Archive - May 1, 2013 - Story

While the global 'central-bank-inspired' wealth effect has benefited the uber-rich more than anyone else, it seems China's burgeoning middle class is more than happy to 'settle' for mediocrity in their fascination with luxury goods. As Bloomberg notes, the demand for diamonds is so heavy (and less discriminatory) that the price of lower-quality gems has surged as the price of high-quality 'flawless' diamonds has been very subdued. Since the US equity market lows in March 2009, the best quality diamonds have appreciated by around 5-7% whereas the lower-quality 'imperfect' stones have gained over 35%. As one Antwerp dealer noted, "the cultural taboo of having to buy the finest diamonds is broken," as the 'snob effect' has disappeared. China (retail sales up 18%) surpassed Japan in 2011 to become the biggest diamond consuming nation behind the US but it would appear we need to add a 5th 'C' to the famous diamond ranking" clarity, cut, color, carat, and cheapness. Simply put, another dealer noted, "people have latched on to the fact that when you buy a lower quality diamond, there is not always a big difference in appearance."

While details are somewhat sketchy of the reasons, Kenneth Bae (a US Citizen known by the Korean rendering Pae Jun-Ho and likely unrelated to this gentleman) has been sentenced to 15 years 'hard labor' for committing 'hostile crimes' against the regime. As AP notes, Bae was arrested in November after entering the China/North-Korea special economic zone city of Rason as a tourist. Of course, there could be well-reasoned facts that lead to the need for this man to serve this sentence - though it seems former-President Jimmy Carter may soon be traveling to North Korea (likely without Dennis Rodman) to seek Bae's release. We hope this is not a temper-tantrum from the nation's leader for not causing enough uproar with his rhetoric earlier in the month...mirroring 2009's US-vs-North Korea standoff.

Downward revisions to previously 'hopeful' levels for Goldman's Global Leading Indicator (GLI) suggest a significantly softer patch for global activity consistent with subdued growth in the near-term. The GLI has now been in 'slowdown' phase for four consecutive months and while it has not reached the 'contraction' phase yet, empirical results show this phase far less supportive of risk-assets than the current exuberance suggests. With Korean Exports, Global PMIs, and Industrial Metals all disappointing, the most concerning aspect is Goldman's three-key-risks (US growth, Euro 'risk', and China growth) have all upticked significantly in recent weeks after consistently falling all year. As the Swirlogram below indicates, the 'Slowdown' is deepening.

On the surface, the Status Quo appears stable, if not quite healthy. This stability is illusory, however, for the Status Quo has a fatal disease: diminishing return. The basic idea of diminishing return is closely related to marginal utility and marginal return: the more capital, energy and labor committed to a project, the lower the return/yield/output. The input needed to keep the Status Quo stable must be taken from other potentially more productive investments. Taxes notch higher as the state scoops ever greater sums into its maw to fund its failing fiefdoms and diminishing-return cartels, and it borrows trillions of dollars to fill the gap between tax revenues and ever-rising input costs. All that borrowed money has a cost, too, of course--interest. The costs of maintaining a sclerotic, cartel-state Status Quo infected with incurable diminishing returns eventually exceed the carrying capacity of the real economy and the Status Quo collapses in a heap.

JPM wasn't satisfied with demonstrating its implicit control over the US bond issuing authority by promoting Matt Zames to the post of COO, the same Matt Zames who courtesy of his Chairmanship of the TBAC, also effectively runs the US Treasury where he "advises" the brand new Treasury Secretary who has no idea what he is doing. Oh no. Just to cover all its bases, Jamie Dimon's firm decided to also take over the SEC as well.

It would appear that (apart from Tesla, for now) that any thing related to electric cars is going up in flames. From Fisker's fubar (and blowing all that hard-earned government funding) and Chevy's Volt dysphoria to A-123 Systems (the Lithium-Ion battery-maker) and now Coda - which Yahoo Finance notes was among an emerging crop of California startups seeking to build emission-free electric cars three years ago. After selling just 100 of its $37,250 five-passenger vehicles, Coda filed Chapter 11 today taking a few well-known investors with it. On the bright side, the government was not involved (from what we can tell), but on the even brighter side, none other than former US Treasury Secretary Hank Paulson was among those burned by the company going up in flames (as was Harbinger's Phil Falcone).

Over a year ago, we first explained what one of the key terminal problems affecting the modern financial system is: namely the increasing scarcity and disappearance of money-good assets ("safe" or otherwise) which due to the way "modern" finance is structured, where a set universe of assets forms what is known as "high-quality collateral" backstopping trillions of rehypothecated shadow liabilities all of which have negligible margin requirements (and thus provide virtually unlimited leverage) until times turn rough and there is a scramble for collateral, has become perhaps the most critical, and missing, lynchpin of financial stability. Not surprisingly, recent attempts to replenish assets (read collateral) backing shadow money, most recently via attempted Basel III regulations, failed miserably as it became clear it would be impossible to procure the just $1-$2.5 trillion in collateral needed according to regulatory requirements. The reason why this is a big problem is that as the Matt Zames-headed Treasury Borrowing Advisory Committee (TBAC) showed today as part of the appendix to the quarterly refunding presentation, total demand for "High Qualty Collateral" (HQC) would and could be as high as $11.2 trillion under stressed market conditions.

