Archive - Aug 2013 - Story

In 2001, the Patriot Act opened the door to US government monitoring of Americans without a warrant. It was unconstitutional, but most in Congress over my strong objection were so determined to do something after the attacks of 9/11 that they did not seem to give it too much thought. Civil liberties groups were concerned, and some of us in Congress warned about giving up our liberties even in the post-9/11 panic. But at the time most Americans did not seem too worried about the intrusion. This complacency has suddenly shifted given recent revelations of the extent of government spying on Americans. What is even more important, though, is for more and more and more Americans to educate themselves about our precious liberties and to demand that their government abide by the Constitution. We do not have to accept being lied to – or spied on -- by our government.

The bankruptcy of Detroit, though long-anticipated, has unleashed a wave of speculation about the health of other cities in the U.S., and indeed, in the world - for example, China. Despite the visible importance of urban centers and cities for thousands of years, it seems our understanding of their dynamics is still incomplete. Nonetheless, the dramatic decline of Detroit and other industrial cities makes us wonder if there are dynamics that we can identify that could enable us to predict which cities will thrive and which will decay.

Remember the "Greekovery"? For those who may have forgotten, it is a scene straight out of Breaking Bad.

It would appear that in the order of who knows what when, in the case of JCPenney, it is C-level executives first, credit markets second (was Goldman's line a pre-DIP?), and equity shareholders (Ackamn included) last. With the torrent of executve departures in the last year, credit market investors led the equity over the past two weeks as credit lines were (allegedly) pulled. Today's 50bps rise in JCP's 5Y CDS pushes the company's risk of bankruptcy to its highest ever (arguably higher than 65% over the next few years given the secured assets). JCP's stock is down 2% on the day but still holding above its April (and 2009) lows (for now).

Today, we have not one but two quotes of the day courtesy of Dick Fisher:

• FISHER SAYS MEXICAN GOVERNMENT BETTER RUN THAN U.S. GOVERNMENT
• FISHER SAYS MEXICO GOV'T ANTITHESIS OF U.S. GOV'T ON FISCAL, BUDGET

Brilliant, 100% accurate and absolutely hypocritical. Because the only reason the US government is the epitome of disorganized confusion, record partisan bickering and sheer chaos is because it has the Federal Reserve to pick up the pieces for its failure to come together on any one fiscal issue. And the Fed is perfectly happy to accommodate the same dysfunctional Congress by enabling it to do nothing not for one, two, or three but four years running now, and likely will continue into 2014 and further, in the process continuing an unprecedented wealth transfer from the poor to the uber rich. The same Fed that Dick just happens to be part of.

"This is a delicate moment. The Fed has created a monetary Gordian Knot.  Whereas before, our portfolio consisted primarily of instantly tradable short-term Treasury paper, now we hold almost none; our portfolio consists primarily of longer-term Treasuries and MBS. Without delving into the various details and adjustments that could be made (such as considerations of assets readily available for purchase by the Fed), we now hold roughly 20 percent of the stock and continue to buy more than 25 percent of the gross issuance of Treasury notes and bonds. Further, we hold more than 25 percent of MBS outstanding and continue to take down more than 30 percent of gross new MBS issuance. Also, our current rate of MBS purchases far outpaces the net monthly supply of MBS. The point is: We own a significant slice of these critical markets. This is, indeed, something of a Gordian Knot."

"Financial markets may have become too acustomed to what some have depicted as a Fed put," Dallas Fed's Fisher warns, causing "serious misallocations of capital."

• *FED'S FISHER SAYS U.S. INVESTORS CAN'T RELY ON A FED 'PUT'
• *FED'S FISHER RECOMMENDS TAPERING STARTING 'THIS FALL'
• *FISHER: FED MUST AVOID 'MARKET HAVOC' IN BOND-PURCHASE TAPERING

Once again, the non-voting 'feral hog' caller is a voice of some reason amid the calls for moar...

First it was the TBAC's May presentation "Availability of High Quality Collateral" piggybacking on reasoning presented previously by Credit Suisse. Then JPM's resident "flow and liquidity" expert Nikolaos Panigirtzoglou rang the bell on regulatory changes to shadow banking and how they would impact the repo market and collateral availability (and transformation) in an adverse fashion. Now, it is the turn of Barclays' own repo chief Joseph Abate to highlight a topic we have discussed since 2009: the ongoing contraction in quality collateral as a result of transformations in shadow banking and the Fed's extraction of quality collateral from traditional liquidity conduits (i.e., QE's monetization of bonds). To wit: "Several recent regulatory proposals will increase the pressure on banks to reduce assets that carry low risk weights. Repurchase agreements are a large source of banks’ low-risk assets, and we expect banks to reduce their matched book operations in response to these proposals."

