Archive - Mar 2013 - Story

GBPUSD (Cable) just cracked back below 1.50 and is trading at its lowest since July 2010 as The FT reports that it appears George Osborne (British Chancellor) is paving the way for Mark Carney (Bank of England governor) to follow the so-called 'Merkel-Draghi wager' that Europe is dangerously betting on. Instead of following business secretary Vince Cable's proposal of a new program of spending on schools, roads and housing – funded by extra borrowing - Osborne will use his Budget on March 20 to reinforce his message of “fiscal conservatism and monetary activism” by clarifying how the government intends to use monetary policy to get the economy growing again. Treasury officials are discussing proposals to change the remit of the bank - which could include giving the monetary policy committee greater time to bring inflation back to the 2 per cent target, giving the BoE a Federal Reserve-style dual mandate to target both employment and inflation, and even targeting cash spending in the economy rather than inflation. It would appear our short Cable trade continues to do well as Carney's arrival heralds more aggression in the global currency wars.

Starting at 1147ET, Rand Paul began his James-Joycean discussion on US-based Drone strikes, six hours later (and with some minor aid from Sen. Mike Lee (R-UT) and Sen. Ted Cruz (R-TX)), he is still going. Have you ever felt so strongly about something that you were willing to talk about it for over six hours? From Cruz's note that today is the 177th anniversary of the fall of (or stand at) the Alamo to Paul's rhetorical (we think) question to the President: "Are you going to just drop a hellfire missile on Jane Fonda?" We suspect the night is yet young as the snowquester continues.

The people of Spain are prisoners of an economic adjustment that looks like something dreamed up by Torquemada.  A lot of the recent compensation decline had to do with public sector workers (who export nothing) and not private sector ones. Is this a sustainable way to regain competitiveness? Torquemada the Inquisitor would be impressed with the pain that Spain is inflicting on itself. The bad news for Spanish labor markets isn’t over: most measures of Spanish competitiveness show that only half the gap has been closed vs Germany. I don’t see how this can be sustained indefinitely, even with the rally in Spanish sovereign and bank spreads, and with looser fiscal policy sanctioned by the EU. Without a true fiscal transfer union in Europe, caveat emptor in its Periphery, unless prices for stocks, bank loans and real estate are sufficiently cheap.

It has been several weeks since the name Monte Paschi, likely the most bailed out Italian bank in history, not to mention the oldest bank in the world, graced these pages: with the Italian elections now over and BMPS' political utility as leverage against Italy's Democratic Party finished, we expected that the next time we would read, and write, about it would be the next time it would need a bailout (its fourth in the past four years) sometime in the next 3 to 6 months. Sadly, Monte Paschi is squarely back on the front page following news moments ago that David Rossi, the head of communications at the bank, committed suicide by jumping off the building.

Another day, another highest ever close for the Dow. However, away from the silliness of that index, the S&P scraped a small gain and the Nasdaq a small loss as volume and the day's range was its lowest in two weeks. Treasuries were weak, adding around 3-4bps on the day (10Y 1.94%), now up 10bps on the week - catching up to equities. The S&P was unable to get away from its VWAP today and churned as HYG (high-yield credit) closed red and VXX (vol) closed green in the face of equity's positive drift. Silver jumped 1.25% on the day (and Gold about half that) back over $29 in the face of USD strength (driven mostly by JPY weakness). It seemed today was a catch-up day for the rest of risk-assets as arbs dragged bonds and FX carry markets up towards equities. Spot VIX hardly moved from its 13.5% opening as it is quite clear protection of gains as opposed to adding is the name of the game here for now.

In official testimony before Congress in December 1912, just three months before his death, J.P. Morgan stated quite plainly: "[Credit] is not the money itself. Money is gold, and nothing else." Of course, this testimony came only 253 days before H.R. 7837, better known as the Federal Reserve Act, was introduced on the floor of Congress. The Federal Reserve Act went on to become law and pave the way for the perpetual fraud of fiat currency which underpins our modern financial system. And if unbacked paper currency isn't bad enough, we award dictatorial control of the money supply to a tiny handful of people, and then simply trust them to be good guys. Owning gold is the same as voting against this system, turning your paper currency into something that they cannot inflate or conjure out of thin air. Yet there's one problem.

While it is widely assumed that the too-big-to-fail banks in the US (and elsewhere) are beyond the criminal justice system - based on simple empirical fact - when the Attorney General of the United States openly admits to the fact that he is "concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them," since, "it will have a negative impact on the national economy, perhaps even the world economy," one has to stare open-mouthed at the state of our union. It appears, just as the proletariat assumed, that too-big-to-fail banks are indeed too-big-to-jail.

