Archive - Aug 2013 - Story

In East Africa, the major water resource is the Nile river, the world’s longest, at 4,130 miles, referred to by Egypt since antiquity as the country’s heart. Instability, poor governance, lack of finances and the availability of other water sources left the issue largely dormant until the 1990s, when Nilotic governments seriously started to consider using their Nile Basin waters to generate energy and irrigate crops. But now, most African countries (expecting growth), where only about 25% of the population is connected to electricity grids, are seeking any and all electric power sources; guaranteeing an ongoing and increasingly fractious source of tension for Nilotic states. With the current political turmoil roiling Egypt, Cairo’s ability to influence upstream states is currently constrained, which until the dust settles may well provide Egypt with a number of aquatic fait accomplits. If Kampala and Addis Ababa press forward with their (Chinese-sponsored) hydroelectric projects in the interim, then they will probably eventually face some “frank and candid” diplomatic discussions with Egypt, which, after all, has a 4,000 year old history of Nile concerns.  Not a happy scenario.

Earlier today we learned that while some executives at Forever 21 were previously confused by Obamacare, subsequently they appear to have rectified their confusion... and full-time staffing levels. Of course, there would have been no confusion had Forever 21 known what it was getting with Obamacare. So for the benefit of all their executives, and for all others who may still be confused by America's new healthcare system, here, once again, is the chart that should explain everything.

For the 5th day in the last 6, US Treasuries are selling off notably. While equity volumes remain lack-luster and liquidity still thin in bonds, the weakness is most pronounced in the 7Y belly (even though selling is across the board). 10Y rates tagged 2.89% and 30Y 3.90% all pushing back to the pre-US-downgrade (debt-ceiling) levels of summer 2011. The 10Y yield has just joined the 30Y trading wider than they did when stocks hit their lows in March 2009.

CBS' White House correspondent Mark Knoller noted earlier:

Meeting with POTUS tomorrow are heads of the CFPB, FHFA, the Fed, CFTC, FDIC, NCUA, the SEC & Comptroller of the Currency.

— Mark Knoller (@markknoller) August 19, 2013

And while correlation is not causation (but suggests you are on the right path), remember what happened the last time the President, somewhat unexpectedly, met with the CEOs of all the big banks.

The EuroStoxx 50 (Europe's 'Dow') fell over 1% today - not 'huge' but this is the largest drop in over 6 weeks in the key index. While much has been made of the recent (good) performance of peripheral nation stocks and bonds (and Japanese buyers dominate) today marked a notable shift. Record bad debt in Spanish banks, political uncertainty in Italy, and a rise in fringe German political parties weighed on peripheral banks and sovereign bonds (which by now have become one and the same symbiotically) - Spain -2%, Italy -2.5% (biggest drop in 2 months). Greek stocks and bonds also slid notably (ASE -3% and GGBs down most in 6 weeks) as they deal with their own political drama. It appears the ongoing US Treasury sell-off and capital reduction from around the world is weighing on even the most momo assets now. Credit markets are broadly under-performing with financials leading the way.

Last Friday, King Abdullah fired the first shot in Saudi Arabia's brotherly embrace of the Egyptian military regime when he voiced his support for the (non?) coup. Moments ago he decided to put his nation's crude oil money where his mouth is following an announcement by the Saudi foreign minister Prince Saud al-Faisal that Saudi Arabia would step in to fill the financial gap from any Western sanctions on Egypt, if any of course, since the US still has to admit the country now torn by civil war ever had a coup nearly two months ago, and where as one deposed president is about to spend a lot more time in jail, another is on his way out.

Bringing to mind the critical scene from Flash Gordon when the leading lady explains how the New York Jets' quarterback is Earth's last hope, Germany's FinMin Schaeuble has some 'econcouraging' words for all of us:

*SCHAEUBLE SAYS ONLY EUROPE, U.S. CAN STOP WORLD FALLING APART

So, in other words, just the US then? (and hopefully we have more than 14 hours...)

