Archive - Jun 2013 - Story

Hidden in the Edward Snowden story is this gem exposing just how it was that the story of Swiss bank secrecy was broken. Guess who was at the bottom? None other than the US Central Intelligence Agency. We are confident any US citizens who recently have had to shut down their Zurich, Geneva, Bern, Zug or Lugano bank accounts at a sizable loss of course, not to mention countless Swiss bankers currently facing prosecution, as well as various Swiss citizens will find it all quite fascinating.

"I realised that I was part of something that was doing far more harm than good... The NSA routinely lies in response to Congressional inquiries about scope of surveillance in America. The NSA is intent on making every conversation and every form of behaviour in the world known to them.... What they're doing" poses "an existential threat to democracy."

- Edward Snowden, 29, PRISM Whistleblower

On this day in 1943 the “Current Tax Payment Act”, was passed by Congress. It provides for income taxes on wages and salaries to be withheld by employers from paychecks. The purpose stated was that is was an emergency provision for the War. Sure — but it is still with us today. Milton Friedman, who was a key player in implementing the “tax withholding” system realized what he had done and sought redemption: "... It never occurred to me at the time that I was helping to develop machinery that would make possible a government that I would come to criticize severely as too large, too intrusive, too destructive of freedom. Yet, that is precisely what I was doing."

Chevron, we have a problem.

Moar may not be better after all...

Gross: Surveillance policy of Bush 42 “puts forward a false choice btw the liberties we cherish & the security we provide.” B. Obama 2007

— PIMCO (@PIMCO) June 9, 2013

As we got closer to June 11/12, the date when the German Constitutional Court will conduct a public hearing on the various challenges to the ESM and OMT, the ECB would have no choice but to disclose more details about the real terms of the OMT to assure smooth passage of the OMT, and not to jeopardize the tenuous balance in Europe where things are once again going bump in the night with bond yields suddenly blowing wider on fears the Japanese bond carry trade is set to unwind... The first such notable detail comes courtesy of the FAZ this morning, which "in fear of the judgment of the Federal Constitutional Court, the European Central Bank (ECB) has revealed for the first time the boundaries of their controversial bond buying program... ECB President Mario Draghi announced last year, if necessary, that unlimited government bonds of distressed euro countries would be monetized to save the euro. Meanwhile, however, the central bank has limited this program to a maximum volume of €524 billion and also communicated this to the court." This is the maximum allowable purchases of Spanish, Italian, Irish and Portuguese bonds.

As we noted just two weeks ago - before the hope-and-change-driven exuberance in Japanese equities came crashing down - "those who believe in Abenomics are suffering from amnesia," and Nomura's Richard Koo clarifies just who is responsible for the exuberance and why things are about to shift dramatically. Reasons cited for the equity selloff include Fed Chairman Ben Bernanke’s remarks about ending QE and a weaker than expected (preliminary) Chinese PMI reading, but, simply put, Koo notes, more fundamental factor was also involved: stocks had risen far above the level justified by improvements in the real economy. It was overseas investors (particularly US hedge funds) that responded to Abe's comments late last year by closing out their positions in the euro (having been unable to profit from the Euro's collapse) and redeploying those funds in Japan, where they drove the yen lower and pushed stocks higher. Koo suspects that only a handful of the overseas investors who led this shift from the euro into the yen understood there was no reason why quantitative easing should work when private demand for funds was negligible... The recent upheaval in the JGB market signals an end to the virtuous cycle that pushed stock prices steadily higher.

There's one big reason why the administration, James Clapper and the NSA should probably just keep their mouths shut: with every incremental attempt to refute some previously unknown facet of the US Big Brother state, a new piece of previously unleaked information from the same intelligence organization now scrambling for damage control, emerges and exposes the brand new narrative as yet another lie, forcing even more lies, more retribution against sources, more journalist persecution and so on. The latest piece of news once again comes from the Guardian's Glenn Greenwald who this time exposes the NSA's datamining tool "Boundless Informant" which according to leaked documents collected 97 billion pieces of intelligence from computer networks worldwide in March 2013 alone, and "3 billion pieces of intelligence from US computer networks over a 30-day period."

