Archive - Feb 2013 - Story

For those who want to get a sense of who the leading candidate in Italy is, at least based on concurrent mentions on Twitter, here is an application that tracks candidate references in real-time. Needless to say, Grillo and Berlusconi are head and shoulders above the rest.

The 2011 failure of the Super Committee produced a sequester that reduces budget authority in FY2013 by $85bn; resulting in estimated actual spending cuts of $42bn. What is less commonly known is that in FY2013 there is also a second sequester. The math behind the second sequester is even messier than the Super Committee sequester, but the bottom line is that it adds to the fiscal pain and highlights the complexity of the budgetary process.

While the topic of net Fed capital flows, and implicit balance sheet risk has recently gotten substantial prominence some three years after Zero Hedge first started discussing it, one open question is what happens when we cross the "D-Rate" boundary, or as we defined it, the point at which the Fed's Net Interest Margin becomes negative i.e., when the outflows due to interest payable to reserve banks (from IOER) surpasses the cash inflows from the Fed's low-yielding asset portfolio, and when the remittances to the Treasury cease (or technically become negative). To get the full answer of what happens then, we once again refer readers to the paper released yesterday by Morgan Stanley's Greenlaw and Deutsche Bank's Hooper, which discusses not only the parabolic chart that US debt yield will certainly follow over the next several decades, but the trickier concept known as the Fed's technical insolvency, or that moment when the Fed's tiny capital buffer goes negative. In short what would happen is that the Fed will be then forced to print money just so it can continue to print money.

... And this time it is a true parabola.

'Nothing can stop us now' appears to be the message we are being fed as Bullard et al. confirm we should rest assured that the Fed will pump as long as there's a sun in the sky. However, there is a little fly in that ointment that just keeps on popping up. As Barclays' Barry Knapp notes, gas prices have risen high enough to hurt stocks if history is any guide. Gas prices, which have risen every day since January 17th are pressuring the critical $3.80 level that has capped valuations for the equity market in the last three years. The last times gas prices have risen this high, consumer spending growth has stalled and just as we have noted previously, it appears the only thing that can tame the enthusiasm of a liquidity-addicted equity market is a cash-strapped consumer pulling back. The double-edged sword is simple, Knapp notes: any slowing of economic growth that stems from higher gas prices may prevent companies from meeting earnings projections; whereas sustained expansion would increase the risk of inflation and put pressure on the Fed to scale back its QE4EVA. Rock meet hard place.

Every year over 1.5 million Americans go through some form of drug and alcohol abuse treatment, according to the last large survey done by the Substance Abuse and Mental Health Services Administration, an agency of the Federal government. Only about half – 47%, to be precise – complete their treatment. One quarter drop out, and the remaining 25% either transfer facilities or end treatment for some other reason. In general, the more intensive the treatment – inpatient hospital care, for example – the more successful the outcome. The length of treatment varies, as one might imagine, based on what addiction is being treated. Heroin and other opioids take over 150 days, but the median is anywhere from 90 – 121 days. Needless to say, these are long days for anyone who goes through them as well as the family and friends who support them. Somewhere over the past few years, the serious term ‘Addiction’ has entered the lexicon of capital markets watchers as it relates to how central bank policies enable and distort the price of debt and equity securities. Essentially, the analogy is that markets have become dependent on both artificially low interest rates and the cash provided by liquidity programs such as “Quantitative Easing” in much the same way that a person can become addicted to a dangerous drug or alcohol. If you’ve ever seen addiction first hand, you know this is a spurious anthropomorphizing of financial markets. If you haven’t, well, just trust me.

Federal Reserve Bank of New York, Lexington Partners; Tudor Investment, Brevan Howard, Goldman Sachs, UBS, Bank of Korea; BNP Paribas, Fidelity Investments, Deutsche Bank,, Freeman and Co., Bank America, National Bureau of Economic Research, FDIC, Interamerican Development Bank; 4 hedge funds, BTG Pactual, Gavea Investimentos; Reserve Bank of Australia, Federal Reserve Bank of San Francisco, Einaudi Institute, Bank of Italy; Swiss National Bank; Pension Real Estate Association; Goodwin Proctor, Penn State University, Villanova University, Shroeder’s Investment Management, Premiere, Inc, Muira Global, Bidvest, NRUCF, BTG Asset Management, Futures Industry Association, ACLI, Handelsbanken, National Business Travel Association, Urban Land Institute, Deloitte, CME Group; Barclays Capiital, Treasury Mangement Association, International Monetary Fund; Kairos Investments, Deloitte and Touche, Instituto para el Desarrollo Empreserial de lat Argentina, Handelsbanken, Danske Capital, WIPRO, University of Calgary, Pictet & Cie, Zurich Insurance Company, Central Bank of Chile, and many, many more.

