Archive - Aug 5, 2013 - Story

"No passion so effectually robs the mind of all its powers of acting and reasoning as fear."

- Edmund Burke

Some analysts and Congressional officials suggested Friday that emphasizing a terrorist threat now was a good way to divert attention from the uproar over the N.S.A.’s data-collection programs, and that if it showed the intercepts had uncovered a possible plot, even better.

- NY Times article from August 2, 2013: Qaeda Messages Prompt U.S. Terror Warning

Thanks to an over-flowing cup of Fed liquidity, corporate debt maturities have not only been pushed out in time but have risen in their nominal outstandings as cheap financing was too good to ignore (especially for those firms on the bubble of failure). The problem these firms face now is, with the Fed set to Taper (and indeed tighten on rates in the next few years); the outlook of much higher bond yields will have a major impact on firms that levered up and used this period to 'survive'. As is clear from the chart below, debt maturities will once again surge in 2-3 years; and given credit markets now focused on fundamentals (future cashflows) as opposed to merely technicals (fed liquidity flows), the wall of maturities just as rates are rising (and liquidity being withdrawn) will make high-yield investors increasingly nervous (and feedback into lower valuations for stocks, no matter how exuberant a rotation retail investors expect). The message once again appears to be - there's no free lunch as the Fed has merely dragged forward exuberance at the expense of dystopia in the not so distant future.

The media, the financial markets and investors have become fixated on the unemployment rate, as reported by the Bureau of Labor Statistics, particularly since it was directly linked by the Federal Reserve to its current bond buying program. What is clearly evident is that, despite the headline reports, there is clearly an alarming divergence in employment from the long-term trend.  The structural shift in employment away from manufacturing and production to a service and outsourced based economy has clearly created a deviation that will not likely be corrected for decades to come.  The implications for the Federal Reserve, and the economy, should be concerning.  While the hope is that the economy will suddenly spark back towards stronger growth; the supply/demand imbalance suggests otherwise.

Nobody may wish to believe it, but, Diapason Commodities' Sean Corrigan warns, it just might be that the US economy has seen its best for this phase of the cycle. Where does that leave assets? Arguably overpriced and overbought, he believes. The VIX has swooped to a low only once briefly undercut since before the last New Era started to lose its luster in early 2007. As a result, Corrigan's "Blue Sky" index - the OEX divided by the VIX, being an inverse representation of what people perceive to be the worth of buying price protection - has jumped to the upper third of the ninety?ninth percentile of the past quarter-century's distribution; an anoxia?inducing plane only briefly exceeded just as the first rumblings of the forthcoming doom started to afflict the Boom in the March of 2007.

August is traditionally Europe’s holiday month, with many government officials taking several weeks off. In the process, important initiatives are put on hold until the “great return” at the beginning of September. This year, there is another reason why Europe has pressed the pause button for August. With a looming election in Germany, few wish to undermine Chancellor Angela Merkel’s likely victory.  Some of the recent economic news has seemed to justify this approach. Yet no one should be fooled. This summer’s sense of normality is neither natural nor necessarily tenable in the long term. It is the result of temporary and – if Europe is not attentive – potentially reversible factors. If officials do not return quickly to addressing economic challenges in a more comprehensive manner, the current calm may give way to renewed turmoil. In essence, Europe (and the West more generally) owes its recent tranquility to a series of experimental measures by central banks; consequently, the resulting surface calm masks still-worrisome economic and financial fundamentals.

China's bid to host the world's tallest building may be delayed for a while as the PBOC prints the money to complete the over-budget Sky Tower in Changsha, but that doesn't mean China can't enjoy the world's second largest building, and Asia's tallest, in the face of the 128-floor Shanghai Tower located, obviously, in Shanghai, and which stretches a massive 2073 feet from base to tip. The 'Skyscraper Index' anecdotes remain firmly ensconced throughout China (and India).

This insane world was created through decades of bad decisions, believing in false prophets, choosing current consumption over sustainable long-term savings based growth, electing corruptible men who promised voters entitlements that were mathematically impossible to deliver, the disintegration of a sense of civic and community obligation and a gradual degradation of the national intelligence and character. There is a common denominator in all the bubbles created over the last century – Wall Street bankers and their puppets at the Federal Reserve. Fractional reserve banking, control of a fiat currency by a privately owned central bank, and an economy dependent upon ever increasing levels of debt are nothing more than ingredients of a Ponzi scheme that will ultimately implode and destroy the worldwide financial system. Since 1913 we have been enduring the largest fraud and embezzlement scheme in world history, but the law of diminishing returns is revealing the plot and illuminating the culprits. Bernanke and his cronies have proven themselves to be highly educated one trick pony protectors of the status quo. Bernanke will eventually roll craps. When he does, the collapse will be epic and 2008 will seem like a walk in the park.

