Archive - Jun 2013 - Story

Since the topic of quantifying how big the sovereign assistance to assorted banks - both in Europe and the US (which Bloomberg calculated at $83 billion per year) - has become a daily talking point, we are happy to read that Harald Benink and Harry Huizinga have reached the same conclusion as us in their VOX analysis, and further have shown that in Europe the implicit banking sector guarantee by the state is a whopping €650 billion. "Europe has postponed the recapitalisation of its banking sector for far too long. And, without such a recapitalisation, the danger is that economic stagnation will continue for a long period, thereby putting Europe on a course towards Japanese-style inertia and the proliferation of zombie banks... Banks are already saddled with ample unrecognised losses on their assets, estimated by many observers to be at least several hundreds of billions of euros and mirrored by low share price valuations, and an additional loss of their present funding advantage will be crippling."

"This Administration also puts forward a false choice between the liberties we cherish and the security we demand. I will provide our intelligence and law enforcement agencies with the tools they need to track and take out the terrorists without undermining our Constitution and our freedom. That means no more illegal wiretapping of American citizens.... No more ignoring the law when it is inconvenient. That is not who we are. It's not what is necessary to defeat the terrorists... Our constitution works. We will again set an example for the world that the law is not subject to the whims of stubborn rulers and that justice is not arbitrary. This administration acts like violating civil liberties is the way to enhance our security. It is not."

This Friday's night tape bomb came not from the administration, which may have run out of scandals to reveal for the time being, but from FaceBook which late in the evening disclosed the extent to which it has been cooperating with the government on spying on its users. Which also changes the public narrative built upon a pyramid of lies and secrecy one more time - recall how one week ago the company tried to wash its hands one weeks ago when Mark Zuckerberg said that "Facebook is not and has never been part of any program to give the US or any other government direct access to our servers." Just indirect. So in what was spun to be a rebellious act by a private company, long-cooperating secretly with the government, FaceBook's general councel posted on the company's news blog that the company is releasing data "including all national security requests." In doing so FB became the first US internet company to reveal the extent of official US government demands to hand over information, including confidential, about its users.

Well, isn't that convenient?  At the moment when the Obama administration is feeling more heat then ever before, it starts another war.  Suddenly everyone in the mainstream media is talking all about Syria and not about the IRS scandal, Benghazi, NSA snooping or any of the other political scandals that have popped up in recent weeks. As if on cue, Obama made headlines all over the globe on Thursday by claiming that the Syrian government has used chemical weapons against the rebels "multiple times", and that the U.S. was now ready to do more to assist the rebels. As far as the Obama administration is concerned, there is no such thing as a coincidence.  The timing of this announcement regarding Syria was not an accident.

If stock markets really do their best to discount earnings six months ahead of time, then it’s beginning to look a lot like Christmas.  ConvergEx's Nick Colas' monthly review of analysts’ revenue expectation for the Dow 30 companies finds that hopes for growth in the second half of 2013 continues to diminish.  The upcoming Q2 2013 results won’t be much to write home about either, with average top line growth versus last year of just 1.1% and (0.7% ex-financials), the lowest comps analysts have put in their models since they started posting expectations last year.  Back half expected sales growth is down to an average of 3.0 – 3.2%, where these estimates were over 5% just three months ago.  If you are hoping for 3-4% revenue growth – the kind that allows profit margins to expand – you’ll have to wait until 2014, at least according to Wall Street analysts. The bottom line is that this data provides a less-discussed reason for all the recent stock market volatility.

Sometimes one must see to believe, in this case believe just how massive the raw demand for the shiny, barbarous relic is in China during times of relative monetary stability (in this case the Dragon Boat Festival). Now assume runaway inflation as we saw in 2011 China, which may be unleashed by something as catalytic as the PBOC once again deciding to inject liquidity in its suffocating banking system and to revive growth in the stalling economy.

We have been writing extensively about the data behind the headline media reports and discussing the importance of the underlying data trends relative to the broader macroeconomic perspectives.  However, it is sometimes helpful just to view the various economic indicators and draw your own conclusions outside of someone else's opinion. With the economy now 48 months into an expansion, which is long by historical standards, the question for you to answer by looking at the charts below is: "Are we closer to an economic recession or a continued expansion?"