The summer driving season is upon us. For many, that means vacations, barbeques, and of course, higher gas prices. For 23 out of the last 35 years, gas prices have risen an average of 14.7% from one summer to the next, while 12 decline years have only averaged -8.1%. Prices tend to be highest in June for any given year, with some years’ prices spiking in late May or early July. Retail gasoline prices are at their highest levels since 1980, in real dollars. But as we have uncomfortably noted previously, Americans have not returned to pre-crisis consumption patterns yet, despite all the chatter of recovery. So far in 2013, in fact, we have consumed 14 million fewer gallons of motor gasoline than in 2012, and nearly 55 million less than we did at the peak in 2007. But, as ConvergEx's Nick Colas notes, we aren’t necessarily "cutting back", as this data suggests: the Consumer Expenditure Survey shows that Americans spent nearly $700 more on gas in 2011 as compared to 2010, the two latest data sets available. What does appear to happening, though, is that Americans are restructuring their spending as healthcare, lodging, and overall taxes take a larger chunk out of every paycheck. Another explanation is fewer commuters to buy gasoline based on a still-high unemployment rate. Basically, we’re not necessarily consuming less 'on purpose': we’re just adjusting to a "New Normal" way of spending. What the data shows is a disconnect between the life of the average worker and the energy market: we assume that strength in the latter goes hand-in-hand with strength in the former. Unfortunately, the average American is being left behind: they’re still struggling.

Evidence of the sequester remains elusive. The warning signs that we track closely – initial jobless claims, Richmond Fed, personal income and payrolls – do not show any material deterioration that we can attribute to the sequester. One mystery is why personal income of government workers has not contracted, as fewer hours worked should equal less pay. The answer, BofAML notes, is simple - it's just beginning...

Fear, like greed, makes people, and that would include investors, behave irrationally. Two major equity bear markets in the last 13 years have traumatized investors. The belief in Modern Portfolio Theory in general and the Efficient Markets Hypothesis (EMH) in particular has been shaken and finance theory will have to be re-written. So, Absolute Return Partners' Niels Jensen asks, what is it specifically that has changed? Human behavior certainly hasn’t. Greed and fear have been factors to be reckoned with since day nought. When faced with the unknown, people (in this case, fund managers) will use whatever information they can get hold of. Hence we shouldn’t really be surprised that fund managers extrapolate current earnings trends when forecasting future earnings, despite the evidence that it is a futile exercise. Occasionally, the Wisdom of Crowds turns into the Madness of Mobs and all rational behavior goes out the window. History provides many examples of that. EMH is entirely unsuited to deal with froth. What made economists love the EMH is that the maths behind it is so neat whereas the alternative truth is a little messy.

Each and every day we are told by asset-gatherers everywhere that stocks are cheap, money-on-the-sidelines will 'greatly rotate', and now that any 'Taper' is good news as it signals the Fed 'believes'. However, it would appear that the market is either a 'hope-discounting mechanism' or a serial non-linear extrapolator; as, just for clarity, this is the 'hope' that equity bulls are buying currently about the next three years' earnings... what could possibly go wrong?

Confirming that the administration is in very hot water over this week's revelations of widespread domestic and global surveillance, moments ago this Saturday afternoon the head of National Intelligence James Clapper released "Facts on the Collection of Intelligence Pursuant to Section 702 of the Foreign Intelligence Surveillance Act" in which he says that PRISM is not an undisclosed collection or data mining program. It is an internal government computer system used to facilitate the government’s... collection of foreign intelligence information." In fact, the program is so legit, it doesn't even work to collect foreign data: "We cannot target even foreign persons overseas without a valid foreign intelligence purpose." Finally, any rumors that Google Glass will be reverting to its original codename "NSA SpyCam" are greatly exaggerated: "Service providers supply information to the Government when they are lawfully required to do so." In short - please believe him. He is from the government, he is telling the truth, and the government is here to help. As for all those Verizon (and other carrier) all too domestic phone intercepts: don't you worry about that.

We’ll admit it. We just don’t understand Prime Minister Shinzo Abe’s much vaunted economic policy known as Abenomics.  Spend public funds that Japan doesn’t have, increase inflation, but not raise minimum wages?  How is this supposed to improve the economy? We know we’re missing something. Secretly, we feel like it only works because people believe it works. Sort of like fairies. If you believe in fairies, gnomes, and Abegnomics – than clap your hands! Follow the rainbow, kids! A pot of platinum yen coins is waiting for you.