Archive - Nov 2013 - Story

"Debt matters... even if it is possible to pretend for many years that it doesn't," is the painful truth that, author of "Avoiding The Fall", Michael Pettis offers for the current state of most western economies. Specifically, Pettis points out that Japan never really wrote down all or even most of its investment misallocation of the 1980s and simply rolled it forward in the form of rising government debt. For a long time it was able to service this growing debt burden by keeping interest rates very low as a response to very slow growth and by effectively capitalizing interest payments, but, as Kyle Bass has previously warned, if Abenomics is 'successful', ironically, it will no longer be able to play this game. Unless Japan moves quickly to pay down debt, perhaps by privatizing government assets, Abenomics, in that case, will be derailed by its own success.

To many institutional investors, buying the Russell 2000 is merely the highly levered bet with which the bulk of institutions (recall that almost all hedge funds, and a majority of mutual funds, are underperforming the S&P for a 5th consecutive year) seek to make up for losses in their portfolios by chasing high (and even higher with leverage) beta.  Which is why as the next chart below shows, in a furious scramble to catch up by year end, the institutional Russell net futures (i.e. levered) positioning just hit a record high: the biggest investors are now all-in the smallest names.  So is the massively overbought small cap sector due for a correction? With these manipulated, centrally-planned markets, nobody has any idea. However, for those who have once again bet all in, which just happens to be most plain vanilla dumb money, it may be time to reevaluate.

As reported yesterday, Typhoon Haiyan - potentially the strongest storm to ever make landfall, and stronger than Katrina and Sandy combined - has come and left the Philippines (currently heading for Vietnam), and now the time has come to evaluate the damage and count the dead. Sadly, as Reuters reports, the devastation is absolutely massive and especially in the hardest hit city of Tacloban in the central Leyte province, may match the aftermath of the Fukushima tsunami: "This is destruction on a massive scale. There are cars thrown like tumbleweed and the streets are strewn with debris." Airport manager Efren Nagrama, 47, said water levels rose up to four metres (13 ft) in the airport. "It was like a tsunami. We escaped through the windows and I held on to a pole for about an hour as rain, seawater and wind swept through the airport. Some of my staff survived by clinging to trees. I prayed hard all throughout until the water subsided."

Moments ago BitCoin hit $395, and will likely cross $400 in the immediate future.  So as more and more pile into the electronic currency, some due to ideological reasons, some simply to chase momentum, some out of disappointment with the manipulated gold price looking to park their savings in an alternative, non-fiat based currency, which a year ago traded 40 times lower, the attention of the government is finally starting to shift to what has been the best performing asset class in the past year, outperforming even the infamous Caracas stock market.

Which means one thing: Congressional hearings.

1. Even if the economy returns to full employment under existing policies, it won’t remain there after (and if) interest rates normalize.
2. Based on today’s debt and valuation levels (charts 8-9, for example), rising interest rates will have an even harsher effect than suggested by the 60 year history
3. Contrary to the establishment’s “sustainable recovery” narrative, the most plausible outcomes are: 1) interest rates normalize but this triggers another bust, or 2) interest rates remain abnormally low until we eventually experience the mother of all debt/currency crises.

We’re stuck in an Escher economy (see below), thanks to the impossibility of the establishment economic view, and this will remain the case until the existing structure collapses and is rebuilt on stronger policy principles.

Venezuela's relatively new government has adopted arguably the best and brightest socialist policy wielded by both Hollande and Obama, namely the "fairness doctrine." However, in this case it is not about what is a "fair" tax for the wealthy (as taxes in Venezuela's socialist paradise will hardly do much to build up the desperately needed foreign currency reserves), but what is a "fair" price for electronic appliances like flat screen TVs, toasters, and ACs. The result is that Maduro's government now determines what equilibrium pricing should be. The reason for this latest socialist victory over the tyranny of supply and demand is that overnight Venezuela's President Nicolas Maduro ordered the "occupation" of a chain of electronic goods stores in a crackdown on what the socialist government views as price-gouging hobbling the country's economy. Various managers of the five-store, 500-employee Daka chain have been arrested, and the company will now be forced to sell products at "fair prices," Maduro said late on Friday.

