Archive - Aug 12, 2013 - Story

George Orwell's prescient book 1984 envisioned a technologically-enabled authoritarian state of ubiquitous surveillance, propaganda and fear that constantly rewrote history to suit the needs of the present regime. Welcome to the new, improved 1984, America 2013. Ubiquitous surveillance: check. Ubiquitous propaganda extolling the state and central bank: check. Perpetual fear-mongering: check. Perpetual war against an unseen enemy who can never be defeated: check. Police state with essentially unlimited powers to suppress "enemies of the state": check. Continual revision of history to support the current party line: check. However, Orwell underestimated the power of complicity; once you get a check from the state, you begin loving your servitude.

"Mommy, we're on vacation. We're here to have fun. This is not what we expected," was the comments from kids after luxury resort condos crumbled into a massive sinkhole a few miles from of Disney World. About 30% of the three-story structure collapsed into the sinkhole - which is about 50 feet in diameter and 15 feet deep. Luckily among the 24 units, only 20 people were present (perhaps an nsight into the real economy on its own), and with only 10 to 15 minutes to escape the cracking, collapsing building, it is good fortune that no one was injured.

The last few days have seen JCPenney's saga take a decided turn for the worse - if that's possible. With the stock price EKG-ing on every utterance from a CNBC mouthpiece, a desperate hedge fund manager, or a board looking to remain relevant; it seems - as usual - that credit markets not only saw through the news but remained stoic in their cash-flow-discounting reality check. Critically, the last few days have seen the short-end of the JCP CDS curve surge and the term structure has inverted. At current levels, the credit market assigns a 13% probability that JCP will default by March 2014. Not good... It is extremely unusual (though not unprecedented) for a credit to 'recover' from an inversion such as this.

The Bank of England has missed its inflation target more than any other major European central banks in the past five years. As Bloomberg Brief notes, while BOE Governor Mark Carney linked monetary policy to unemployment last week, the BOE has failed to meet its CPI goal 90 percent of the time. Hungary is the second-worst performing, having missed its target 88 percent of the time. The best performers have been the Swiss and Norwegian central banks, which have a 5 percent and 20 percent miss rate, respectively. To rub further salt into the open wound of hope in the UK, it has also had the largest average deviation from its target inflation rate overall.

When it comes to political rhetoric, no one can top the un-filtered awesomeness of 89-year-old Robert "we are delivering democracy on a platter" Mugabe. Following his 61% of the vote winning election at the end of July, Sky News reports that Mugabe's first public speech was full of his typically defiant pith. He dismissed his defeated "western-sponsored stooge" rivals as "pathetic puppets" that can "go hang," adding a particularly downbeat assessment that "if they die, not even dogs will sniff them." Mr. Tsangviri - the dog-despised opposition - is challenging the poll vowing to expose "glaring evidence of the stolen vote," as the renewed leader celebrates Heroes Day - the end of white minority rule (pledging that Zimbabwe will never be a colony of Britain) and ironically for the hyperinflater, Mugabe stated that he will " Never give thieves the power to rule."

Outside the fetid terrarium where US economists live, like skinks kept as pets by bankers, other forces are in motion. For instance, there’s the non-theoretical, non-financial economy, which is now apparently based on the trade in tattoos, and the journey by automobile from the nearly foreclosed home to the tattoo studio, and to the hamburgers, pizzas, and fried chicken thighs consumed on each end of the journey. It seems, based on the latest odds, that Larry Summers will be entering the scene the way Vincent Price used to enter a Hammer Studio horror film - reliably delivering some deadly unpleasantness. We don’t think a more perfect figure might be found for piloting the garbage barge of American finance over a Niagara Falls of consequence.

We have discussed the flipping frenzy that has gripped the country in 2006 2013 on several occasions previously (most recently here, here and here) so there is little we can add, but this anecdote from Reuters just has to be read to be believed. Presenting Jan Brzeski who stands in a sun-filled, beautifully refurbished living room high in the Hollywood Hills, looking out at a swimming pool and miles below, stunning views of Los Angeles. Brzeski is a private money lender running an investment firm in Los Angeles that provides loans to house flippers - investors who buy a home, refurbish it, and sell it at a profit. Many flippers turn to money lenders because they cannot get banks to provide such short-term, quick financing. Standing with Brzeski is Scott Ryan, the realtor who bought this four-bedroom, five-bathroom house in December 2012 for $1.5 million - with money lent by Brzeski - and has transformed it with another $600,000. This week the property will go on the market at $3.295 million.

