Archive - Apr 16, 2013 - Story

It is no surprise that pension funds in the US are significantly underfunded (median 72% funded). California Public Employees’ Retirement System (CALPERS), specifically, is about 26% short of meeting its long-term commitments. Like most major pension funds, it uses smoke-and-mirrors to avoid this yawning gap by smoothing over a long enough timeframe where 'hope' for growth in assets triumphs over the reality of liabilities (through a 'rolling' 15- or 30-year window - that therefore never comes due). However, under a new plan proposed by CALPERS' chief actuary, they will shorten the horizon from 15 to 5 years and aim for a specific date 30 years from now to be 100% funded (instead of a rolling hope-driven horizon). The impact of this, as Bloomberg reports, may mean California taxpayers municipal pension contributions will rise as much as 50%. "This is clearly the right thing to do," notes the fund's CEO, "as it will reduce the risk of the system," though we suspect the 'system' may just get a little upset at having to face this 50% 'tax-hike'.

Panic, depression, rage, suicidal ideations: watching the US mainstream media, one would think that these are the prevailing sentiments among those who unlike the prevailing "developed world" speculative class, are invested most heavily in physical old - Indians, who collectively comprise the largest end-demand consumer segment for gold products. One would be very wrong. Because while apparently it is incomprehensible to the "sophisticated" financial crowd in the US that someone may have conviction in their beliefs, and not just lunge from extreme to another, merely riding momentum and technicals like so many "professional" investors, Indians are doing precisely what a buyer should do when the price of the desired product plunges: doubling down, literally. Bloomberg reports of the immediate aftermath to the past few days' gold plunge: "Gold buyers in India, the world’s biggest consumer, are flocking to stores to buy jewelry and coins, betting a selloff that plunged bullion to a two-year low may be overdone." Wait, so instead of jumping out off high buildings, Indians are being cool, calm and collected and... buying more? Unpossible. Do they not get CNBC in Mumbai? Apparently not: "My daughter is just six months old, but I think it is never too early to buy gold,” said Sharmila Shirodkar, a 28- year-old housewife, while displaying a new pair of earrings she bought from a store in Mumbai’s Zaveri Bazaar. “I had been asking my husband every day if prices will go down more. I couldn’t wait anymore.”

President-elect Nicolas Maduro has stern words for his opposition, Henrique Capriles, who lost by an apparent 1.8% of the vote (the closest margin in 45 years) and is demanding a recount. Capriles is urging his supporters to take to the street tomorrow to push for the recount, but Maduro warned doing so is a "death wish," as Bloomberg reports, he added, "going to downtown Caracas will fill it with blood and death." With little to lose in this zero-sum game, the protests have already turned deadly with 61 injured and 7 dead. The government's refusal to complete the recount is polarizing the country, "if supporters lose faith in formal politics, the violence will become unpredictable." The images and clips below suggest things are escalating rapidly as Maduro has called the election a choice between capitalism and socialism warning Spanish corporations such as Repsol that they could face 'exemplary action' from his government. The violence of the 2002 coup against Chavez is fresh in people's mind, but today's situation is far more worrisome since the relative legitimacy of Maduro is less clear.

Security expert Bruce Schneier’s key message is to "empathize, but not be terrorized." This is the same sentiment as Benjamin Franklin 250 years ago when this wise founding father stated:

This is as true today as it was at the time of the Revolutionary War.

"Gold has become much more affordable in recent days as the price has collapsed. Such a collapse is unpleasant, but not cause for concern," advises Dylan Grice. "Gold remains durable," as a source of protection from loss of confidence in the system, and, he adds "a correction was overdue. Now, the gold market has become healthier." Critically, Grice warns during this interview with Finanz und Wirtschaft, "gold will not protect against a crash in the financial markets, it showed 2008," since if many investors simultaneously urgently need cash, they sell everything they have, including gold. However, Europe is a time-bomb, China's credit bubble is ow where the US was before the financial crisis, and while inflation may not be an imminent threat (and likely shuffled more gold holders out leaving "a more stable investor base,") Grice concludes, "Gold endures. If confidence in the currency is lost, or in the bond market; Gold is a safe haven." There are good reasons to own gold. And to buy gold, there is now a reason more than a week ago: It's 30% cheaper.

"In order for central banks to achieve their ultimate economic objective - which is growth and jobs - they have to push investors into taking more risk than is justified," is the somewhat chilling warning that PIMCO's Mohamed El-Erian gives in this excellent interview with the WSJ. "Central banks are operating through the wealth effect and animal spirits," El-Erian says peeling back the truth onion, as they prop up asset prices to "artificial levels, in virtually every market." Worries over the central bankers of the world withdrawing easy money policies too early are "unwarranted," he notes, adding that he suspects, "they will most likely stay too long and they will consciously make that mistake." Critically, though, he sends a message that appears to fit with many of our recent discussions (most recently here) that "if these levels aren’t validated by the fundamentals, then investors will get hurt."

Whether by intent or good fortune, gold's plunge in the last few days has reduced its appeal as a store of wealth and spurred the more central-planner-biased view that the US Dollar is the 'safest' place to deposit your hard-earned after-tax wealth. However, as Cypriots learned the hard way, trust in the entire system depends on the counterparty (in the case of bank deposits, you are implicitly lending your money for no return to a highly-leveraged entity) covered by an FIDC guarantee. As the following infographic makes very clear, that level of trust is remarkable when the reality is that gold is an asset without any counterparty risk and without any implied risk.

