Archive - Mar 2013 - Story

The fiscal cliff is permanent and insurmountable. It stands at the edge of a $20 trillion abyss of deficits over the next decade. And this estimation is conservative, based on sober economic assumptions and the dug-in tax and spending positions of the two parties, both powerfully abetted by lobbies and special interests which fight for every paragraph of loophole ridden tax code and each line of a grossly bloated budget. Fiscal cliffs as far as the eye can see are the deeply troubling outcome of the Great Deformation. They are the result of capture of the state, especially its central bank, the Federal Reserve, by crony capitalist forces deeply inimical to free markets and democracy. Why we are mired in this virtually unsolvable problem is the reason I wrote this book. It originated in my being flabbergasted when the Republican White House in September 2008 proposed the $700 billion TARP bailout of Wall Street. When the courageous House Republicans who voted it down were forced to walk the plank a second time in betrayal of their principled stand, my sense of disbelief turned into a not-inconsiderable outrage. Likewise, I was shocked to read of the blatant deal making, bribing, and bullying of the troubled big banks being conducted out of the treasury secretary’s office, as if it were the M&A department of Goldman Sachs.

Still think this market is driven by humans? Behold European stock markets this morning as they collapsed into the pre-Daylight-Savings-Time European close and reversed to the second... and then a few minutes later as reality struck, as Nanex points out, HFTs went wild in FTSE and CAC Futures...

Since the second half of 2012, financial markets have recovered strongly worldwide. But this financial market buoyancy is at odds with political events and real economic indicators. In short, we are witnessing a rapid decoupling between financial markets and inclusive social and economic well-being. As a result, the income of the global elite is growing both rapidly and independently of what is happening in terms of overall output and employment growth. Demand for luxury goods is booming, alongside weak demand for goods and services consumed by lower-income groups. All of this is happening in the midst of extremely expansionary monetary policies and near-zero interest rates, except in the countries facing immediate crisis. Structural concentration of incomes at the top is combining with easy money and a chase for yield, driving equity prices upward. And yet, despite widespread concern and anxiety about poverty, unemployment, inequality, and extreme concentration of incomes and wealth, no alternative growth model has emerged.

A little while ago, Paul Ryan revealed his proposal for a US budget titled "the Path to Prosperity" which is a 91-page waste of time, because if America nearly fired more people than were employed as a result of an $85 billion reduction to the increasing US rate of spending, at least according to math and logic-challenged Maxine Waters, Ryan's suggestion to really gut spending by cutting $4.6 trillion from the deficit over the next decade would be Armageddon incarnate as interpreted by the Obama administration. Which, no matter what one thinks of Ryan's political views, is unfortunate as the fundamental ideas contained in the budget are spot on: America has an unsustainable spending problem which, however, simply can not be resolved, period. After all - why bother: Bernanke will fund US deficit spending until the very end. So while we present the budget in its entirety for those who need a handy paperback to print out, below we have cropped the key, read scariest charts, from Ryan's budget. They are self-explanatory.

Since a government austerity plan intended to reduce the risk of a debt crisis and ensure the backing of the ECB took hold last year, Italy's economy has tumbled into one of worst recessions of any euro zone country, and as NY Times reports, among Italy’s estimated six  million companies, businesses of all sizes have been going belly up at the rate of 1,000 a day over the  last year, especially among the small and midsize companies that  represent the backbone of Italy's shrinking economy. With policy "paralysis" now more likely following the recent inconclusive elections, Ken Rogoff warns, "this underscores the likelihood of Italy having a Japan-like decade with phenomenally slow growth," and adds that this raises concerns over "the long-run stability of  growth in the euro zone over all."  Italy’s longstanding problems have grown worse in the last year as tax increases and spending cuts were pressed by Mr. Monti. 50% of small companies - ones with fewer than 50 workers, which constitute the vast majority of Italy’s economy and long provided much of its vitality, that are buckling as banks halt lending and taxes rise - unable to pay their employees on time. With the European Union standing as America's largest trading partner, problems that plague Europe's economy will be felt across the Atlantic.

A record number of Americans may be collecting food stamps, but things for the 1% have rarely been better, as confirmed not only by the now daily tradition of record-er Dow Jones highs, but this time by Lamborghini sales, which according to AP soared by 50% in the US and up by 34% in the recession-riddled Europe.

From Europe's close (and end of POMO) yesterday, US equities went into hyperventilate mode as the rest of risk-assets were decidedly unimpressed. This morning, gold has snapped higher (along with other commodities as the USD deteriorates) to catch up to stocks on the week while Treasury yields continue to slide in a more risk-off manner - or did the dismal data overnight drive expectations for moar QE and buying gold, buying bonds, and buying 'protected' stocks is the order of the day? Once again it appears the equity indices (and in that way the entire US equity market of thousands of stocks) are driven by dips and rips in EUR and JPY.

First it was gas prices, then it was food prices, and now it is the turn of basic utilities to see costs surge by double digits. Dow Jones reports that "Japanese utilities, forced to idle their nuclear power plants over the past two years and facing higher fuel costs due to a weak yen, are now looking to push through double-digit rate hikes for their commercial customers." This means less disposable income, less corporate profits, less monetary velocity, less growth and ultimately less "inflation" in other things such as the much desired stock market, which was supposed to be the wealth effect offset to all staples price increases. At least on paper. Of course we explained on various occasions, most recently here, why in Japan a US-style of wealth effect price substitution would never work. Surely nobody could possibly see this coming - "The action comes at a bad time for some Japanese companies that were hoping the fall in the yen and much-trumpeted efforts by the government to turn round the economy would help improve their prospects." Ah hope - the only strategy left.

