Archive - Jan 2014 - Story

The trend that was so many momentum-chasing bulls friend for so long has ended. The steady downward drift in jobless claims - all noise, debt-ceiling, winter storm, and software glitches aside - has ended. Initial claims rose 19k this week, missed expectations by the most in 6 weeks, and jumped to the same levels seen 6 months ago. The Labor Department says "nothing unusual" about this week's data but noted one state 'estimated' claims last week. Total benefit rolls dropped by 16k this week (back under 3 million) as emergency claimants remains "0". For those of the "seasonals are to blame" persuasion... this is the worst start to the year since the financial crisis...

Yesterday we reported that Goldman's attempt to buy an 18% stake in Dong Energy, the world's biggest operator of offshore wind farms, while largely preapproved by Danish politicians, had met with solid resistance by the broader population, which had started a petition to block the sale, signed by nearly 200,000 as of yesterday. Alas, despite the valiant effort by the population to keep the energy company - with 68% of the population polled as being against the deal - the country's politicians, certainly with no palms greased by the world's biggest depositor-insured hedge fund - just let Goldman have the DONG.  As Bloomberg reports, "a majority in Denmark’s parliament will let Goldman Sachs Group Inc. proceed with its purchase of a stake in state-owned utility Dong Energy A/S, according to a senior lawmaker in the ruling Social Democrat Party."

We are sure it's just a storm in a teacup; just a brief interlude before the IMF's ever-changing forecast for global trade growth picks right back up again and demand to ship dry goods surges back to the inventory stuffed levels of Q4. But, for now, the Baltic Dry Index (admired when it's rising, ignored when it drops) has collapsed by over 50% from its December highs and is back to August lows.

"For the year ended Dec. 31, UPS generated $5.3 billion in free cash flow, producing a net income-to-cash conversion ratio of more than 120%. The company paid dividends of $2.3 billion, an increase of nearly 9% per share over the prior year, and repurchased more than 43 million shares for approximately $3.8 billion."

• Only time will define Bernanke's crisis-era legacy at Fed (Reuters)
• Record Cash Leaves Emerging Market ETFs (BBG)
• Investors Look Toward Safer Options as Ground Shifts (WSJ)
• Fed Policy Makers Rally Behind Tapering QE as Yellen Era Begins (BBG)
• Rating agencies criticise China’s bailout of failed $500m trust (FT)
• Russia to await new Ukraine government before fully implementing rescue (Reuters)
• U.S. readies financial sanctions against Ukraine: congressional aides (Reuters)
• Companies resist president’s call for minimum wage rise (FT)
• Secret Swiss Funds at Risk as Italy’s Saccomanni Visits Bern (BBG)
• Top Democrat puts Obama trade deals in doubt (FT)
• Erdogan to Give Rate Increase Time Before Trying Other Plans (BBG)

Yesterday's epic failure of central bank intervention when both Turkey and South Africa hiked rates only to see their currency initially bounce then collapse, is long forgotten, and early today, the USDTRY once again traded to the rather unstable level of 2.30 and threatened with yet another rout, before verbal intervention out of Russia managed to soothe nerves on edge around the EM world. What followed out of Turkey, however, was an epic verbal diarrhea from both the government and the central bank, which firmly proves the nation on the Bosphorus truly has no idea what it is doing. Here is the evidence.

And so following yet another Fed taper, coupled with another disappointing manufacturing data point out of China, emerging markets did their thing first thing this morning and all the most unstable EM currency pairs - the TRY, the RUB, the ZAR and the HUF - all plunged promptly in the process pushing down the USDJPY which as become a natural carry offset to EM troubles, only to rebound promptly. Specifically, USDTRY blew out 400 pips to 2.3010 highs after which it bounced, and has now stabilized around 2.27, well above the Turkish central bank intervention level, USDZAR is back down to 11.2120 after hitting five-year highs of 11.3850, the Ruble also plunged after which it jumped on speculation of Russian central bank intervention, while futures are tracking even the tiniest moves by USDJPY and pushing the Emini which is trading in a liquidity vaccum by a quarter point for ever 2 or pips. And with all news overnight shifting from bad to worse (keep an eye on declining German inflation now) it goes without saying, that EM central banks around the world now are desperately trying to keep their currencies under control: which is why the market's jitteryness is only set to increase from here on out.

The prominent realist international relations scholar John Mearsheimer says there is a greater possibility of the U.S. and China going to war in the future than there was of a Soviet-NATO general war during the Cold War. In contrast to the Middle East, which he characterizes as posing little threat to the United States, Mearsheimer said that the U.S. will face a tremendous challenge in Asia should China continue to rise economically.

