Archive - Feb 2013 - Story

We would assume that tomorrow's ECB meeting will be the usual smug gloating by Draghi of how the market has turned around so exuberantly and implicitly that means all is well. While Willem Buiter just took that complacent perspective to task, we thought the following six simple charts of Good (well not terrible), Bad, and Ugly macro-economic data would simplify reality...

There have been several articles as of late discussing that the next great secular bull market has arrived. However, the reality is that this cycle is currently unlike anything that we have potentially witnessed in the past.  With massive central bank interventions, artificially suppressed interest rates, sub-par economic growth, high unemployment and elevated stock market prices it is likely that the current secular bear market may be longer than the historical average. No matter how you slice the data - the simple fact is that we are still years away from the end of the current secular bear market. The mistake that analysts, economists and the media continue to make is that the current ebbs and flows of the economy are part of a natural, and organic, economic cycle. If this was the case then there would be no need for continued injections of liquidity into the system in an ongoing attempt to artificially suppress interest rates, boost housing or inflate asset markets. From market-to-GDP ratios, cyclical P/Es, misconstrued earnings yields, and the analogs to previous Fed-blow bubbles, we appear near levels more consistent with cyclical bull market peaks rather than where secular bear markets have ended.

Citi's Willem Buiter sums it all up: "...the improvement in sentiment appears to have long overshot its fundamental basis and was driven in part by unrealistic policy and growth expectations, an abundance of liquidity and an increasingly frantic search for yield. The key word in the recovery globally, and in particular in Europe, growth is fragile. To us the key word about the post summer 2012 Euro Area (EA) asset boom is that most of it is a bubble, and one which will burst at a time of its own choosing, even though we concede that ample liquidity can often keep bubbles afloat for a long time." His conclusion is self-evident, "markets materially underestimate these risks," as the EA sovereign debt and banking crisis is far from over. If anything, recent developments, notably policy complacency bred by market complacency, combined with higher political risks in a number of EA countries highlight the risks of sovereign debt restructuring and bank debt restructuring in the EA down the line.

Just as markets can stay irrational longer than traders can stay solvent, so Byron Wien warns all the market-watching self-confirming bulls that "markets slough off bad news until they don't." Blackstone's top-man fears the "oblivious markets" are missing the point that nothing has been solved and that a "big battle between entitlement cuts and raising the debt ceiling" is coming. Shrugging off the anchor's insistence that earnings have been 'pretty good', Wien states reality as expectations are rolling over and performance following. With people complacent and investors euphoric (ignoring European risk re-emergence and depression and Middle East tensions), Wien's brief clip concludes with his expectation of a 200 point correction in the S&P 500 in H1 2013.

While Japan's recent attempt to massively reflate and break out of its "liquidity trap" - an artificial construct to explain what happens when an artificial model, created by a flawed and artificial economic theory explodes in a singularity of Econ PhD idiocy leaving billions of impoverished people in its wake, is nothing new, there are those who are rather skeptical this latest attempt to achieve what Japan has not been able to do in over 30 years will work. And while one can come up with complicated, expansive, verbose theories based on Keynesian DSGE models and other such gibberish, why this time will be different for Japan, there is a very quick and simple argument why it won't.

Compared to previous V-shaped recoveries, this one is not looking too rosy. From consumption to GDP, and from retail sales to consumer sentiment, the following charts show how we are doing in context. So, the next time someone on TV tells you how great we are doing, perhaps a glance at these charts will flush some of the recency bias away. There is one bright shining 'better than any other recovery' segment though... one that is dominated by record levels of stuffed channels - can you guess?

“Facts do not cease to exist because they are ignored.” – Aldous Huxley

The entire system is corrupt to its core. Both political parties, regulatory agencies, Wall Street, the Federal Reserve, and mainstream media are participants in this enormous fraud. They grow more desperate and bold by the day. The lies, misinformation and propaganda being spewed on a daily basis become more outrageous and audacious. They are using the Big Lie method on a grand scale. They frantically need to lure the muppets into the stock market and the housing market to keep the game going a little longer. You can sense we are reaching a tipping point. The system they have created is mathematically unsustainable. Therefore, it will not be sustained.

The US equity market continues to boldly go where no other market is willing to go (Dow outperforming EuroStoxx by 850bps this year). European stocks and bonds (+30-45bps) are down notably on the week (and year in some cases); Treasury yields are 4-6bps lower on the week; the USD is up 0.6% (as EUR bleeds a little lower into tomorrow's ECB); and Gold is up 0.6% (oddly with the USD) on the week; but US equities are unchanged with Staples and Industrials holding gains on the week. Today saw credit markets and treasuries pushing notably risk-off as stocks oscillated around unch on the week - pushing to the day's highs into the close on the back of yet another vol-selling ramp. Equity volume was average and trade size was lower than average as cash S&P and Dow managed small gains and Nasdaq a small loss as AAPL gave back its 'buyback rumor' gains. We've seen this EUR-USA disconnect before...

