Archive - Sep 11, 2013 - Story

As the AFL-CIO blows off Obamacare, it seems unions have been hard at work in recent days. In a ruling on Tuesday, current and former 'dancers' from the tastefully decorated (from what we hear) Midtown Manhattan Rick's Cabaret have won a class-action suit that protects them under labor laws and entitles them to minimum wage at least. The club, having argued unsuccessfully that the strippers were independent contractors, plans to appeal the Judge's ruling that the dancers are 'the main attraction" and integral to it success (though personally we would only go there to read the articles). Whether this will raise (or lower) the price per dance, VIP room access fees, mark-ups on beer and bottles of vodka, or acceptance (or not) of EBT cards has yet to be made clear.

Political analysts over the next year or so, and historians well into the future, are likely to point to the fall of 2013 as a fundamental inflection point in American politics. That period, they will say, is when the American people forced a major new direction in American foreign policy. Before the events of this fall, the country’s electorate largely delegated foreign policy to its political elite—and largely supported that elite as it projected American military power with more abandon than the country had ever before seen. Even as the government steadfastly expanded the range of international problems that it said required U.S. military action, the electorate accepted that expanded international role and that increasingly promiscuous use of force. Those days are gone now.

During an extended interview with Bloomberg TV, billionaire investor Stanley Druckenmiller provided a seemingly fact-based (and non-status-quo sustaining, commission-taking, media-whoring) perspective on a very wide variety of topics. The brief clips below touch the surface, with the detailed annotated transcript below providing details, as Druckenmiller opines on the looming catastrophe in entitlement spending "when you hear about the National debt being $16tn; if you actually took what we promised to seniors and future taxes, present value to both of them, that number is $200tn," why the Fed exit will be a big deal for markets, "it is my belief that QE has subsidized all asset prices and when you remove that, the market will go down," and his changing views on Obama "I was drinking the hope and change Kool-aid... in hindsight, he probably needed more experience for this job." Looking back to the financial crisis, he warns, "...a necessary condition to have a financial crisis, in my opinion, is too loose monetary policy that encourages people to take undue risk and go on the risk curve and do silly things. We should have shut this down in 1998, 1999. The NASDAQ bubble, we should have raised rates, we didn’t. Then we got the implosion."

Just three weeks ago, Goldman Sachs cried 'uncle' when their market-making options algo-machine exploded in a fit of guilt causing the firm to face hundreds of millions of dollars losses (should the exchange not have DK'd the deals). Nanex has investigated the rogue algo and here are the findings... "As soon as option quotes in the affected symbols began exceeding theoretic economic values by some threshold, quotes (and therefore liquidity) on other options exchanges for those contracts would immediately disappear - bid/ask prices would go to zero at other exchanges. Within 10 seconds of starting, one algo, in effect, completely destroyed the concept of the National Market System and obliterated liquidity..." As they sadly conclude, what was the fine for shutting down an options exchange, and destroying liquidity in hundreds if not thousands of options contracts? There was no fine. Worse, they were able to get the trades busted. As in, pretend we didn't just do that. Pretty shocking. Until there are financial consequences for firms that turn on market disrupting algos, the markets, will continue to be disrupted.

"If we can avoid force against Syria, this will improve the atmosphere in international affairs and strengthen mutual trust. It will be our shared success and open the door to cooperation on other critical issues.... No one doubts that poison gas was used in Syria. But there is every reason to believe it was used not by the Syrian Army, but by opposition forces, to provoke intervention by their powerful foreign patrons, who would be siding with the fundamentalists. Reports that militants are preparing another attack — this time against Israel — cannot be ignored... The potential strike by the United States against Syria, despite strong  opposition from many countries and major political and religious leaders, including the pope, will result in more innocent victims and escalation, potentially spreading the conflict far beyond Syria’s borders.... It is alarming that military intervention in internal conflicts in foreign countries has become commonplace for the United States. Is it in America’s long-term interest? I doubt it. Millions around the world increasingly see America not as a model of democracy but as relying solely on brute force, cobbling coalitions together under the slogan “you’re either with us or against us.”

Despite PIMCO, DoubleLine, and pretty much every other major mortgage bondholder in the world litigating the actions, Richmond, California's leaders approved this morning a plan for the city to become the first in the nation to acquire mortgages with negative equity in a bid to keep local residents in their homes. Richmond's city council voted 4 to 3 to use the power of 'eminent domain' (as we discussed here most recently) to seize underwater mortgages and refinance them. City council members opposed to the plan countered that using eminent domain would put Richmond at risk of expensive lawsuits that could destroy the city's finances; and sure enough, Richmond had no takers last month when the successor to its redevelopment agency put $34 million of bonds up for sale to refinance previous debt. As Reuters reports, investors holding the mortgages targeted by Richmond dispute altruism motivates the plan and are set to meet in court for the first time tomorrow.

Israel's richest person Beny Steinmetz, who amassed his $7.4 billion net worth beginning in the diamond trade, has seen his Geneva home raided by Swiss police following a request from the Government of Guinea. The West African country, as Bloomberg reports, approached Swiss prosecutors following an investigation into claims that bribes (shock, horror) were paid for mining licenses by Steinmetz's mining company BSG Resources. This follows raids of London-based Onyx Financial (run by a director of BSG) and the arrest of a BSG employee on charges he interfered with the U.S. grand jury probe (witness tampering, obstructing a criminal investigation and destruction of evidence in a federal investigation). He has pleaded not guilty. All sounds above board we are sure... just ask Eike Batista...

