Archive - May 10, 2013 - Story

Yesterday saw a lot of extreme volatility moves around the world. Most of them stemmed from Japanese actions - JPY plunging 3 big figures in 18 hours, JGB limit down and biggest yield spike in years against a JGB implied volatility collapse, NKY smashing exponentially higher - but there was also an unusual action in precious metals. While price has been notably set back in the last two days, yesterday saw the largest addition to IAU and GLD ETF holdings in 7 months (following a 10 million ounce reduction from mid-February highs). For equity investors, if this is considered a normal, calm operating environment for putting your capital to work, enjoy.

The senior IRS official briefing the press just said: "I'm not good at math."

— Zachary A. Goldfarb (@Goldfarb) May 10, 2013

Earlier today, news crossed the wire that the Britsh Embassy was pulling all non-essential staff from its Libya embassy, with the release of this warning: "Given the security implications of the ongoing political uncertainty, the British Embassy is temporarily withdrawing a small number of staff, mainly those who work in support of Government Ministries which have been affected by recent developments." Moments ago, perhaps in an attempt to avoid the humiliation suffer by Hillary Clinton and the Benghazi fiasco, Fox News reports that "The U.S. military has alerted two elite military units in Europe to be on standby if needed to respond to a deteriorating security situation in Tripoli."

A funny thing happened on the way to the next Bull market: the price-earnings (P/E) ratio has entered bubble territory--again. So what if the Bull market is already 4+ years old--no reason it can't run another four years. Or 40 years. The Fed has found the key to a permanent Bull market. Dow 36,000 is for pikers: Dow 400,000, baby! Another funny thing might happen on the way to Infinite QE Nirvana: giddy "buy the dip, the Fed's got our back" participants tend to forget that major players profit from going short when all the other shorts have been terminated with extreme prejudice, and then taking the market down. Once they've driven the market down and taken out all the stops, then they can buy back in and launch the next melt-up. What's more profitable, a slow melt-up or a panic sell-off and sharp rebound? Definitely the latter, if you're heavily short, the market is teetering on record margin debt and you can kick out the critical 2X4 holding the whole contraption up.

Aside from being core long gold and oil on the basis of an ongoing global reflation effort by the myopic central bankers of the world; Eclectica's Hugh Hendry is long consumer Staples (as he explains - for a conservative investor, there is little choice but safest, least volatile, most liquid consumer non-discretionary blue chips), long USD (cleanest dirty shirt), long Japanese equities (extreme reflation efforts), and is long the short end of the curve in various sovereign bonds around the world (once again on the basis that weaker data combined with central bank intervention means this duration will benefit). Critically, the outspoken Scot notes that Japan's monetary pivot towards QE will not create economic growth out of nothing. Instead it seeks to redistribute global GDP in a manner that favors Japan versus the rest of the world. This is the last thing the global economy needs right now. His base view remains that there will be more central bank intervention, more debasement, that a sound money core is key, and taking advantage of liquidity flows in the meantime can be profitable.

The blue line in the chart below? That's the total holdings of Government (cash and derivative) securities of PIMCO's flagship $293 billion Total Return Fund. At a net exposure of 40% of total fund AUM, or roughly $117, PIMCO has not been more bullish on Treasury and Agency securities since July 2010, when Gross was selling into the QE2 Jackson Hole preannouncement panic. If also is the first time since the summer of 2010 that the fund holds substantially more government-related securities than MBS. Why is this notable? Because moments ago, Gross used his now favorite public service distribution medium, twitter, to announced that "The secular 30-yr bull market in bonds likely ended 4/29/2013." Uhm. No.

With markets screaming that Europe is fixed and Italian sovereign bond spreads back near pre-crisis levels, we thought it somewhat interesting that delinquent loans in the country just surged by their most in almost 18 months as bad debt begin to re-accelerate. ANSA notes that over EUR130 billion of Italian debt is currently delinquent (+21.7% YoY) and this comes on the heels of the Bank of Italy's demand that Italian banks increase their loan loss provisions are 'disappointing' audits in March. As we noted previously, the percentage of loans in delinquency rose from around 3% in 2008 to 6.3% in February 2012, and assuming a relatively flat total private sector credit creation in the last year (which is probably conservative since fragmentation has been soaring), the current percentage of loans in default is approaching 8% of the total.

