Archive - 2013 - Story

When people talk about "cash in the bank", or "money on the sidelines", the conventional wisdom reverts to an image of inert capital, used by banks to fund loans (as has been the case under fractional reserve banking since time immemorial) sitting in a bank vault or numbered account either physically or electronically, and collecting interest, well, collecting interest in the Old Normal (not the New ZIRPy one, where instead of discussing why it is not collecting interest the progressive intelligentsia would rather debate such trolling idiocies as trillion dollar coins, quadrillion euro Swiss cheeses, and quintillion yen tuna). There is one problem, however, with this conventional wisdom: it is dead wrong.  Tracking deposit flow data is so critical, as it provides hints of major inflection points, such as when there is a massive build up of deposits via reserves (either real, from saving clients, or synthetic, via the reserve pathway) which can then be used as investments in the market. And of all major inflection points, perhaps none is more critical than the just released data from today's H.6 statement, which showed that in the trailing 4 week period ended December 31, a record $220 billion was put into savings accounts (obviously a blatant misnomer in a time when there is no interest available on any savings). This is the biggest 4-week total amount injected into US savings accounts ever, greater than in the aftermath of Lehman, greater than during the first debt ceiling crisis, greater than any other time in US history.

Jim Grant spends exactly the correct amount of time (zero) discussing the "urban myth' of the trillion dollar coin in this brief interview on CNBC; instead deciding to try and strike up some intelligent understanding of the dire situation we face. By providing context for our massive 16 trillion dollar debt (360 million pounds of $100 bills), and explaining how exponential the idiocy has become, Grant brings us full circle as he explains to the money-honey that once upon a time our debt was backed by gold, and "there was only so much gold and so many dollars," thus limiting our exuberance, but "now we have neither the gold covering the dollar nor do we have interest rates constraining us [thanks to Bernanke et al.]; the only thing remaining to constrain us is some sort of civil discussion, a numerate discussion about the debt," which it appears the bespectacled and bow-tie-bound bond brain-box hopes is possible. "The debt has increased twice as fast as federal receipts," he warns, adding correctly that "the United States is truly submerging."

Mercantilist trade policies have returned in a big, big way. States around the world including in the West, and especially America, have massively adopted corporatist domestic policies, even while spouting the rhetoric of free trade and economic liberalism publicly. A key difference between a free market economy, and a corporatist command economy is the misallocation of capital by the central planning process. While mercantile economies can be hugely productive, the historic tendency in the long run has been toward the command economies — which allocate capital based on the preferences of the central planner. This means that the competition is now over who can run the most successful corporatist-mercantilist system. This is the worst of both worlds for America. All of the disadvantages of mercantilism — the rent-seeking corporate-industrial complex, the misallocation of capital through central planning, the fragility of a centralised system — without the advantage of a strong domestic productive base.

What will the world look like two decades from now? Obviously, nobody knows, but some things are more likely than others. Companies and governments have to make informed guesses, because some of their investments today will last longer than 20 years. In December, the United States National Intelligence Council (NIC) published its guess. The NIC foresees a transformed world, in which “no country – whether the US, China, or any other large country – will be a hegemonic power.” This reflects four “megatrends”: individual empowerment and the growth of a global middle class; diffusion of power from states to informal networks and coalitions; demographic changes, owing to urbanization, migration, and aging; and increased demand for food, water, and energy. 

As Obi-Wan Kenobi might have said "This is not the debt ceiling debacle you are looking for." That is the seeming 180-degree shift that Goldman appears to have taken with its latest missive on the pending 'discussions'. Their reasoning that this time is different is based on the fact that, in contrast to now, the S&P 500 seemed immune to 'cliff' risks and traded in the 1300 range for the first half of 2011, even as the macro backdrop began to sharply deteriorate. Their models suggest it was clear that risk sentiment was buoying the market even as macro fundamentals were deteriorating. Goldman's view is that the swift market 20% sell-off was in part a reflection of a levitating market reconnecting to still-deteriorating macro fundamentals, possibly catalyzed by the political debate. This time around, they claim, the macro backdrop is, at least for now, stable and far better then in 2011, which perhaps, will allow the market to better absorb the upcoming debt ceiling debate. Unless, this happens...

Another day, another epic European close trend reversal (or is it POMO that is driving that odd timing-based shift?). S&P 500 closes at 5-year highs. Today's ramp was brough to you by the algos that needed to enable high volume exits in AAPL and a Draghi-driven 200pip run in EUR against the USD (as the ECB head basically shut the door on rate cuts anytime soon). VIX slid lower (relatively outperforming stocks) but mid-dated VIX futures actually rose modestly today (to steepest in a year!); high yield credit ETFs tested new highs (but cash never followed) and even that collapsed again at the close; the USD dropped the most in 4 months (even as JPY weakened); and Silver surged (+2% on the week) along with gold (as oil slid in the afternoon). It appears that so far this year risk-assets in general had been less exuberant than stocks - but first Treasury yields, then VIX, and now FX markets (EURJPY today), and increasingly Gold (and Silver) are shifting to catch up to stocks. Today saw equities ramp from the end of POMO on to catch up to EUR-driven risk model perception, with AAPL trading like a penny stock (or HLF). The great recoupling of risk-assets from pre-holidays is almost complete...

