Archive - Mar 2013 - Story

In the upcoming week the key focus on the data side will be on US payrolls, which are expected to be broadly unchanged and the services PMIs globally, including the non-manufacturing ISM in the US. Broadly speaking, global services PMIs are expected to remain relatively close to last month's readings. And the same is true for US payrolls and the unemployment rate. On the policy side there is long lost with policy meetings but we and consensus expect no change in any of these: RBA, BoJ, Malaysia, Indonesia, ECB, Poland, BoE, BoC, Brazil, Mexico.  Notable macro issues will be the ongoing bailout of Cyprus, the reiteration of the OMT's conditionality in the aftermath of Grillo's and Berlusconi's surge from behind in Italy. China's sudden hawkishness, the BOE announcement and transition to a Goldman vassal state, and finally the now traditional daily jawboning out of the BOJ.

As we have been warning for nearly a year, the biggest threat facing China has been the fact that contrary to solemn promises, the problem of persistent, strong and very much relentless real-estate inflation has not only not been tamed but has been first and foremost on the minds of both the PBOC and the local government. After all with the entire "developed" world flooding the market every single day with countless billions in new cheap, hot money, it was inevitable that much of it would end up in the mainland Chinese real estate market. And since both the central bank and the politburo are well aware that the path from property inflation to broad price hikes, including the all critical to social stability pork and other food, is very short, it was inevitable that the issue of inflation would have to be dealt with eventually. Tonight is that "eventually", when following news from two days ago that yet another Chinese PMI indicator missed, this time the Services data which slid from 56.2 to 54.5, the government announced its most aggressive round of property curbs yet. The immediate result was that the Shanghai Stock Exchange Property Index slumped by a whopping 9.3%, the steepest drop since June 2008, and pushing it down to -11% for the year. The weakness also spread to the broader market, with the Composite closing down 3.65% the biggest drop in months, and now just barely positive, at +0.2%, year to date. We expect all 2013 gains to be promptly wiped out when tonight's risk off session resumes in earnest.

Since promises are as good as gold (or better apparently) for the world's central bankers, the BoJ's new man Kuroda dropped those three little words that worked so wonderfully for Draghi back in July. At 1943ET, Kuroda told the world he would do "whatever it takes" to rid his nation of the ravages of deflation. However, unlike the 200 pip rally in EURUSD that Mr. Draghi's soothing words created (and a risk on rally that last for months); it appears the world's investors are a little tired of that ol' chestnut. Since Kuroda opened his mouth and kept promising moar and moar (open-ended buying of longer-dated bonds), the Nikkei has dropped over 100 points and USDJPY has strengthened 60 pips and rising. The question now becomes, what happens if 'whatever it takes' is not enough? Meanwhile the JPY strength is wreaking mild havoc with US equity futures which have dropped 6 points from Friday's close.

So this is what is happening in Oakland, one of the many forgotten about, left-behind corners of America, "Oakland’s crime problems have gotten so bad that some people aren’t even bothering to call the cops anymore; instead, they’re trying to solve and prevent crimes themselves." Since we all know by now the bureaucracy will not be coming to the rescue, the sooner we figure out solutions on our own the better. Welcome to the recovery!

'Buy-and-Hold'; Bonds-Schmonds. Sometimes a longer-term perspective is useful for context. Whether you are a safety-seeking, "some-return-is-better-than-no-return" bond-holder; or a "Jim Cramer said 'all clear' so I'm nuts deep in stocks" wannabe trader; the charts below at least provide from insight into why all that 'crazy' money might prefer the bond market to the stock market. Since rear-view-mirror investing appears the meme of the moment (and hope is now a strategy), it makes one wonder, when fixed income returns average 8.6% per annum for 33 years with a maximum 4% drawdown annually as opposed to stocks with a 8.9% per annum return and four 10%-plus annual drawdowns (and two 50% intra-period collapses within a decade). While we hold no judgment here, arguing that rates are so low they can't go any further is futile (ask Ben and see Japan) and applies just as well to equity multiples, margin expectations, and fundamentals. Context is king, be informed.

"Imagine you have a girlfriend; and she is Italy. You love her dearly, but she is in a coma. She has been sick for a long, long time." Former Economist Editor Bill Emmott's expansive BBC documentary asks where has Italy gone wrong and examines (deep down inside) the good sides about the country as well as the disasters. With the next few weeks/months dominated by talking heads claiming to be experts on Italy, Italian politics, and Italian society; perhaps spending a few minutes on a Sunday night learning as opposed to guessing which blond will pick which buff young man in a reality show (or who Trump will fire) is time well spent (with a big glass of Chianti obviously).

