Archive - Dec 16, 2013 - Story

Real estate is currently a tale of two distinct trends. In formerly hurting markets such as Arizona, Nevada and Florida, private equity investors have flooded into what is a now gigantically crowded to “buy-to-rent” trade. Meanwhile, in the prime markets such as New York City and San Francisco, we have seen the “money laundering trade,” where rich oligarchs move their often ill-gotten gains into trophy real estate assets abroad. We have seen many signs all year that the first key pillar to the manufactured rise in housing was becoming strained, as rents continued to rise while incomes continued to fall. As far as the second pillar, well at some point the oligarchs will have purchased enough homes in London and Manhattan and then what? Interestingly, the seemingly unstoppable rental market in Manhattan is showing signs of cracking...

We warned last week of the rising nationalism and concerns about Abe's intentions and this evening the escalating tensions in the East China Sea are clear once again. In an effort to "normalize" an officially 'pacifist' policy, a hawkish Abe announced that Japan has tonight increased its military budget notably to buy drones, amphibious vehicles, submarines, and vertical take-off aircraft to boost defenses around the remote Senkaku islands. It seems the farce is getting more surreal as Japan also considers obtaining the means to counter ballistic missiles the point of launch. Why go to war and risk it all by printing and deficit spending your country into oblivion for a 'purpose' when you can do it without spilling a drop of blood?

UPDATE: The earlier rumors have been confirmed: People’s Bank of China told more than 10 third-party payment service providers yesterday not to give clearing services to online Bitcoin exchanges, China Business News reports, citing a central bank meeting with the companies. This news is pressuring Bitcoin to $678 (on Mt.Gox) but more notably, BTC China rates imply a $588 equivalent price - down 57% from its highs. From a $100-plus premium, BTC China now trades $130 cheap to Mt.Gox as the 'arb' flips.

Talk from the PBOC (via Sina) that "the central bank directs: third party payment institutions shall not undertake business with Bitcoin hosted sites," appears to be responsible for the slump in the virtual currency once again. This expands the PBOC's earlier Bitcoin ban to other institutions. Bitcoin prices have dropped over 20% from their overnight highs - trading at around $715 now. Perhaps even more notable is the relationship between Bitcoin and the precious metals today with the early Bitcoin weakness corresponding almost perfectly to gold and silver strength (and again mid-morning in the US).

For many commentators there are two distinct camps in the gold market: investors in bullion and speculators in the paper market. With the two markets pulling in different directions some dealers think it is only a matter of time before derivatives fail completely and the price of gold will rocket on physical demand. However, the key to future gold prices comes down to the point in time at which central banks stop supplying the market; not some sudden crisis between value investors in the East and momentum chasers in the West. That is to confuse cause with effect.

While Canada has had Bitcoin ATMs for over a month, bringing the virtual currency closer to mainstream acceptance; Bittiraha.fi reports that at one of the busiest spots in Helsinki, the Finns have opened the first permanent Bitcoin ATM installation in Europe. With the Chinese shunning the crypto-currency for now but the Swiss inching towards a broader acceptance, the appearance of ATMs (like this one at a well-known Finnish record store in the Helsinki railway station) will only serve to stoke the public interest.

The Federal Reserve holds its last policy meeting of 2013 in the week ahead. In UBS' view there are four possible surprises that could affect the markets. From the odds of a taper to adjusting forecasts and from forward-guidance communication to the chances of a cut in the IOER, the FOMC meeting in the week ahead presents upside and downside risks to the dollar in the near term; even if UBS believes the longer-term will see USD strength against both the EUR and JPY.

All over America, formerly prosperous communities are being transformed into crime-infested wastelands of poverty and despair.  Of course the most famous example of this is Detroit.  At one time, Detroit was the greatest manufacturing city that the world had ever seen and it had the highest per capita income in the entire country.  But now it has become a rotting, decaying hellhole that the rest of the planet laughs at.  And of course Detroit is far from alone.  There are hundreds of other U.S. cities that are suffering a similar fate.  In this article, the focus is going to be on Camden, New Jersey, but the truth is that there are lots of other "Detroits" and "Camdens" all over the nation.  Jobs and businesses are leaving our cities at a staggering rate, and what is being left behind is poverty, crime and extreme desperation.

