Archive - Jun 28, 2013 - Story

Day after day we are force-fed the typical mumbo-jumbo jargon memes from strategists, analysts, and asset-gethering commission-takers. Today we get a breath of fresh air from, arguably, the man on the street - whose perspective seems very prescient. 'Pawn Star' show business owner Rick Harrison explains to CNBC - in words that we can all understand - why gold remains a crucial insurance for people because "governments can screw up the currency," how our economy is based purely on printing money, physical gold and paper gold disconnects - "I'm having a real difficult time right now getting physical metal. It is the crazy world of gold and silver; sometimes the paper market is going down, but you can't actually find the physical items," and the increasingly bubble-like reality of our housing market (especially in Las Vegas).

How bad is the situation? Quite bad. As as of last night, courtesy of SMRA, we know that the amount of ten-year equivalents held by the Fed increased to $1.608 trillion from $1.606 trillion in the prior week, which reduces the amount available to the private sector to $3.603 trillion from $3.636 trillion in the prior week. There were $5.211 trillion ten-year equivalents outstanding, down from $5.242 trillion in the prior week. After the Treasury issuance, maturing securities, rising interest rates, and Fed operations during the week, the Fed owned about 30.86% of the total outstanding ten year equivalents. This is above the 30.63% from the prior week, and the percentage of ten-year equivalents available to the private sector decreased to 69.14% from 69.37% in the prior week.

A system that suppresses dissent is fault-intolerant, ignorant and fragile. Any event that does not respond to centralized, rationalized policy creates unintended consequences that throws the centralized mechanism into disarray. Lacking dissent and redundancy, the system piles on one haphazard, politically expedient "fix" after another, further destabilizing the system. The event that triggers crisis and collapse isn't important; the system, rendered unstable and fragile by centralization, is primed for crisis and collapse. The dry underbrush is piled high, and if the first lightning strike doesn't start the fire, the second one will. With dissent and the inefficiencies of redundancy and decentralized pathways of response gone, there is nothing left to stop a conflagration that consumes the entire forest.

The 'outing' of the Irish bankers for gaming the central bank and mocking zee Germans has infuriated an election-hungry (and purse-string-holding) Angela Merkel. Appealing to he populist roots, Reuters reports, Merkel exclaimed, "For people who go to work each day and earn an honest living, this kind of thing is very hard to take, it's impossible to stomach." Germany is concerned it will be asked to rescue more mismanaged banks (even with the template of bank resolution in place) as she adds - perhaps most prophetically, "this is really damaging to democracy, the social market economy and all that we work for." Of course, this show of disdain seems highly hypocritical since Merkel's main role is to keep Deutsche Bank alive (as we explained in words and pictures here).

The last few days in Europe have been marked by a bounce off the post-FOMC plunge lows (just as in the US) but today's weak close in all the highest-beta most-levered momo trades suggests things are not done with yet. As the following two charts show, once the 'taper' uncertainty began (and US Treasuries started to leak), Europe has been (almost) a one-way street worse...

UPDATE: POMO ends and... Dow drops 100 points

When conspiracy theory becomes conspiracy fact once again...

In case investors in the US were lulled into believing that since the Dow is limping higher, after a full-court-press open-mouth-operations week of jawboning from the Fed, that all is well again; we present, the Italian banking system. In the last week, stocks in this sector have had 8 swings of approximately 6% up or down. Still think all is well in the world of highly-levered high-beta risk bets? Mint Partners' Bill Blain explains why European banks are collapsing...

Given surging mortgage rates, fading macro data, a Fed that perhaps is not so prone to support people's 401(k)s, we wonder, just as we have seen in the prior two cycle, whether the gains in confidence (based on future hope and expectations more than current situations) may have peaked. With yet another lower low and lower high, it seems the easy-money path to creating animal spirits is suffering an epochal series of diminishing returns.

A devastating 49.0 in April, a surge to 58.7 in May, and then a crash right back to 51.6 in June, far below the expectation of a 55.0, and just above the lowest economist forecast of 51.5. This was the biggest monthly crash in over 4 years. What's another name for this hilarious data series? Why the Baffle with BS Index of course, or Chicago PMI for short. What many saw as definitive proof of an industrial rennaissance in the May number (which only led to a huge ISM disappointment), will mean the economy stasis continues which should at least be good for the market. And since Baffle with BS must continue, look for the Mfg ISM, for which Chicago is a leading indicator, on Monday to be a solid beat. As for the PMI, fear not: it's the weather's fault.

"Bond and stock markets fell sharply in response, but that should not be too surprising. The Chairman’s statement forced financial market participants to re-evaluate the likely total amount of securities the Fed would buy under this open-ended purchase plan — in other words, how much liquor would ultimately be poured into the punch bowl. Market participants also had to reconsider their estimate of when the Federal Reserve would begin to remove the punch bowl by raising interest rates. These reassessments appear to have warranted price changes across an array of financial assets. As market participants gain additional insight from the words of Federal Reserve officials or by policy actions in coming quarters, further asset price volatility seems likely." - Richmond Fed's Jeffrey Lacker

Bond Funds saw a a massive $23bn of redepmtions in the latest week - a record in absolute terms. The outflows were across every segment of the fixed income market and are second only (in %of AUM) to the capitulative collapse that occurred after the October 2008 plunges (after which Treasuries rallied 5% in 6 weeks). The past 4 weeks have seen an unprecedented $58bn of outflows. All of this is providiung fodder for the mainstream media (and several hopeful strategists) that the great rotation 'must' have started. However, as BofAML notes, there were $13.1 billion of outflows from equity funds (including $6.7 billion from pure long-only funds) - the most since late April. It appears the money that has been 'rotated' into stocks from money-market funds has merely reverted back into these safe-havens - another reason why the powers that be would like to drastically reduce the access to these liquidity-sapping investment vehicles to keep the sheep in risk assets.

From time to time it is necessary to quietly sit down and assess where we are going.  Sovereign revenues cannot, by any stretch of the imagination, support the imbedded costs of countries. Investors of the world are in another reality altogether. They do not want to hear anything about these sorts of things. They are in the state of, "ignore and deplore." You can live there for a while. Government induced fantasies have occupied the center stage before and for some time. Our current denial of reality is fueled by all of the money that the central banks have pumped into the world but that will be diminishing as the Fed and others examine the longer term consequences of their actions. There are always consequences. What has been put off will arrive. It was always just a matter of time.

The first of three Fed speeches is out, and as expected, it contains nothing new save for the ongoing barage of stock market battering for daring to sell on last week's Bernanke warnings that the Fed's monthly flow is set to begin tapering in September. It continues to be as if the Fed is shocked to learn that nothing else matters in this "economy" and, of course, "market" than what the Fed will do and say.

• Fashionable 'Risk Parity' Funds Hit Hard (WSJ)
• No 1997 Asian Crisis Return as China Trembles (BBG)
• Greece Faces Collapse of Second Key Privatization (FT)
• China Bad-Loan Alarm Sounded by Record Bank Spread Jump (BBG)
• Iranian official signals no scaling back in nuclear activity (Reuters)
• Asmussen Says Any QE Discussions at ECB Not Policy Relevant (BBG)
• Flat Japanese consumer prices aid Kuroda (FT)
• Vietnam Devalues Dong for First Time Since ’11 to Boost Reserves (BBG)
• World Bank Sees ‘Vulnerable’ Food System on Climate Change (BBG)
• Fed big-hitters seek to quash QE fears (FT)
• EU Leaders Set to Slow Support for Ailing Banks (BBG)