Archive - Apr 2013 - Story

Did you know that the greatest period of economic growth in American history was during a time when there was absolutely no federal income tax?  Between the end of the Civil War and 1913, there was an explosion of economic activity in the United States unlike anything ever seen before or since.  Unfortunately, a federal income tax was instituted in 1913, and this year it turned 100 years old.  But there was no fanfare, was there?  There was no celebration because the federal income tax is universally hated.  This year, the American people will shell out approximately $4.22 trillion in state and federal income taxes.  That amount is equivalent to approximately 29.4 percent of all income that Americans will bring in this year, and that does not even take into account the dozens of other taxes that Americans pay each year.  At this point, the U.S. tax code is about 13 miles long, and those that are honest and pay their taxes every year are being absolutely shredded by this system.

Anyone surprised, please raise your hands. And yes, it was fun when margin were hiked only on surges in the various futures contracts. Now, dumps works just as well. The logic, of course, is that gold shorts are also margined. However, judging by the immediate $15 drop in gold upon the announcement, those who are short the metals certainly have a much, much bigger balance sheet and cash hoard to satisfy any collateral requirements than those long. Next: expect the Shanghai Gold Exchange to hike margins in a few short hours once China wakes up and looks at overnight PM prices in horror.

Remember when the last time a cluster of Hindenburg Omens nearly toppled the market in August 2010 and the only saving grace was Ben Bernanke's QE2 announcement at Jackson Hole which sent risk soaring? Today, nearly three years later, we got the first instance of the Omen again. Will it be a one-off fluke, or a cluster, which is needed to confirm this dreaded technical formation? Stay tuned in the coming days to find out...

At 6:10 pm, Barack Obama is expected to address the nation over today's explosions at the Boston marathon. It is unclear what additional info he can provide at this time as there is little to no incremental information available, aside from the conviction everywhere that this was a terrorist attempt (which likely means war against someone is imminent), but watch it live below in any case.

Perhaps the best video capturing the terror, chaos, and confusion in Boston, comes from twitter user @stevesilva.

As law enforcement authorities investigate today’s explosions in Boston, I ask all New Yorkers to keep the victims and their families in your thoughts and prayers. I have spoken with Police Commissioner Ray Kelly, and the NYPD has stepped up security at strategic locations and critical infrastructure, including our subways. Some of the security steps we are taking may be noticeable, including deployment of Critical Response Vehicles and additional police personnel, and others will not be. We have 1,000 members of the NYPD assigned to counter-terrorism duties, and they – along with the entire NYPD and the investments we have made in counter-terrorism infrastructure – are being fully mobilized to protect our city.

While headlines are flashing with increasingly worrisome details, the Boston PD is about to provide up-to-date details on the incident.

*MASSACHUSETTS' PATRICK SAYS WE DON'T HAVE WHOLE PICTURE YET
*TWO DEVICES WERE FOUND IN TRASH CANS AND DEFUSED: WBZ RADIO
*BOSTON POLICE COMMISSIONER SAYS EXPLOSIONS 50-100 YRDS APART
*BOSTON POLICE COMMISSIONER SAYS CASUALTIES FROM BOTH BLASTS
*BOSTON'S DAVIS SAYS THIRD INCIDENT OCCURED AT JFK LIBRARY
*BOSTON'S DAVIS SAYS JFK EXPLOSION WAS HALF HOUR AGO

Boston PD are warning people to stay home - this is an ongoing event.

Update from Bloomberg: Boston Police says no suspects are in custody. Could it be that even the venerable NYPost got something wrong? Or is the Boston PD merely making a distinction between someone in custody (i.e., arrested) and someone guarded as a possible suspect? We should find out soon.

Just a brief blurb at the NY Post for now (which may have been overzealous in reporting the number of casualties earlier) but for what it's worth:

• Authorities ID'd a suspect in marathon bombings - he is being guarded in Boston hospital.
  
• Authorities have a identified a suspect, who is currently being guarded in a Boston hospital with shrapnel wounds.

