Archive - May 10, 2013 - Story

The almighty dollar is looking less mighty these days. By almost every measure, the purchasing power of the US dollar is in precipitous decline.

It is a fair bet that one way or another, the current generation of young people will be unwilling and/or unable to pay for Social Security and Medicare as they presently stand. Of course, Western Europe has the same problem and President Hollande of France recently got a whiff of what is coming from an open letter addressed to him by a 20-year old student named Clara G... "I want to go to a country where there is growth, where wages are rising, where being rich is not a deadly sin, a country in short where the individual and the society have confidence that tomorrow will be brighter than today." Developed nations with deteriorating demographics will have a big problem if large taxpayers decided to move away to lower tax jurisdictions. Clara’s letter suggests that an exodus by the young would be just as damaging, indeed probably more damaging.

Gold bears are coming out of the woodwork to declare gold dead. Santiago Capital's Brent Johnson wonders where they have been for the last 12 years and reflects on the reality of why one should hold the precious metal; putting the recent weakness in its proper context.

Yesterday, the rumor turned out to be a joke. Today, there was no rumor, but as we warned four hours ago, it was only a matter of time. Less than four hours later, the time has come, and Jon Hilsenrath's "Fed Maps Exit from Stimulus", conveniently appearing after the close, has just been released.

If the greatest trick the devil ever pulled was convincing the world asset bubbles don't exit, the next question is who is QE Soze?

The Obama administration has come out in support of the idea of exporting U.S. natural gas. This stance is counterproductive and shortsighted, and if followed, it will prove harmful to domestic manufacturing (i.e., value generation) and to future generations of Americans. While exporting natural gas would certainly prove to be an economic boon for a very select minority of companies and individuals, it makes no sense from an energy standpoint and undermines our national interests. All it will do is enrich a few while boosting prices for all domestic consumers and shortchanging the energy and environmental inheritance we pass along to our children. The time has come to give greater weighting to energy matters than to economic and political desires. To continue to be energetically wasteful at this time in history, when so much data is telling us that the effluent of our activities is measurably altering our support systems, is beyond embarrassing.  It's tragic.

During an interview with The Globe and Mail, 'Gloom, Boom, and Doom's Marc Faber unleashed some awful truthiness about gold "I buy gold every month", real estate "bubble territory", and the likelihood of a crash in smoke-and-mirrors-like asset markets - "In the 40 years I’ve been working as an economist and investor, I have never seen such a disconnect between the asset market and the economic reality... Asset markets are in the sky and the economy of the ordinary people is in the dumps, where their real incomes adjusted for inflation are going down and asset markets are going up... Something will break very bad."

China may or may not be building empty cities any more, but when it comes to the buildings it does, ahem, erect, it appears that the communist regime is either running out of ideas or is taking the symbolism of the skyscraper just a little too seriously. Behold the building that will house the new Beijing offices of the People's Daily, the official paper of the China Communist Party...

Succinctly summarizing the positive and negative news, data, and market events of the week...

Presented with little comment aside to note, amid a quiet day with non-equity markets showing extremely volatile movements, it was decided by a great majority that (following 90 minutes of momentum ignition efforts) all protection should be lifted and VIX was smashed to its lowest level in a month...

No news is the best news. Quite a week across every asset class dominated by the last two days as USDJPY broke 100 and seemingly all hell broke loose (apart from in stocks). Spikes in Treasury yields (10Y and 30Y +15bps on the week); a surging USD (+1.3%) driven by major JPY and AUD weakness (-2.75%) and the biggest drop in EUR in 6 weeks; Gold and Silver sold off hard (-3.5%) before bouncing back this afternoon ending -1.5% on the week; crude oil plunged but the Brent Vigilantes were not so easily beaten and ripped back above $96 and higher to close the week. Bond-like stocks (Utes) were hammered as high-beta cyclicals (homebuilders) ripped and while stock indices rolled over a little they remain near highs. It's not all sunshine and ponies though... credit markets drastically underperformed (playing catch down from an exuberant few days but sending a clear message to stocks) and the VIX curve steepened rather significantly around the Labor Day horizon - a date that represents desk chatter for "tapering" and debt ceiling drama to re-appear). S&P futures exhibited a spooky 15-min cycle zig-zag pattern this afternoon - in a totally human way... and average trade size was very low (algos) - right before the late-day ramp.

More millionaires live in Tokyo than in any other city, according to a new report from WealthInsight, beating out New York and London. The Economist notes that the city, which boasts 460,700 individuals with net assets of $1m or more (excluding their primary residences), is home to over a fifth of Japan's millionaires. However, when it comes to real money (since who can get by on a mere million dollars worth of wealth these days), London tops the list with 4,224 multi-millionaires. But when it comes to the real BSDs, New York City and Moscow rule the world with 70 and 64 billionaires respectively wondering the streets. As The Economist also notes, should you wish to rub shoulders with the rich, heading to Tokyo, London, New York, or Moscow would be a mistake - it is Frankfurt that has the highest millionaires per capita (with 75 out of every 1000 people having at least a seven figure net worth).

The reason for yesterday's late day swoon was a humorous tweet, which subsequently became a full-blown serious rumor, that the WSJ's Hilsenrath would leak the first hint that the Fed is contemplating preannouncing the "tapering" of its $85 billion in monthly purchases. Naturally, this did not happen as we explained. And yet, judging by the market's response there is substantial concern that the Fed may do just that. To be sure, it is quite likely that in addition to just rumblings out of economists, which are always wrong and thus ignored, that one of the Fed's unofficial channels may hint at some tightening in the monthly flow (if certainly not halt, and absolutely not unwind). Which makes sense: all previous instances of non-open ended QE took place for up to 6-9 months before the Fed briefly let off the accelerator to see just how big the downward response is. The problem now, however, is that even the tiniest hint that the grossly overvalued "market", which has risen only thanks to multiple expansion for the past year, would lead to a massive overshoot not only to whatever an ex-Fed "fair value" may be, but overshoot wildly as the liquidation programs kick in across a Wall Street that is more liquidity starved today than it has been in a decade. This is precisely what Scotiabank's Guy Hasselman thinks: "Few care about “right-tail” events, but should investors decide to pare risk in reaction to a hint of ‘tapering’, the overshoot to the downside may surprise many. The combination of too many sellers, too few buyers, and dreadful (and declining) liquidity means a down-side overshoot is highly likely."

There is a mathematical term used to describe a time series' propensity to mean-revert or not. Autocorrelation measures the tendency for today's price direction to be in the same direction as yesterday's. In a period of negative autocorrelation (such as today) when the market sells off one day it is much more likely to rebound the next. As Artemis Capital's Chris Cole notes, the current level of negative auto-correlation (often associated with positive for 'buy-the-dip' strategies in an upward trending market) has never been higher. Mean reversion and negative autocorrelations are one reason why many pure 'portfolio insurance' strategies are struggling with losses. If you are constantly shorting volatility this trend toward powerful mean reversion is your best friend. However, empirically, this high mean reversion is unsustainable; the potential for mean reversion regimes to ‘shift’ is driven by increasing leverage and interconnectedness in the system.

Sadly, not much in terms of macro observations this quarter or discussions of jelly donuts, but a whole lot on the fund's biggest Q1 underperformer, Apple and the hedge fund's ongoing fight for shareholder friendly capital reallocation as well as proving Modigliani-Miller wrong. And then this cryptic ellipsis: "Under the circumstances, it is curious that gold isn’t doing better." Say no more, David. We get it.