Yesterday we got a flashback of 9/11, and now the Anthrax scare is back. From @911Buff

LETTER ADDRESSED TO A U.S. SENATE OFFICE INTERCEPTED AT U.S. CAPITAL, TESTS POSITIVE FOR RICIN POISION.
POISON LETTER WAS SENT TO SENATOR ROGER WICKER FROM MISSISSIPPI AT THE CAPITOL. FBI INVESTIGATING.

Ricin's toxic history is long and illustrious: starting with the death of Bulgarian dissident journalist Georgi Markov, using the infamous KGB umbrella, and most recently used by Walter White (unsuccessfully) to eliminate the meth dealing competition.

The last decade has seen significant changes in media and communication. In a world where there is an ever louder cacophony of news sources competing for our attention, any one particular story has to be communicated at a particularly high volume if it is to attract notice. UBS' Paul Donovan warns that this perhaps gives a tendency to sensationalism. For financial markets, Donovan notes, there is a risk that these changes in the world of media will impinge on the calm and reflective world of economics. Economists rely on sentiment data as a leading indicator for future economic trends. If individuals are overreacting to events relative to the past, however, sentiment may not be as useful as a barometer of future economic activity. In the US a certain economic hysteria seems to be developing, amongst consumers in particular (especially compared to Europe) and Donovan suggests investors would be wise to treat US sentiment data (particularly consumer sentiment data) with some caution as American investors appear to react more strongly to the underlying economic events.

Today's bounce back in gold prices is fading into the close and as Barclays Suki Cooper notes, despite some physical demand response to lower prices, it has not been sufficient to combat the overall decline. In the absence of support from physical buying, where does fundamental support materialize? Should gold just put on its commodity hat, instead of its increasingly more popular currency one, its cost of production should provide some guidance.

By now regular readers should be aware that one of our favorite metrics on the state of not only the economy, but corporate viability in the New Normal centrally planned age, are not fudged, manipulated earnings which always find a way to "beat" downward revised expectations, not even free cash flow (which in far too many cases has ceased to exist), but capital expenditures for two reasons: i) it number can not be fudged, adjusted, recasted or in any other way modified, and ii) it represents the managements' own view of what the growth prospects of the company are. The logic is simple: if management itself is not confident on growth prospects, it will not replenish its asset base (already at a record old age across the world) and will not invest in projects that have a high hurdle rate but only after several years of gestation. Instead, management will merely opt to use the company as a cash cow in the here and now, extracting as much shareholder value is possible with dividends and buybacks while the future viability of the company... well, that can be some other management team's concern.

Yesterday's high volume dumpfest in stocks - its biggest drop in 5 months - is followed by a considerably smaller volume pumpfest that elevates the S&P by its 2nd most of the year (2nd only to the opening day of the year). The 'excessive' grab for protection yesterday that took VIX above 17% was smashed into the open and provided the ammo to leak stocks higher all day (VIX fell 3.3vols back under 14% - the biggest VIX drop of the year). The critical level for the bounce appeared to be the pre-Boston drop and every major index managed to regain it - with the Trannies leading the way. S&P futures regained 60% of the Friday-to-Monday slump, gold regained around 25% of its drop, and 10Y yields rose on the day, unwinding around 35% of the rally in Treasuries. EUR strength (and broad-based USD weakness) provided some impetus for algos to lift stocks. All-in-all, today's lower volume, lower average trade size move is not surprising and the coincident close of the S&P at around yesterday's VWAP (and lesser follow-through on other risk-assets) suggest this is more a bounce than a renewed uptrend for now.

That the IMF is the most unwavering optimist despite fundamentals, facts and reality has been well-documented over the years. For those who still haven't seen the agency's perpetual upward bias in forecasting world growth, a quick scan of the charts below will cement the understanding that all the Washington-based serial bail-outer of insolvent countries is, is a dispenser of optimism and whose agenda is simply to preserve confidence that all is still well. The charts show how just over the past year's six outlook revisions, the IMF has been forced to downgrade, with quarterly precision, its overly optimistic forecast for virtually every part of the world, from the US, to the Euroarea, to China, and of course, the entire world: the black line is the most recent revision set - it also happens to be the lowest one. However, one chart which deserves particular attention not because it is accurate, but because the rate of deterioration is truly troublesome, is the IMF's view on global trade volume of goods and services. It is here that one can clearly see the disastrous impact of global central bank micro-mismanagement, capital misallocation and central planning. In short: global trade is collapsing - even from the point of view of one of the staunchest macro optimists - at a rate unseen since the Great Financial Crisis, and the Great Depression before it.

Presented with no comment.

In 1996 it was Alan Greenspan with his "irrational exuberance" call, is Janet Yellen sending the same message, as she warns...

• *YELLEN SEES SIGNS `SOME PARTIES ARE REACHING FOR YIELD'
• *YELLEN SAYS LOW INTEREST RATES MAY PROMPT `TOO MUCH LEVERAGE'

Did the Fed's most dovish member, and likely next chairperson just suggest that, while 'lower for longer' rates will continue, that stocks and high-yield credit look a little more than frothy.