Archive - Mar 2013 - Story

“‘Devaluing a currency,’ one senior Federal Reserve official once told me, ‘is like peeing in bed. It feels good at first, but pretty soon it becomes a real mess.’”

—Francesco Guerrera, The Wall Street Journal, 4 Feb 2013.

One of the often repeated "truisms" of modern economics, is that the advent of central banking, and the end of the gold standard ushered in a far more stable, safe and secure financial system. Facts notwithstanding (because hard as we try, we can't find a historic episode where the entire developed world had to coordinate to fund, guarantee and backstop a $30+ trillion global bail out - using even more money created out of thin air, i.e., debt - to prevent the nearly $1 quadrillion derivative complex from collapsing, not to mention the failure of every single modern financial institution, during the gold standard), the reality is just slightly different. As the following table from Bloomberg's Joseph Brusuelas shows, modern "stabilty" is certainly in the eye of the beholder, in this case manifesting itself in countless periods of uni- and multi-lateral currency devaluation, beggar thy neighbor, and currency, trade, and various other types of war.

In news that is hardly welcome to Chancellor Merkel and her September reelection hopes, German Focus magazine revealed that a substantial 26% of all Germans would back a party that wants to quit the euro. Even more disturbing is that a whopping 40% of all Germans in the prime 40-49 age group are tired of supporting a failed monetary regime and will just say "nein" to the European globalist experiment at preserving the status quo if just given the opportunity. The Italian virus is spreading: the question is which "clown" will show up on the cover of the Economist in six short months, when at least one person will appear on the political scene to take advantage of the populist protest at endless German-backed bail outs, and what as Dylan Grice so eloquently explained earlier, is merely a reaction to central banker central planning manifesting itself in ongoing social breakdown.

While it has been a while since Charlie Gasparino broke anything material, and is why we urge readers to take this news with a grain of salt, the report that CNBC's Gary Kaminsky would be leaving the Comcast channel and his role as capital markets editor and heading to Morgan Stanley as vice chair of its brokerage division would make sense, and would certainly explain the quite amicable relationship between CNBC, its various anchors, and the B-grade brokerage.

With their crackpot monetary ideas, central banks have been robbing Peter to pay Paul without knowing which one was which. And a problem here is this thing behavioral psychologists call self-attribution bias. It describes how when good things happen to people they think it’s because of something they did, but when bad things happen to them they think it’s because of something someone else did....  When we look around we can’t help feeling something similar is happening. The 99% blame the 1%; the 1% blame the 47%. In the aftermath of the Eurozone’s own credit bubbles, the Germans blame the Greeks. The Greeks round on the foreigners. The Catalans blame the Castilians. And as 25% of the Italian electorate vote for a professional comedian whose party slogan “vaff a” means roughly “f**k off ”, the Germans are repatriating their gold from New York and Paris. Meanwhile in China, that centrally planned mother of all credit inflations, popular anger is being directed at Japan, and this is before its own credit bubble chapter has fully played out. (The rising risk of war is something we are increasingly worried about…) Of course, everyone blames the bankers (“those to whom the system brings windfalls… become ‘profiteers’ who are the object of the hatred”).

Departing a socialist regime to avoid paying taxes is not just a French thing anymore: Bloomberg reports that one of the most famous hedge fund managers of the late 2000s, if not so much recently, John "Boricua" Paulson "is exploring a move to Puerto Rico, where a new law would eliminate taxes on gains from the $9.5 billion he has invested in his own hedge funds, according to four people who have spoken to him about a possible relocation." In moving to Puerto Rico, Paulson would merely be the latest person to avoid paying any taxes associated with Paulson & Company: virtually every other investor in Paulson's hedge funds also has no taxes to worry about, for a far simpler reason: taxes are generally incurred on profits, not three years in a row of relentless losses.

The Status Quo is shameless when it comes to hyping the recovery by whatever metric is most positive. Recently, that has been the stock market, but if GDP rises significantly (and recall GDP increases if the government borrows and blows money), then that number is duly trotted out by politicos and Mainstream Media toadies. If we scrape away this ceaseless perception management, we find that legitimate broadbased prosperity is always based on rising employment and increased purchasing power of wages. The phantom wealth that is conjured by asset bubbles vanishes when the bubbles inevitably pop, leaving all those who borrowed against their ephemeral bubble wealth hapless debt-serfs. If prosperity ultimately depends on employment and earned income (wages), how are we doing as a nation? Unfortunately, the answer is "terrible." As a percentage of the population, full-time employment is down. Only 36% of the population has a full-time job.

