Archive - Apr 2013 - Story

As we have discussed numerous times over the past year, there is a quiet movement among the world's central banks to diversify their reserves away from the pejorative USD. Whether it is direct trade linkages, hording physical precious metals, or simply buying foreign sovereign debt, there is a trend emerging. The latest defection, as BusinessWeek reports, is Australia's plan to invest about 5% of foreign currency reserves in China. The decision "represents the first time that the RBA will have invested directly in a sovereign bond market of an Asian country other than Japan," the country's deputy governor noted, adding that this step was an "important milestone" to "stronger financial linkages" leaving Australia "better positioned to benefit from the shift in global economic growth towards Asia." Of course, palling up to its closest trade partner is a big driver, but in a somewhat barbed comment on the strength of the AUD, Lowe noted, "quantitative easing that has taken place in a number of countries is having a significant effect on exchange rates of freely floating currencies... which is clearly making for difficult conditions in certain parts of the Australian economy."

This may be a trick question.

While immediately after earnings, we were treated to a plethora of self-justifying talking heads exclaiming how wonderful the worst news was, how positive the future looked, how leveraged dividends were great, and how awesome iPhones 5S sales will be inevitably; it seems the market (which one bright chap noted 'must know something' when the stock was soaring) is now testing its recent lows... The selling appears to have started once Tim Cook began pitching the future like a European politician and bitching about the competition as opposed to discussing the current state of affairs. AAPL has dropped almost 9% from its overnight highs and is near 17 month lows.

So much for the great American CapEx recovery. Moments ago the Census department released the March Durable Goods report, thanks to which one can lay to rest any hope of a recovery in the US economy, with the headline number printing an absolutely abysmal -5.7%, an epic swing from the +5.7% (revised lower of course to 4.3%) in February, and confirming the recovery is dead and buried. Although we are confident the propaganda spin is just waiting to be unleashed: after all it is possible that March weather was both too hot and too cold, thereby making the number completely irrelevant - after all it is always the inclement weather's fault when the economy does not act as predicted by some economist's DSGE model of reality and stuff.

While precious little space has been dedicated in the US media to what remains an uncontained epidemic of the H7N9 bird flu in China, cases continue to spread even as the number of deaths mount, taking at least 22 reported lives at last check. Things just got from bad to worse, as the bird flu is now following in the footsteps of the 2003 SARS breakout, with the first reported case outside of China hitting newswires overnight.

• The Inland Empire bubble is back: BMW to Amazon Space Demand Spurs Rush to Inland Empire (BBG)
• Tamerlan Tsarnaev was on classified government watch lists (Reuters)
• Brothers in Boston Bombing Case Said Drawn to Radicalism (BBG)
• Germany Spurns Calls to Loosen Austerity Stance (WSJ)
• Spain poised to ease austerity push (FT)
• What ever happened to France's voice in Europe? (Reuters)
• U.S., South Korea Reach Nuclear Deal (WSJ)
• U.S. Sees No Hard Evidence of Syrian Chemical Weapons Use (BBG)
• RBA Set to Invest Foreign Currency Reserves in China, Lowe Says (BBG)
• FedEx Wins $10.5 Billion Postal Contract as UPS Shut Out (BBG)

When it comes to Italy, the market may have priced in every possible favorable outcome (the ECB and Kuroda will take care of the rest), but the country still has no Prime Minister and its economy continues to be in freefall with record unemployment and ever higher bank non-performing loans month after month. And while it may have elected a new figurehead president after 6 attempts last week, the choice of Prime Minister will hardly be as simple, especially since as the WSJ reports, this will likely be Enrico Letta, deputy of the Democratic Party (which as a reminder is in complete chaos following last week's internal coup and the resignation of its head Bersani over the weekend), at a time when Berlusconi's PDL lead in the polls continues to increase. Why the Bunga veteran would agree to a premiership by his opponents remains unclear, and with a parliamentary vote coming, it is doubtful just how smooth the approval process will be in a country best known for its dysfunctioning political process.

It is one thing for the market to no longer pay attention to economic fundamentals or newsflow (with the exception of newsflow generated by fake tweets of course), but when the mainstream media turns full retard and comes up with headlines such as this: "German Ifo Confidence Declines After Winter Chilled Recovery" to spin the key overnight event, the German IFO Business climate (which dropped from 106.2 to 104.4, missing expectations of 106.2 of course) one just has to laugh. In the artcile we read that "German business confidence fell for a second month in April after winter weather hindered the recovery in Europe’s largest economy... “We still expect there to have been a good rebound in the first quarter, although there is a big question mark about the weather,” said Anatoli Annenkov, senior economist at Societe Generale SA in London." We wonder how long Bloomberg looked for some junior idiot who agreed to be memorialized for posterity with the preceding moronic soundbite because this really is beyond ridiculous (and no, it's not snow in the winter that is causing yet another "swoon" in indicators like the IFO, the ZEW and all other metrics as we patiently explained yesterday so even a 5 year old caveman financial reported would get it).

