Archive - Jan 2013 - Story

In a post-financial crisis world, the lack of viable international leadership is potentially troubling. In 2013, the WEF believes, this breakdown of international coordination will go increasingly local: in such a world, governments will focus more on their domestic agendas, which will create new risks in and of itself. Most importantly, the growing vulnerability of elites makes effective public and private leadership that much more difficult to sustain. Leaders of all kinds are becoming more vulnerable to their constituents, generating more reactive and short-term governance. Whether one looks at the dismal approval ratings of the U.S. Congress or the impact that more open flows of information is having on the Chinese ruling elite, it is clear that people are becoming more and more uninspired by their governments. When it comes to unemployment, the widening disparity of wealth, or environmental degradation, highly complex or even intractable issues set politicians up for failure in the eyes of their constituents. Underperformance erodes elites’ legitimacy, making it that much harder for them to lead effectively. Against this backdrop, a host of key 2013 risks and opportunities takes shape.

On the surface, it may seem innocuous for Germany to move some pallets of gold closer to home. But most economists can't see the bigger implications and frequently miss the forest for the trees. What your friendly government economist doesn't reveal and the mainstream journalist doesn't report (or doesn't understand) is that in the event of a US bankruptcy, euro implosion, or similar financial catastrophe, access to gold would almost certainly be limited. If other countries follow Germany's path or the mistrust between central bankers grows, the next logical step would be to clamp down on gold exports. It would be the beginning of the kind of stringent capital controls Doug Casey and a few others have warned about for years. Think about it: is it really so far-fetched to think politicians wouldn't somehow restrict the movement of gold if their currencies and/or economies were failing? Remember, India keeps tinkering with ideas like this already.

While we have pointed out various divergences among risk assets, the deterioration in macro fundamentals, the dismal earnings picture, and the potential for various geopolitical hotspots to ignite, there appears to be only one chart that the US equity market is willing to pay any attention to, for now - that of global central bank balance sheet size. The ongoing competitive devaluations of developed market currencies is a by-product of policymakers’ attempts to (repress) lower real bond yields and, as Credit Suisse notes, has an important (and potentially vicious) element of contagion to it (as Europe is finding out currently): currency appreciation continues until the deflationary pressures associated with an overly strong currency become too large and the country is forced to join in the trend of central bank balance sheet expansion. For now, it appears stocks are 'allowed' to rise, gold is suppressed, and balance sheets are expanding, but as we saw in Q4 2012, there comes a time when reality interjects (albeit briefly).

Food stamps are just a payoff to the poor. It keeps them off the streets.  It’s an unspoken bribe plain and simple.  The oligarchs do not want angry, roving, hungry masses on the streets while they strip mine what’s left of the economy. However, the oligarchs have another problem to deal with - the huge group of people that resides in between them and the poor. The average person can feel themselves getting poorer despite the nonsense spewed by the mainstream media; and this is where the stock market comes into play. More than any other group, the 1% has been convinced that the stock market represents some sort of leading indicator of wealth and prosperity. A rising stock market today is actually a leading indicator of the destruction of the middle class, cultural destitution and a society in collapse. The stock market is like slop in a pigpen.  It is a key instrument used to keep the 1% from getting antsy.  Unlike the middle class (a group that isn’t falling for any of the tricks), many of the 1% work on Wall Street or related industries and own stocks. They must be kept quiet as the coup that started in 2008 is brought to fruition. So as the 1% sits around analyzing a casino, the poor collect food stamps and the middle class dies.

We have long-discussed the growing concerns of a rising level of social unrest in Europe. Our go-to chart has been youth unemployment - and it still reigns supreme as the scariest chart for European leaders (no matter what they publically claim). JPMorgan's Michael Cembalest shares our concern as he opines on the potential for a tear in the social fabric in Europe. While there may be increasing cracks in the social fabric, so far, concrete political manifestations have been limited. Could it be that the social fabric in Europe is stronger than many perceive it to be, and that 'Europeanization' has advanced a lot since 1992? Perhaps; but Michael is equally tempted to believe that Europeans simply recognize the financial and economic dangers of immediate dissolution, and remember the words of Benjamin Franklin: “We must all hang together, or most assuredly we shall all hang separately!”

The globalists have stretched the whole of the world thin.  They have removed almost every pillar of support from the edifice around us, and like a giant game of Jenga, are waiting for the final piece to be removed, causing the teetering structure to crumble.  Once this calamity occurs, they will call it a random act of fate, or a mathematical inevitability of an overly complex system.  They will say that they are not to blame.  That we were in the midst of “recovery”.  That they could not have seen it coming. Their solution will be predictable.  They will state that in order to avoid such future destruction, the global framework must be “simplified”, and what better way to simplify the world than to end national sovereignty, dissolve all borders, and centralize nation states under a single economic and political ideal?

Is this what tax season prep looks like when you have a Congressionally-imposed ban from using TurboTax? We will let readers decide...

With the Fed purchasing $45 billion in Treasury securities across the curve each month, keeping a consistent picture of Ben Bernanke's consolidated, risk-adjusted holdings can be somewhat problematic: the best way to do this is to represent the Fed's $3 trillion balance sheet, of which $1.7 trillion is in Treasurys, in the form of ten year equivalents. A ten-year equivalent is the amount of 10-year notes that must be held by the Fed in order to remove the same amount of interest rate risk from the market as its current holdings. This allows for a uniform representation that eliminates the duration variance along the curve. Looked in this light it may come as a surprise to some that as of this moment, the Fed now owns some 29% of the entire amount of marketable ten-year equivalents outstanding in the entire US bond market.