The most vocal justification provided for the disappointing Q4 GDP print by the mainstream was an increase in US government "austerity" resulting in a decline in the government contribution to the economic bottom line in the last quarter (or first fiscal quarter of 2013). Ironically, both total spending and total debt issuance in the past quarter increased, which means that far from being austere, the US actually spent more, not less, i.e., the opposite of austerity. And while it is true that Defense spending declined by a tiny amount in the past quarter compared to the year ago, it was more than offset by a surge in Medicare and Medicaid, as well as Social Security, or, as they are better known, welfare. And, as the CBO yesterday showed, these two components of US spending, which together account for half of all US spending and which couldn't be funded by all US revenues even if the government spent $0.00 for all other programs, which will soar in the coming years as US society ages, as more workers retire, and as more are reliant on Uncle Sam for the payment of every bill. So the next time someone say that the US has a defense spending problem and nothing else, show them this chart.

Presented with little comment aside from noting that the only time stocks have been this 'euphoric' was right before the collapse in 2000 and right before the collapse in 2008.

Yesterday we had our 15 minutes of fun with the CBO's latest budget forecast, which, while wrong as always, provided the mainstream media with its dose of propaganda optimism, by "forecasting" that the baseline 2013 budget deficit will be some $845 billion, well below the $1+ trillion deficit in 2012 (and quite a bit above the CBO's last year 2013 deficit forecast of $585 billion). It will be higher. And we know that not only because the CBO is a complete and utter failure when it comes to predicting the future (which as Rajoy would say would be "just as forecast, except for everything that does happen"), but because earlier today the Primary Dealers that make up the Treasury Borrowing Advisory Committee (a topic we have written extensively about in the past), released their own 2013 budget deficit forecast. The picture there is far less optimistic: the median estimate is some $929 billion, however it is the upside range that is where reality lies, and this number is, according to the likes of Goldman and JPM (who head the TBAC) as well as the 18 other Primary Dealers, as high as $1.037 trillion.

Some phrases are endowed with immediately recognizable symbolism.  When we hear them, we instantly know who and what the phrases are referring to, and can even gain a greater depth of understanding to a particular situation just by applying them. Throughout history there have always been people who were right, and usually a “majority” that were wrong, on any single issue.  Defenders of institutionalized ignorance argue constantly that truth is “relative”, and that they should not be criticized for having their own "opinions".  They use this relativism as a cover for their unwillingness to admit a lack of knowledge. What they fail to understand is that their “opinions” were never theirs to hold.  What they believe has merely been conditioned into them.  They are willing to embrace the system no matter how unjust, because their entire identity is predicated on its continued existence. We call them sheeple... Sheeple are puppets in the game of political reconstruction, and their job is to cheerlead the establishment and to drown out all honest voices.

Both the recent increase in interest rates and renewed questions about the duration of QE3, sparked by the release of the December FOMC minutes, have raised concerns about a 'Great Rotation' out of credit and into stocks. Barclays notes that the story goes something like this: negative total returns in fixed income and increasing equity prices will drive investors to sell the fixed income assets they have accumulated over the past several years and buy stocks. This “Great Rotation” will force investment grade corporate spreads wider. However, in nearly 100 years of data, Barclays finds no evidence of a period when rates rose, spreads widened, and equity returns were positive. Risky assets are generally correlated. The few times that higher rates were accompanied by wider spreads happened in the 1970s and early 1980s, when inflation was accelerating. In each of these periods, equity prices fell sharply. As we have been warning, credit spread deterioration has tended to front-run equity weakness (with some false positives) but never with the divergence remaining consistent as a 'rotation' would suggest.

Some thought the irony of a Treasury Secretary who cheated on his taxes was extreme but Germany has gone one better as the nation's Education Minister has just been stripped of her PhD due to plagiarism. As Spiegel Online reports, the University of Düsseldorf has revoked German Education Minister Annette Schavan's degree because "she systematically and deliberately presented intellectual efforts throughout her entire dissertation that were not her own." As such, she was guilty of "intentional deception through plagiarism." Schavan is yet to resign from Merkel's Cabinet. What next? A skeet-shooting gun tzar, a job tzar responsible for thousands of jobs losses while in the private sector, or a Nobel Peace Prize winner building a drone army.

While it is a time-honored tradition that every single person who worked with Tim Geithner, usually on spotless terms, never daring to say one word out of place for fears of offending the former Treasury Secretary and jeopardizing their government salary, has upon exit from the public sector penned a book bashing none other than the Tax-challenged former head of the New York Fed (whose leaks of imminent Fed activity will never be investigated by any US judicial body), it is certain that Tim Geithner's upcoming book will have a different subject. And since the centrally-planned US population is always glad to help out with ideas, today's key trending hash-tag in twitter is none other than #geithnerbooktitles, which as the name implies, is the collective twitter subsonciousness' proposal for what Timmy's new book should be called. The real time list is presented below. Readers are naturally encouraged to provide their own suggestions.