Archive - Jul 30, 2013 - Story

Accounting for “Sunk costs” – money already spent that cannot be retrieved – is likely both the best understood and most widely ignored bit of wisdom on Wall Street and beyond.  As ConvergEx's Nick Colas notes, whether you buy a stock or make a corporate investment or purchase a theater ticket, that money is gone forever.  If the investment doesn’t pan out or you hear that the play stinks, you are better off cutting your losses or, in the case of the ticket, just going out to dinner.  But, Colas quickly reminds us, that is way easier said than done, as apparently humans are generally hard wired to fall further in love with whatever they have already chosen.  The single largest sunk investment of recent decades is the Federal Reserve’s bond buying program, with $2.4 trillion in QE 1, 2, and 3 on the line. Tomorrow, we’ll get a another glimpse of how well the Federal Open Market Committee knows its sunk cost theory – and what they know about Friday’s jobs number.

In the first act of the movie "Willy Wonka and the Chocolate Factory," Bill, the owner of the sweetshop, sings a song called "The Candyman", which praises the wonderful world created by Wonka and espouses the pure joy of living in a place where everything is deliciously sweet; miracles, dreams, and rainbows are ubiquitous; and any sorrow is separated and discarded in favour of cream... pure cream. As Bill hands out free candy to a group of wide-eyed kids, you can see in their eyes the pure joy that only comes of living in a world where everything is wonderful and nothing bad ever happens. Ring any bells?

There are certain potential catastrophes that can be so threatening we must take steps to insure ourselves even though the probability of one actually occurring is slim. It’s like keeping a small fire extinguisher under your kitchen sink and hoping you never have to use it. We cannot put our life savings and our family at risk by trivializing dangers potentially on the horizon. While CNBC may want to pooh-pooh the probability of something similar happening in our country, we all know that creating massive amounts of currency out of thin air always results in the currency collapsing, or at the very least being revalued in a way that most of us will suffer from. A prudent investor (particularly one on either side of the cusp of retirement) would do well to take out some insurance. That is generally done by investing in metal, farm land, and other forms of hard assets.

When one observes the decline in Deutsche Bank's two net derivative exposures since 2011, one notices something curious: over the past year, the nominal net exposure of the bank's positive and negative derivative market values has collapsed from a combined total of €1.678 trillion to just €1.253 trillion, with consecutive declines over each of the past 4 quarters for a cumulative net deleveraging of €425 billion.

Despite Tom Keene's best efforts to appear fair-and-balanced, this brief interview on Bloomberg TV places ECRI's Lakshman Achuthan in the uncomfortable position of destroying every propagandized 'fact' that the mainstream media is entrusted with disseminating to the Pavlovian investing community. From recessions with job growth ("a US recession began in 2012") to the wealth divide and from GDP revisions to job quality differentials, Achuthan warns the US is becoming Japan, "U.S. growth over the last five years is weaker than Japan during the Lost Decades." Keene's insistence that things are on-the-up (though admitting that Achuthan's call on the decline in growth was correct) is met with the rhetorical question, "you wouldn't have four years of zero-interest rate policy and quantitative easing if everything was okay."

We previously showed hard evidence of the Bank of England's complicit hiding of the truth about the quality of Bundesbank gold stored in the Fed's vaults. A few weeks later in a "completely unrelated" action, the Bundesbank dramatically shifted its recent stance, and demanded that its gold be repatriated into its own vaults (and we now know the impact that has had on the paper-physical paper markets). However, in yet another one of the 'darkest episodes in central banking history' the FT reports, the Bank of England facilitated the sale of gold that was looted by the Nazis after their invasion of Czechoslovakia in 1938. Of course, judging today's central bankers by this ethical (and potentially criminal) behavior of over 70 years ago is unfair but it is notable that the pattern of whatever-it-takes and at-all-costs decisions, coupled with pervasive opacity and stark unaccountability, appear to have been formed a long time ago.

As the world waits breathless for tomorrow's preliminary (only to be revised again and again) GDP estimate for Q2 2013 (having seen expectations collapse in recent months), there remains the ever-present faith that Q3, Q4, and on and on will see the mean-reverting growth lift the US economy from its current 'Better-Bargain'-less dystopia. So what happens next? Well, let's look at the trajectory of GDP expectations in 2007...