While Abenomics has failed in spurring exports, while the rise in the Nikkei has benefited some 1-2% of the population, the most direct consequence of crushing the yen some 20% is that energy costs, virtually all of them imported, are if not surging, then about to soar to all time highs.  In other words, our sincerest condolences to Japan, for whom this winter will be a very cold one (and a very hot summer follows), unless of course in Japan, like in the US, energy costs don't matter when calculating CPI and inflation and the consumer can spend any amount to keep themelves warm, or cold as the case may be.

It has now been two years since the self-immolation of the Tunisian street vendor, Mohamed Bouazizi, provided the spark that set the Arab world aflame. A wave of protests spread throughout the region in quick succession and led to the overthrow of long ruling autocrats in Egypt, Tunisia, Yemen, Libya, and possibly Syria. The collapse of regimes like Hosni Mubarak’s in Egypt, which many considered "an exemplar of... durable authoritarianism" was a salient reminder to many that such revolutions are "inherently unpredictable." Before long some began to speculate that the protest movements might spread to authoritarian states outside the Arab world, including China. Although sharing many of the same problems as Arab societies, the Arab Spring never arrived in Beijing. Why?

While we have discussed the strategic implications of this tomorrow's critical Italian elections previously  (An Italian "Hung Parliament" - Europe's Biggest Political Risk), the actual chronology of events of tomorrow's Italian elections which proceed through Monday is somewhat nebulous. So courtesy of JPM's Alex White, here is the complete 10 step walk-thru of what to expect starting tomorrow, and ending, perhaps, with the appointment of a new President in May, unless of course there is a slight detour...

The one-stop, comprehensive summary of the key positive and negative news and events in the past week.

This document is one of several found by The Associated Press in buildings recently occupied by Al-Qaeda fighters in Timbuktu, Mali. Written by Abdullah bin Mohammed, apparently with God’s help, with the goal "of disabling the new strategy of the American army at the medium or long-range levels," through three methods: the formation of a public opinion to stand against the attacks, deterring of spies, and tactics of deception and blurring. These 22 tactics are as follows...

With recent (post-Minutes) chatter of a gradually-tightening Fed since curtailed by a plethora of Federal Reserve market savants jawboning us back to creditopia - "the liquidity must flow"; we thought a gentle reminder of what Quantitative Easing really is was worthwhile. Whether goldbug, bond-vigilante, or permabull-stock-muppet; two-and-a-half minutes of reality (or comedy) depending on your perspective.

And now for a quick lesson in government spending: in the 1940s the federal government created the now mostly decommissioned Washington's Hanford Nuclear Reservation as part of the Manhattan Project to build the atomic bomb. During the Cold War, the project was expanded to include nine nuclear reactors and five large plutonium processing complexes, which produced plutonium for most of the 60,000 weapons in the U.S. nuclear arsenal. Sadly, many of the early safety procedures and waste disposal practices were inadequate, and government documents have since confirmed that Hanford's operations released significant amounts of radioactive materials into the air and the Columbia River. The weapons production reactors were decommissioned at the end of the Cold War, but the decades of manufacturing left behind 53 million US gallons of high-level radioactive waste, an additional 25 million cubic feet of solid radioactive waste, 200 square miles of contaminated groundwater beneath the site and occasional discoveries of undocumented contaminations that slow the pace and raise the cost of cleanup. The Hanford site represents two-thirds of the nation's high-level radioactive waste by volume. Today, Hanford is the most contaminated nuclear site in the United States and is the focus of the nation's largest environmental cleanup. The government spends $2 billion each year on Hanford cleanup — one-third of its entire budget for nuclear cleanup nationally. The cleanup is expected to last decades. It turns out that as Krugman would say, the government was not spending nearly enough, and moments ago Governor Jay Inslee said that six underground radioactive waste tanks at the nation's most contaminated nuclear site are leaking.

From Citi's Steven Englander, who confirms what we said previously: the UK is now officially in the hands of the monetary apparatus, which is controlled by, you guessed it, yet another Vampire Squid tentacle.