Back when the Executive and Congress at least pretended not to abdicate all power to the Fed, one of the centerpiece programs designed to boost the housing market for the benefit of the poor (as opposed to letting Ben Bernanke make marginal US housing a rental industry owned by a handful of private equity firms and hedge funds), was Barack Obama's Home Affordable Modification Program or HAMP, which attempted to prevent foreclosures by lowering distressed borrowers’ mortgage payments. Under the program, homeowners would be given trial modifications to prove they can make reduced payments before the changes become permanent. The program was a disaster as of the 3 million foreclosures that were targeted for modification in 2009, only 905,663 mods have been successful nearly five years later - a tiny 13% of the 6.9 million who applied (still, numbers which Obamacare would be delighted to achieve). Part of the reason: the program's reliance on the same industry that sold shoddy mortgages during the housing bubble and improperly sped foreclosures afterward. But there was much more. For the definitive explanation of everything else that went wrong, we go to Bloomberg's Hugh Son whose masterpiece released today explains how and why once again the banks - and especially one of them - won, and everyone else lost.

The European Union's February decision to outlaw banker bonuses that are more than twice fixed pay was an effort to curb excessive payouts and asymmetric risk-taking. The UK challenged the caps as illegal in September (and the case has yet to be decided) but the European Banking Authority softened its stance last week by allowing banks to exempt staff earning up to EUR 1 million from the rules that cap bonuses. It seems the bankers are making hay while the sun shines as Bloomberg now reports, Managing Directors at banks in London are expecting a 44% rise in bonuses for 2013 - to more than double their average salary.

Despite the best efforts of the search engines, the majority of the Internet is unsearchable with estimates of this “Unlit” Web as high as 90%. As ConvergEx's Nick Colas notes, some of this content (no one knows how much) is dark for a reason - hosting every form of criminal behavior known to man - but the rest from the increasing interest in anonymous Internet use in light of widely publicized government surveillance. Among the least well understood emerging themes in technology, Colas points out, is the “Dark Web”, adding that Oscar Wilde famously opined that “All human beings have three lives: public, private and secret.”  The existing structure of the Internet handles the first two very well.  The Dark Web is, apparently, for the third. The first innovation to move from “Dark” to “Lit” Web is bitcoin, but it certainly won’t be the last.

When all else fails...

Could we have another bullish year in 2014?  It is certainly possible as long as the Federal Reserve remains engaged in their ongoing balance sheet expansions. But maybe the ongoing inflation of assets, without the underlying improvement in organic, sustainable, economic growth, will eventually lead to the next market bubble and bust. Of course, for anyone that has payed attention, such an outcome would be of little surprise. The important point is that, as an investor, you need to pay attention to the ever decreasing reward/risk ratio of chasing the financial markets. The "low hanging fruit" has long been harvested and the risk currently far outweighs the potential reward of being aggressively invested. Of course, it is not popular, or fun, to rain on the bullish parade.  However, while they will likely appear to be correct in the short term; the long term outcome will most likely be far less pleasant.

While the BLS may be searching far and wide for evidence of hedonically-adjusted "core" inflation, and not finding it anywhere (expect in assets, housing prices, food and energy, but apparently all America buys every day are LCD TVs and iPads), one place where not even the BLS can hide what is clear and present "inflation" is college grade point averages, and especially grades for humanities courses, where as the saying goes pretty much everyone is "above average." And, as JPM adds, "Soon, colleges will have to “turn the dial up to 11” or else everyone will have the maximum GPA." Well, in a society where the push is to make everyone equal, it would only be fair for everyone to get the exact same perfect grades...

We want to believe the fake unemployment rate of 7% rather than the real rate of 14+% because the officially sanctioned forgery feeds our belief that our bloated, corrupt Empire of Debt is sustainable, fair and working well. To accept that we've been bamboozled, ripped off, taken advantage of and ultimately cheated out of an authentic economy and life by swindlers is too painful.

While stocks clung to overnight ramp gains, tensions were clear under the surface. Managers sought protection as spot VIX trended higher (closing over 16%); JPY crosses were not buying into (or supporting) the equity bounce (off the S&P's 50DMA), credit markets remained unimpressed, Treasuries closed practically unchanged (30Y was worst +2bps), gold and silver were bid, and another Hindenburg was spotted. The previous two "clusters" of Hindenburg Omens produced meaningful corrections in the US equity market (albeit dips that were rapidly bought). While ominous in its wording, the features that cause an Omen are all about market confusion with highs, lows, advancers, decliners, and momentum all signaling opposing (and mixed) views. With this week's FOMC meeting likely to resolve in significant volatility one way or the other, it is perhaps not surprising that the 3rd H.O. has just been spotted.