Archive - Feb 2013 - Story

We warned last week that European markets were beginning to show signs of cracking. European stocks had surged on to new highs while credit markets had decidedly not joined the liquidity-fueled exuberance. Sure enough a few days later and Europe in general is weak, but Italy and Spain are under significant pressure. The last four days have seen the biggest plunge in over six months with the IBEX (Spain -5.7%) and Italy's MIB -6.7%. At the same time, Europe's seemingly invincible OMT-promise-protected sovereign bond market has started to underwhelm. Italian bond spreads are 32bps wider and Spain 28bps wider - the biggest increase in risk in two months. Europe's VIX has surged from 14.5% to almost 19% today in the last 4 days and even Greek government bonds are losing their luster, -6.5% in the last few days. Whether this is exacerbated by European leaders jawboning the strength of the EUR down, or simply we hit the limit on reality amid Italian bank fraud, Spanish political fraud, referenda votes, and macro- and micro- fundamentals snapping; this is the worst performance in Europe in six months. It would seem that if the tail-risks in Europe are starting to re-appear then at least one of the legs of global equity exuberance is starting to break.

In the aftermath of Friday's mediocre jobs report, and while we wait for the USDA to release the latest November foodstamp update which will almost certainly print at a new record high, here is yet another representation of a relationship we have shown on several occasions previously, yet which is always entertaining, and shows just what kind of "recovery" the US is undergoing. Presenting the indexed change of payrolls (green line) and foodstamps recipients (red). No explanation is necessary.

It is not the United States of Europe but the other way around; the Europization of the United States. It is not a new game but a very old game and not played with such fervor in America since Franklin Delano Roosevelt stirred the pot which was done in an attempt to end the consequences of the Great Depression. This bouncing ball is not too tough to follow. The people with money pay higher taxes and then have less money to spend on goods and services. The corporations pay higher taxes and then have less money to spend on acquisitions, dividends or growing their business. The money flows to the people who are not in the middle class but are poorer and it gets spent on the basics of life and not on consumer durables. The rich are poorer, the middle class is poorer, the poor become better off at first and then less well off in the second instance as taxes bleed the entire economy of excess capital.

Gold bullion for delivery in December climbed as high as 1.2% to 5,000 yen per gram on the TOCOM. In ounce terms, the yen fell to 155,180/oz against gold, its highest level since 1980.  According to the data on Bloomberg, the all-time record high for gold priced in yen was 204,850 yen on January 21, 1980. Thus, yen gold remains 33% below the record intraday nominal high from 1980. Given the Japanese determination to devalue the yen to escape deflation, the record nominal high will almost certainly be reached in the coming months. Platinum also climbed 2.7% to 5,130 yen per gram for the same month, the highest level for the most-active contract since May of 2010.

One-stop summary of the key events and issues in the week ahead.

• Euro Tremors Risk Market Respite on Spain-Italy, Banks (Bloomberg)
• Obama Says U.S. Needs Revenue Along With Spending Cuts (Bloomberg) 
• China Regulators Moved to Restrain Lending (WSJ)
• Low Rates Force Companies to Pour Cash Into Pensions (WSJ)
• JAL wants to discuss 787 grounding compensation with Boeing (Reuters)
• Abe Shortens List for BOJ Chief as Japan Faces Monetary Overhaul (Bloomberg)
• Monte Paschi probe to widen as Italian election nears (Reuters)
• Hedge funds up bets against Italy's Monte Paschi (Reuters)
• Spain's opposition Socialists tell Rajoy to resign (Reuters)
• Electric cars head toward another dead end (Reuters)
• BlackRock Sued by Funds Over Securities Lending Fees (Bloomberg)