With the Fed pumping $118 million per hour into excess (and fungible) reserves into the banking system, the market has once again front-run the exuberance expected from the CCAR (or bank stress tests). Sadly, just as we saw last year, the 'hope' priced into US financial stocks is absolutely not priced into US financial credit markets and the strange case of deja vu all over again that we saw in last year's stress test makes us wonder why all those professional investors aren't snapping up the 'cheap' debt of the banks - unless they are well aware of reality. Of course, as we noted last year, the combination of pure economic guesswork and financial analysis leaves belief in the Stress Tests a total 'act of faith' and it seems, once again, credit markets don't believe.

Another Beige Book comes and goes providing little real color as to anything useful about the real world. The excessive use of words synonymous with 'mediocre' appears to be the best we can do (on a $1 trillion deficit?) - but of course, the Dow is still near all-time highs...

• *FED SAYS ECONOMY GREW AT 'MODEST TO MODERATE PACE' IN FEBRUARY
• *FED SAYS 'MANUFACTURING MODESTLY IMPROVED IN MOST REGIONS'
• *FED SAYS SEVERAL DISTRICTS REPORTED 'RESTRAINED HIRING'
• *FED SAYS MOST DISTRICTS SAW MODEST PRESSURES ON PRICES
• *FED SAYS 'WAGE PRESSURES WERE MOSTLY LIMITED'

Of course, the spin will be, at least it's not bad... the S&P is 3 points off the highs, BTFD. Perhaps of most note, though: "Many District contacts commented on the expired payroll tax holiday and the Affordable Care Act as having restrained sales growth."

During the Great Depression, there were countless suicides. People jumping out of buildings because they lost everything and could not face a future that was destitute. The photographs of such scenes will live forever. The same is taking place throughout Southern Europe today and it is a cry for fiscal responsibility upon government. In Italy, just since the start of the year, 23 entrepreneurs have committed suicide. Politicians are responsible for these economic declines.

Updated for Krugman's sociopathological response

Niall Ferguson "In my view Paul Krugman has done fundamental damage to the quality of public discourse on economics. He can be forgiven for being wrong, as he frequently is--though he never admits it. He can be forgiven for relentlessly and monotonously politicizing every issue. What is unforgivable is the total absence of civility that characterizes his writing. His inability to debate a question without insulting his opponent suggests some kind of deep insecurity perhaps the result of a childhood trauma. It is a pity that a once talented scholar should demean himself in this way."

Steven Rattner, investment banker and former member of the Obama Administration, is terrified that under a proposed law companies will be able to raise money without investment bankers: "most troublesome is the legalization of 'crowd funding,' the ability of start-up companies to raise capital from small investors on the Internet..." This is absolutely, classically representative of the technocratic arrogance of the Obama Administration and the investment bankers that inhabit it. Here are three quick thoughts...

As we recently noted, despite the incessant chatter that the worst is behind them and the unending belief that if European politicians repeat a lie often enough it will become truth, the following chart perhaps better than many others shows the sorry state that exists in Europe's core and periphery - no green shoots, no second-derivative shifts, and only the 'Merkel-Draghi' wager holding things together. And despite US equity strength, European markets disappointed today with EURUSD back under 1.3000, European stock indices closing red (not holding US equity-driven gains), and Italian and Spanish bond spreads leaking wider into the close (about 10bps off their intrday tights).

Hauser's law contends that Federal tax revenues rarely rise above 20% of GDP, regardless of where nominal tax rates are set.  The implicit dynamic here is that when taxes exceed 20% of GDP, participants modify their behavior to lower their taxes. Corporations will shift operations overseas. Some high-wage earners will simply work less, reducing their income to lower tax brackets. Small business owners will decrease their compensation, cut back their workload, or simply bail out. Others will leave the high-tax market and slip into the cash/informal economy where the tax rate is zero. In a $15 trillion economy, this suggests the maximum Federal tax revenue that can realistically be collected is around $3 trillion. Currently, Federal tax revenues are around $2.5 trillion, and Federal spending is about $3.8 trillion. That leaves a $1.3 trillion deficit that is filled with borrowed money. Tradeoffs will have to be made. That is the essence of adulthood. Too bad we've become a nation of spoiled adolescents.

When a month ago we wrote "It's Deja Vu, All Over Again: This Time Is... Completely The Same" as the endless din over some non-existent "Great Rotation" had the TV anchors on the financial comedy channel giddy with excitement, we said one thing, when we compared the current environment with its carbon copy observed back in 2011: "Fund Flows into equities were unstoppable. Yes - that was 7 consecutive weeks of major equity inflows into stocks... back in January 2011." Moments ago ICI just released its latest weekly US equity mutual fund flow data for the week ended February 27. We can now officially end the 2013 version of the "great rotation" myth because we just got our first outflow, after how many weeks of inflows? That's right: seven. Just like in 2011.