Archive - Jan 2014 - Story

Venezuela's (freely elected) President Nicolas Maduro (amid toilet-paper and food shortages nation-wide) pointed out this in a State of the Nation address - which Bloomberg's Peter Jeffrey notes was unnecessary as everyone who lives in Venezuela knows the State of the Nation and it is Excruciating - "I'm a socialist, and I know what I'm doing." As Jeffrey ascorbically notes in this wonderful Op-ed, the Venezuelan treasury is now free to issue notes bearing the motto E Non Sequitur Gloria, or "Out of that which makes no sense shall we stitch the fabric of our glorious destiny."

Five years after the 2008 crisis hit, economies are more financialised than ever. If the politicians and regulators ever had any balls they have been amputated by the casino managers, under the anaesthesis of perceived self-interest. They have become the casino eunuchs. An apparent early consensus on the systemic problems of over financialisation has melted away into a misconceived search for ‘business as usual’.

As Vladimir Putin proudly shows off his holiday vacation spot - Sochi - to the world and proclaims it clean, safe, and accepting of homosexuals ("just don't tell the kids"); there is a considerably darker side to Russia that he would very much like the outside world not to know about. As Bloomberg reports, hidden from the outside world and abetted by policies that critics say promote infections rather than curbing them, the HIV scourge plaguing Russia is one that even the poorest countries have begun to subdue. With an estimated 2.4 million users of injected drugs and 1.3 million of Putin's countrymen with the life-threatening virus that causes AIDS; among the top 20 global economies, only India, with a population almost nine times bigger than Russia’s 143 million, has more people living with HIV.

Most people on Wall Street know all about it: the junior banker hazing ritual. Fresh out of college, pulling all nighters after long hours of starting at an excel screen playing solitaire in the background, writing and re-writing pitch books for the sake of generating work which nobody will read, waiting for senior bankers to get back with their revisions, eating (expensed) meals after midnight, and so on. The justification is well-known: greater money and benefits than anyone can make in any other job. But is the trade off worth it? Increasingly more banks and their executives are asking that question, leading to various banks telling their young bankers to take one, even (gasp) two weekends off per month. So how are the young bankers themselves seeing these developments? “A cocktail of zero social life, coffee, propranolol (helps with stress and panic attacks) and modafinil (keeps you up all night),” wrote one UK-based banking employee. Another noted that the “emotional stress” had been reduced since “splitting from my partner”.

In his 712-page tour de force, The Great Deformation, David Stockman dissects America’s descent into the present era of “bubble finance.” it’s hard to refute Stockman’s perspective on the Fed’s role in the housing bubble. But that won’t stop some from trying, and especially the many academic economists beholden to the Fed. Research papers have stealthily danced around the Fed’s culpability for our crappy economy, as we discussed here. More importantly, if Stockman is right about bubble finance, there’s more mayhem to come. Consider that denying failure and persisting with the same strategy are two sides of the same coin. Just as investors avoid the pain of admitting mistakes by holding onto losing positions, Fed officials who claim to have done little wrong are also more committed than ever to propping up asset markets with cheap money. For those concerned about another policy failure, a key question is:  “As of today, where do we stand with respect to bubbles and bubble finance?”

Up until now, most terrorist provocations surrounding the Sochi winter olympics set to begin on February 7, had been in the surrounding cities (here is dramatic video footage of the recent suicide bombing in Sochi) while the actual venue has been largely left untouched. Perhaps this is due to the security gauntlet that has wrapped the city under the constant supervision of countless eyes in the sky and about 70,000 police and soldiers. This tenuous peace, however, was disturbed this morning when as Bloomberg reported, Russian police were searching for an alleged terrorist Razmena Ibragimova, according to a wanted poster on display at a security checkpoint in Sochi’s airport. Ibragimova, 22, is "currently located on Sochi territory" and may attempt a suicide bombing, according to the poster. According to information from BlogSochi she was spotted on the street outside the foreign ministry building in Sochi.

If you want to get an idea of where the rest of America is heading, just take a trip through the western half of West Virginia and the eastern half of Kentucky some time.  Once you leave the main highways, you will rapidly encounter poverty on a level that is absolutely staggering.  Overall, about 15 percent of the entire nation is under the poverty line, but in some areas of eastern Kentucky, more than 40 percent of the population is living in poverty.  After decades of decline, vast stretches of impoverished Appalachia look like they have been through a war.  Those living in the area know that things are not good, but they just try to do the best that they can with what they have.

"I happen to think that 2014 is a VERY different year than 2013 from a variety of viewpoints.  First, there appears to be a dispersion of opinion about markets, valuations, policy frameworks and more.  This is a healthy departure from YEARS of artificiality.  Artificiality in valuations, artificiality in market and policy mechanics and essentially artificiality in EVERY financial, and real, relationship on the planet based on central bank(s) balance sheet expansion and other measures intended to be a stop-gap resolution to  tightening financial conditions, adverse expectations of economic activity, and the great rollover" - Russ Certo, Brean Capital

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."