Archive - Jan 14, 2014 - Story

Tax burdens are so high that it might not be possible to pay off the high levels of indebtedness in most of the Western world. At least, that is the conclusion of a new IMF paper from Carmen Reinhart and Kenneth Rogoff - “The size of the problem suggests that restructurings will be needed, for example, in the periphery of Europe, far beyond anything discussed in public to this point.” The 'not different this time' couple see two facts of life for Europe’s future: financial repression through higher inflation rates and taxes levied on savings and wealth.

Poor Uber: the limo company has had its share of tribulations in the US over the past month, being accused periodically of price gouging when it implemented surge pricing during times of peak demand and lack of alternatives (and a very confused consumer, who naturally has the option of not paying the surge price if they feel insulted by it). However, this is nothing compared to the treatment the company that is a manifestation of pure capitalism at its rawest received in socialist France yesterday. As Rudebaguette reported previously, a French taxi drivers strike turned ugly for none other than an Uber driver who was carrying Eventbrite CTO Renaud Visage & Kat Borlongan from the airport to Paris, when "he was attacked by multiple assailants, who allegedly, after smashing one window and slashing two tires (as seen in the photo), as well as defacing one side of the car with glue, attempted to enter the vehicle" That was just the beginning. Later Uber confirmed that no less than a dozen confirmed incidents in Paris & Lyon, including “flat tires, eggs, broken windows."

"Continuing large-scale asset purchases risks placing us in an untenable position, both from the standpoint of unreasonably inflating the stock, bond and other tradable asset markets and from the perspective of complicating the future conduct of monetary policy," warns the admittedly-hawkish Dallas Fed head. Fisher goes on to confirm Peter Boockvar's "QE puts beer goggles on investors," analogy adding that while he is "not among those who think we are presently in a 'bubble' mode for stocks or bonds; he is reminded of William McChesney Martin comments - the longest-serving Fed chair - "markets for anything tradable overshoot and one must be prepared for adjustments that bring markets back to normal valuations."

The eye of the needle of pulling off a clean exit is narrow; the camel is already too fat. As soon as feasible, we should change tack. We should stop digging. I plan to cast my votes at FOMC meetings accordingly.

As global central bankers appear set on a game of inter-continental reach-around, the Japanese - printing press handle in hand - have taken the lead. For those wondering why EURJPY is so high and why, despite an endless stream of disappointingly near-record-bad macro and micro data in Spain and Italy, yields are near record lows... wonder no more. As Reuters' Jamie McGeever reports, the Japanese bought Spanish and Italian government debt at the fastest pace in 5 years. As Abe increases his militaristic presence in Asia, perhaps his 'promise' to buy any and all European peripheral debt is just the handshake he needs to pressure China (through its largest export market).

... the most effective alpha-generating investment strategies are parasites. An alpha-generating strategy of the type I’m describing uses the market itself as its habitat. It’s not an investment strategy based on the fundamentals of this company or that company – the equivalent of a geographic habitat – but on the behaviors of market participants who are living their investment lives in that fundamentally-derived habitat. A parasitic strategy isn’t the only way to generate alpha – you can also be better suited for a particular investment environment (think warm-blooded animal versus cold-blooded animal as you go into an Ice Age) and generate alpha that way – but I believe that the investment strategies with the largest and most consistent “edge” are, in a very real sense, parasites.

The 1,582-page (apparently bipartisan) omnibus spending bill announced last night adds up to a cool $1.1 trillion. As Bloomberg reports, lawmakers notes "not everyone will like everything in this bill," and we can see why. There is no IMF funding, nothing that "blocks Obamacare," the IRS gets a reprimand - barring them from targetng groups based on their ideological beliefs, preserves language that blocks Federal funding for abortions and spending any money to legalize marijuana. But, perhaps the most critical aspect of the bill is the NSA is required to give Congress number of phone records collected, reviewed during last 5 yrs, including estimate for records of U.S. citizens (among other things). Will that be one step too far for the administration?

