Archive - May 2013 - Story

There are a dozen significant economic indicators that are warning that the U.S. economy is heading into a recession.  The Dow may have soared past the 15,000 mark, but the economic fundamentals are telling an entirely different story.  If historical patterns hold up, the economy is heading for a very rocky stretch. But most average Americans are not that concerned with the performance of the stock market.  They just want to be able to go to work, pay the bills and provide for their families.  During the last recession, millions of Americans lost their jobs and millions of Americans lost their homes.  If we have another major recession, that will happen again.  Sadly, it appears that another major recession is quickly approaching. The following are 12 recession indicators that are flashing red...

From the November lows, the S&P 500 has gained an impressive 21.5%. This is at an annualized rate of over 50% with 4 very modest 'dips' that have been snapped up by those that should know better. The Dow topped 15,100 - yay! Until the last hour of the day, VIX was very much not in agreement with the exuberance in stocks but the mid-afternoon swoon in stocks (Druckenmiller?) that corrected futures to VWAP was just what was needed to spark some furious volatility selling euphoria and crush VIX back to its lows of the day. Despite the equity excitement, 'most shorted' names actually underperformed (for once) but every effort at selling was met with a squeeze (especially into the close). Treasuries ended lower in yield for the second day in a row with stocks higher. Credit markets remain under-impressed for the second-day with IG and HY both wider on the day. Commodities generally improved on the day (with Copper's early euphoria fading as the day went on) as the USD leaked lower (with everything stronger against it aside from AUD). Today was the highest average trade size in S&P futures of the year (on sub-average volume).

“There can be no doubt that besides the regular types of the circulating medium, such as coin, notes and bank deposits, which are generally recognised to be money or currency, and the quantity of which is regulated by some central authority or can at least be imagined to be so regulated, there exist still other forms of media of exchange which occasionally or permanently do the service of money. Now while for certain practical purposes we are accustomed to distinguish these forms of media of exchange from money proper as being mere substitutes for money, it is clear that, other things equal, any increase or decrease of these money substitutes will have exactly the same effects as an increase or decrease of the quantity of money proper, and should therefore, for the purposes of theoretical analysis, be counted as money.”

While most comprehend that when buying credit-risky instruments the most critical aspect of return is the spread (or additional compensation over the risk-free rate) which itself is in 'bubble' territory; it is nevertheless spell-binding that the so-called 'High Yield' corporate bond market is now trading with a yield below 5% for the first time on record - a level at which 10 Year Treasuries were trading in July 2007...

When three hedge fund titans all explain in words so simple a financial media channel morning show host can grasp that there is nothing behind this rally but smoke, mirrors, and a bearded academic, it seems more than a few people start to pay attention. Following Paul Singer and Kyle Bass, Stanley Druckenmiller "loves the market short-term, but hates it long-term," since Bernanke is "running the most inappropriate monetary policy in history." He warns, for it is a warning, that "markets will melt up," until the Fed is forced to tighten. He recommends shorting the AUD, and sees the commodity super-cycle as over, because, "supply-demand... is deadly." He also likes Google but not "tech companies that engage in financial engineering under advice of hedge fund managers."

Confirming that while Central Banks may have halted economic logic and reason indefinitely, supply and demand still have some relevance in the real world was today's earlier news that in the aftermath of McDonalds' 20% price hike of basic burgers in Japan three weeks ago, that the company's Japanese same store sales tumbled by a whopping 3.7% in April, a major contributor for the miss in the expected global same store sales for April which came at -0.6%, below Wall Street expectations. One can only guess what the SSS drop would have been had MCD implemented the price hike at the start of the month. One can also guess if the increase in average price offset the drop in sales volume - we will know soon, but just to make doubly sure if what MCD loses in volume it makes up for in price, McDonalds announced that one month after the 20% price hike in Japan, its Indian franchise operator said it too would proceed with a price hike - the second one this year - amounting to 5-6%.

We have a sinking suspicion we know who the ultimate winner of this particular war will be.

As we reported a month ago, when we reported that Enron CEO Jeff Skilling may be released from prison early, moments ago we just learned that, to nobody's real surprise, the mastermind of the biggest US bankruptcy in the early 21st century may be behind bars for just four more years, cutting his total sentence, which was scheduled to expire in 2028, by 11 years. From Bloomberg:

• ENRON'S SKILLING AND JUSTICE DEPARTMENT REACH SENTENCE DEAL
• ENRON'S SKILLING MAY BE RELEASED IN 4 YEARS, LAWYER SAYS
• ENRON'S SKILLING WAS SENTENCED TO MORE THAN 23 YEARS IN PRISON
• ENRON SENTENCE DEAL ALLOWS OVER $40 MLN RESTITUTION PAYOUT
• ENRON'S SKILLING HELPED MASTERMIND MASSIVE FRAUD AT ENERGY FIRM

Indeed he did: which is why it is surprising he served any prison time at all.  So in brief: justice for all, except for those who have $40 million set aside for "restitution payments."