With last night's China PMI disappointing expectations and eking out a just-expansionary miasma of hope for the growth enthusiasts, the very real question of global growth sustainability (while not on US equity market participants' minds) is coming to the fore. As Michael Pettis notes, Martin Wolf's recent perspective that it may be useful to think about Japan as a model for understanding the adjustment process in China since the Japanese model shows how risky it is to shift to a slow-growth model. While expectations for a 'relatively moderate' slowdown are common (at rates considered rapid for most economies); Pettis asks rhetorically, if part of the explanation for China’s spectacular growth of the past three decades has to do with the positive feedback loops that are so typical of developing countries with fragile and unsophisticated financial systems, then a moderate slowdown in growth may be an impossible target to achieve. Once growth starts to slow, the self-reinforcing impact on urbanization, on credit growth, on financial distress, and on expectations may force growth rates to drop far more sharply than any 'plausible' analysis would suggest.

We really hate to be negative... but this is positively revolting. Disgusting. Indescribably offensive. In the Land of the Free recently, a California couple had their child kidnapped by the state. At gunpoint. It all started in mid-April when Anna and Alex Nikolayev took their 5-month old son Sammy to the hospital in Sacramento to be treated for flu symptoms...

Cyprus is absolutely the template for Europe now. It is just that the template is far worse than what is narrowly imagined. It is not the small nation of Cyprus nor is it that the specifics of the criminality that was transacted in Cyprus which is any sort of template. This is not the center of the issue. It is what Cyprus means and the horrible implications of what took place. Yesterday the Parliament in Cyprus narrowly passed the EU bailout. There is one set of guidelines for Germany now and Germany still operates under their own laws but when it comes to other nations in the European Union that are in financial difficulty there are no real laws left. All that there is now is the tyrannical demands of Berlin that must be obeyed to receive funds.

A major issue in America today is the growing gap between the rich and the poor, and the popular narrative is that the disparity is caused by capitalism run wild and only the firm hand of government can fix the problem. But what if this narrative has it backwards? What if the growing wealth disparity in America is actually caused by the government? Take Warren Buffet, a man often at the center of this debate, as not only is he a billionaire, but also a vocal advocate for higher income taxes on the rich. Many are aware of his acumen in making investments that have a “margin of safety” – or minimal downside – but few are aware of the greatest source of such safety for Mr. Buffet in recent years, the US Government.

Those who have been following the barren wasteland that is the precious metals retail market know that not only is it virtually impossible to get any silver for less than a $3-4 premium per ounce over spot, but it has become next to impossible to find any physical, period. So the fact that Apmex is now selling silver at just a $1.79 over spot - a bargain even in the days when JPM wasn't about to run out of commercial gold (incidentally no change in the gold held at the firm's 1 CMP vault as of yesterday's close), and certainly a blue light special at a time when the entire world is scrambling for anything shiny. There is however one minor catch. Maybe not so minor. Because while most PM afficionados are used to buying silver by the ounce, or at most bar, the Apmex offer involves a very generous dollop of Silver Koala. 1 Kilogram's worth of generous.

Today was a non-POMO day; a day when the Federal Reserve did not actively inject a couple billion dollars into bank reserves. The last 7 POMO days have been wonderfully green for the cash equity session. Today, no POMO, no MOMO, no new highs. What was different? Europe was closed (so we didn;t get the ubiquitous surge post EU close), we had poor data (bad has been good for weeks now), bonds outperformed (equities haven't cared at all for weeks), and the USD weakness 'should' have been equity positive (if correlations held). But it didn't. Trannies were monkey-hammered with their second-biggest drop in almost six months but the S&P, Dow, and Nasdaq are clung together down around 1% (biggest drop in 2 weeks).  FX markets were 'sporadic' with periods of silence punctuated by chaos (around the FOMC) - JPY's last 5 days now equal the biggest rally in two years as it tested up to 97 and pulled back. The worst first-day-of-the-month since June of last year for stocks seems to signify a Great Un-rotation as Treasuries were well bid (yields down 4-5bps to new 2013 lows).

With the Fed now openly warning that there may actually come a time when the 'flow' stops; the most recent Treasury Borrowing Advisory Committee (TBAC) report has some concerning statistics for those change-ridden hopers who see a smooth Fed exit, deficit-reduction, and blue skies ahead.  While they are careful not shout 'sell' in a crowded bond market; hidden deep in the 126 page presentation are two charts that bear significant attention. The first shows what TBAC expects (given the market's expectations) to happen to interest rates in the US as the Fed 'exits' its QE program (taper, unwind, hold) - the result, the weighted-average cost of financing for the US government will almost triple from around 1.6% to around 4.3% over the next ten years. But more problematic is that even with CBO's rather conservative estimates of the growth in US debt over the next decade the USD cost of financing will explode from around $205bn (based on TBAC data) to over $855bn. Still convinced the Fed can exit smoothly?