Archive - Nov 2014 - Story

With the equity market back to near-historical highs, Goldman Sachs' Jan Hatzius revisits his analysis of the predictability of asset price busts. The main predictors of busts are past asset price appreciation and past credit growth, followed by a rising investment/GDP ratio. Hatzius warns that their model says that the further US equity price gains of 2014 have pushed the risk of an equity bust back up - as the chart below shows to levels not seen since 2008/9. Interestingly, the main factor holding down the risk of another bust, especially in the housing market, is the weakness of credit growth since the crisis.

"Whichever side emerges victorious, both Republicans and Democrats should face up to a much bigger truth: Neither party as currently constituted has a real future." On this, another election day sham, it is key to not get discouraged. Things are changing at the grassroots for the better. The battle of decentralization vs. centralization, networks vs. hierarchies, will not be easily won, but it will be won. Keep fighting.

Having destroyed any remnants of the "it's earnings that matter" meme, we thought the following chart would clarify just how bad the outlook for Q4 EPS is. As Factset notes, "the decline in the bottom-up EPS estimate recorded during the course of the first month (October) of the fourth quarter was higher than the 1-year, 5-year, and 10-year averages." That is not a 'good' thing..

Just three months ago, Mario Draghi embarked on his own Quixotic folly by taking certain interest rates into negative territory (convincing himself that he was saving Europe from disaster). On November 1st, the first European bank has passed along these negative interest rates to its retail customers. So if you maintain a balance of more than 500,000 euros at Deutsche Skatbank of Germany, you now have the privilege of paying 0.25% per year... to the bank.

The most bizarre story of the weekend was that of Bank of America's 29-year-old banker Rurik Jutting, who shortly after allegedly killing two prostitutes (and stuffing one in a suitcase), and called the cops on himself.  The answer, as the WSJ has revealed, is just as unsavory: "he had been part of a Bank of America team that specialized in tax-minimization trades that are under scrutiny from prosecutors, regulators, tax collectors and the bank’s own compliance department, according to people familiar with the matter and documents reviewed by The Wall Street Journal."

Don't think and trade...

It appears the excitment of US midterm election sparked a "sell-everything-American" strategy today as stocks, bonds, WTI crude, the dollar, Treasuries, and credit all sold off to a lesser or greater amount. Trannies started off liking weak oil prices but faded as WTI could not bounce off multi-year lows but stocks were jolted lower (before v-shape recovering to VWAP) by Mutiny at the ECB (and desk chatter that - as we have warned - QE is not coming). The decouplings continue as high yield presses to 2-week lows and Nikkei futures diverge from USDJPY. The dollar weakened back to unch on the week after Draghi but commodities saw no gains from that as gold, silver, and copper slipped. WTI dropped to as low as $75.85 at 3-year lows. VIX - helped by numeous CBOE 'breaks' today - jerked back below 15 (after trading above 16 briefly).

"Japan is no Zimbabwe. Neither was Israel, yet from 1972 to 1987 its inflation averaged nearly 85%. As its CPI rose nearly 10,000 times, its stock market rose by a factor of 6,500 … Regular readers know that I don’t generally make forecasts, but that every now and then I do go out on a limb. This is one of those occasions. Mapping Israel’s experience onto Japan would take the Nikkei from its current 9,600 [as of October 2010] to 63,000,000. This is our 15-year price target." - Dylan Grice

Presented with little comment aside to suspect the answer to our implicit question is something like "it's the new economy" or "you don't understand the new valuation metrics"

Watch Spain closely in the months ahead. It will be another canary in the coal mine for the entire Western world.

When (0.94) correlation is causation...

Because when you have no POMO, and no QE on the horizon, you can always break a stock exchange and send the entire market... higher!?

"I think that a good victory for Democrats on Tuesday, you know, should be rewarded with some fried chicken." - Michelle Obama

We’ve been keeping the long lost idea of our long lost society alive by squeezing our own children wherever we can, and telling them that if they only work hard enough, they can be whoever they want to be. But they can’t, that notion is also long lost. When you keep home prices artificially high, homeowners don’t suffer as much, even if they bought at insanely high prices, but the suffering is switched to potential buyers, who remain just that, potential, while they live in their mom’s basements for years. A surefire way to kill a society while everyone’s eagerly awaiting the growth that is just around the corner and will forever remain there. Take it from your kids. Take it from somewhere else in the world. And that’s where we’re now passing a barrier: there’s no-one to take it from anymore.

The cacophony of various talking heads proclaiming this morning that oil price weakness is not due to weak demand but to over-supply (which are obviously merely different sides to the same coin) was deafening. While he hate to steal the jam from their aggregate donuts, the following chart may just provide a hint at what is really driving oil prices... "it's the economy, stupid!"