Archive - Jun 2013 - Story

Reuters reports that Japan's public pension fund, the world's largest with a pool of $1.1 trillion, and which until recently was the mystery buyer ex machina that was supposed to buy up the Nikkei past 16,000 and on its way to 20,000, 30,000 and more (a dream that fizzled as quickly as it appeared following our explanation that buying stocks means selling bonds), may start buying real estate to boost returns in a move that could involve tens of billions pouring into cities such as London and Paris. Or New York.

The evolution of the Case-Shiller Index viewed in real time is like watching paint dry, but without the possible dramatics of runs... So far we are headed right down the middle towards the main area of stability, where inflation-adjusted house prices remained for about 50 years after WWII. You can throw an apple really high, but it's hard to keep it from falling afterwards. Clearly, if people are to get wealthy from real estate, Bernanke needs to keep blowing (or is it sucking?)

Among the first things we learn in school are the rules of grammar - the building blocks of proper communication which underpin the English language. It’s amusing therefore to watch as “the market” (a collective expression of the grammatical competence of billions around the world) tries to dissect every utterance made by the likes of the Federal Open Market Committee, which itself spends an inordinate amount of time structuring its prose so as to convey, via the most intricate inflection imaginable, exactly what it intends to do. Grant Williams' latest must-read newsletter starts with this mystery of confusion, bluff, and counter-bluff, explaining that [the Fed] does it because then they would have no room to change course when it was proven that they had no idea what they were doing. Surely this makes more sense in reality: "Because the Fed has no idea what it is doing, it is much more sensible for it to be as vague as possible in its choice of language so as to leave itself room to change course when the magic pixie dust it is sprinkling on the world turns out to be largely ineffective." Much Better...

Presented with little comment - via the Electronic Frontier Foundation, the full timeline of legislation, rulings, and events related to domestic surveillance in the United States (based on credible accounts and information found in the media, congressional testimony, books, and court actions).

"If one of you stands up right now and heads for the exit, the rest of the audience probably won’t pay much attention. If ten of you do it, one or two people may notice and follow. But if 400 of you suddenly head for the exit, the rest of the audience would probably follow quickly." It’s a great metaphor for how our financial system works. The entire system is based on confidence. And as long as most people maintain this confidence, everything is fine. But as soon as a critical mass of people loses confidence in the system, then it starts a chain reaction. More people start heading for the exit. Which triggers even more people heading for the exit. This is the model right now across the system. And it’s especially pervasive in the banking system. Modern banking is based on this ridiculous notion that banks don’t actually have to hang on to their customers’ funds. Bottom line, it matters where you hold your savings. Balance sheet fundamentals are critical.

In a world of surging youth unemployment, increasingly-wide wealth inequalities, and  generation of older citizens working longer implicitly impacting the youth, we thought it perhaps useful to see which nations in the world are the most prone to 'vice'. Bloomberg ranked countries on their propensity for vice, measured by alcohol and cigarette consumption, drug use and gambling levels and found that the Czech Republic and Slovenia top the charts while Zambia and El Salvador are the most virtuous (least vice-prone). The US sits at a 'healthy' 16th in the world overall (just above the UK) but Italy, Spain, and Greece are all more vice-prone; but have no fear as the USA is Number 1 in the world for the annual prevalence of all drug usage.

The vast majority of Americans are going to be absolutely blindsided by what is coming.  They don't understand how our financial system works, they don't understand how vulnerable it is, and most of them blindly trust that our leaders know exactly what they are doing and that they will be able to fix our problems.  As a result, most Americans are simply not prepared for the massive storm that is heading our way.  Most American families are living paycheck to paycheck, most of them are not storing up emergency food and supplies, and only a very small percentage of them are buying gold and silver for investment purposes. Right now we seem to be living in a "hope bubble" and people have become very complacent.  They seem to have forgotten what happened back in 2008... 

