Archive - Jun 24, 2013 - Story

Things are getting a little out of hand in Asia once again. China's Shanghai Composite is down 3.7% at the break for its biggest 2-day drop in almost 4 years (-8.9%) and Japan's Nikkei 225, after staging a solid come-back has collapsed 450 points from its highs of the early session smashing below the US day-session lows. Chinese repo is very noisy but 7-day is around 160bps higher for now at 9.2% (having traded at 17% at one point - suggesting 'specific' injections have been made). The carry unwinds continue as USDJPY and Nikkei track each other tick for tick. S&P futures are not going unpunished (-4.5 from the close and -12 from after-hours highs). What's Chinese for 'Dallas Fed's Fisher' or Japanese for 'Hilsenrath'?

Someone once wrote that criticizing economist and New York Times columnist Paul Krugman and his "vulgar Keynesianism" is the internet’s favorite pastime. All along, the Princeton prof has stayed true to the cause of aggressive government action to forestall the downtrodden economy. Large fiscal expenditures, aggressive monetary stimulus, increased legal privileges for organized labor, and boosting the degree of state pillaging – Krugman is the caricature of a tyrannical apologizer who will defend the cause of rampant statism at any cost. But now, it appears Krugman has gone overboard with his progressive moaning. Instead of getting bogged down in the economic imbecility that frequents Krugman’s twice-weekly diatribes; there is a fallacy more fundamental in this latest theorizing. What Krugman is embracing in his latest attack on historical cases has much more to do with the man’s epistemological bent and approach toward economics.

How should investors approach sub-$1,300 gold? VisualCapitalist's analysts each take a side and answer five questions:

1) How does the interest rate impact gold?
2) What is the inflation impact on gold?
3) What is the international impact on gold?
4) What is the short-term outlook for gold?
5) What is the long-term outlook for gold?

to visualize the Bull and the Bear case.

Tech stocks seem cheap on paper - based on valuations relative to the market using both P/E multiples and free cash flow yields they are the cheapest they have been in decades - but as JPMorgan's Michael Cembalest notes there are some obvious reasons for this (and some not-so-obvious). The challenge with technology companies: there are a lot of haves and have-nots; as sector-level valuations may be less useful when looking at technology companies than when looking at sectors with more homogenous revenue performance.

With US equities 7.5% off their all-time highs and on the verge of instigating a 'Markets In Turmoil' special, we thought it perhaps of note that the growth engine of the world continues to see real turmoil. Short-term funding rates remain elevated (7-day repo jumping 240bps to 10% today) as the 'engineered' credit crunch continues for China. The Shanghai Composite opened down today, crossing the 20% drop level from the recent Feb highs (and -16.5% in the last 16 days!) pushing the index to its lowest level since January 2009.

A mortgage market that is practically 100% government-driven, impossibly low rates for impractically long periods of time, no MtM concerns to clear delinquent or foreclosed property from bank balance sheets, and sure enough 'prices' for the houses that are being sold have risen. But there's a rather worrisome unintended (we presume) consequence of this 'recovery'. As BofAML notes today, the US has shifted to renting at the dramatic expense of homeownership...

You know it’s bad for the establishment when Nancy Pelosi gets booed and heckled by her own supporters at a progressive gathering in her home state of California.  It seems the actions of the criminals in control of these United States finally have become so absurd that the apathetic citizenry is being shaken from its long slumber.

Some among the cognoscenti of European elite still crow that the crisis is behind us and point to the closing of current account deficits in Spain, Italy Portugal, and Greece as some evidence of this. However, as JPMorgan's CIO David Cembalest notes, while, in prior cases, this development usually meant a broadening recovery was on the way; the collapse in imports has driven this move and dramatically flatters any overall improvement. Typically balance of payments crises are solved by rising exports and as Cembalest warns, Europe's ability to endure the current collapse remains a major question mark.

