Archive - Jul 2013 - Story

As municipal bankruptcies become the New Normal, it's worth noting that litigation does not generate more wealth to distribute, it simply burns existing wealth, leaving less to distribute. Yes, this is stating the obvious, but what's obvious is precisely what's ignored when fantasy attempts to trump reality. Every constituency in every municipal bankruptcy believes they're the most deserving, and they believe that litigation will reveal the obvious truth of their claim. Unfortunately for those counting on the Grand Federal Bailout, the queue at the Federal bailout window is already long: $100+ billion bailout of FHA, which issued hundreds of billions of dollars of mortgages to unqualified buyers; $100+ billion in uncollectible student loans owned or guaranteed by Federal agencies, and of course the $1+ trillion annual deficits needed just to fill the massive feeding troughs of the Status Quo.

Here is the cover of the latest New Yorker magazine, which one can only hope puts to rest the latest surreal episode of a man who has become a walking parody of himself, and which increasingly blurs the boundary between US politics and reality TV (and cunningly so: 69% of 18-29 year olds believe he should continue his mayoral campaign).

Despite more than two-third of respondents expecting interest rates to rise in the year-ahead, and inflation to increase; and despite dramatically higher current mortgage rates and a surging gas price, consumers haven't been this 'happy' since July 2007. Unfortunatley for those expecting something more, it appears the slightly-better-than-expected print is not good enough to cause the market to plunge (in a good-is-bad "we've done our job" manner) and not bad enough to cause the market to soar (in a "we need moar animal spirits manner). Of course, we've seen this before (here and here) and it doesn't end well.

There appear to be three critical aspects playing out behind the scenes in markets that are little discussed as potentially catalyzing events. With all eyes focused on FOMC next week (and Kuroda Sunday), the ABCs (Angela Merkel's election, Bankrupt Detroit's fallout, and Corrupt Cohen's potential contagion) make few strategists' notes but could quickly ascend to public enemy number one for the secular bull case. Little Red Riding Hood thought it a lovely day to walk to Grandma’s house. Then look what happened.

In the last month not a day appears to pass without some news about a glitch, malfunction, or full-blown fire, affecting the ironically named Boeing Dreamliner (resulting in the stock soaring to daily all time highs). Today promises to be no different, with not one, not two, but three separate incidents impacting the airplane. Reuters reports that Qatar Airways has taken one of its 787 Dreamliners out of service following what it described as a "minor" technical issue. "Minor" as in a burnt-out indicator light, or "Minor" as in the plane nearly fell out of the sky burnt to a crisp? The distinction can be important.

With hotter than expected inflation in Japan (yes we know that's what they wanted), it appears (from Nikkei and JPY) that there is a growing concern Kuroda will back off just a little during his speech on Sunday night (NY time) from the print-til-we-stink paradigm. Japanese stocks are down over 5% since Tuesday and the JPY is surging (suggesting markets are crying out for Kuroda to do a Bernanke and shift to longer/lower forward guidance). US equities - dragged by JPY-related carry unwinds - are also diving, back near yesterday's lows.

Government efforts to curb imports is meant to limit that downward pressure on the Rupee but has instead driven a surge in illegal imports (smuggling) of the precious metal. As the WSJ reports, the measures are having an effect. Gold imports declined 11% to 859.7 tons in 2012 from 969 tons in 2011 and the total for June fell about 80% to 30 tons from 162 tons. But while supply may be falling, demand isn't - "Trying to manage this demand, which is so diversified, by restricting supply will lead to undesirable consequences." Sure enough, "smuggling of gold seems to be increasing month on month," the number of people arrested by the department for gold smuggling rose to 32 in Q2 2013 from just 4 the year before - and officials are able to "detect only about 5% to 10% of the gold smuggling." The value of the gold seized during the quarter was 270 million rupees, more than 10 times that of last year.

Is Vladimir Putin, tired with Edward Snowden recasting himself as Tom Hanks in the Moscow transit terminal, about to send the NSA whistleblower packing, bound and gagged, and gift wrapped back to Obama? It increasingly appears so. Reuters reports that, in a sudden and abrupt shift to the previously defiant tone out of Putin, Russia's FSB federal security agency and its U.S. counterpart, the FBI, are in talks over the fate Edward Snowden, who is stuck at a Moscow airport, Russian President Vladimir Putin's spokesman said on Friday. Dmitry Peskov said the Kremlin was not involved in talks over the 30-year-old American, who is wanted by the United States on espionage charges.