In a 43-page research report, the Federal Reserve has authored a rather concerning tome warning that the mechanical positive-feedback rebalancing of Leverage ETFs (LETFs) resembles the portfolio insurance strategies, which contributed to the stock market crash of October 19, 1987. The impact of LETFs on broad stock-market indexes become significant during periods of high volatility (shown empirically in 2008/9 and H2 2011) as they show that LETF rebalancing in response to a large market move could amplify the move and force them to further rebalance which may trigger a “cascade” reaction. Furthermore, executing orders within a short period of time, such as the last hour of trading, may cause disproportionate price changes (especially in financial stocks). The Fed warns that a significant price reduction at market close may also impair investor confidence with accelerating depressed prices at the close potentially driving large investor outflows overnight.

In the world these days the markets often believe the rhetoric. This would be political rhetoric, corporate rhetoric or the prayers and hopes of the talking heads. This is especially true in the equity markets. Critical advice in this environment is, "forget what they tell you; just look at the numbers." So what is the Fed doing? As of July 31, 2013 they have parked $1,157 billion in foreign banks as compared with $1,112 billion in U.S. banks. To us this is a telling sign. The European banks are in trouble and the Fed is propping them up. One of the consequences of tapering, when it comes, may well be less available cash for this task and then the cracks in the European banks may well blow into gaping holes... "There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time."

In a shocking twist for the New Normal, a US judge has actually upheld the constitution...

Bloomberg's Jon Weil, who has compiled the following stunning array of lies regarding the DOJ's enforcement activity disclosed by none other than its head, Eric Holder, is far too kind when he says that the "fast and furious" Holder owes the American people an apology. What we really owes is at least a resignation (and frankly much more, but it is too early on Monday to become too politically incorrect). And considering that the DOJ in its now former employee Lanny Brauer's words refused to prosecute those banks which were deemed "too big to prosecute", the lying here has now became a meta phenomenon, as the DOJ is effectively caught lying about lying. How many more meta levels of higher up fraud "inception" can Holder take this, before the American people finally demand his head, metaphorically-speaking of course? Sadly, judging by the response to unprecedented scandals coming out of this administration so far, the answer is... more.

Gold shorts covered an enormous 23,518 futures contracts last week - the equivalent of 2,351,800 ounces of gold. With JPMorgan appearing to be calling everyone (here and here) to get their hands on gold to deliver, it seems our concerns over a short-squeeze are starting to solidify. The last time shorts collapsed at this fast a rate was in the 1999/2000 period which saw a considerable 33% squeeze ramp in gold prices over the space of 3 weeks in the fall of 1999. Notably, the gold short position still remains huge compared to historical values - having fallen back only to the previous all-time record high levels (i.e. plenty of room for moar squeeze).

Those who did not read Zero Hedge in March 2011 will be shocked, shocked to learn that yet another "news" service, one owned by Deutsche Börse, was merely disguising as an HFT-facilitating, instanews disseminating, speed roadblock removing provider, who just happened to charge $375,000 per year for its frontrunning services. The firm in question, as the WSJ reports today, was "founded by an investment firm and now owned by the Deutsche Börse stock exchange, Need To Know News has operated with an overriding mission: sending data directly from the government through high-speed lines to financial firms that are able to trade on it instantly. Some have paid $375,000 a year for the service." Of course, those who did read Zero Hedge in March 2011 will already know all about Deutsche Boerse's "news dissemination" strategy which was covered here first with "Alpha Flash: For All Your Nanosecond, Collocated, Algorithmic Frontrunning Needs" in which we tongue-in-cheekly asked "Ever feel like your nanosecond algorithmic frontrunning skills are becoming obsolete? Unable to scalp even a few extra pennies from illiterate orphans, widows and kittens armed with REDIPlus 9.0? Despair not, for Deutsche Boerse [and Need to Know News LLC] has Alpha Flash just for you."

• Solyndra Cola: California aims to 'bottle sunlight' in energy storage push (Reuters)
• Ackman may sues himself after all - Penney Board Assails Director William Ackman, Considered 'Rogue' After Releasing Deliberations (WSJ)
• CFTC subpoenas metals warehousing firm as inquiry heats up (Reuters)
• Obama Plan to Revamp NSA Faces Obstacles (WSJ)
• Japan growth slows in second quarter, adds to sales tax uncertainty (Reuters)
• China Urbanization to Hit Roadblocks Amid Local Opposition (BBG)
• Parents Losing Jobs a Hidden Cost to U.S. Head Start Budget Cuts (BBG)
• US seeks better access to Africa as part of trade pact review (FT)
• Singapore Cuts Trade Outlook as China Slowdown Caps Recovery (BBG)
• White House Sifts Fiscal Ideas With Band of Senators (WSJ)
• Spain may ask United Nations for support over Gibraltar (Reuters)
• Michigan Safety Net for Boomers Frays on Bankrupt Detroit (BBG)