Over the weekend, FT noted that China’s central bank reported that companies and individuals sold RMB 684 billion ($109 billion) worth of foreign exchange and bought an equivalent amount of Chinese currency in January, a record for a single month. On the chart below, please point out the Chinese "hot-money" inflationary ticking time bomb (hint: highlighted).

Someone is obviously not complying with the central-planner script and rotating fast enough into equities.

Speculative long gold positions, or bets prices will rise, outnumbered short positions by 107,587 contracts on the Comex division of the New York Mercantile Exchange, the CFTC said. Net-long positions fell by 9,012 contracts, or 8%, from a week earlier.  Speculative long silver positions, or bets prices will rise, outnumbered short positions by 18,603 contracts on the Comex division of the New York Mercantile Exchange, the CFTC reported. Net-long positions fell by 3,134 contracts, or 14%, from a week earlier.  Miners, producers, jewelers and other commercial users were net-short 29,183 contracts, down 1,703 contracts, or 6%, from the previous week.

Over the past month the west had its "horsemeat" scare, where horse DNA traces have been found in pretty much everything. It is now China's turn to reciprocate, with 1,200 pigs found in Shanghai's Huangpu River. Why someone would dump thousands of dead pigs in the river? Who knows - we are confident that it is bullish, however, and it is time fro GETCO or K-Hen to do something about this strange reddish color in the futures. It is not helping with confidence in central planning...

In the upcoming week the key focus on the data side will be the US February retail sales figures on Wednesday, which should provide clearer evidence on how the tax increases that took place on January 1 have affected the consumer. In Europe, industrial production and inflation data will be the releases to watch. On the policy side, the focus will be on the BoJ appointments in an otherwise relatively quiet week for G7 central banks. Italy’s newly elected lawmakers convene for the first time on Friday 15 March and the expectation remains that President Napolitano will formally invite Mr Bersani to try and form a new government. He may also opt for a technocrat government. Although clearly preferred by markets, winning political backing may prove challenging.

• One in four Germans would back anti-euro party (Reuters)
• EU Chiefs Seeking to Stave Off Euro Crisis Turn to Cyprus (BBG)
• Ryan Says His Budget Would Slow Annual Spending Growth to 3.4% (BBG)
• Goldman leads decline as Wall Street commodity revenues plummet (Reuters)
• South Korea and US begin military drills (FT) and North Korea cuts off hotline with South Korea (Reuters)
• Karzai Inflames U.S. Tensions  (WSJ)
• Algorithms Get a Human Hand in Steering Web (NYT)
• Meeting Is Set to Choose Pope (WSJ)
• More U.S. Profits Parked Abroad, Saving on Taxes (WSJ)
• Banks rush to redraft pay deals (FT)
• Fugitive Fund Manager Stuffed Underwear With Cash, Fled (BBG)
• Post-Newtown Gun Limits Agenda Narrows in U.S. Congress (BBG)
• China Hints at Shift in One-Child Policy (WSJ)

Just like a week ago, when the futures experienced an unprecedented event when they actually slid overnight (only to recoup all the losses and then some, in the US trading session), so today sentiment appears to be driven by China which over the weekend once more posted its worst economic numbers to start the year since 2009, with purposeful economic weakness telegraphed by the politburo coupled with higher than expected inflation in what is a harbinger to the end of the global reflation, just as it was in 2011. The Shanghai Composite closed down 0.3%, while the Nikkei was in a world of its own, closing up 0.5%, tracking nothing but the USDJPY nowadays. Additionally, while the US stock market took Friday's downgrade of Italy in stride, and in fact Getco's algos used it to catalyze a late day ramp to close the DJIA just around the "psychological" 14,400 (just like Dow 36,000 is apparently psychological), Europe is less sanguine, and so far Italian bonds have been pressured compared to the rest of PIIGS, rising with yields rising to 4.65%, hitting 4.694% earlier. That's ok though: as we reported over the weekend, there is nothing for widening BTP spreads that a few hundred billion in Fed reserve reallocations to European banks can't fix. And with no macro events or news on today's calendar, perhaps the most notable event so far is the lack of the overnight ramp, which we have all grown to love and expect almost as much as the mysterious 3:30 pm intraday clockwork DJIA ramp.