As the Fed gets ready to taper ‘QE’, UBS' Larry Hatheway warns investors to brace for a period of increased international policy tension. Previously harmonized - but not coordinated - monetary policy stances will give way to conflicting objectives and new strains as adverse ‘spillovers’ occur. As Hatheway notes, we are about to rediscover several inconvenient truths. First, the Fed is the US, not the world’s, central bank. Second, international policy coordination is desirable in an interdependent world but, third, it is no more likely to materialize now than in the past. The world, it seems, is destined for a less comfortable policy co-existence in the coming few years.

Day after day, CNBC's Rick Santelli hears analysts arguing how the economy is doing pretty well and that there is always some anecdotal fact that backs up their cognitively dissonant view with fundamentals. However, as Santelli asks (rhetorically), it always comes back to the same question, "if things are really that good, why do we still need the [Fed] training wheels on?" The answer is presumably obvious as actions ($85bn per month of POMO-provided liquidity to the 21 primary dealers) speak louder than analysts words (we promise recovery is just around the next corner.) While careful not to explicitly rebuff the exuberance of his channel's clients revenue-base, Santelli notes the oddly correlated relationship (that has time and again appeared in pixelated format on these very pages) between the Federal Reserve balance sheet and the ebbs and flows of the US equity market. As he concludes, the only (causal) transmission mechanism for the Fed's actions is via the primary dealers and implicitly the Fed is the entity that is goosing the stock market.

We do not inhabit a “normal” economy. We live in a financialised world in which our banks cannot be trusted, our politicians cannot be trusted, our money cannot be trusted, and – not least thanks to ongoing spasms of QE and expectations of much more of the same – our markets cannot be trusted. At some point (though the timing is impossible to predict), asset markets that cannot be pumped artificially any higher will start moving, under the forces of inevitable gravitation, lower.

With revenues fading, profit margins collapsing, and only financial institutions' entire lack of transparency providing any lift in EPS, the 'great rotation' continues to provide enough cognitive dissonance to sink a boat for the asset-gatherers. The trouble, as we showed previously, is this 'rotation' is dominated by US retail investors (more specifically non-US domiciled and non-retail investors are rotating away from US equities). The US retail investor has shifted in a great-rotationary manner by the greatest amount since Feb 2000 - just as the last great bubble burst. US equities are the 3rd most over-crowded speculative long asset in the world after Crude Oil and the Brazilian Real. It seems the Fed is getting just what it wants but, just as Kyle Bass warned, "investors should be really careful doing what the central bankers want them to do."

Jeffrey P. Bezos to purchase Washington Post, Express, Gazette, other Greater Washington, DC papers -- deal valued at $250 million #breaking

— Reuters Business (@ReutersBiz) August 5, 2013

Simply put, these four charts have to be seen to be believed. Presented with little comment, via Nanex, this is the 'market' we are supposed to trust...?

S&P futures volume was the lowest of 2013 for a non-holiday-related day (35% below last year's volume and 40% below recent average volume). NYSE volume the second lowest of the year. Tech and Staples managed small gains on the day but homebuilders and utilities underperformed as bond yields rose 3 to 5bps on the day. The 'anxiety' in stocks showed itself with another appearance of the Hindenburg Omen (which has signaled short-term weakness in the last six months). The Russell closed green and thanks to AAPL, the Nasdaq eked out a small gain. Trannies were down 0.8% in their now-ubiquitous schizophrenic manner as 'most-shorted' names outperformed significantly. The USD slid lower from the US open ending -0.1% (with JPY strength dominant) but commodities were worse down 0.5% (WTI) to 1% (silver and gold) on the day. VIX was clubbed lower (to 11.8% - its lowest close in 5 months) right at the close to ramp stocks into the cash close.

Are American workers paid enough?  That is a topic that is endlessly debated all across this great land of ours.  Unfortunately, what pretty much everyone can agree on is that American workers are not making as much as they used to after you account for inflation.  Back in 1968, the minimum wage in the United States was $1.60 an hour.  That sounds very small, but after you account for inflation a very different picture emerges.  Using the inflation calculator that the BLS provides, $1.60 in 1968 is equivalent to $10.74 today. According to the Social Security Administration, 40.28% of all workers make less than $20,000 a year in America today.  So that means that more than 40 percent of all U.S. workers actually make less than what a full-time minimum wage worker made back in 1968.  That is how far we have fallen.