Archive - Aug 2, 2013 - Story

In an important diversion from a pure markets focus, Marc Faber outlines his concerns and hopes for the "economic battle between the US and China," noting that as the gap between the Western world and the US narrows so "through trading links, [China] has more and more influence," especially (he adds) in Africa. His biggest fear, and one stoked every day, is that if the Chinese economy slows down meaningfully, they will depreciate their currency, leaving the world's largest economies "in a mode of protectionism - not just through import quotas - but through currency manipulation." And for now Russia is happy just tp upset the US via diplomatic means, but, Faber warns, should we see commodity prices slide further, low growth in Russia may prompt further actions - especially given US interference in markets and politics.

The problem is clear; every level of government has promised too much and is now faced with the politically unappealing prospect of either drastically increasing taxes for the working age population or significantly reducing benefits for the retired (or future retired). As evidenced by the Detroit bankruptcy, the longer we wait, the worse it will get. The greater the delay, the more pain and suffering citizens will face when the benefits and safety nets they have come to expect from the government suddenly disappear. Over time, politicians from all stripes have proven adept at cognitive dissonance, but these increases in taxes and cuts to benefits will have to happen, one way or another; it is just a matter of time.

Just about a year ago we questioned the "demographic demand" thesis for why the US housing 'recovery' would become self-sustaining and lead to yet another fiscal and monetary 'nirvana'. However, while the 'household formation' meme remains front-and-center among bloviating Fed apologists; the sad facts are that not only is household formation actually still falling but, as a recent Pew Research study finds, a record 21 million young adults are now living at home with their parents.

Greed; corporate arrogance; lobbying influence; excessive leverage; accounting tricks to hide debt; lack of transparency; off balance sheet obligations; mark to market accounting; short-term focus on profit to drive compensation; failure of corporate governance; as well as auditors, analysts, rating agencies and regulators who were either lax, ignorant or complicit. This laundry list of causes has often been used to describe what went wrong in the credit crunch crisis of 2008-2010. Actually these terms were equally used to describe what went wrong with Enron more than twenty years ago. Both crises resulted in what at the time was the biggest bankruptcy in U.S. history — Enron in December 2001 and Lehman Brothers in September 2008. Naturally, this leads to the question that despite all the righteous indignation in the wake of Enron's failure did we really learn or change anything?

Despite rising gas prices, rising mortgage rates, slowing income growth and the rise of 'low-quality' part-time jobs, 'con'sumer 'con'fidence 'con'tinues to rise to post-recession highs. However, as Citi's FX Technicals group notes, for the 3rd time in the last 17 year period we may be looking at a 4-year-4-month rise in consumer confidence before a turn lower again; and in spite of the Fed's rosy forecasts (and the market's expectations), we should be careful being too quick to believe that the sluggish economic dynamic that has 'dogged us' for the last 6 years is yet fully behind us.

There are very few segments of the U.S. economy that are more heavily affected by interest rates than the real estate market is.  When mortgage rates reached all-time low levels late last year, it fueled a little "mini-bubble" in housing which was greatly celebrated by the mainstream media.  Unfortunately, the tide is now turning. 

Succinctly summarizing the positive and negative news, data, and market events of the week...

Fact or Fiction: In a new report released Wednesday, Americans indicated that when it comes to what they expect from their country, all they really want is to be safe, happy, rich, comfortable, and entertained at absolutely all times.

Well that's that - Bad is definitely good. While an initial dip was seen in US equities (as the rest of the asset-classes shifted in Taper-off mode after the dismal jobs/factory orders data), it didn't take long (and took no volume) to wriggle us back up to green and a new all-time high for stocks. But while stocks ended unch for all intent and purpose, the moves were violent elsewhere. 10Y yields collapsed the most in over 5 months today (continuing its ECG-like performance recently); the USD dropped over 0.5% on the day; and while gold ended the day unch, silver (and gold) gapped higher on the NFP release (ending the week lower though). High-yield credit markets are not amused - following long-dated bonds' 7bps yield increase on the week (confirming unwind fears as opposed to growth-driven hopes). Homebuilders gained over 4% on the week (just because). On the week, 'most-shorted' stocks tripled the market's performance. VIX closed at 12.00% - lowest in almost 4 months. BTFATH

While assuring the world that he will not give advantage to Larry Summers, we wonder if the meeting with the President will sound a little like this?

Today is the second time in three months that someone, or something, either leaked the Non-farm payroll data just ahead of its official release, or if not leaked then a trading algorithm manipulated the bond market ahead of the official data release by launching a "momentum ignition" (see here, here and here for much more on how HFT uses this strategy over and over to set trading bands) launch higher just ahead of the official data release at 8:30:00:0000 am that desperately needed to push 10 Year yields, already on the verge of a 2 year breakout, lower.

With the return of Federal Reserve Chair(wo)man odds at PaddyPower (leaving Summers a dreary 28% likelihood of winning) comes the Irish bettors' latest gamble... when will the US Fed initiate Tapering of QE? Based on the month during which the first reduction of QE bond-buying from the current $85bn per month, it seems (unlike the majority of prognosticators and standing blithely in the face of technical, political, and deficit reasons) that tapering will not begin until December at earliest with most believing 2014-or-later...

The past few weeks have seen the tech and business media abuzz about a not-so-little warehouse in Tennessee. That's because this distribution center, opening its doors with a burst of fanfare and even a few visits from nearby politicians, isn't a jumping-off point for Macy's or Target. Instead, the warehouse is the latest in a series of new locations being opened by retail technology giant Amazon.com. The jobs this new mega-warehouse is purported to create: 5,000. However, as we discuss below, for every job Amazon "creates," four other jobs go away at a company like TJX.

In short:

Since the March 2009 lows, US GDP has increased by $2.3 trillion.
Since the March 2009 lows, the capitalization of the US stock market has increased by $12.3 trillion.
Delta between the two: 436% in favor of stocks.

In the aftermath of the global financial crisis, world leaders repeated a soothing mantra. There could be no repeat of the Great Depression, not only because monetary policy was much better (it was), but also because international cooperation was better institutionalized. And yet one man, the American former intelligence contractor Edward Snowden, has shown how far removed from reality that claim remains. Prolonged periods of strain tend to weaken the fabric of institutional cooperation. The two institutions that seemed most dynamic and effective in 2008-2009 were the International Monetary Fund and the G-20; the credibility of both has been steadily eroded over the long course of the crisis. The Snowden affair has blown up any illusion about trust between leaders – and also about leaders’ competence.