America has become a gigantic gulag over the past few decades and most of its citizens don’t know, or just don’t care. One of the primary causes of the over incarceration in the U.S. is the absurd, tragic failure that is the “war on drugs”, and indeed nearly half of the folks in prison are there for drug related offenses. Making matters worse is a rapidly growing private prison system, which adds a profit motive to the equation. Recently, we wrote an extensive rant against the private prison system and provided details on how it works in:  A Deep Look into the Shady World of the Private Prison Industry. Now here are some of the sad facts...

We previously highlighted Didier Sornette's excellent work trying to identify pre-crash conditions in financial markets and John Hussman's chart below suggests we are indeed heading that way. His warning, however, "Don't rely on further blow-off - but don't be shocked - risk dominates... Hold Tight."

Most market watchers expect that Janet Yellen will grapple with two major tasks once she takes the helm at the Federal Reserve in 2014: deciding on the appropriate timing and intensity of the Fed's quantitative easing taper strategy, and unwinding the Fed's enormous $4 trillion balance sheet (without creating huge losses in the value of its portfolio). In reality both assignments are far more difficult than just about anyone understands or admits.

Speaking, ironically, at the Economic Club of Detroit in 1988, Ron Paul warns oh-so-prophetically of a coming economic crisis and the profound implications of the government's fiscal and monetary program largesse.

The death of the dollar is coming, and it will probably be China that pulls the trigger.  What you are about to read is understood by only a very small fraction of all Americans.  Right now, the U.S. dollar is the de facto reserve currency of the planet.  Most global trade is conducted in U.S. dollars, and almost all oil is sold for U.S. dollars.  More than 60 percent of all global foreign exchange reserves are held in U.S. dollars, and far more U.S. dollars are actually used outside of the United States than inside of it.  As will be described below, this has given the United States some tremendous economic advantages, and most Americans have no idea how much their current standard of living depends on the dollar remaining the reserve currency of the world.  Unfortunately, thanks to reckless money printing by the Federal Reserve and the reckless accumulation of debt by the federal government, the status of the dollar as the reserve currency of the world is now in great jeopardy.

When one steps back from all the frustration, all the confusion,  all the failures both in the rollout and the mass behavioral experimentation, and the fact that the math just doesn't work, the primary stated purpose behind Obamacare was simple: to provide uniform, affordable (the A in ACA) healthcare for all Americans. But especially to those who are currently uninsured. At least such was the utopian, egalitarian vision behind its conception. Which is also why, stripping away the political posturing, the html coding errors, the funding issues, the biggest failing of Obamacare would be if it opened, and none of America's uninsured came. Sadly, this last nail in Obamacare's coffin, has just been confirmed with a just released Gallup poll which found that a tiny 18% of uninsured Americans - the primary target population for the exchanges - have so far attempted to even visit an exchange website.

"People are, once again, being fooled," fears Bill Fleckenstein in this brief CNBC clip, warning that investors buying into the stock market at all-time highs here are making a grave error. Investors are ignoring fundamentals at their peril, "in the stock mania in 1999, people were bullish because stocks were going up. In 2007, people were bullish because stocks and real estate were going up. They didn't look ask - Why are they going up? Is this sustainable? Is this healthy? - and in both cases, it was not." In the current environment, the bubble Fleckenstein points to is powered not by tech stocks or real estate, but by the Fed's quantitative easing program. But, he warns, the Fed is losing control of one key market...

European monetary policy/monetary conditions are too tight and, Citi's FX Technical group explains, the EURO is too strong thereby exacerbating the effects of the internal devaluation in Europe (as we noted here). Looser monetary policy and a weaker currency are becoming increasingly necessary conditions for the Eurozone to recover/survive. The present period in the Eurozone, Citi adds, where the financial architecture is coming apart at the seams is not remotely unprecedented and in fact offers a very compelling historical perspective for significant devaluation of the EUR in the years ahead.

One of the most trumpeted stories justifying the US economic "recovery" is the resurgence in car sales, which have now returned to an annual sales clip almost on par with that from before the great depression. What is conveniently left out of all such stories is what is the funding for these purchases (funnelling through to the top and bottom line of such administration darling companies as GM) comes from. The answer: the same NINJA loans, with non-existent zero credit rating requirements that allowed anything with a pulse to buy a McMansion during the peak day of the last credit bubble.  Bloomberg reports on an issue we have been reporting for over a year, namely the 'stringent' credit-check requirements for new car purchasers by recounting the story of Alan Helfman, a car dealer in Houston, who served a woman in his showroom last month with a credit score lower than 500 and a desire for a new Dodge Dart for her daily commute. She drove away with a new car.