Archive - Jan 17, 2014 - Story

If the Federal Reserve is trying to force feed us prosperity then the inevitable blowback will be adversity. If the Fed is trying to compel the most dramatic economic recovery in history, then the blowback may well be the deepest depression in history. If the Fed is trying to enforce confidence and optimism then the blowback will be fear and despair. If the Fed is trying to force consumers to spend then the blowback will be a collapse in consumer confidence.

"Sooner or later everyone sits down to a banquet of consequences." - Robert Louis Stevenson

We sincerely hope that we are completely wrong here, that we are missing something, that there is a flaw in our logic. However until we can locate such a flaw we must trust the technical case for treating this Fed force-fed rally in the stock market as something that will end badly.

A common argument that has been made to explain the precipitous decline of the price of precious metals in 2013 (in spite of the significat demand for the physical bullion) is of investors’ disenchantment with gold and silver, which had been piling up in exchange traded products as a way for investors to gain exposure to the metals. However if redemptions are a symptom of investors' disenchantment with precious metals as an investment, shouldn't silver have suffered the same dramatic redemptions fate as gold? Indeed it should have, but we think the reason silver ETFs were not raided like gold was that Central Banks do not have a silver supply problem, they have a gold problem...

Germany's blowback against gold manipulation is accelerating. Following yesterday's report that Bafin took a hard line against precious metals manipulation, after its president Eike Koenig said possible manipulation of precious metals "is worse than the Libor-rigging scandal", today the response has trickled down to Germany and Europe's largest bank, Deutsche Bank, which announced that it would withdraw from the appropriately named gold and silver price "fixing", as European regulators investigate suspected manipulation of precious metals prices by banks. As a reminder, Deutsche is one of five banks involved in the twice-daily gold fix for global price setting and said it was quitting the process after withdrawing from the bulk of its commodities business. The scramble away from gold fixing was certainly assisted by the recent first (of many) manipulation expose in the legacy media, when Bloomberg revealed "How Gold Price Is Manipulated During The "London Fix." And sure enough, with Germany already very sensitive to the topic of its gold repatriation, and specifically why it is taking so long, it was only a matter of time before any German involvement in gold manipulation escalated to the very top.

"We are concerned about the sustainability of the Equity market rally at this stage," warns Citi's FX Technicals' Tom Fitzpatrick. Between price action parallels to those seens around the peaks in 2000, the fragility of confidence, the Fed taking its "foot off the gas" and bonds now yielding considerably more than stocks, Citi adds, though we are yet to see bearish breaks, they doubt higher highs wil be sustained for long.

The following is Part 2 (Part 1 here) a firsthand story of how and why a former US citizen - who kindly shared this information on condition of anonymity - decided to renounce his US citizenship

On the heels of his less-than-optimistic presentation, DoubleLine's Jeff Gundlach tells Europe's Finanz und Wirtschaft "he's concerned about the growing amount of speculation" and draws a parallel between today’s markets and the dot-com boom of the late Nineties. This excellent interview takes the themes of his recent conference call and extends them as he warns "In the over thirty years I’ve been in the financial investment industry, I don’t recall a single year where I saw the year begin with the consensus being so solidified in its thinking across virtually every asset class." His biggest worry (for investors, as opposed to his funds), "the most unthinkable things happen this year and that is a basic pain trade that forces people into treasury bonds."

Hjalmar Schacht was Hitler’s economic guy. According to Wikipedia, Schacht: ”became a supporter of Adolf Hitler and the Nazi Party, and served in Hitler’s government as President of the Reichsbank and Minister of Economics. As such, Schacht played a key role in implementing the policies attributed to Hitler.” Now, we all know what happened to Hitler. But what about Schacht?

Krugman frequently accuses his opponents of being stupid and/or evil, when they present a view that he himself advanced in other circumstances. His typical readers would have no idea that Krugman once worried about bond vigilantes, or that his books lay out the standard case for why generous government unemployment benefits might contribute to structural unemployment. No, Krugman has led such typical readers to believe that anyone espousing such views is either a complete idiot - immune to theory and evidence that we’ve had since the 1930s - or is a paid shill who hates poor people.

In order to appeal to their target demographics, the smart people in the marketing department at Obamacare central have provided us with such wonders as kegstanding "bros" and easy-women. However, the following clip - which almost defies description - shows just how desparate (or clueless) the administration has become, as a #GetCovered promo turns dirty-dancing-meets-twerking as Richard Simmons and an unknown male assailant begin to...well just watch...

The IMF has reported that its resident respresentative in Afghanistan - 60-year-old Wabel Abdallah - is among the 15 people killed in a coordinated assault at a Kabul restaurant by the Taliban. The upscale taverna is well-known to be frequented by foreigners and ex-pats. As Reuters reports, Abdallah had been leading the IMF's office in the Afgan capital since 2008 and IMF Managing Director Christine Lagarde said "this is tragic news, and we at the fund are all devastated."

Just before New Year's Day, as we previously reported, Russia's city of Volgograd, located in close proximity to Sochi where the Winter Olympics begin in a few weeks, was rocked by two powerful suicide bombings, the first of which took place in its train station - one of Russia's largest. At least 14 people were killed. Yesterday, footage released by Lifenews.ru shows the suicide bomber as he approaches the train station, and then explodes as he crosses the metal detectors. Up close and personal, not for the faint of heart.

With the market more bullishly positioned, more euphoric, and more levered than almost any time in history, it is perhaps worth "pondering" what some of the risks to this optimism could be...

JPY crosses were in charge of stocks again today - and not in a good way - as a sideways market gave way to weakness late on as Goldman released part two of their market-bashing research. With the dramatic help of AXP and V (78 of the Dow's 41 points!), the Dow was the only index green today and managed to close just green on the week. Since the taper, Homebuilders have tumbled from heroes to almost zeroes (+1.5% from +6.5% at year-end in spite of the big drop in TSY yields in recent weeks) with Healthcare outperforming (+5.5%). Away from stocks, things were also escalating rapidly this afternoon. Treasury yields limped lower all day then dropped notably starting around 1445ET with 30Y -5bps on the week (and 5s30s at 212bps - the flattest term structure in 4 months). The USD rose on the day (up 0.75% on the week) led by EUR weakness (JPY was relatively stable). Despite the USD strength, gold and silver closed green on the week (+0.25% and+0.7% respectively) but WTI crude led the way up 1.5% on the week at $94.10. Despite valiant efforts to VIX-slam the market higher into the close, the S&P closed red and VIX +0.6vols higher on the week at 12.7%

"US profits are growing, companies have underinvested and have no choice but to spend more on CapEx, and corporations have much less debt than they did during the crisis thanks to a massive cash build up."

These are the generic go to explanations by soundbity talking heads for why the US recovery is gaining traction with US corporations, if not so much Joe Sixpack, and why companies are still cheap. There is one problem: they are all wrong. As SocGen's Andrew Lapthorne shows conclusively, "US profits are not growing, companies are over not underinvesting (they may in fact have overinvested), and corporates are carrying more (not less) net debt than they were in 2009. It would appear that many believe the opposite to be true, yet corporate report and accounts data seems to say otherwise.""

$1 Trillion worth of central banking money printing around the world just does not seem to go as far as it used to... behold, the death cross of faith in monetary policy.