More than six months since the Japanese nationalistic escalation over the disputed island chain (that shall not be named) in the East China Sea sent Sino-Japanese foreign relations to a level not seen since a particular territorial dispute over Manchuria, tensions just hit a fever pitch overnight, when an armada of eight Chinese ships entered what Japan claimed were its territorial waters. China's version of the story is that the vessels were there to monitor the activity of a flotilla of boats reportedly carrying members of a Japanese nationalist group (in what it too, naturally, views as its territorial waters). This was the most Chinese ships to enter Japanese waters near the Senkakus since the Japanese government purchased three of them from what it considers their owner last September and effectively nationalized the chain, a move China has quite vocally disputed and which has led to violent anti-Japanese demonstrations in China, as well as a wide-ranging boycott of numerous Japanese exports. Moments ago Kyodo reported that Japan's Defense Ministry said on Tuesday that "about 1,000 officers of the nation's Self-Defense Forces will participate in a U.S. drill to be held in California in June involving recapturing control of an isolated island."

Near multi-generational low bond yields, driven at least in part (and some think in full) by the undeniably large asset purchase program (Quantitative Easing (QE)) that the US Federal Reserve has been implementing in one form or another since the 2008 Global Financial Crisis (GFC), have pushed the question of whether or not the bond market is a bubble to the front of many people's minds. However, while the chart below of over 220 years of 10-year treasury yields shows the extraordinarily low bonds yields, they have resulted from many fundamental and rational drivers (expectations of weak economic growth and safe haven flows amid the European sovereign debt crisis) in addition to Fed purchases. So while bond prices look expensive, there is nothing particularly bubbly about the bond market today.

The paper price of gold crashed to $1,325 in the wake of this huge trade. It is now hovering around $1,400. Our first reaction is to suggest that this is only an aberration, and that the fundamentals of the depreciating value of paper currencies will eventually take the price of gold much higher, making it a buying opportunity. But what we can't predict is whether big players might again deliver short-term downturns to the market. The momentum in the futures market can make swings surprisingly larger than the fundamentals of currency valuation would suggest; but the fundamentals will drive the long-term market more than these short-term events. The fight between pricing from the physical market for bullion and that from the "paper market" of futures is showing signs of discrimination and disagreement, as the physical market is booming, while prices set by futures are seemingly pressured to go nowhere. In short, we think this is a strong buying opportunity.

For the last few years, the US equity market has soared through Q4 and into Q1 and macro-economic indications have trended with them in a virtuous circle 'confirming' that this time it's different and recovery is 'on'. Then just as investors get all bulled up, convinced by the market's all-knowing-efficiency that the old normal is back and growth is returning, macro-economic data starts to disappoint expectations. This is initially shrugged off - "it's a transitory dip", "the market sees through this temporary weakness", "where else are you going to put your money?" - and the stock buying continues through the Winter. But there comes a time, when the divergence from economic reality grows too wide and the 'faith' that the market knows best starts to fade; and sure enough, each time, the market drops back rapidly to reality. What is the common denominator for this winter surge?

Indifference has historically been accepted by multiple cultures and religions as a vice.  Isn’t it about time, in an era where democracy appears to be slowly gaining ground, that we successfully battle such vice with its corresponding virtue: indignation?  After all, indignation is not just anger, but righteous anger at people or situations that are truly offensive or unjust to the better nature of humankind. As we look at the arrogance of the strong, and the ignorance of the weak, we can’t help but recognize that at least for now... vice rules over virtue and our country will continue to remain long on indifference and short on indignation.  And that’s not a prescription to cure us from terrorism... or, what’s even worse, the fear of terrorism.

Not supremely confident despite the stock market being at all-time highs? Unsure of the future and feeling poorer than in the past? You are not alone. In fact, you are among the 93% majority. As the Pew Research Center finds, during the first two years of the US economic 'recovery', the mean net worth of households in the upper 7% of the wealth distribution rose by an estimated 28%, while the mean net worth of households in the lower 93% dropped by 4%. As they explain, affluent households typically have their assets concentrated in stocks and other financial holdings, while less affluent households typically have their wealth more heavily concentrated in the value of their home. Due to these differences, wealth inequality increased during the first two years of the recovery. The upper 7% of households saw their aggregate share of the nation’s overall household wealth pie rise to 63% in 2011, up from 56% in 2009, with the mean wealth of affluent households now 24x the less affluent group (up from 18x in 2009). So the next time you see some talking-head on TV devoutly proclaiming his faith in the Fed's QE policies, perhaps it's worth considering in which cohort he and his clients sit.