While we know that the Fed will be forced to taper in the short-term as it desperately avoids the 'appearance' of outright monetization that a falling deficit will create, Marc Faber sums up the endgame perfectly in this clip: "I don’t think they will come to their senses for the simple reason that insane people don't realize that they are insane." Faber adds, "they think they’re doing a great job," and in fact they believe - in general - that "if anything, we need to do more, not less." The 'forced-taper-to-plunge-to-untaper' progression means it's going to get worse; as Faber notes, QE/printing will continued indefinitely "until the system breaks down." Having printed this much money with such dismal results, Faber concludes, "the Fed is completely clueless."

The world supply of crude oil isn’t going to run out any time soon, and we will be producing oil for decades to come. However, what we won’t be doing is producing crude oil – petroleum – at the present rate of around 30 billion barrels per year. For a global civilization that is based almost entirely on a plentiful supply of cheap, crude oil, this is going to present some considerable challenges.

Earlier today, when we reported that median asking rents in the US had just hit an all time high, we had a thought: how long until the hedge funds that also double down as landlords decide to bypass the simple collection the rental cash flows, and instead collateralize the actual underlying "securities"? One look at the chart below - which compares the median asking "for sale" price in black and the median rent in red - shows why. The last time there was a great divergence (to the benefit of housing), Wall Street spawned an entire Residential Mortgage-Backed Securities industry where Paulson, Goldman willing sellers would package mortgages, often-times synthetically, slice them up in tranches of assorted riskiness, and sell them to willing idiots yield-starved buyers. As everyone knows, that particular securitization bubble ended with the bankruptcy of Lehman, the bailout of AIG and the near collapse of the financial system. As it turns out, the answer to our original question was "a few hours" because securitizations are back, baby, and this time they are scarier and riskier than ever.

For the 5th time in 5 days, equity markets dropped back below their May 2013 all-time highs only to be rapidly bid back above that magical level into the close. Stocks in general went nowhere fast with another heavy volume dip and light volume rip to close the day near VWAP. Nasdaq continues to outperform from the last FOMC meeting (up over 4%) even though Tech is unchanged since 6/19. Homebuilders are the drag (down 5.5% from the last FOMC). Treasuries ended the day unchanged (selling back from a 5bps yield compression across the US open after housing data disappointed). AUD continued its overnight weakness (as did GBP) but the USD managed only very modest gains on the day. Gold flatlined as the rest of the economic-commodities slipped lower (WTI at $103 with spread to Brent testing $4). Do not panic!! The Dow closed red for a second day in a row for the first time in six weeks!

While one can have sympathy for the over-levered, underwater homeowners that took free-money with both hands and feet as house prices surged in the mid-2000s (just like they are now) but the latest moves to 'save' people from themselves in the city of Richmond, CA is raising both market and constitutional concerns. As NYTimes reports, the city is the first to use eminent domain by the local government (in partnership with a 'friendly' mortgage provider) to seize homes, force investors to take a loss on the mortgages, re-issue a new 'lower' mortgage, and allow the homeowner back with positive equity (ready to lever-it-back-up into a new Harley). As Guggenheim notes, this is likely to hurt supply of new mortgages and as we noted previously (here and here), it seems clear that private-label MBS holders will not be happy, consumers hurt as mortgage costs would rise (this 'risk' has to be priced in), and taxpayers unhappy as this is yet another transfer payment scheme to bailout underwater loans.

The heart of any con is winning the trust of the mark, and the heart of counterfeiting is persuading the mark that a facsimile of value is real. What happens when trust in the counterfeiters is lost? What happens when the assets presented as zero-risk lose value? What happens when "the Fed has our back" doesn't stop the stock market from careening off the cliff of a global credit crisis, which is another term for a crisis of faith that the system is as stable and resilient as it is presented? Trust is a fragile creature. It is a most ephemeral yet powerful force. Once lost, it can never be fully regained; it can only be earned back, one step at a time. We are fast approaching the moment when the value of the counterfeit trust, the counterfeit assets and the counterfeit promises are revealed as fakes.

Today, the wealth redistributor par excellence came to us live from an Amazon warehouse in Chattanooga, TN where with dramatically rolled-up sleeves, Obama praised a vision of a full-time middle class to a fulfillment center gathering of racially diverse, part-time workers, thereby concluding "America's Transformation To A Part-Time Worker Society" first observed here in 2010.

Is there such a thing as a ‘safe’ fiat currency? The term itself is as intellectually disingenuous as terms like ‘fair tax’ or ‘government innovation’. But as we’ve been exploring recently why modern central banking is completely dysfunctional, it does beg the question – is any currency ‘safe’? Let’s look at the numbers for some data-driven analysis. But which is the safest major currency?