Archive - Aug 24, 2013 - Story

While the United States is repositioning its naval forces in the Mediterranean as it considers a possible military response to recent developments in Syria (as reported and shown yesterday), at least two other nations are joining in preparation for a naval offensive against the Middle Eastern nation.

As rising Taper (and QE unwind) uncertainty, the biggest trade driving the rate complex, and by implication, the entire risk complex, is being put (no pun intended) to rest. As BofA explains: "the FOMC (the biggest buyer of duration and convexity risk in the world) is long the option to taper asset purchases (and eventually raise rates) if the data improves. That leaves the market short the option that the Fed may decide to taper. The market has looked to hedge this “short gamma” exposure by selling duration and buying vol."

While central planning has seemingly achieved its goal, they have merely created another bubble. A bubble in which fundamentals will have their day and a completely unsustainable societal situation has emerged. Rising rents and falling incomes. For example, in Minnesota we find that “since 2000, rents have risen about 6 percent statewide, but renter incomes have dropped about 17 percent.”

The new American Dream is to one day be able to move out of your parent's basement and rent from Blackstone.

— Michael Krieger (@LibertyBlitz) August 22, 2013

For roughly forty years (since the report was published in 1972), technology has pulled one magic rabbit after another out of the hat, making a mockery of the claims that there were limits on consumption and resource extraction: the green revolution and fossil-fuel fertilizers expanded food production, new supergiant oil fields and improved drilling technologies opened up vast new energy reserves, and improved technologies led to more efficient use of resources. The success of the past four decades in pushing back looming limits has created a widespread confidence that technology can solve any apparent limits. For example, if the seas have been stripped of fish, then aquaculture will fill the desire for fresh fish. Presto-magico. But what if the technological improvements are entering a terminal phase of diminishing returns? What if the "solutions" don't really replace what has been destroyed? For example, the ecology of the open ocean is not restored by aquaculture; rather, it is further harmed by poor aquaculture practices.

"Not having encryption on the web today is a matter of life and death," is how one member of the Internet Engineering Task Force - IETF (the so-called architects of the web) described the current situation. As the FT reports, the IETF have started to fight back against US and UK snooping programs by drawing up an ambitious plan to defend traffic over the world wide web against mass surveillance. The proposal is a system in which all communication between websites and browsers would be shielded by encryption. While the plan is at an early stage, it has the potential to transform a large part of the internet and make it more difficult for governments, companies and criminals to eavesdrop on people as they browse the web. "There has been a complete change in how people perceive the world," since Snowden exposed the NSA's massive surveillance efforts, and while "not a silver bullet," the chief technologist at security firm RSA notes, "anything that improves trust in this digital world is a noble aim."

"When things are going well people become greedy and enthusiastic, and when times are troubled, people become fearful and reticent. That’s just the wrong thing to do. Another mistake that people often make is that they compare themselves with others who are making more money than they are and conclude that they should emulate the others’ actions ... after they’ve worked. This is the source of the herd behaviour that so often gets them into trouble... As long as human nature is part of the investment environment, which it always will be, we’ll experience bubbles and crashes.... People talk about the wisdom of the free market – of the invisible hand – but there’s no free market in money today. Interest rates are not natural. They are where they are because the governments have set them at that level. Free markets optimise the allocation of resources in the long run, and administered markets distort the allocation of resources. This is not a good thing..." - Howard Marks

"The latest numbers that we have received, in particular from Germany, are encouraging, whether it's manufacturing, whether it's service activity, whether it's exports. That is heading in the right direction, but it needs to be sustained over time. And I'm crossing fingers for the eurozone..."

Russia may reinforce naval grouping in Mediterranean in response to U.S. buildup - expert http://t.co/gtOai0LqqU #Russia #interfax #news

— Interfax News (IFAX) (@IFAXnews) August 24, 2013

The 10Y Treasury yield has jumped nearly 130bp from its low point in early May. Given the tight ranges and low volatility of yields during the most of QE era, this kind of move in just over 3 months seemed stunning to some investors. Consequently, the question that has come up often recently is: what has been driving Treasury yields? As UBS' Boris Rjavinski notes, several years ago a rate strategist would give you a straightforward and predictable answer: inflationary expectations, economic growth projections, and current and future monetary policy. But now, as Rjavinksi notes, central banks and politics in the driver seat. Volatility will remain elevated as we await key messages from the Fed in September, and U.S. political calendar will start to heat up as we approach the “drop-dead” dates to fund the government and extent the dent ceiling.

Remember when Obama said it is impossible for the NSA to spy to American citizens? Well, at least one guy didn't get the memo. As AP reports, two U.S. officials said one analyst was disciplined in years past for using NSA resources to track a former spouse. The officials spoke on condition of anonymity because they were not authorized to speak publicly. Not that we blame him of course: if one has every capability to spy on anyone, certainly including exes, and there are absolutely no checks and balances to any violating behavior, then why not? Which of course goes to the root of the problem. And the other problem: if one guy has done it, all others have done it too. They just haven't been caught yet.

The challenge to the world's credit cycle comes from both ends. An increasingly sluggish growth outlook creates downward pressures on earnings and internal cash generation. The slowdown is fairly widespread. In addition, the cost of funding is on the rise. Downside skews begin to emerge in the later stages of a cycle when leverage has already increased and the cycle turns more adverse, and that is happening in Asia right now.  This is critical in our current benign default environment because the combination of highly leveraged firms, slowing GDP and rising real rates was exactly what created the spike in defaults in 2007-2009 (that only the largest monetary policy bailout in history was capable of kicking down the road).