Archive - Jun 2013 - Story

Earlier today we reported that producer prices in May rose primarily as a result of a jump in electricity and nat gas prices. Which is why it is somewhat surprising that Industrial Production among Utilities dropped by the most, or -1.8%, for the second month in a row, following last month's -3.2% decline. This drop was offset by an increase in Mining IP of 0.7% (a decline from April's 1.1%) and the general manufacturing production which increased by a tiny 0.1%, still the best result of the past three months.  Altogether, these amounted to an unchanged print in the broader index, which printed at 98.7, same as April, and the lowest since February, not to mention below expectations of a 0.2% increase. Finally, looking at capacity utilization, in May total industry CU edged down 0.1 percentage point to 77.6 percent, a rate 0.2 percentage point below its level of a year earlier and 2.6 percentage points below its long-run (1972–2012) average. It was also the lowest print since October 2012. Oops.

Sometimes you see something that is from a credible source and you are so dumbfounded you don’t know what to think. Yesterday's raly-inducing WSJ' Jon Hiselnrath is one such example. If the Fed believes the market is worried about a rate hike, it would be downright terrifying how out of touch the Central Bank. Our explanation for the move in short rates is the loss of confidence in the Central Bank and its policy making process. The Fed’s balance sheet and Quantitative Easing program has become a Frankenstein monster over which the Central Bank is losing control. QE1 started during a crisis and was either incredibly successful or well-timed. It is often forgotten that the S&P 500 dropped another 22% in the first 3 months of QE1. QE1 had an Exit Strategy, a plan, a time frame and a reason. QE3 has no Exit Strategy, no plan, time frame, no expected level of job creation and no known end. As such, forecasting is nearly impossible in a policy by whim environment, especially when the key decision maker is likely to leave.

So much for continued disinflation: moments ago the PPI headline number came out at the highest level since February, or 0.5%, well above the expected 0.1% and up significantly from the -0.7% in April. The core PPI ex-food (which rose 0.6%) and energy (increasing 1.3% in May, the highest since February) rose a far more manageable 0.1% in May, and just 1.7% Y/Y, below the statutory accepted 2% annual growth on both the producer and consumer side: a break down of just which finished products led to this increase (gasoline, eggs and imitation cheese as it turns out) is provided below. Luckily, since nobody in the US either eats or uses energy (because they are such a "small component" of the hedonically-adjusted purse), nobody will mind when companies have no option but to pass through rising input costs to consumers.

It was less than 24 hours after we warned that the Chinese "liquidity shortage" had hit an all time high, as a result of the PBOC's intransigence to inject liquidity into a financial system roiled by Bernanke's and Kuroda's offshore hot-money flows, that things got worse when early in the Chinese trading session we learned that the PBOC experienced its first liquidity drainage failure in 23 months, when the Chinese Finance Ministry failed to sell over 30% of the debt offered at auction - the direct result of a cash squeeze currently ravaging the country's banks. The ministry sold 9.53 billion yuan ($1.55 billion) of 273-day bills, less than the 15 billion yuan target, according to Chinabond, the nation’s biggest bond-clearing house. Agricultural Development Bank of China Co. raised 11.51 billion yuan in a sale of six-month bills last week, less than its 20 billion yuan goal.

"Information about the usage of chemical weapons by Assad is fabricated in the same way as the lie about Hussein's weapons of mass destruction.” Alexei Pushkov, head of the Russian lower house of parliament’s international affairs committee, said on Twitter.

• As Goldman's money-printing tentacle Carney arrives, everyone else leaves: Tucker to Leave BOE (WSJ)
• So much for pent up demand: Refinancings Plunge as Bond Yields Rise (WSJ)
• Singapore Censures 20 Banks for Attempts to Rig Benchmark Rates (BBG)
• Behind the Big Profits: A Research Tax Break (WSJ)
• While working for spies, Snowden was secretly prolific online (Reuters)
• Turkey to Await Ruling on Park as Erdogan Meets Protesters (BBG)
• Iran votes for new president, Khamenei slams U.S. doubts (Reuters)
• NSA revelations, modified wheat cast a pall on U.S. trade talks with Europe (WaPo)
• Euro zone inflation subdued as employment keeps falling (Reuters)

Thursdays may be the new Tuesdays (if only this week), but so far Fridays are still just Fridays, and no mysterious overnight levitation is here to open the market 0.5% higher. The Nikkei 225 retraced a fraction of Thursday’s losses overnight as the positive close on Wall Street and a dovish interpretation of Hilsenrath’s WSJ piece yesterday allowed the Japanese indices to recover from the worst levels of the week. USD/JPY has pared Thursday’s bounce and trades lower as the Bank of Japan’s minutes showed one member of the board proposing the advantages of limiting the bank’s QQE program to just two years in order to avoid financial imbalances. Overnight in China, as we warned yesterday, the liquidity situation got even worse, when the PBOC's attempt to drain liquidity failed to sell some 30% of the planned 15 billion yuan in 273-day bills (more on this shortly), leaving the banks screaming Uncle and on the verge of a full-blown liquidity crisis: we expect rumors, and news, of more banks failing to roll over overnight liquidity to hit the tape shortly.