Today, to much fanfare, the FT and other media blast that "Japan posts highest inflation rate since 2008" using this as evidence that Abenomics is once again working (i.e., that the Nikkei 225 has resumed its upward nominal path). Unfortunately, as usually happens, there is a problem here: this is simply not true.

• The Citadel-SAC connection (BBG) - just wait until the Citadel-FRBNY connection emerges
• Letter backs Yellen for Federal Reserve role (FT) - or said otherwise, the Democrats would like the Fed to rule (and monetize deficits) for ever
• Obama, Republicans gear up for bruising U.S. budget fight (Reuters)
• Up for Debate at Fed: A Sharper Easy-Money Message (WSJ)
• UBS to Pay $885 Million to Settle U.S. Mortgage Suit (BBG), Banks shiver as UBS swallows $885 million U.S. fine (Reuters)
• Japan finmin Aso: CPI shows gradual shift to inflation from deflation (Reuters)
• Japan's PM calls for high-level talks with China (Reuters)
• Holder Targets Texas in New Voting-Rights Push (WSJ)
• Another Nightmareliner incident: Probe opened as Air India Boeing Dreamliner oven overheats midair (Reuters)
• Samsung Boosts Capital Spending as High-End Phone Demand Slows (BBG)

For the second consecutive day futures have drifted lower following a drubbing in the Nikkei which was down nearly 3% to just above 14K (time to start talking about the failure of Abenomics again despite National CPI posting the first positive print of 0.2% in forever and rising at the fastest pace in 5 years) and the Shanghai Composite which dropped to just above 2000 once again, after PBOC governor Zhou saying that China has big economic downward pressure and further reiterated prudent monetary policy will be pursued. This is despite Hilsenrath's latest puff piece which pushed the market into the green in yesterday's last hour of trading and despite initial optimism which saw stocks open higher following forecast-beating EU earnings gradually easing and heading into the North American open stocks are now little changed. It may be up to the WSJ mouhtpiece to provide today's 3pm catalyst to BTFATH, or else it will be up to the circular and HFT-early released UMichigan confidence index to surge/plunge in order to push stocks on any red flashing news is good news.

There appears to be a level of optimism priced into every macro-economic forecast. Whether this is simply mean-reverting models or a systematic need to justify an ever-increasing equity market is unclear but over the past few years the consensus GDP growth forecast has fallen by around 0.7 percentage points over the year before its final release (as hope turns to reality). So just how bad is the current environment? With the latest update of Q2 2013's GDP consensus forecast now at 1.0%, the last year has seen the consensus drop a stunning 2.0 percentage points (almost triple the average loss of hope). Of course, as we noted here, we'll make it all up in H2 2013 (even as CEO after CEO adjust down their outlooks). Have no fear though - as Jason Schenker from Prestige Economics still believes we will get a +2.2% print for Q2 2013.

This morning’s news that the China leadership has launched a “mini-stimulus” package might confirm what we’ve long feared – China’s economic situation is more perilous than we thought. It looks like a comparatively modest supply-side package of tax cuts, export boosts and railway stimulus, designed to “arouse the energy of the market” according the State Council. But it could be the first of many new programs according to analysts. The state is clearly concerned. That it has been forced to act should be a wake up and smell the coffee moment for markets – the implications of China slowdown could be this year’s game changer in markets.

With regard to the disastrous Macondo oil well rupture that ended in 11 deaths and triggered the largest US offshore oil spill of all time (and uncountable ongoing ecological impacts), Halliburton has 'graciously' decided to plead guilty to destroying evidence. 'Guilty?' we hear you ask? When has any large US corporation not just settled in order to not be forced to admit guilt? Well, as Reuters reports, "their willingness to plead to this may also indicate that they'd like to settle up with the federal government on the civil penalties." The maximum statutory fine for this apparent midemeanour? $200,000! Or 0.0007% of expected revenues for 2013. Well, that'll teach 'em for sure - they won't be destroying evidence again, eh?

Gold owners are almost universally familiar with the story of Franklin Roosevelt criminalizing the ownership of gold back in 1933. The term gold ‘nationalization’ is often thrown around. But remember, with nationalization, it’s the state that takes control of an asset. Executive Order 6012 took assets from private individuals, and then gave those assets to a private company – the Federal Reserve. This isn’t nationalization. It’s just theft. You’d think that the entire nation would have been in an uproar. But surprisingly, this wasn’t the case. History shows that the likelihood of a government pillaging its citizens’ wealth is directly proportional to that government’s fiscal health.