Today's star-studded Ira Sohn conference was led by two behemoths - Elliott's Paulk Singer and Hayman's Kyle Bass. We recently discussed in detail Paul Singer's perspective on the "most dangerous" investing environment but today he summarized and added to those comments at the Ira Sohn conference. "There is no safe haven in today's markets," he explained, "those holding long-term bonds in US, UK, and Japan own assets that are trading at the wrong price," and went on with more brutal honesty, QE causes a distorted recovery - financiers doing well, ordinary person not experiencing recovery. Kyle Bass also stuck to the script noting that in Japan "mindsets are changing - the beginning of the end has begun," and exclaiming in his subtle and forthright manner, "you have to be shitting me, you're adding a ponzi scheme to a ponzi scheme." We leave the summation up to Singer, "the ultimate question for a fiat money regime is at what point does confidence in money disappear?"

Moments ago the Treasury sold a fresh batch of $24 billion in 10 year bonds (CUSIP: VB3 - remember it: it will promptly be monetized by the Fed in the next few POMOs) in an auction that can at best be described as weak. The When Issued had been trading 1.80% moments before the announcement that the auction priced at a high yield of 1.81%: a 1 bp tail, and quite a bit wider than market levels in the 10 Year seen earlier today. The result surprised the market and pushed the bond complex lower. The internals were not good either: the Bid to Cover was 2.70, the lowest since February, and far below the TTM average of 2.96. Notably, as the chart below shows, the BTC ratio has been declining slowly over the past year. The Indirects took down 33.9%, below the average of 37.07%, Directs took only 16.9%, the lowest since January, leaving Primary Dealers with the lion's share or 49.2%, or well above the past 12 month average of 40%. And since correlation algos are pegged to see any bond weakness as good for stocks (as pretty much everything else too), the weak bond auction was an "trigger" for the algos to send the stock market to fresh all time record highs.

An independent, critical account of the American economy would soon raise questions about the structural causes of inequality by asking cui bono, to whose benefit is the system arranged? If we can honestly say that the system's primary source of inequality is a dynamic economy that rewards the top 10% who are best able to deploy skills and capital, then that suggests one set of potential remediations. If however we find the system is unequal largely as a result of its cartel-state structure, then that suggests a political and financial reset is needed to clear the deadwood of corruption, malinvestment and state/central bank manipulation of statistics, finance and credit. We had to destroy the economy to save it. Indeed.

Presented with no comment - because none is needed...

Following the latest set of revelations on the Benghazi embassy attack, the House is back to doing what it does best: pontificating, pointing fingers, and talking, and making a TV spectacle of it all. As the Hill notes, "New revelations about the terrorist attack in Benghazi, Libya, are pulling Hillary Clinton back into a political firestorm that the presumptive 2016 candidate had so far managed to escape unscathed. House Republicans have unearthed new evidence suggesting the Obama administration could have done more to help the U.S. diplomats under attack last Sept. 11. State Department whistle-blowers testifying Wednesday before the House Oversight panel are also expected to say the then-secretary of State was personally involved in the decision to depict the attack that killed Ambassador Christopher Stevens and three other Americans as something other than terrorism." Sadly, Hillary will not be there to vehemently ask, rhetorically of course, of anyone interested in the failings in US foreign policy, "what difference does it make?"

As if charts of endlessly grinding lower hourly earnings was not enough to show the increasingly desperate plight of the US worker, here is another nugget from the BLS, this time showing the annual change in real US wages, where we have conveniently highlighted the long-term trendline, and where Q1 wages just posted a -0.1% annual decline, which makes one wonder: with "recoveries" like these who needs any wage growth? Another question: what happened to the Fed's trickle-down - or are government handouts and transfer payments to a nation addicted to government handouts all that matters? Final question: since some cash is transferred to the US workers ultimately, what happens to worker wages when the Fed's QEternity finally ends?

While POMO and its unstopppable force of liquification will lift the nominal price of each and every stock to the point of no return, it seems VIX, Treasury, and JPY-carry traders are not quite as convinced that today is the day to be backing up the truck...