Archive - Feb 26, 2013 - Story

Maker's Mark recent foray into "diluting" reality by keeping prices flat while reducing the alcohol content - a painful reminder that stealth inflation comes in the most unexpected of shapes - came and went, with the outcry limited to a select group of Bourbon lovers. However, when the realization hits that every other alcohol producer may have been engaging in the same less than ethical behavior, including America's precious Budweiser, we expect the response to be faster and furiouser. We also expect the answer to the question of how it is that food inflation is not far greater, will be made even clearer. It will, however, certainly bring new meaning to the phrase the beer glass is half full. Of course, since the lawsuit was filed by two men who "routinely purchased as many as four cases of Bud per month for the past four years" one can see why it may not be taken very seriously.

There are many complexities in the socio-economic structures that the nations (and corporations) of the world have used (and abused) over the years. Volumes have been written to explain the intricacies of Capitalism, Fascism, Communism, and Socialism; and how these impact various corporations from Iran to Greece to Australia. However, in the interest of brevity, the following infographic - utilizing nothing more than two cows (which perhaps should now be horses, considering their inflationary displacement capacity for firms like IKEA and Nestle) to provide everything you need to know about ecomoomics.

February has been an odd month for precious metals to say the least. On-again, off-again fears of Bernanke removing the punchbowl (and endless sell-side strategists discussing Great Rotations and the end of the gold cycle) have led to prices for gold and silver sliding notably. However, while all this price deterioration has been going on, demand for physical gold and silver has surged - entirely disconnecting from January's apparent demand-to-price correlation - and Silver set to break all-time record demand highs for a February. We know who was buying in January, as Reuters reports Russia and Turkey were significantly adding to their bullion reserves; and while the divergence between demand and price coincided with Chinese New Year - leaving a large marginal buying nation on the sidelines - we suspect the drop is more to do with hedge fund reflexive selling - now caught offside. It seems at least one smart player was using lower prices to build their stack; manipulation or no manipulation.

There was nothing notable about today's just concluded $35 billion 5 year auction, with the possible exception of the fact that at a high yield of 0.777% (of which just 12.5% was allotted at the high), just inside the When Issued 0.778% at 1 pm, this was the first yield drop in three months, breaking the sequence of rising yields since December 2012 when Bernanke announced his $1 trillion balance sheet expansion program for 2013. Aside from that, the Bid to Cover of 2.85 was just shy of January's 2.88, and on top of the TTM average of 2.86. The Direct takedown was a weakish 14.3%, the lowest since September 2012, Indirects saw a 41.7% allocation, the highest since November, and the remainder was given to the Dealers, who will as usual promptly flip their quota back to the Fed while picking up several point in margin spread at the upcoming POMOs. Overall a snoozer, which however with tomorrow's last auction for this week, will take total record US debt which was $16.61 trillion higher by $53 billion to $16.7 trillion, or a 105% debt/GDP rounded up.

Equity markets relatively collapsed intraday yesterday given the recent lack of volatility with the range around four times larger than the three-month average and volume at its highest in that period. While that is significant of itself, as the S&P broke its uptrend, Nanex has found a much more serious shift in the market structure that occurred yesterday. Soon after the open on the US day session, market-making HFTs surged their quote-stuffing efforts to the highest level in months. Whether this was intended to artificially inflate orders to enable institutional sell-orders to be crossed with falsely hopeful retail orders is unclear but given the order flow and direction of trade, it seems something significant changed yesterday.

What could go wrong with the housing 'recovery' in 2013? To answer this question, we need to understand that housing is the key component a middle class squeezed by historically high debt loads, stagnant incomes, and a net worth largely dependent on their home. In response, Central Planners have pulled out all the stops to reflate housing as the only available means to spark a broad-based “wealth effect” that would support higher spending and an expansion of household debt. This returns us to the key question: Are all these Central Planning interventions sustainable, or might they falter in 2013?  Once markets become dependent on intervention and support to price risk and assets, they are intrinsically vulnerable to any reduction in that support. Should these supports diminish or lose their effectiveness, it will be sink-or-swim for housing. Either organic demand rises without subsidies and lenders originate mortgages without agency guarantees, or the market could resume the fall in valuations Central Planning halted in 2009.