One of the main reasons that investors so often get caught up in major market meltdowns is due to the short-sighted, near term, focus of market analysts and economists.  The data has to be analyzed with relation to the longer term trends and a clear understanding that all things, despite ongoing central bank interventions, do eventually end.  The problem with the current environment is that the artificial inflations have detached the market from the underlying economic fundamentals which has historically led to larger than expected reversions and outright crashes.

Seasonal-Affected-Disorder is not just for investment bankers who never see the light of day. As is clear from the chart below, the August/September seasonal variation is quite dramatic for US equities. With only a 44% chance of advance in September  (compared to ~60% average for the other months) and an average drop of -0.62% for thelast 60 years, the current slide in the S&P back to the June FOMC cliff-edge and a rising expectation for a Sept-Taper, it seems history may well repeat.

Some unpleasant observations from Deutsche Bank below for fans of either central planning and/or risk assets, as having one's cake and eating it too is no longer an option, and one or the other is finally set to snap. To wit: "Yield curves are very steep suggesting a challenge to central bank guidance credibility is at a tipping point. Either the data really are strong and the central banks lose credibility soon or the markets have overstretched themselves, allowing for a partial recovery in lower rates." A "tweeted out" Bill Gross is praying to the Newport gods it's the latter.

While Abe and Kuroda-san would be jubilant, the powers that be in India are none too happy at the 44% devaluation in their currency in the last 2 years (and 17% collapse in the last 3 months) as capital floods out of the once potential growth-engine of the world economy. Accelerating in the last few days amid capital controls and gold importation bans, Taper-based carry unwinds appear to have exaggerated initial flows and driven the USD to over 63 Rupee (and all-time record low). India's Sensex stock market is down 11% in the last 3 weeks to 11 month-lows (as fast money exits in a hurry) and the beleaguered bond market has imploded from a 7.1% yield in May for the 10Y to 9.25% now (its highest since 2001). Food prices rose at 9.5% YoY (vegetable +47% YoY) and fuel at 11.3% YoY sparking grave concerns across the nation of social unrest and bringing back memories of the 1990s - when the government was forced to ask the IMF for a loan to rebuild foreign reserves. Current efforts at stemming the tide have done little to stall the liquidity withdrawal and look to squeeze growth to a lowly 4.8% YoY.

While jobs in the US are hardly a success (employment not the movie), it appears that despite the faith that China is still growing at 7.5%, the slowing-growth nation is facing its own job creation nightmare. As China.org reports, this is being called the hardest job-hunting season ever for Chinese graduates - as nearly 7 million of them swarmed into the job market this summer. In a sad reflection of the US, it is becoming increasingly difficult for college graduates to secure a job in recent years (let alone a degree-required job) as the number of unemployed graduates has nearly doubled in the last 4 years (from 9% of graduates in 2008 to 17.5% now).

The man whom the Muslim Brotherhood deposed with the assistance of the CIA following the first Egyptian coup in 2011 - former Egyptian president Hosni Mubarak - is about to be return to the public scene, and perhaps to power (as we predicted in March 2011 in a tried and true Thermidorian Reaction fashion) now that the Muslim Brotherhood itself has been overthrown in the recent countercoup. And with his return, US foreign policy sinks even more than previously thought possible. Reuters reports: "More than a year on, the only legal grounds for Mubarak's continued detention rest on another corruption case which his lawyer, Fareed el-Deeb, said would be settled swiftly. "All we have left is a simple administrative procedure that should take no more than 48 hours. He should be freed by the end of the week," Deeb told Reuters." In other news, John Kerry is preparing to stick foot even further in mouth any minute now.

Believing official reassurances based on Fantasyland projections of ever-rising payroll taxes and employment does not magically make the Social Security system viable. Questioning the financial viability of the Social Security system is often taken as an attack on the program itself. Nothing could be further from reality. Anyone who truly wants Social Security to continue as is should take an active interest in structural trends rather than focusing all their energy on attacking those who question the official reassurances that the the system is sound until 2033.