"Ever heard of SB3341?" is Rick Santelli's opening salvo in today's rantless discussion of the concerns he has with Illinois' 'Precious Metal Purchasing Act'. While passed in the Illinois Senate last year, and moth-balled in the House since, Rick notes that "the long and short of it is is they want an audit trail to any precious metals, whether you're talking coins or bullion." It does not seem too much of a stretch to this Chicagoan to the 1933 Executive Order #6102 that confiscated gold and cleared the way eventually for Nixon's 1971 disconnect of the dollar from gold. As Liberty Blitzkrieg's Mike Krieger notes: "So let me get this straight.  First they want gun registration and now precious metal registration?  I’m sure the government would only use such information in our best interests, because as we all know: Your Government Loves You.  Sounds reasonable, after all, only 'terrorists' buy guns and gold anyway."

Pretty much sums up not only the present and future of US budget cuts, but everything else about the US:

• PANETTA SAYS NO IDEA `WHAT THE HELL IS GOING TO HAPPEN' ON CUTS

The $1 trillion platinum coin saga took a surprising turn as the Central Bank of Mars has expressed interest in buying 100 of the proposed coins. Interpreters are puzzling over the meaning and subtexts of the Martian communique. Opinion on the Martian offer is divided. A small cadre of analysts suspect the Martian Central Bank naively believes the fantasy that the arbitrary creation of assets, either via platinum coins or electronic entries in the Federal Reserve's balance sheet, creates actual value. Though this credulity borders on the fantastic, these analysts point to the many commentators in the U.S. who have bought into the platinum coin fantasy. If Paul Krugman et al. have swallowed the fantasy that something of real value can be created from nothing, then why not the Martian Central Bank?

Ever feel like we have been here before? Overwhelmed by the chatter that this time is different and the 'recovery' is self-sustaining? Join the crowd (and Goldman). Their MAP indicator - which tracks both absolute (up/down) and relative (beat/miss) moves in macro-economic data - is once again at a level that in the last two years has perfectly marked the tipping point in expectations and absolute macro performance. While the markets (in their infinite wisdom) appear convinced - just as they were in 2007 - perhaps 4 weeks in a row of weakening claims and a gross downward revision of Philly Fed is a glimpse that it really is no different this time.

The Constitution of the United States is an undeniably powerful document.  So powerful in fact, that it took establishment elitists with aspirations of globalized governance over a century to diminish the American people’s connection to it.  It’s been a long time coming, but in the new millennium, there is now indeed a subsection of the masses that not only have no relationship to our founding roots, they actually despise those of us who do! There are a number of reasons for this dangerous development in our culture...

With gun tzar Joe Biden expected to propose his "gun recommendations" to Obama by next Tuesday, a proposal which will certainly involve some additional measure of gun control, the last thing the nation needed was more gas being poured into the fire today. Yet that is precisely what it got following news that two people had been shot, one of which reportedly a student, at Taft Union High School in the San Joaquin Valley in California earlier. From AP: "A student was shot and wounded at a San Joaquin Valley high school Thursday and a suspect was taken into custody, officials said. The shooting occurred about 9 a.m. at Taft Union High School, an oil and agricultural community about 120 miles northwest of Los Angeles. The student who was shot was flown to a hospital in Bakersfield, said Ray Pruitt, spokesman for the Kern County Sheriff’s Department. There was no immediate word on the victim’s condition. “We have a suspect in custody,” Pruitt said, adding that the person was believed to be a student. Pruitt said it’s believed a shotgun was used in the attack. KERO-TV Bakersfield reported that the station received phone calls from people inside the school who hid in closets."

President Obama is due to speak at 130pmET on what we pre-suppose is his introduction of Jack Lew as the new Treasury Secretary. As Geithner steps aside to take up his rumored role as Citigroup Chair (although more realistically to write a book over the next 12 months, bashing none other than Tim Geithner), he leaves behind a legacy of opacity that we are sure the incoming "political guy" will be all too happy to continue until his chairmanship is ready...

Three months ago, in anticipation of the now traditional year end ramp in "story stocks" (i.e., those companies in the Russell 2000 that have negligible or negative cash flow, yet have a "story" to them, and/or massive short interest usually for a reason) we penned an article titled "Presenting the most shorted stocks" focusing on the 50 most shorted/hated names in the Russell 2000. We suggested that for "the overly aggressive out there, and those who are tired of watching paint dry, one option is to create an equal-weighted basket of the 20 most hated names, and hope for the arrival of the one catalyst that forces a massive squeeze." That, or just await the traditional rotation into high beta garbage that comes every year like clockwork in the last months of the year. Sure enough precisely this happened in 2012 as it always does, with the Russell 2000 outperforming the S&P notably since November, with the index hitting all time highs a few days ago, yet our most-shorted basket crushing the returns of both the S&P and the broader Russell 2000 by a substantial amount. Alas, those hoping that that the Russell bubble will continue indefinitely may want to promptly reassess, as moments ago Interactive Brokers just announced it would hike both initial and maintenance margins on all low cap stocks (under $250 million in market cap) beginning January 11, 2013, to 100%!

It is hard to find a policymaker who hasn’t actively tried to talk his currency down. The few who don’t talk, act as if they were intent on driving their currency lower.  Citi's Steven Englander argues below that the ‘currency wars’ impact is collective monetary/liquidity easing. Collective easing is not neutral for currencies, the USD and JPY tend to fall when risk appetite grows while other currencies appreciate. Moreover, despite the rhetoric on intervention, we think that direct or indirect intervention is credible only in countries where domestic asset prices are undervalued and CPI/asset price inflation are not issues. In other countries, intervention can boost domestic asset prices and borrowing and create more medium-term economic and asset price risk than conventional currency overvaluation would. So the MoF/BoJ may be credible in their intervention, but countries whose economies and asset markets are performing more favorably have much more to lose from losing control of asset markets. So JPY and, eventually CHF, are likely to fall, but if the RBA or BoC were to engage in active intervention they may find themselves quickly facing unfavorable domestic asset market dynamics.