Archive - Oct 2014 - Story

Did the IMF just upset the bulls?

The always "nailing it" IMF has downgraded global growth expectations...

*IMF SEES WORLD ECONOMY GROWING 3.8% NEXT YEAR VS 4% JULY EST.

Citing geopolitical risk (among other things). The only problem - the IMF's estimate is still 30% better growth than the consensus expects for 2015...

If you want to understand why our economy is stagnating and wealth inequality is rising, look at the rise of rentier skims and the resulting decline in wealth creation.  To understand why the real economy is stagnating, we have to understand the critical difference between rentier wealth and wealth creation. Rentier wealth is skimmed by fees that provide little to no value to the to the person paying the fee. The classic example is a fee collected to pass from one fiefdom's border to the next: no value is provided to the person paying the border fee; it is a rentier skim that transfers wealth from serfs to the fiefdom's landowning nobility. In the modern economy, rentier skims take a variety of forms. The government is adept at levying rentier skims. Harsh penalty fees piled on top of minor traffic violations are one example; another is extra fees to "expedite" services government is supposed to provide in a timely manner.

In the new normal, companies can one second trade with a market cap of hundreds of millions (or over a billion in the case of negative cash flow GTAT) and the next unexpectedly report they are bankrupt, or, as SODA just did, report guidance that is just about as bad.: "We are very disappointed in our recent performance," said Daniel Birnbaum, Chief Executive Officer of SodaStream. "Our U.S. business underperformed due to lower than expected demand for our soda makers and flavors which was the primary driver of the overall shortfall in the third quarter. While we were successful over the last few years in establishing a solid base of repeat users in the U.S., we have not succeeded in attracting new consumers to our home carbonation system at the rate we believe should be achieved.  The third quarter results are a clear indication that we must alter our course and improve our execution across the board."

• Liberian Rubber Farm Becomes Sanctuary Against Ebola (WSJ)
• The World’s Most Powerful Central Banker: Janet Who? (BBG)
• Islamic State moves into south west of Syrian Kurdish town (Reuters)
• Waldorf to Be Biggest Chinese Property Purchase in U.S. (BBG)
• Spain Seeks People in Contact With Ebola-Infected Nurse (BBG)
• Hong Kong protests at crossroads as traffic, frustration pile up (Reuters)
• Immigration: Grim Caseload at the Border (WSJ)
• China Cuts Thousands of ‘Phantom’ Workers From State Payroll (BBG)
• U.S., U.K. Regulators Push to Settle Deutsche Bank Libor Case This Year (WSJ)
• Wall Street Moles Go to NY’s Top Cop, Spurning SEC Cash (BBG)
• Pimco's outflow headaches only just beginning (Reuters)
• Japan Lawmakers Flag Need for Exit Strategy as Yen Falls (BBG)

While the economic data, especially out of Europe, just keeps getting worse by the day, with the latest confirmation that Europe is now officially in a triple-dip recession coming out of Germany and the previously observed collapse in Industrial Production which tumbled the most since February 2009, it was once again the Dollar and especially the New Normal favorite currency, the Yen, that was in everyone's sights overnight, when it first jumped to 109.20 only to slide shortly after midnight eastern, when Abe repeated once again that a plunging Yen is hurting small companies and consumers - and to think it only took him 2 years to read what we said would happen in late 2012 - but also the BOJ minutes which did not reveal any addition easing, which apparently disappointed algos and triggered USDJPY slel programs, pushing the USDJPY 80 pips lower to 108.40.

A few hours ago we finally got undeniable confirmation that Europe is once again in recession, its third since Lehman, only this one is worse: it is led by the "core" countries, with Germany in the forefront, a Germany which just reported industrial output which suffered its biggest monthly decline in more than five years in August. Specifically, German IP tumbled 4%, led by capital goods which crashed 8.8%; consumer goods sliding 0.4%, and basic goods dropping 1.9%, with the headline plunge far below the consensus of -1.5%, and below even the worst forecast of -3.0%, the biggest drop since February 2009, a result which according to the FT rose "fears that Europe’s biggest economy might be heading for recession and prompting renewed concern about the economic health of the eurozone."

"...it is rather medieval. But what can you do? Even in 2014, we hardly have any way to combat this virus... There will certainly be Ebola patients from Africa who come to us in the hopes of receiving treatment. And they might even infect a few people here who may then die... I am more worried about the many people from India who work in trade or industry in west Africa... that really is the apocalyptic scenario."

"It's tiring," explains author Stephen King in this succinct interview, "to see the world looks more and more like George Orwell's vision in 1984 where war is a constant thing... it's just a little bit depressing."

The integrity of markets is clearly at risk. And we have long sought alternatives that offer much lower credit and counterparty risk. The time-honored alternative has been gold. As the chart below shows, gold has tracked the expansion in US debt pretty handily (the correlation between the two is a strong +0.86) and if one expects that relationship to resume (we do), then gold looks anomalously cheap relative to the rising level of US debt.

In June, ConvergEx's Nick Colas sized up the legal recreational marijuana market in Colorado by surveying several storeowners and their employees. Today he offers an update after circling back with these sources to get a grasp on the business 10 months into its legal tenure. On the whole, Colas notes that the marijuana business continues to be robust.  This Colorado experiment is growing into a mature market that offers a handsome stream of revenue to both businesses and the state - pricing has remained stable at about $40-$50 for an 1/8 ounce, and $300-$400 for an ounce (plus tax). Sure, there are a few headwinds like any startup industry endures, but this continues to be a fascinating case study of a new – and quite profitable – business.

From the end of August to mid-September long-term T-bond yields rose even as the Fed-balance-sheet predicted they would continue to fall. Since mid-September, though, gravity seems to be reasserting itself on yields as they have fallen nearly all the way back in line; and if history is any guide, suggests new lows are not far off.

Effectively G4 central banks have been "soaking up" government bonds forcing private investors to hold more corporate bonds, and as JPMorgan warns successive QE programs since 2009 have forced private non-bank investors increasingly more overweight credit. From essentially neutral in 2009, non-bank investors are implicitly overweight a record-high 17% which points to more elevated credit spreads than in previous cycles to compensate private non-bank investors from becoming increasingly overweight credit (and accepting the soaring liquidity risks). Is it any wonder Blackrock (and every other corporate bond manager) is freaking out about potential weakness and systemic risk "right under the regulators nose."

In recent months, this prognostication has been gaining traction that a second, more severe crash - one that reflected the level of debt - is inevitable. There are two primary camps amongst economists with regard to the economic direction that a crash will generate: inflationists and deflationists. The argument goes back and forth, yet there seems to be the misconception that one must be either an inflationist or deflationist. This is not at all the case.

Americans want guns without serial numbers. And apparently, they want to make them at home. On Wednesday, Cody Wilson’s libertarian non-profit Defense Distributed revealed the Ghost Gunner, a $1,200 computer-controlled (CNC) milling machine designed to let anyone make the aluminum body of an AR-15 rifle at home, with no expertise, no regulation, and no serial numbers. Since then, he’s sold more than 200 of the foot-cubed CNC mills—175 in the first 24 hours.