There is plenty of discussion of outflows but we though the following chart was perhaps the most insightful at why this drop is different from the last few year's BTFD corrections. As we noted here, corporate bond managers have desperately avoided selling down their cash holdings (since they know dealer liquidity cannot support broad-based selling and its an over-crowded trade) and bid for hedges in CDS markets. But it seems, given the utter collapse in the advance-decline lines for high-yield and investment-grade bonds that the liquidations have begun. While the selling in high-yield bonds is on par with the Lehman liquidationlevels, it is the collapse in investment grade bond demand that is dramatic (and worse than Lehman). It's not like we couldn't see it coming at some point (here) and as we warned here, What Happens Next? Simply put, stocks cannot rally in a world of surging debt finance costs.

The overnight gains from a market's misperception of PBOC comments faded quickly as out of the gate this morning it appeared 'good news was bad' as the market faded fast on heavy volume (after decent volume) but once the first hour flush was done we retested highs and then trod water for most of the rest of the day. S&P 500 tracked AUDJPY almost tick-for-tick all day and got its lift - testing up to unchanged from Friday's close. Equities were aided (in a correlated fashion) by VIX compression (down over 2 vols below 18%) and a very significant compression in credit markets (more below) which provided a stop-run ramp at 330 (surprise) but that faded fast into the close (leaving stocks still with decent gains but on very weak volume). Treasuries saw more longer-dated underperformance (bear steepening with 10Y/30Y +7bps, 5Y +3bps) and FX markets saw the USD rise modestly - both clearly more Taper-on moves. Equities closed weak.

After fluctuating wildly this morning between $1 and $35, the price of money spiked to an unprecedented $90 a dollar in afternoon trading, plunging international financial markets into chaos... "Everywhere you look, panicked investors are clamoring to exchange their dollars - which can only purchase about two cents apiece right now - for more stable dimes and quarters, which are trading at $18 and $32.25, respectively." President Obama is expected to address the nation later today about easing America’s dependence on domestic currency.

Perhaps - as we are always reminded - it will be different this time but following this morning's surge in Consumer Confidence, we got to thinking, just why is everyone so confident? The facts are, as Citi's FX Technicals group notes, the last times we saw mortgage rates surge like they just have, that marked the peak in consumer confidence and the market followed shortly after. It seems that the Fed, by engineering ever lower rates, can lift confidence; but as is clear from this chart (and as we noted previously) there is a limit to this effect (ZIRP) and each cycle has diminishing returns.

A mere 39 days after the once-largest-market-cap company in the world came to market with its bond issues, those that saw 'value' in the 3.85% coupon are not having a great run. The 30Y issue is now down 14% from the break price (and down over 18% from high price to low price since issuance). What is perhaps most notable is that while AAPL's equity price has also struggled, it is only down 9% in that period. And don't blame it all on those pesky Fed-driven rates, AAPL's spread (credit risk) has risen from ~90bps to over 110bps in this time.

Goodbye housing (non)recovery... except for those private equity-cum-landlord firms and offshore oligarchs who pay all cash of course. "The 30-year fixed mortgage rate on Zillow(R) Mortgage Marketplace is currently 4.38 percent, up fifty basis points from 3.88 percent at this time last week. The 30-year fixed mortgage rate hovered between 3.82 and 4 percent late last week, before spiking up near the current rate over the weekend. This represents the highest rate on Zillow Mortgage Marketplace since July 2011."

Presented with little comment but we've seen this picture before a few times...

The modern-day role of the Fed is to distort these prices, effectively to disrupt the economy’s guidance system. The purpose is to fool you into making improper decisions. This deception threatens social harmony and individual well-being. Distorting prices, especially systematically, is the equivalent of drugging a person and then having him make major life or financial decisions. Drugs and price distortions have the same effect on decision-making - the mind is unable to properly receive and process information. The Fed’s behavior of distorting prices is deliberate dishonesty calculated for government advantage. The policy is designed to deceive others to behave in a manner which is ultimately harmful to these individuals. It is outright fraud! A government that can only survive via fraud has reached the desperate stage. It can create great harm in its death throes but its survival is unlikely.