Investors in China have been running scared of a default on a high risk trust product; but, as Bloomberg's Tom Orlik notes, they should embrace it. The implicit guarantee that no investments will go sour is one of the key problems with China’s financial system as Orlik adds it encourages reckless lending often to borrowers whose only merit lies in backing from a deep-pocketed government. Crucially, as JPMorgan warns in a recent note, "avoiding defaults is not the right answer, as it will only delay or even amplify the problem in the future." A default that encourages lenders to price in risk would be a positive development and the CEG#1 was an ideal product to 'fail' with its 11% yield and clear idiosyncratic company problems. However, regulators won't have to wait long for a second chance as JPM warns "There will be a default in China’s shadow banking industry this year as economic growth momentum slows."

An oldie but a goodie... On the final FOMC meeting of Ben Bernanke's illustrious career as Fed Chair, we thought it appropriate to dust off the following musical reminder of just who the Fed are...

"... you see the Federal reserve is not a government thang; it's a bunch of private bankers we obey...and they don't answer to the people coz they pull the strings; and that's precisely why we have to say... hey hey, hey hey... F##k The Fed.."

Following last week's Flash PMI print of 49.6, the Final print for January China Manufacturing dropped further to 49.5 confirming the contraction is deepening. Japanese stocks were down the most since August in the early going as Nikkei futures extended the losses from the US day-session (and rather notably decoupled from USDJPY and breaking below 15,000). The Nikkei is heading for the worst month since May 2012 (-8.66% so far). S&P futures tracked USDJPY as 102.00 was defended aggressively. Chinese stocks are also tumbling (though not as hard as Japan and US) and the PBOC will not be adding liquidity today. Furthermore the blame is being shifted as Deputy FinMin Zhu warns that the "Chinese economy faces risks from overseas uncertainty." EM FX is drifting lower still.

If one were only to look at the stock market and the buzz within New York, London, San Francisco, Sydney or Toronto; they would conclude that the world is indeed booming. After all, people say the stock market is a leading indicator and that is telling us that the world is bursting at the seams with accelerating growth. And of course, the leading financial news stations are tripping over themselves with gushes of great news. Now, we don’t mean to be the party pooper; however one must understand what is really happening to truly appreciate the still, slow moving and delicate economic pickle the world has been stuck with. For starters, these major cities are always booming. Instead, for a better picture of economic life, feel free to visit St. Louis, Winnipeg, or Marseilles and we’re sure you’ll have no problems at all securing that dinner reservation. Peeling away the top layer of fabulous news resulting from the stock market, we cannot help but see that the deep structural issues associated with the 2008-09 crisis remain. The mountains of bad debt have simply shifted away from specific investors, to governments and their tax payers. From a global perspective, this transfer of bad debt from specific investors to tax payers is THE most important issue to understand. In simpler terms, and unknown to many, the bad debt has been spread around the world for everyone to share. Yes, socialism has arrived and few in our capitalistic world have noticed.

The global economy’s glory days are surely over. Yet policymakers continue to focus on short-term demand management in the hope of resurrecting the heady growth rates enjoyed before the 2008-09 financial crisis. This is a mistake. When one analyzes the neo-classical growth factors – labor, capital, and total factor productivity – it is doubtful whether stimulating demand can be sustainable over the longer term, or even serve as an effective short-term policy. Instead, policymakers should focus on removing their economies’ structural and institutional bottlenecks. In advanced markets, these stem largely from a declining and aging population, labor-market rigidities, an unaffordable welfare state, high and distorting taxes, and government indebtedness.

Sometimes, in cables amongst themselves, politicians tend to forget that "real people" will eventually get to read their words (either that or they realize but just don't give a damn), and they drop the facade and talk in real terms. As Grant Williams explores in the following excellent discussion, the phrase "propitiate public opinion" among Spanish and UK minsters arguing over Gibraltar sums up perfectly the world in which we live. Propitiate - to make (someone) pleased or less angry by giving or saying something desired. Behold, politics.

The problem, though, is that once you embrace the Narrative of Central Bank Omnipotence to "explain" recent events, you can't compartmentalize it there. If the pattern of post-crisis Emerging Market growth rates is largely explained by US monetary accommodation or lack thereof ... well, the same must be true for pre-crisis Emerging Market growth rates. The inexorable conclusion is that Emerging Market growth rates are a function of Developed Market central bank liquidity measures and monetary policy, and that all Emerging Markets are, to one degree or another, Greece-like in their creation of unsustainable growth rates on the back of 20 years of The Great Moderation (as Bernanke referred to the decline in macroeconomic volatility from accommodative monetary policy) and the last 4 years of ZIRP. It was Barzini all along!