Spanish stocks ended the week slightly in the red (the only European major to accomplish that feat) and its sovereign bond spreads ended very modestly wider. Away from that 'weakness' everywhere else was green-green-green - European stocks generally surged (though giving some back today) and bonds rallied further, compressing spreads further into pre-crisis territory. All this with a background of the worst week for the EUR (against the USD) in almost two months. Swiss 2Y rates saw some significant demand today (-2bps to -6.4bps) but are higher on the week and Europe's VIX ends the week modestly lower. Away from sovereign markets, corporate and financial credit markets did not play along with the exuberance at all...

Just because you are a conservative and paranoid, doesn't mean the IRS is not after you. And, assuming the AP was not hacked again, this is precisely what happened. In a stunning disclosure, the supposedly impartial Internal Revenue Service has admitted and apologized for flagging and subjecting to extra reviews, conservative political groups - those that included the words "tea party" or "patriot" - during the 2012 election to see if they were violating their tax-exempt status. No such privilege was apparently afforded to groups identifying themselves as "liberal." It does make one wonder, just how far the IRS goes to make the lives of conservatives a living hell: will all 2012 tax audits be those who on their facebook profile admit to liking Ron Paul? And just how far does the IRS invade personal privacy to determine how any one tax filer is indeed, a "conservative?" But don't worry - aside from the obvious persecutions, America is a free country for one and all.

This is what happens when the world's central bankers - incapable of seeing the bubbles forming in front of their own eyes - are let loose on global markets... Where ever you look, markets are in turmoil this morning with even the precious equity indices trading like penny stocks... The bottom line is that significant Treasury weakness, gold weakness, and stocks actually in the red suggest an increasing feeling that the QE juice has run its course.

The anti-consumerism Degrowth movement is gaining visibility and adherents in Europe. Degrowth (French: décroissance, Spanish: decrecimiento, Italian: decrescita) recognizes that the mindless expansion of mindless consumption fueled by credit and financialization is qualitatively and quantitatively different from positive growth. In a very real way, Degrowth embraces the devolution of paid work and wealth that cannot be reversed. Growth and consumption based on financialization, expanding credit and phantom collateral is unsustainable and will devolve or implode. Rather than pine for what cannot be, it's far healthier to embrace using less of everything and increasing well-being by leveraging the web, the commons and what cannot be commoditized or financialized.

The Chairman is about to take the lectern to discuss bank structure and competition at the SIFI conference at the Chicago Fed. His prepared remarks are likely to be a little less exciting than the Q&A where the world will be watching for the words "buy, buy, buy", "mission accomplished", or "taper". Charles Evans will be his lead out man. Finally, since Bernanke will be discussing shadow banking, or the source of some $30 trillion in shadow money always ignored by Keynesians, Monetarists and Magic Money Tree (MMT) growers, a topic we have discussed over the past three years, here is the TBAC's own summary on how Modern Money really works.

it is no secret that for years, one of the most useful features of the Bloomberg terminal (if only for other users of Bloomberg), has been the ubiquitous red or green user dot, showing if a given user is online (such as NY Fed Analyst/Trader Kevin Henry before Zero Hedge exposure) or gray i.e., invisible, circle such as Kevin Henry after Zero Hedge exposure. Because to some there is nothing more informative than knowing if the object of their stalking ambitions is currently sitting next to a PC. As it turns out, it is not just clients of Bloomberg that found this functionality useful, but Bloomberg journalists too, who until recently at least, it turns out had much more access than just the "dot" including information on when a subscriber had most recently logged onto the service, when they had first become a subscriber and a tally of the types of functions they were accessing through the terminal. That is, at least until Goldman Sachs complained.

A month ago we pointed out that even as the Chinese credit bubble - at a record 240% of GDP on a consolidated basis - is now clearly out of control, the far more disturbing aspect of China's credit-fueled economy is the ever declining boost to economic growth as a result of every incremental dollar created. Indeed, as the economic response to "credit shock" becomes lower and lower, even as the inflationary impact lingers, the PBOC is caught between a stagnating rock and an inflationary hard place. Nonetheless, there are few options and with the shark-like need to continue growing, or at least moving, in order to prevent collapse, China did precisely what we expected it to do: boost credit growth even more despite the obvious tapering economic impact of such money creation. Sure enough, overnight China reported that its M2 growth accelerated in April from 15.7% in March, to 16.1% on a Y/Y basis: the fastest pace of credit creation in two years. Yes, the PBOC may not be creating money, but the Chinese pseudo-sovereign commercial banks, sure are, and at a pace that puts the rest of the world to shame.