The rabbit hole just got deeper. A whole lot deeper.

Establishment politicians from both major political parties are rushing to defend the NSA and condemn whistleblower Edward Snowden.  They are attempting to portray Edward Snowden as a "traitor" and the spooks over at the NSA that are snooping on all of us as "heroes".  In fact, many of the exact same politicians that once railed against government spying during the Bush years are now staunchly defending it now that Obama is in the White House. But it isn't just Democrats that are acting shamefully.  Large numbers of Republican politicians that love to give speeches about "freedom" and "liberty" are attempting to eviscerate the Fourth Amendment to the U.S. Constitution.  The government is not supposed to invade our privacy and investigate us unless there is probable cause to do so. Apparently many of our politicians misunderstood when they read the novel 1984 by George Orwell.  It wasn't supposed to be an instruction manual.

Based on Credit-Suisse's Panic-Euphoria model of risk appetite, US bond markets are on the verge of the short-term capitulative "Panic" mode. Each time we have reached this level of 'selling' in the last 6 years, Treasury yields have compressed significantly. At the same time, equity risk appetite remains bearish and US credit risk appetite has resumed its decline (but relative to Treasuries they are significantly over-sold). Not a pretty picture...

Gluskin Sheff's David Rosenberg has ten nagging concerns...

Earlier this month, in an article for “Project Syndicate” famous American economist Nouriel Roubini joined the chorus of those who declare that the multi-year run up in the gold price was just an almighty bubble, that that bubble has now popped and that it will continue to deflate. Gold is now in a bear market, a multi-year bear market, and Roubini gives six reasons (he himself helpfully counts them down for us) for why gold is a bad investment. His arguments for a continued bear market in gold range from the indisputably accurate to the questionable and contradictory to the simply false and outright bizarre. But what is most worrying, and most disturbing, is Roubini’s pathetic attempt to label gold bugs political extremists. It is evident from Roubini’s essay that he not only considers the gold bugs to be wrong and foolish, they also annoy him profoundly. They anger him. Why? – Because he thinks they also have a “political agenda”. Gold bugs are destructive. They are misguided and even dangerous people.

We are trying to remember when the last time the BOJ minutes were important for global risk assets, and are drawing a blank. That's how messed up the financial markets have become. That said, here are the highlights from the BOJ's May minutes which appear to have spooked the Nikkei some 10 minutes ahead of the open.

• HIGHER VOLATILITY MAY ACCELERATE JGB SELLING - Remember the "VaR shock?" 
• L-T RATE RISES DUE TO WEAK YEN, HIGHER OVERSEAS RATES - And higher overseas rates due to weak yen, also known as a Circular iteration
• FEW MEMBERS: BOJ SHOULD WATCH FED POLICY EFFECT ON JAPAN YIELDS - We have several non-lemmings
• ONE MEMBER:MUST KEEP FISCAL DISCIPLINE TO ENSURE BOND STABILITY - And a dissenter

And perhaps that quotes that spooked the market:

• ONE MEMBER: TIMELINE SEEMED TO BE INCREASING BOND VOLATILITY - i.e., the longer it goes on, the more we lose control
• FEW MEMBERS: BOJ SHOULD WATCH FED POLICY EFFECT ON JAPAN YIELDS - Get to work, Mr. Chairman

Nikkei down 200 in minutes.

With most market participants (what's left of them) traditionally narrowly focused on one specific asset class, be it stocks, bonds, rates, or commodities, they sees a few trees but miss the whole forest - a perspective which has to include all cross asset perspectives, which in our day and age is quite complicated, to say the least, due to the prevailing and oftentimes irreconcilable cognitive biases among such traders (all of which tend to interpret Bernanke's market signaling in their different way). So courtesy of Citi's Stephen Antczak, here is a comprehensive summary how every single asset class is viewing the market right now.

For the past five years of suppressed crisis, central states around the world have chosen to create an artificial sense of abundance by printing or borrowing trillions of dollars of fiat money and flooding their economies with this false abundance. This false abundance has led to a continuation of bad decision-making, as it has nurtured a magical-thinking faith that the era of abundance can be conjured up with monetary tricks. This is the essential feature of cargo cults, the magical-thinking belief in the return of abundance without having to chart a new path of authentic reforms. Creating the monetary illusion of abundance is not the same as authentic abundance. Fostering illusions of prosperity only further cripples our ability to make the necessary difficult decisions.