If oil and gas is a profoundly dynamic phenomenon, then so too must be environmental risk and conflicts over natural resources - and we are not getting the full picture from the mainstream media, according to Michael T. Klare, professor of peace and world security studies at Hampshire College. As risks multiply, conventional sources evaporate and we are left with “extreme” energy, renewables may be the only way to avoid war and disaster.

The long US war in Afghanistan never made any sense in the first place. The Taliban did not attack the US on 9/11. The Authorization for the use of force that we passed after the attacks of 9/11 said nothing about a decade-long occupation of Afghanistan. But unfortunately two US presidents have taken it to mean that they could make war anywhere at any time they please. Congress, as usual, did nothing to rein in the president, although several Members tried to repeal the authorization. Afghanistan brought the Soviet Union to its knees. We learned nothing from it. Sadly, that is the story of our foreign policy.

That Iceland is so far the only success story in the continent of Europe, which continues sliding into an ever deeper depressionary black hole, as a result of the complete destruction of its financial sector and its subsequent rise from the ashes, is by known to most. What is still not exactly clear is what conditions have allowed success and growth to flourish in a barren wasteland where 60% youth unemployment is increasingly the norm, and where economic "outperformance" is measured in shades of red. As it turns out, perhaps the biggest jolt to Icelandic economic growth is what we said was the correct prescription for resolving not only the US but global growth malaise that struck in 2008: debt liquidation.

Did you know that you are involved in the most massive Ponzi scheme that has ever existed?  To illustrate our point, allow us to tell you a little story...

While we explained - in detail here - the copper-financing-deals that are among the epicentric drivers of the credit crunch in China, there is an (albeit smaller) missing link. The so-called 'Wealth Management Products' that are discussed widely and yet little understood are basically higher yielding vehicles pitched to a greater-fool retail audience with the goal of reducing banks' risk at the behest of the PBOC. Of course that is not how these stuffed-to-the-gills-with-risky-development-projects deals are pitched to the investing public but they have allowed banks (and implicitly local governments) via the infinitely virtuous loop below to fund any and all things construction-based... until now. It seems that losses (step 5), risks (step 3), and illiquidty (step 6) are breaking the loop very rapidly and therefore implicitly lowering credit creation (and therefore growth) or driving credit demand even further into the shadows.

The 100-day moving average (100DMA) and VWAP (as usual) appeared to be the key pivots today as equity markets plunged lower on the open after drifting lower overnight as the liquidity-suck-out circles the global market's drain. At their worst, the S&P 500 was 7.5% off its recent highs but the Fed hawks came out in full dovish mode and provided just enough headline-fodder to slam VIX lower (as it appeared to over-react to the upside at the open) and drag the S&P back above its 100DMA. Some (prematurely) proclaimed the day a victory for the bulls as we didn't close at the lows but the last few minutes of the day saw equities roll back over, VIX rising, credit widening, and commodities fading (even as the USD closed the day unchanged from Friday). Treasuries - the center of most people's attention in recent days - had an interesting day (30Y -1.5bps, belly +3-4bps), especially into the close as stocks sold off (bonds rallied in safe-haven mode as opposed to un-taper mode). The S&P 500 faded and closed below its 100DMA for the first time in 2013... as it seems the time for jawboning os over.

On March 10, 1975, a group of US diplomatic and national security officials gathered at the office of the Turkish foreign minister’s office in Ankara. Henry Kissinger was among them. The discussion turned to foreign aid and supply of parts for military equipment, at which point Kissinger (Secretary of State at the time) suggested something that violated the law. William Macomber, the US Ambassador to Turkey, said, “That is illegal.” Kissinger didn’t miss a beat, replying, "Before the Freedom of Information Act, I used to say at meetings, 'The illegal we do immediately; the unconstitutional takes a little longer.'" Then, in an almost cartoon-like reaction, the room filled with laughter. You can practically see the rising cigar smoke and fatcats slapping each other on the back as they stick it to the little guy. But that one quote, probably more than anything else, sums up the US government’s attitude: they will do whatever they want, legal or not, Constitutional or not.