-ics. Of course, we await Goldman's blessing of the number as just wait one more quarter for the J-curve to turn up on this devaluation cycle... we wait patiently...

If you are still of the belief that the stock "market" is a market of stocks idiosyncratically valued based on the aggregate of investors weighted expectations of future earnings potential, we highly recommend you look away from the chart below. If, however, like Rick Santelli's "something is wrong" comment or Carl Icahn's "it's all a mirage" perspective, you have some doubts, take a glimpse at the 'fundamental' reality you are betting your retirement on...

Just another day in the markets, just another HFT algo going completely insane and Nanex catching it in the act.

In short nothing new, just the usual "tapering is not tightening" mantra, the traditional attempt to misdirect from tapering, and to keep pushing the agenda that it is the stock that matters, as does forward guidance and rates, and not the flow of monthly securities. Good luck. And now, back to the blackened chicken on a wavy craker dinner and the live webcast below (after the jump).

The height of absurdity in yesterday’s hearing probably came during the testimony from the Financial Crimes Enforcement Network (FinCEN), in which the agency’s chief cited the 'benefits' of digital currencies, including anonymity, simple, easy to navigate, lower fees than the conventional financial system, globally accessible, can be used as both a store of value and medium of exchange, security, etc. Yet in listing all of these benefits, FinCEN’s chief was actually trying to make a case 'against' Bitcoin! In her mind, only criminal terrorists want low-fee, secure, globally accessible money. So we can expect more hearings, more regulation, more disclosures. At least, in the Land of the Free. However, on the other side of the world, though, they’re not afraid of Bitcoin.

One can debate whether QE has benefitted Main Street or Wall Street until one is blue in the face, even though five years later, the answer is perfectly clear to all but the staunchest Keynesians and monetarists (and if it isn't, just pay attention to the 3:30 pm S&P ramp every day). One thing, however, that is undisputed is what the market itself says about where the QE money ends up when it is being spent by its recipients. And that story is so simple even a Keynesian would get it. Stated briefly, luxury retailers such as Tiffany, Coach and LVMH are now up 500% since the Lehman lows, and about 30% above the prior cycle highs. On the other hand, regular retailers such as Macy's, Kohl's and JC Penney are barely up 100% from the crisis lows, and still more than 30% below the last bubble highs.

What happens next?

Despite Yellen, Bullard, and Evans on the tape, markets limped lower on the day. Of course, we had the standard POMO-based ramp but once again credit markets and VIX indicated more than a few were seeking protection rather than loading the boat at these all-time high round-numbers. Stocks had reached their 'richest' in 3 months relative to the Fed's balance sheet and so were perhaps due a little more turmoiling but Treasuries sold off all day (and not on growth expectations) to end unchanged across the curve on the week. The USD oscillated but ended lower (JPY unch on the week) and commodities dribbled higher (though all remain red on the week). Perhaps the most worrisome thing today was the total disconnect between stocks and FX carry after Europe closed...

Whoever bet money on the prop bet that Obama would finally blame the epic debacle that is Obamacare on the republicans can now retire.

OBAMA SAYS ONE REASON FOR ROCKY HEALTH CARE ROLLOUT WAS THAT REPUBLICANS ON "ONE SIDE OF THE HILL" WERE INVESTED IN ITS FAILURE

Because it was obviously the Republicans who sabotaged the 3+ year rollout of Obamacare, and handpicked the "outside" contractors who made healthcare.gov such a smashing success. At least Bush walked away unscathed.