Archive - Nov 2013 - Story

"London Gold Market Fixing Ltd., a company controlled by the five banks that administers the benchmark, has no permanent employees. A call from Bloomberg News was referred to Douglas Beadle, 68, a former Rothschild banker, who acts as a consultant to the company from his home in Caterham, a small commuter town 45 minutes south of London by train. Beadle declined to comment on the benchmark-setting process."

A great many long refuted Keynesian shibboleths keep being resurrected in Krugman's fantasy-land, where economic laws are magically suspended, virtue becomes vice and bubbles and the expropriation of savers the best ways to grow the economy. According to Paul Krugman, saving is evil and savers should therefore be forcibly deprived of positive interest returns. This echoes the 'euthanasia of the rentier' demanded by Keynes, who is the most prominent source of the erroneous underconsumption theory Krugman is propagating. Similar to John Law and scores of inflationists since then, he believes that economic growth is driven by 'spending' and consumption. This is putting the cart before the horse. We don't deny that inflation and deficit spending can create a temporary illusory sense of prosperity by diverting scarce resources from wealth-generating toward wealth-consuming activities. It should however be obvious that this can only lead to severe long term economic problems. Finally it should be pointed out that the idea that economic laws are somehow 'different' in periods of economic contraction is a cop-out mainly designed to prevent people from asking an obvious question: if deficit spending and inflation are so great, why not always pursue them?

Even the most ardent of bulls would 'admit' that the period of the last 90s was a bubble in US equities. What started at the margin quickly morphed into a euphoric valuation for any and everything that could be pitched. Even The Fed's Jim Bullard 'knew' there was a bubble back then... Today's recovery of the NASDAQ to 4,000 - levels not seen since this period - is quickly dismissed by those that need things to go higher on the basis of earnings, multiples, or some such forward-looking hope-based methodology that reinforces their bias. However, Tobin's Q - among the longest-lived and most well-respected of longer-term valuation methodologies has just reached levels only ever seen during the 1999/2000 bubble. BTFATH valuation?

Even we were shocked when we ran the numbers on this one...

Just as many expect that the #1 buyer of Treasuries (the Fed) will soon begin paring back its purchases, the top foreign holder (China) may cease buying, thereby opening a second front in the taper campaign. Little thought seems to be given to how the economy would react to 5% yields on 10 year Treasuries (a modest number in historical standards). The herd assumes that our stronger economy could handle such levels. That is why when it comes to tapering, the Fed is all bark and no bite. But the market understands none of this. This is not unusual in market history. When the spell is finally broken and markets wake up to reality, we will scratch our heads and wonder how we could ever have been so misguided.

Here’s the crucial part of what Summers and Krugman are saying: this is not a temporary gig. This isn’t going to just “get better” on its own over time. This really is, as Mohamed El-Erian of PIMCO would call it, the New Normal. And if you’re Jeremy Grantham or anyone for whom a stock has meaning as a fractional ownership stake in a real-world company rather than as a casino chip that gives you “market exposure” … well, that’s really bad news...  Just don’t kid yourself into thinking that your deep dive into the value fundamentals of some large-cap bank has any predictive value whatsoever for the bank’s stock price, or that a return to the happy days of yesteryear is just around the corner. It doesn’t and it’s not, and even if you’re making money you’re going to be miserable and ornery while you wait nostalgically for what you do and what you’re good at to matter again. Spoiler Alert: Godot never shows up.

Led by countries such as Russia and China, central banks have recently become net buyers of gold. Meanwhile, ETF gold outflows have been a temporary source of supply this year, but obviously this cannot persist. It’s also unreasonable to assume that recycling will make up a significantly greater piece of supply without the price of gold increasing substantially. With the grade of current producing gold mines being 32.6% higher than undeveloped deposits, it makes the supply scenario even more clear. Not only is the current yearly mine supply difficult to sustain, but future mines coming online will be challenged by grade and margins to be economical at today’s prices. Mathematically, unless we have high-grade, high ounce deposits that are being fast tracked online, it will be very difficult to find a way to get supply to match demand. Have we reached peak gold?

From consumer and retailer surveys to quantitative data such as household spending and private jet bookings, ConvergEx's Nick Colas has amassed a collection of 10 clues about this year's holiday shopping season. On the plus side, disposable personal income and consumer spending on discretionary items are rising, and travel to Palm Beach via private jet is quite popular this Christmas season. However, consumer confidence surveys are particularly weak, and consumer debt has ballooned to a 5-year high. Roughly equal parts good and bad, Colas' collection of holiday spending indicators points to a mediocre (at best) 2013 shopping season (as we noted earlier).

One is a dystopian society of haves and have-nots (favored or disfavored) controlled from The Capitol by a totalitarian 'big' government and entertained by reality TV shows... the other is a fictional movie entitled "The Hunger Games"...

Twice in the same day? Coincidence?

It has been over a year since we listed the three "pillars" of the latest dead cat bounce in the housing market. Recall: "the REO-to-Rental subsidized investment program, which led to an epic surge in demand for multi-family housing, i.e., rental, units was, together with offshore investors parking their cash in the US for safekeeping (taking advantage of the NAR's anti-money laundering check exemptions) and the big banks Foreclosure Stuffing, the key reason for the recent, stimulus-fueled and quite transitory bounce in house prices in assorted markets." In other words, the latest artificial move higher in the housing market had nothing to do with an "improving" economy (and implicitly, everything to do with the epic injection of liquidity by all global central banks and chinese loan creation). Today we got confirmation that once again we were correct: to wit: "Douglas Elliman rep: 70% of Brooklyn home sales going to hedge funds, investors and international buyers."

Energized by a lower crude oil price - and collapsing JPY - equity markets hit their highs shortly after 8pmET on Sunday night, trod water thorugh the Asian and European markets and started more aggressive selling once US cash markets opened. Coincidentally (or not) when Obama started speaking around 1445ET, US equities took a dramatic dive - catching down to an already weaker signaling VIX rally. EURJPY stayed in sync through all of this priming ignition pumps right into the close as NASDAQ 4,000 close was desperately needed (but the dot-com darlings were all hit). Gold and Silver's early monkey-hammering was met with buyers which lifted then up 0.5% and 0.8% respectively on the day (and 2% off their lows). WTI crude recovered more than half of its losses (-0.6% on the day) but Brent not so much as the spread broke to new 8 month highs. VIX closed higher and Treasury yields trended lower all day from the overnight open to close practically unchanged as the USD lost half its early gains to end +0.25%.

Presented with no comment*...

After a year of talks over the post-2014 US military presence in Afghanistan, the US administration announced last week that a new agreement had finally been reached. Under the deal worked out with Afghan President Hamid Karzai, the US would keep thousands of troops on nine military bases for at least the next ten years.  In fact, much of the US government’s desire for an ongoing military presence in Afghanistan has to do with keeping money flowing to the military industrial complex. Addressing Afghan tribal elders last week, Karzai is reported to have expressed disappointment with US assistance thus far: “I demand tanks from them, and they give us pickup trucks, which I can get myself from Japan… I don’t trust the U.S., and the U.S. doesn’t trust me.”  Let us hope that Karzai sticks to his game with Washington. Let the Obama administration have no choice but to walk away from this twelve-year nightmare. Then we can finally just march out.

A renewed confidence in the administration must be carried forward. We can't wait to hear how immigration reform will single-handedly fix the economy, joblessness, education, and healthcare... and if it's not passed, the failure of all those things is due to the Republican's unwillingness to negotiate... perhaps it is time for the Republicans to don their best Rouhani costumes?