"Part of my advantage, is that my strength is economic forecasting, but that only works in free markets, when markets are smarter than people. That’s how I started. I watched the stock market, how equities reacted to change in levels of economic activity and I could understand how price signals worked and how to forecast them. Today, all these price signals are compromised and I’m seriously questioning whether I have any competitive advantage left. Ten years ago, if the stock market had done what it has just done now, I could practically guarantee you that growth was going to accelerate. Now, it's a possibility, but I would rather say that the market is rigged and people are chasing these assets, without growth necessarily backing confidence. It's not predicting anything the way it used to and that really makes me reconsider my ability to generate superior returns. If the most important price in the most important economy in the world is being rigged, and everything else is priced off it, what am I supposed to read into other price movements?" - Stanley Druckenmiller

Several days ago, in the damage control aftermath of Snowden's NSA espionage conspiracy fact confirmation, Barack Obama took to the TV pulpit where he appealed to the nation, as he always does in times of strife, explaining that one can't have 100% security and 100% privacy. He said some other things, all of which as usual wrapped in rhetorical brilliance, if holding little of pragmatic and realistic value. So who better the debate the president's attempts at damage control than the vice president himself. Here, for your viewing pleasure, is Joe Biden, circa 2013 debating Barack Obama, circa 2013.

How risky is gold relative to other assets?

Just a few days ago we warned of the surging incentives among auto makers - and the diminishing benefits of that margin compression. It seems GM, not to be outdone by its peers, has stepped up with a hefty $5,000 discount for the Chevy Volt with demand for electric vehicles (EV) low, and falling lower, and manufacturers desperate to try anything to try and increase sales. Normally, after a couple of years of underperforming sales a manufacturer would pull its car from the market, however EV manufacturers are under pressure to keep struggling along, partly due to regulations in California (the largest car market in the US) that require all major manufacturers to offer a minimum number of Zero-Emission Vehicles. Unintended consequences once again appearing amid government regulation and cheap credit.

With unprecedented government largesse in all major financial centers around the globe, the throughput to job growth has been abysmal. Also there have been consistently poor results in key emerging economies, as we highlight in this issue of Abraham Gulkowitz's The PunchLine chart extravaganza. Mixed signals from Asia, in particular, have caught world markets off guard. New Chinese trade, inflation and industrial production datasets all undershot general expectations. Disappointing export and import figures were a particular concern. Another major concern is the likely timing of a gradual change in the Fed’s easing posture. It is inevitable. What is worrisome is that there may have been a significant reliance – a dependency - on easy money that has built up in world financial markets. Any reversal in this historic experiment in government policy leads us into the unknown.

Equities closed red for the third week of the last four with today's selloff reducing about half of yesterday's gains. The 5.25% high-to-low drop (in the S&P 500) was bid on low volume yesterday but heavier volume today was to the downside. While stocks were sold, Treasuries were bid and had their best week in over two months (as some level fo safe-haven Syria bid was evident - as well as de-Tapering chatter). What was interesting is that the USD - typically bid when war tensions rise - is weaker - its worst 3-week run since October 2010. JPY strength (+3.25%) was the main driver of USD weakness. Precious metals were bid instead as Oil and silver coincided up around 2% on the week. Financials were the worst sector on the week as, thanks to yesterday's ridiculousness, homebuilders went from zero to hero and ended the week +1%. VIX rose 0.5 vols on the week with its highest close of the year.

"First they ignore you. Then they ridicule you. And then they attack you and want to burn you. And then they build monuments to you."

Has Abenomics failed? Impossible, Abe's fans will say: he has barely had a chance to explore his policies. That maybe true, but one major problem with Japanese society is that it is very impatient when it comes to its politicians. In fact, the median tenure in office of each of its last 10 prime ministers is precisely 419 days, or just over 1 year. And Abe is already six months into his term (his second term, of course: let's not forget he quit his first stint as PM after exactly 365 days due to diarrhea). What is worse is that the key variable that has kept his approval rating high has been the stock market: worse, because the stock market is now in freefall, and with few favorable things Abe can point to in the economy (recall that his entire policy is based on a stock-market driven wealth effect - no Nikkei ramp, no wealth effect, no inflation), he suddenly finds himself in a support vacuum.