While cogitating on yesterday's weak GDP print, CNBC's Rick Santelli confirmed his view that forecasting is complex (at best) and impossible (most likely). The 2010 view of the Fed was that 2012 growth would be 3.5-4% - quite a destructive miss as it turned out; and while Santelli is not attacking the Fed for its ridiculously bad forecasts, he makes a critical point. Forecasting such a massively complex and dynamic system as the global economy is foolhardy but attempting to control a few of the pieces (and not all of the pieces - which is akin to herding cats) is insane. His suggestion, "maybe [the Fed] should look at what has worked in the past; that is market forces." Indeed, two minutes of sanity...

From the close on Dec 28th (pre-fiscal-cliff), the Dow is up over 7% (for its best January since 1994), the long bond is down 3.3% in price, gold is up marginally and the USD is down marginally. From around November 2012, the current in stocks is eerily reminiscent of the same run from November 2011's dip and co-ordinated easing. It would appear that if 2011/2 was the world normalizing to ZIRP, 2012/3 is the world's central banks fighting currency wars with their ever-expanding balance sheets (and while Europe won last year in stocks, the ECB's fading balance sheet is leading its stocks to underperform a renewed Fed expansion). Credit markets are notably not buying this risk-on move (and nor is VIX) in January but JPY-cross-based carry is leading the way, so the world better hope that no one doubts the BoJ's ability top unilaterally 'win' the currency wars. Energy and Healthcare are the month's winners as JPY loses 6.4% on the month and EUR gains 2.7% against the USD. ES clung to VWAP into the close. with a second down day in a row

The central planner's policy tool formerly known as "the stock market" has experienced unprecedented levitation in the past two months on the heels of what, as shown previously, is some 38 countries concurrently pursuing negative interest rates and monetizing their debt, while flooding the market with record liquidity. Furthermore, as we said back on January 9, now that the Fed is back to full scale unsterilized market injections in the form of good old POMO, anyone who wishes to challenge the Fed directly may want to reconsider doing so via stocks (buying precious metals on FRBNY, BOE and BIS-facilitated 8:00 am crashes is always encouraged).  Below is a chart of what happened next: it shows the stock market's performance and whether or not there was POMO on that day. In brief: of the 15 POMO days since January 9, the market was up 13 of them, or an 87% hit rate. Those who did not short January POMO at least did not lose money.  And since Goldman's Bill Dudley was kind enough to release the February POMO schedule, during which the Fed will add another $44 billion to Primary Dealer dry powder, not to mention some $40 billion in MBS, and since there is no stock market and hasn't been since 2008, we urge everyone to stude the POMO table below and to not short the S&P on the highlighted POMO days unless they absolutely must.

Despite the modest weakness in the long-bond, that so many herald as the next coming of the Great Rotation meme, it would appear that the longer-end of the Treasury bond term-structure actually flattened quite notably since the start of the year. Whether this bear-flattening reflects less extreme long-term concern of hyperinflation (small odds but high impact at long-end), mid-curve-based hedging (January was a massive IG issuance month and MBS convexity concerns are growing), or lower long-term growth/inflation expectations is unclear. But given the Fed's foot on the throat of the short-to-medium-term Treasury term-structure, the longer-end remains a marginally 'free' market and based on the chart below implies equities are well ahead of themselves as we draw a line under January 2013.

What does it mean that China is making a lot of noise about the Federal Reserve’s loose monetary policy?

In the aftermath of yesterday's surprising attack by Israel on Syrian soil, an act which any prior justification notwithstanding is a clear act of war sovereign aggression, it was only a matter of time before Syria responded, at least diplomatically at first. And as we also noted yesterday that "Iran has previously warned that any attack on Syria is the same as an attack on Iran" it was safe to assume that Iran would have a thing or two to say in response as well. Earlier today they did just that, with Syria warning that a "surprise" response to the Israel attack is forthcoming, while the "Iranian deputy foreign minister Hossein Amir Abdullahian said the attack "demonstrates the shared goals of terrorists and the Zionist regime... It is necessary for the sides which take tough stances on Syria to now take serious steps and decisive stances against this aggression by Tel Aviv and uphold criteria for security in the region." Finally yesterday we wondered "how Russia and/or China which have made clear that Syria is a strategic geopolitical center for both in the past will react", and today we know: "Russia, which has blocked Western efforts to put pressure on Syria at the United Nations, said that any Israeli air strike would amount to unacceptable military interference." So far nothing from China, which has in the past let Russia be its proxy on Syrian matters.

"Absent an immediate crisis - and sometimes in the face of one - governments will often struggle to meet great challenges. The short-term palliatives we are currently pursuing go against everything a long-term oriented society should aspire to achieve. Growing entitlements are popular with voters and with those whom they elect, for obvious reasons: because the bill never seems to come due. But come due it will. Our spending is completely out of control, and, as of now, it seems as if the situation will have to become calamitous before we act. Let’s hope that it won’t then be too late."

-Seth Klarman, Baupost