There has been much discussion by the mainstream media of the rise in gas prices since we initially showed the equity market's dependence (or transitory correlation if you are a Keynesian) on this consumer-crushing unintended consequence of the new normal liquification of our economy. However, while most have focused on the absolute levels (as we noted the $3.75-80 Regular appears to be a limiter in recent years), over time this has not been the case. The stagnation of average hourly earnings combined with the price of gas shows why the last two years have not had the consumer-driven surge of the initial 2009 lurch (or the pre-crisis economy). We are trapped in an era when the average hourly wage buys a de minimus amount of energy and just as we saw heading into 2008, this relative price surge is occurring just as the macro-economic data itself is rolling over. This time it's the same - a double-dip in macro surprises driven by relative gas prices.

Should one attribute to malice and Jamie Dimon's bloodthirst what sheer, brutal JPMorganite incompetence can explain far more simply? Read on and make your own conclusion.

My generation, born during or near post World War II, has been quite fortunate. Those of us lucky to have been born in the US during this period hit a sweet spot of both place and history. The economy thrived, standards of living soared and many avoided the numerous wars that dominated the Twentieth Century. Today, the future does not look so bright. Economies are stagnant, standards of living are declining and the threats of war increase. Younger generations will have more difficult lives than my generation. Life has its own ways of ensuring that TANSTAAFL (“There ain’t no such thing as a free lunch”) is enforced. My twilight years now present major challenges. Because high inflation and a market collapse are real possibilities, I (and millions of others who believe similarly) am forced into playing the wildly dangerous game of financial chicken. When we should be enjoying our retirement and grandchildren, government has forced us to take risks that even wild teenagers likely would avoid.

Having trouble deciding whether to join the herd? Unsure if Abe and Kuroda can unilaterally take on the world's central banks? Worried that surging inflation in energy and food costs in Japan will force the BoJ's inflationary resolve to crack? The following flow-chart from HSBC provides an at-a-glance decision-tree for whether JPY weakens to over 120 or strengthens back to 80...

From his perch in the United Kingdom, Alasdair Macleod provides an update on the ongoing economic crisis in Europe, which -- while largely absent from headlines in the US of late - continues to worsen. Due to bloated state-run programs and extreme malinvestment, EU governments find themselves in a box. Economic growth has stalled, and no amount of intervention seems able to get it going again. So in order to keep their economies moving forward, they are becoming increasingly rapacious in extorting tax revenues from wherever they can find them. This, of course, is strangling the private sector. And so a vicious cycle ensues.

Even as the gargantuan $1+ trillion student debt load has been the bubbly elephant in the room that few are still willing to talk about, there have been until now zero opportunities for a the proverbial highly convex "ABX" short in the student debt space. This of course is the trade that was put on by those who sensed the subprime bubble is about to pop in early/mid 2007 and made billions as the yield chasers were summarily punished one by one as first New Century blew up, and then everyone else. Yet while one was able to buy synthetic "hedge" exposure with limited downside and unlimited upside (by shorting synthetic index spreads) in subprime, so far the only way to be bearish on student debt has been to short the equity of various private sector lenders - a trade with very limited upside and unlimited downside, and which in the current idiotic New Normal is more likely to leave one insolvent and crushed in a smoldering heap of margin calls following yet another epic short squeeze as GETCO's stop hunting algo run amok. This may be about to change. As WSJ reports, SecondMarket Holdings, the private-market securities trading firm best known for allowing numerous overzealous fans to buy FaceBook at moronic valuations, on Monday "will roll out a platform allowing lenders to issue securities backed by student loans directly to investors." 

While risk-on has been a successful strategy since September, UBS' Stephane Deo is growing more cautious. The positives of activity improvement, reduction of political risks, and positioning are now considerably less convincing, and Deo is worried about a potential 'pocket of air' in the market in the near future. They lay out five reasons to be concerned from sentiment and valuation to political concerns in the US and Europe along with fundamental macro deterioration.

We are well aware of the infamous French dramatics as the wealthy flee the country over the changing tax structure but few know that Americans renouncing citizenship has tripled in the last few years. As The Telegraph reports, many decide to give up citizenship after tiring of the lengthy US tax return process. Since US tax laws changed in 2008 (all American citizens are required to file a tax return on their world-wide income - even if they have not visited the US for decades), the number of 'renunciations' has risen from 231 per year to 1,781. The process of immigration can be costly (due to the actual tax and legal preparation) but "actually giving up your citizenship is dead easy - once you have an appointment with a consular official, it takes a matter of minutes." One London-based lawyer (where it appears a lot of Americans are immigrating - the 2011 census found 177,185 people living in England and Wales were born in the US) adds that the "US Embassy in London has responded to that demand by streamlining the process."