Moments ago The Hill reported that the Executive Council of the AFL-CIO, the largest federation of unions in the US and one of Obama's staunchest supporters, is expected to consider a resolution, "subject to fierce internal debate, that will call for changes to the Affordable Care Act (ACA) — setting up a potential floor vote this Wednesday before the convention closes." In other words, the one constituency that was supposed to be among the biggest benefactors from Obamacare is about to launch a formal criticism of Obamacare as "frustration has grown within labor as the Obama administration has failed to offer a fix to temper union worries over the law."

But at least "they passed it."

The definition of what makes an “enemy” may vary from person to person. But we would say that, generally, an enemy is one who has an active ability to do irreparable harm to you or your essential values. He is motivated by destruction, the destruction of all that you hold dear. He is capable and unrelenting. He is a legitimate threat. He will not compromise. He will not waver. He will do anything to wound you. He will not stop. He is possessed. Americans have spent the better part of a century being told who their enemies are with very little explanation or substantiation. We have blindly rallied around our patriotic prerogative without knowing the root cause of the conflict or the nature of the target we are told to annihilate. We have been suckered into war after war, conjured by international interests in order to lure us into accepting greater centralization and concentrated globalism. As a culture, we're sorry to say, we have been used. We are a tool of unmitigated doom. We are the loaded gun in the hand of the devil. When one applies the above definition of “the enemy” to Syria, one comes away with very little satisfaction. So, the question arises: If Syria is not the real enemy, who is?

VIX futures positioning hit another all-time record short just two weeks ago after collapsing to 12-month high levels as "Taper" concerns increased. From the start of July to the 3rd week of August VIX futures were sold in epic proportions providing the fuel to lift a plateaued stock market from taper-anxiety to new all-time highs (as nothing changed). Over 100 million contracts were sold in the 7-week period - a totally unprecedented amount of complacency. However, in the past 3 weeks, there has been an inflection; is this the end of selling, or are we about to pull VIX even lower with a concerted reflexive selling of even more shorts? As SocGen warns, this historic level of non-commercial short positions (read speculative) implies any market correction - or VIX-related spike - would increase short-covering and exaggerate the fall dramatically. With today's exuberant spurt lower in VIX, vol has caught back with stocks once again.

Policy officials believe that growth and inflation would fix the problem of large debts, but growth fueled by public spending that is financed by debt or central banks is not sustainable.  Like most Ponzi schemes, it doesn’t end well.  Reducing total debt was always a better solution, but it would have resulted in even slower economic activity and lower living standards. However, in the long run, the system would have been purged of unsustainable excesses. ‘Short term pain’ for ‘long term gain’ is often shunned for fear of electoral defeat and lobby group pressure. Now, we are stuck with financial repression. Investment is being directed toward funding the public sector.  Policy rewards debtors over creditors. Such policy cannot go on forever.  In reality, “unlimited” rarely means unlimited, because imbalances become too great.  The Fed’s current quagmire has aspects resembling the Triffin Dilemma. The recent adverse spillover from Fed policies in emerging market economies and currencies may be the first hint of cracks in the global monetary system.  At a minimum, foreign central banks have deviated from good policy in order to prevent sharp destabilizing fluctuations in the value of their currencies and to arrest volatile inflows and outflows of capital.

"Not only was it a civil war, an effort by a people who had for years been seeking their liberation from any colonial influence whatsoever, but also we found that the Vietnamese whom we had enthusiastically molded after our own image were hard put to take up the fight against the threat we were supposedly saving them from. We found most people didn't even know the difference between communism and democracy. They only wanted to work in rice paddies without helicopters strafing them and bombs with napalm burning their villages and tearing their country apart. They wanted everything to do with the war, particularly with this foreign presence of the United States of America, to leave them alone in peace..."

Presented with little comment aside to ask just how levered the market is when a 'twitch' lower in VIX smashes the entire S&P 500 index up by 0.3% in 15 minutes...

AAPL's demise was shrugged off by a broader market as VIX was slammed lower once again to 14.00% stirring the S&P to its 7th green day in a row and best run in 2 months. The Dow outperformed on the day (absent the AAPL drag) but stocks tyraded amid very low volumes once again and weakened into the close. Treasuries were well bid (along with stocks) as a very healthy 10Y auction and some negative chatter over Syria saw a modest safety bid. The USD was monkey-hammered against all the majors - EUR most notably but JPY strength was entirely ignored by stocks (as we point out once again - it was VIX that drove us). So bonds bid, stocks bid, USD offered, oil and gold modestly bid, and VIX offered - smells a lot like a market that is absolutely not pricing in a Taper. It appears that VIX 'war-hedges' have now been fully unwound - where's the ammo for the next leg higher?

While the unemployment rate has been falling, currently at 7.3%, it has not been because of a strongly increasing workforce.  Rather it has been a function of people leaving the workforce.  This, of course, brings up the obvious question of how these people are live if they aren't working.  A recent trip to Walmart answered that question...