Stocks may be masquerading as a big bounce today, driven by a VIX slam which has gotten the algos to ramp the S&P higher and of course a perfectly innocuous gold slam which as usual took out the entire bid stack, but the real money is furiously going elsewhere, such as today's 4 Week auction. Two things were notable: first - the rate was a solid 0.000%. This is not that surprising: after all under ZIRP, and as long as the Fed has control and the USD is the reserve currency, ultra-short term maturities are cash equivalent, which is why investors don't mind getting zero return in exchange for 1 month maturities.  However, what was far more notable is that the Bid to Cover in today's auction just soared to 6.36x, highest than last week's 5.66x, and the highest since December of 2011, when the scramble into short-term paper was a function of year end window dressing (made since unncessary courtesy of the Fed's Reverse Repo facility). So while algos are levitating stocks higher based on simple carry currency/VIX correlations, why the sudden real money scramble for the safety of near-term paper?

It would appear that in order to appease the masses - despite his recent small bump in popularity post-Affair - France's President Hollande has gone full Socialist-tard. Aside from promises to cut spending by EUR50 billion in the next 3 years (so less taxes?), Hollande has suggested...

• FRANCE'S HOLLANDE SAYS FRANCE MUST PRODUCE "MORE AND BETTER"
• HOLLANDE SAYS COMPANIES WILL IN RETURN BE GIVEN QUANTITATIVE TARGETS FOR HIRING, TRAINING
• HOLLANDE SAYS PUBLIC SPENDING CUTS CAN BE MADE WHILE PRESERVING FRENCH SOCIAL MODEL

Channeling Stalin, he further calls for "more economic governance of the Euro-zone" and the creation of a Franco-German energy company and more tax-harmonization with the Germans. We are sure Merkel will be over-the-moon at that suggestion.

Well that escalated quickly... As Europe closes, the precious metals complex is slaughtered on the altar of higher stocks and lower bond prices...

Yesterday we saw that JPY crosses lost their momentum-igniting effect on stocks as US equities suffered. This morning has seen the machines fall back to their old standard - the VIX slammer. However, while VIX is being slammed, stocks are not rising as much as expected. Trannies are back into the green year-to-date but we note more importantly that this most recent wrench higher has lifted S&P 500 futures to yesterday's closing VWAP - a crucial levels for market-making algos to make money. Silver is spiking once again; bonds are selling off very modestly (+2bps) and the USD is fading slightly.

"...in these artificial markets the percentages are skewed towards the bulls for now." - Deutsche Bank

Despite sovereign bond yields plumbing new record lows and the Prime Minister proclaiming (against Draghi's advice) that the nation has turned the corner and is out of the crisis; Spain's record unemployment and record loan delinquency is showing up in a major credit-creation-crushing way for small businesses. As Bloomberg's Jonathan Tyce reports, Spanish new business lending rates just experienced the largest 2-month surge in over a decade to their highest since 2008. At 4.04%, new business loans trade over 300bps above two-year sovereign debt (and are diverging) as the efforts of Europe's 'whatever it takes' central bank are being entirely wasted in terms of reaching the Keynesian growth-driving economy. We suspect this surge will once again raise talk of a rate-cut (and expose the impotence of the ECB's transmission mechanisms).

Remember when everyone said rising rates would not cripple mortgage origination and the lending pipeline? Well, tell that to the largest US mortgage lender, Wells Fargo...

The Status Quo views real estate bubbles as a "good thing": as home prices rise, the homeowner's collateral (equity) rises, creating both a psychological "wealth effect" (now that we're richer, we can afford to borrow and blow more money) and a temporary (and thus phantom) increase in collateral that will support more household debt. What few seem to realize (or discuss) is how rising home prices push rents higher.This is an entirely pernicious effect, as renters aren't getting any more "home" for the higher rent--they're paying more money for the same shelter. Central Planning pushing housing prices higher is not win-win--it is lose-lose-lose.

The Greek economy initially slipped into a deflationary trend in March 2013 and for the 10th month in a row in December, Bloomberg's Niraj Shah notes that EU-harmonized consumer prices dropped 1.8%. This is the longest deflationary streak since 1968 (largest in record according to Bloomberg data) as the Greek economy remains 21.3% smaller than it was in the third quarter of 2007. Of course, this doesn't matter to the dash-for-trash-grabbing fast-money muppets who have driven Greek stocks up 19% in the last 9 days to their highest in almost 3 years; because, as is the only important fact, Stournaras says recovery is coming any minute...