While the people of France voted for a wealth distributing tax-the-rich Socialist President, it appears Francois Hollande is not living up to his electorate's hope for change as his policies are increasingly seen as simply more of the same as Sarkozy - “often the line is very fine between the two but Hollande must maintain the idea that he is more left wing.” Hollande’s popularity fell in February, leaving him the most unpopular French leader since 1981, a TNS-Sofres poll showed. More than two-thirds of the French and 44% of those who voted for him say they’re disappointed with him. It seems Socialism is not all it's cracked up to be as "the [European] obligation to cut deficits and spending and make reforms... exactly what Sarkozy had to deal with... annuls all measures Hollande wants to impose to boost jobs and growth." Hollande has restated his promise to reverse the unemployment trend and chanted his three mantras "constancy, endurance and hope," but, as Bloomberg notes, the last five opinion surveys have been disastrous for the self-proclaimed 'normal' president but have no fear as the 'old fuddy-duddy' is going back to the people in a charm offensive.

If there is one firm that would know what the arrival of a Goldmanite at the head of the BOE means for the GBP, and specifically EURGBP, it would be Goldman. Moments ago Goldman's Tom Stolper just poured more gas into the EURGBP "parity" fire, sending the EUR spiking. That said, the logical Stolper-contrarians in us say this is precisely the time to fade the relentless move higher in the EURGBP: history is on our side about 93% of the time. After all, Goldman's prop flow desk is now selling the pair to its clients. This is even as we said to short the GBP with both hands and feet in late November when Carney's appointment was announced: a move that has resulted in nearly a +1400 pip gain in the GBPUSD short. Oh well, time to take profits.

While FX Reserves may not exactly be freely spendable ready cash, they are often used a proxy for a nation that is 'wealthy'. It seems, however, from the following chart that in fact the FX reserves of the world shows a different picture than Americans might like to consider. The highest level of reserves are split between currency manipulators and resource-rich nations. China and Japan top the table, according to Bloomberg, and Saudi Arabia and Russia are rising fast up the league tables of FX horders. Just as notable is that China's FX reserves have swelled to $3.31 trillion at the end of 2012 from $286.4 billion a decade ago, representing a pace of $829 million per day. The problem is that recently China has hardly had the same appetite for the USD it exhibited in prior years. With the world apparently devaluing against a more stoic inflation-anxious China, it would seem Japan's 'horde' will dwindle fast if they ever do anything but jawbone.

Today is the day all Robert Langdon fans have been feverishly waiting for: the 115 voting cardinals of the Catholic church begin today their secret conclave to choose the successor to Pope Benedict XVI. As Bloomberg puts it succinctly, "he who enters the conclave a pope exits as a cardinal" and it is notoriously tricky to try to handicap the papal vote. In processional next steps, the Cardinals will gather in the Sistine Chapel, hailing from as far as the Philippines, and may hold a single vote today with as many as four ballots on succeeding days. Politically, this conclave has been presented as a "struggle between cardinals looking to overhaul the Vatican bureaucracy known as the Curia, and those trying to maintain its influence, according to Vatican analysts. Electing a non-European, while a novelty, would not necessarily presage a change of course for the millennia-old institution shaken by the abdication of German-born Benedict." Realistically, it will be a free for all for the scandal-riven church, and it is very much an open question who the next pope will be. So while we await the puffs of white smoke, courtesy of Bloomberg here are brief biographies of some of the men who may be in the running, based on betting websites and consulting Vatican watchers.

Glorious words in many ways. They begin the preamble to the United States Constitution as America threw off the chains of tyranny and became a country. However it must be said that Americans are not the only “We the People” country on the planet. This declaration is to be found in democracies everywhere and should be cherished and praised as citizens of each nation get to make the choices appended to self-determination. I point all of this out this morning because there is change afoot on the Continent and to not take note of it may well be an expensive mistake. Business of late, business as usual, may not be the business of tomorrow as the citizens of various countries, not in open revolt or not in the streets, are beginning to wave a different banner and it is decidedly nationalistic and a potential new definition of just whom “We the People” are; in fact. Recently, in poll after poll, the citizens of Germany, Britain and other countries in Europe are gathering around their own flags and seemingly rejecting the imposed commonality.

Average daily trading combined volumes on the three main gold contracts on the Shanghai Gold Exchange in the first two months of the year jumped 24% on the year, according to Reuter’s calculations.  "The strong physical demand in China is the main reason behind gold's resilience," a Beijing-based trader told Reuters. Physical demand prospects out of China remain positive in the weeks ahead, UBS AG said  according to Bloomberg. China is very vulnerable to a property crash and its own economic crisis. The Chinese stock market has performed very poorly in recent years and Chinese people realise the importance of gold as a store of value.

The eye of the hurricane over Southeast Europe may soon be shifting, exposing Greece to the same 150 mph gale turmoil everyone has grown to love and expect over the past three years as soon as this month, when a new proposal by Greece is due on how to cut a massive 150,000 public sector jobs: a move which will result in an immediate surge in public unrest, and an exponential jump in strike activity. As Bloomberg reports, "Greece is locked in talks with international creditors in Athens about shrinking the government workforce by enough to keep bailout payments flowing. Identifying redundant positions and putting in place a system that will lead to mandatory exits for about 150,000 civil servants by 2015 is a so-called milestone that will determine whether the country gets a 2.8 billion-euro ($3.6 billion) aid installment due this month. More than a week of talks on that has so far failed to clinch an agreement."