While all eyes were on Italy today - and we will get to that below - Swiss 2Y rates turned negative once again for the first time in a month; EURUSD relatively flatlined around 1.3050 (250 pips lower than pre-Italy); Europe's VIX exploded to almost 26% (from under 19% yesterday); and 3-month EUR-USD basis swaps plunged to their most liquidity-demanding level since 12/28. Spain and Italy (and Portugal) were the most hurt in bonds today as 2Y Italian spreads broke back above 200bps (surging over 50bps casting doubt on OMT support) and 3Y Spain yields broke above 3% once again. The Italian equity market suffered its equal biggest drop in 6 months falling back to 10 week lows (and down 14% from its end-Jan highs). Italian bond yields (and spreads) smashed higher - the biggest jump in 19 months as BTP futures volume exploded in the last two days. Something dramatic has changed as the fast money is running with bonds and stocks going out at their lows of the day. In CDS-land, Italy is now 'riskier' than Spain for the first time in a year.

Here's Bernanke's list of the costs/risks associated with further asset purchases, and his assessment about the severity of those risks:

It would appear that someone tripped and flipped the algo switch this morning as the ubiquitous morning slamdown has morphed into a take-off. Perhaps it is no coincidence that every Muppet's favorite banker (cough Goldman Sachs cough) opined on Gold's coming weakness yesterday and that hedge funds are the least exposed to the precious metals on record, which as everyone BUT Goldman knows, is the traditional signal that it is a time to buy. Actually we take that back: Goldman certainly knew it, which is why it has been urgently advising its clients to sell... To Goldman.

Ok Census Bureau: enough is enough.

At 10 am Eastern the Chairman will go before Senate to deliver his agency's semi-annual Monetary Policy Report to lawmakers. Tomorrow he will do the same before the House. Speaking before the Senate Banking Committee, Bernanke will face questions about the nation's current economic situation.  He is also likely to field lawmaker's comments on how the nation's economy will be impacted by sequestration. Perhaps someone will inquire about the Fed's exit plans, but that is unlikely as there are none. Perhaps someone else will inquire what Bernanke's closing print target for the S&P and the EURUSD are. We, and numerous GETCO synthetic momentum algos, are looking forward to both.

Each time the Fed's balance sheet is expanded, gas prices at the pump surge... strange coincidence or entirely to be expected consequence of flooding the world with newly printed money. Dear Senate, please ask Bernanke to explain this... on Humphrey-Hawkins Report days, gas prices have only been higher once - right before the entire financial market collapsed.

As expected earlier, today's December Case Shiller data came and went and nobody cared. Perhaps because it is three months delayed, perhaps because it posted an increase in the NSA top 20 city composite at a time when all the previous data was supposedly contracting due to snow in the winter, to the Sandy endless aftermath, or due to the Fiscal Cliff, or perhaps just because the NSA increase (and remember: Case Shiller itself says one should use not adjusted data for an accurate sense of what is going on) was so tiny (0.16%) that nobody cared. Either way, after two sequential monthly declines, the Top 20 Composite index is back to 145.95, lower than the level hit in September. Even a casual glance at the below the headline data showed that the increase in December house prices were driven mostly by Las Vegas (+1.8) and Los Angeles (+1.14%). Where have we seen this before. Declines were reported in Denver, Washington, Chicago, Detroit, Minneapolis, Charlotte, New York, Cleveland, Portland, Dallas, Seattle. Excluding those, the Case Shiller was up much more.

The French industry minister, Arnaud Montebourg, appears to have taken a break from writing rambling, factless letters to US CEOs who have in the past week openly snubbed and ridiculed his demands to provide jobs to the French labor unions, and instead has focused his brilliant socialist mind on something far more appropriate of its unique polymathness: currency wars, and specifically demands that the ECB finally "get involved." Why? Because if it has not been made clear in the past month, France now blames its lack of expert competitiveness not on the same issues previously highlighted by Maurice Taylor such as disintegrating work ethic and a complete lack of competitive productivity, but on the soaring EURUSD - the same soaring EURUSD (well, not soaring so much in the past few weeks) which is also crushing German exports, but because it is crushing France even more, both Merkel and Weidmann are delighted to put up with it. As a result, Montebourg will have no more of it.

One of the reasons mistakes are made, and often serious mistakes, are because the right questions are not asked. If you ask the wrong questions then the answers, even if answered correctly, will lead you to the wrong conclusions. What we are seeing in Italy this morning is a good example of asking and answering the small questions when the larger questions are vastly more important. What most people have not grasped yet, but the dawning will come, is that a Referendum has just taken place in Italy. All of the political upheaval in Italy was caused by anger and frustration with the European Union and their policies. The EU is now cornered.