Slowly things in Europe are starting to go bump in the night again, with the EURUSD down some 150 pips from Friday's multi-year 1.37 high, Spanish bond yields spiking 20 bps to over 5.41%, back over the declining 50 DMA, Italian BTPs getting slammed up some 10 bps to 4.42%, as both Spanish and Italian stocks are sharply down on the day, by 1.2% and 1.9% respectively, following yet another Monte Paschi halt lower earlier in trading. The reason goalseeked by the media for today's weakness is signs of upcoming "political turmoil", namely the escalating Monte Paschi incident out of Italy, which we have been following closely, as well as the Spanish graft scandal, in which the ruling PP party and Mariano Rajoy have been implicated in massive kickbacks, and which may cost Rajoy his leadership at this pace. Of course, none of the data above is new, and neither is France's Moscivi repeating for the second time in a week that the EUR has risen far too high, and to call it catalytic is very naive, but it merely goes to show how the manipulated market decides when and if to actually follow the newsflow. As a result, US futures are pointing to a mildly lower opening, which however may reverse quickly once today's $2.75-$3.5 billion POMO kicks in. Of course, if the Italian political turmoil drags Draghi further into the mud, all bets are suddenly off about Europe being "fixed."

From macro to micro; from momentum to valuation; and from money supply to expectations, the 'new normal' in which investors find themselves is one currently dislocated and 'different' from the past. However, as we have seen all too often in the past, these dislocations do not last forever. And with positioning (here, here, and here) as bullish as its ever been, it seems there is little room for error in economic reality catching up to stocks 'hope'-filled expectations.

While in the past 3 months both the USDJPY and the Nikkei index have soared on the same vague mix of promises (than can never be delivered), and threats (by central bankers, which work only as long as they remain purely abstract and are not acted upon), one security that has barely budged are Japanese bonds: without doubt the fulcrum security that will put a premature end to Abe's latest attempt to reflate an economy, whose total debt is a ridiculous 2000% of annual public revenues, and which will spend half of its annual tax income on interest expense if rates merely double from their record low levels. Until now: Bloomberg reports that Japan's Government Pension Investment Fund: the largest retirement fund in the world overseeing 108 trillion yen ($1.16 trillion), and historically the biggest buyer of Japanese bonds, "will begin talks in April about whether to reduce its 67% allocation to domestic bonds." Read: sell, which may be why we have already seen a rather steep move across the JGB complex overnight, because one the largest player in the space moves, everyone else follows as nobody wants to be the last seller left.

Someone, somewhere will surely blame the upcoming Q1 GDP miss on what just happened in New Orleans.

While it is now unanimous that Solyndra just won the funniest ad of the Superbowl by a mile, while we await for electricity to return to the Superdome (a stadium which has seen some $471 million in taxpayer funds since Katrina, and apparently not nearly enough) as the Boeing battery used to power up Super Bowl 47 is replaced, we wish to bring to our readers this message of supreme ironic poetry delivered by none other than the US Department of Energy.

It's that day again. Some will fast forward through the game and watch the commercials (Top 5 most viral Ads below); others will have a stadium-pal installed early and elasticated waist-bands; and many will win (or lose) a fortune based on any number of random permutations of path-wise dependent scoring. However, presented for your viewing pleasure, the only three infographics needed for today: Of Beer and Bathroom Breaks, Super Bowl Bingo (drinking game), and the History of Super Bowl Betting Lines. Go Niners...

We recently summarized the world's developed markets in one simple table and there was much 'redness' to go around. The following table provides a similarly broad-based view of the world's developing nations. Citi's Early Warning System heat-map provides an at-a-glance perspective of the emerging market currencies at most (and least) risk based on 12 indicators of economic and financial stress. As currency wars migrate contagiously from developed money-printers to developing 'growth engines' the table below suggests Hungary and South Africa at most risk and China and Thailand least.

From Margaret Thatcher's original (now extremely prescient) warning of the European Union's structure creating "insecurity, unemployment, national resentment, and ethnic conflict" to Nigel Farage's recent clarifications on the agonizing direction in which the unelected leadership of the Union are pulling Europe, this brief 3 minute clip draws some significantly eery similarities between the former Soviet Union and the current European Union. Every now and again, a step back to look for context in history is important - as while the Soviet Union was created by armed force, the European Union is being forced by political coercion and economic bullying. Perhaps Churchill summed up best how it should be, "We are with Europe, but not of it; we are linked but not combined; we are interested and associated but not absorbed."