Tepco is struggling to contain the highly radioactive water that is seeping into the ocean near Fukushima. The head of Japan's NRA, Shinji Kinjo exclaimed, "right now, we have an emergency," as he noted the contaminated groundwater has breached an underground barrier and is rising toward the surface - exceeding the limits of radioactive discharge. In a rather outspoken comment for the typically stoic Japanese, Kinjo said Tepco's "sense of crisis was weak," adding that "this is why you can't just leave it up to Tepco alone" to grapple with the ongoing disaster. As Reuters notes, Tepco has been accused of covering up shortcomings and has been lambasted for its ineptness in the response and while the company says it is taking actions to contain the leaks, Kinjo fears if the water reaches the surface "it would flow extremely fast," with some suggesting as little as three weeks until this critical point.

Just like the incredulous surge in last week's Manufacturing ISM which exploded higher from 50.9 to 55.4 (as we predicted following the Chicago PMI plunge hours before that), so today its non-manufacturing cousin soared in a desperate attempt to give the "all clear" on the US second half economy (at least until the inevitable hangover of course): at 56.0, up from 52.2, and smashing expectations of 53.1 (supposedly the weather was neither too hot nor too cold this time), this was the biggest beat of expectations since January 2012, pushing the index to the highest since February 2011 (when as we now know GDP was negative) and the biggest sequential jump since April 2009. Those part-time workers must really be putting their shoulder into it even though the employment index actually declined from 54.7 to 53.2. New orders soared although at the expense of Backlogs which dropped sharply into contraction mode: pulling activity forward again to telegraph momentum? Long story short - until reality returns and the surge in various global PMIs is moderated, as happened in 2012 and 2011 before it - the Taper once again appears to be on. We expect the September number to plunge just to keep the Baffle with BS theme going strong.

While many people doubted early in the year that a 1994-style sell off in the Treasury bond complex is inconceivable, this is precisely what we got in the two months between May and July, as we showed previously.  But while the bond rout of 1994 is merely one example of a rapid Treasury selloff, there are many more, and many that put both 1994 and the (first?) great bond dump of 2013 to shame. Highlighting them all is the topic of the just released blog post by the NY Fed titled "The Recent Bond Market Selloff in Historical Perspective." The Fed's finding? Despite all the wailing from bond market participants, the "Great (first?) Selloff of 2013" only ranks 13th of all such Risk On (or is that Off for rate PMs?) episodes. Which means there is much more room to fall when the "big one" finally comes.

See if you can spot, on the chart below, why over the weekend Barack Obama (aka the Anti Patent Troll-In-Chief) intervened directly in the ongoing patent dispute between Apple and Samsung on behalf of the Cupertino company (which makes its products in FoxConn facilities in China), resulting in an unprecedented veto of a decision from the US Interantional Trade Commission - an outcome not seen since 1987.

Undated documents discovered by Reuters show that federal agents are trained to "recreate" the investigative trail to effectively cover up where the information originated, a practice that some experts say violates a defendant's Constitutional right to a fair trial. "I have never heard of anything like this at all," is one law professor's response to the fact that a secretive DEA unit is funneling wiretap, informant, and telephone database information to authorities across the nation in order to launch investigations of Americans (targeting common criminals, primarily drug dealers), "It is one thing to create special rules for national security, ordinary crime is entirely different. It sounds like they are phonying up investigations." One recently retired federal gent noted, "It was an amazing tool; our big fear was that it wouldn't stay secret."

Back in late 2012, Goldman's Jan Hatzius did precisely what he did at the end of 2010: predicted that after many years of delays, the US economy would finally soar higher on the back of the reignition of the virtuous cycle driven by now endless Fed micromanagement of virtually every aspect of the economy. We mocked him in 2010 (6 months later he pulled his call following a series of embarrassing mea culpas), and did the same in 2012. So here we are, 8 months later, and this much-delayed recovery has been "delayed" again - just as we thought. Of course, once bitten by the fringe blogosphere, Jan is not willing to pull his recovery call for the second time in a row despite deteriorating GDP and employment data, and instead (like everyone else) if placing his faith with the Fed, despite five consecutive years of disappointment from St. Ben. Maybe this time it will be different... although it won't. In the meantime, from a glass fully full (which is where it was supposed to be by this time in the year), the Goldmanite has now reduced his economic assessment to half that.

Between fast-food staff demanding higher wages, weather-related excuses, central-bank-impacted energy/feed costs, and protectionist policies, consumers (rich and poor) of beef in the US could soon face dramatically higher prices. As Bloomberg reports, US beef production is expected to plunge to 21-year lows (falling for the fourth year in a row) and the 'herd' on July 1st was the smallest for that date since at least 1973. Wholesale beef buyers from McDonalds (facing their own wage-cost demand pressures) to Ruth Chris are facing input prices rising at the fastest rate in almost 2 years even as agricultural commodities have dropped 18% this year. While the situation is not about to get better anytime soon, scientists in Holland are about to grill the world's first laboratory-grown in-vitro burger - forget Sirloin; Soylent Orange anyone?