Unclear how much credibility to assign to this, but that's what is being reported. We will provide more info if and when we see it. Some more via twitter, where we learn that according to CBSNews, police have surveillance video a person bringing multiple backpacks into the area 20 or so minutes before the explosions. The NY Post has released more, such as the nationality of the suspect: Saudi.

A bad day all around. Liquidation continued from Asia and commodities were Baumgartner'd - especially gold and silver, suffering their biggest single-day drop in 30 years. Weak NAHB data stalled any BTFD in stocks and despite a couple of tries at EUR ramps, stocks had their biggest drop in 5 months. The horrible acts in Boston seemed a catalyst for late-day weakness in stocks but there was no bid and heavy volume as homebuilders were hit their hardest in 10 months and US equity indices plunged into the close. Dow Transports had its worst day in 17 months. Away from stocks, FX markets were just as volatile with JPY's 2-day rally the biggest in 35 months (and AUD the biggest down day in 5 months). Swiss 2Y rates dropped to their lowest of the year and US Treasuries were relatively calm (though bid) until Boston hit and then dropped 3-4bps on the day. VIX also surged higher by 5.2 vols to 17.25% (its highest since the Italian elections).

North Korea's daily war bluffs may be (rightfully) ignored by the market, but an unexpected and tragic development comes out of Boston, where local media reports of two explosions and numerous injuries:

AT LEAST 12 INJURED IN BOSTON MARATHON BLAST: BOSTON HERALD
BOSTON BLAST SEEM CENTERED IN `TRASH CAN': BOSTON HERALD
CNN CITES SOURCE ON REPORTS OF DEVICE AT BOSTON MANDARIN HOTEL
AT LEAST 3 DEAD AT BOSTON MARATHON, FOX NEWS CITES SOURCE
BOSTON POLICE SAY "SECONDARY DEVICES" ARE STILL BEING FOUND

For the past three years we have been pounding the table on one very simple fact: when it comes to jobs, there is a quantitative picture, which is often muddied by seasonal adjustments and political narrative but which the mainstream loves for the simply, clear plotline: "the US created [   ] jobs in the past month", and there is a qualitative one: one which takes into account the far more important quality of the jobs created in the US economy in whole or in part (such as in various states). It appears this simple logic has finally trickled down to those masters of the obvious at the San Fran Fed who have just released a paper titled "Job Growth and Economic Growth in California" whose summary is as follows: "California job growth over the past two decades has been relatively anemic compared with gains in the rest of the country. Nevertheless, economic output has grown faster in California than in the rest of the United States. One factor underlying this pattern may be the growth of higher-wage jobs in California, which has contributed more to output than to employment growth. This creates relatively few opportunities for low-skilled workers, which may help explain why poverty increased more in California than in most states over the period."

While there are obviously sellers in the gold market, there is also a dramatic spike in demand for protecting what is still being held (remember there is a buyer for every seller). Gold's short-term VIX (implied volatility) has spiked to 18 month highs above 29% but it is the steepness of the term-structure of volatility that shows just how much protection is being sought. The difference between the one-month volatility and one-year volatility is almost 10 vols - the highest level of inversion (short-term risk higher than long-term) since Lehman. It seems the market is extremely fearful of further volatility in the short-term but less concerned longer-term. What is also worrisome is that the last two times that Gold's VIX was this much higher than the S&P's VIX was June 2006 (when the first hedge funds started to implode from Subprime) and Sept 2008 (Lehman). It appears that gold volatility is signalling counterparty risk concerns once again.

The problem with cutting the links between risk and consequence and the real economy and the stock market is that a market deprived of feedback from reality is prone to disorderly disruption. Why is this so? Participants make decisions based on the information made available to them. If the information from the real world is suppressed or limited, then the decisions made by participants will necessarily be misinformed, i.e. wrong.  If feedback from the real world is suppressed, then decisions will necessarily be bad. The only choice for participants who have lost faith in central planning's promise of permanently higher markets will be to abandon the manipulated markets entirely.