Archive - Feb 2, 2014 - Story

The United States’ rapport with the Russian Federation is one of the world’s most important bilateral relationships.  Russia maintains a large nuclear arsenal and is a resurgent player in world affairs. Russia has considered Ukraine to be a vassal for the last five hundred years.  Russian President Putin has routinely referred to Ukraine as a Russian state rather than a free and independent country. How would the United States react if Moscow was able to exert influence over Mexico and install a pro-Russian government? America needs to take off her rose colored glasses and look at the world with a Machiavellian view.  We should decide to intervene in centuries old conflicts only when there are clear American security interests involved.  Unfortunately for the idealistic leaders of American foreign policy, Ukraine does not meet this test.  The Ukrainian people have shown an ability over the two decades to have a natural ability to take matters into their own hands and are quite capable of deciding this issue among themselves. 

USDJPY opened the evening under 102 with JPY holding its losses until aroun 1700ET when it broke back above the crucial level. S&P futures and USDJPY recoupled for a few hours but are now decoupling faster than the Seahawks and Broncos (S&P -1pt, USDJPY +30 pips). The catalyst for the disconnect (which Japan's Nikkei is also following) was weakness in Chinese data. Following Aussie PMI's lowest print in 5 months, China's Services PMI printed at its lowest on record and its biggest 3 month slide in 16 months. Japan's Nikkei 225 is now down 10% in 2014 and 7 of the last 8 days and 20Y JGB yields are testing 9-month lows.

Citi's Tobias Levkovich sums up the hope... "we have received a fair amount of questions from clients over the last couple of weeks about the effect of share buybacks supporting earnings in the coming year, almost as if they are stretching to find reasons not to cut their numbers." The following charts suggest we are stretched indeed... Quantitative easing has distorted not only financial markets, but financial memory. The awakening is not likely to be gentle.

In 1928, just as income inequality was surging, stocks were soaring and monetary distortions were rearing their ugly head, the now infamous words "a chicken in every pot and a car in every garage" were integral to Herbert Hoover's 1928 presidential run and a "vote for prosperity,' all before the market's epic collapse. Fast forward 86 years and income inequality is at those same heady levels, stocks are at recorderer highs, the President is promising to hike the minimum wage to a "living wage" capable of filling every house with McChicken sandwiches and now... to top it all off - Maserati unveils their (apparent) "everyone should own a Maserati" commercial. It would seem that chart analogs are not the only reminder of the pre-crash era exuberance and its recovery mirage and massive monetary distortions.

In 2008, a mysterious person or group using the apparent pseudonym Satoshi Nakamoto unveiled a new digital currency called Bitcoin that appeared to solve some of its predecessors’ problems. As Bitcoin rose in value the number of high-profile crimes and crashes rose apace. Throughout that boom and bust, Bitcoin retained a core user base that saw its possibilities and worked to overcome its flaws by developing point-of-sale hardware and online merchant services while lessening its dependence on a small number of exchanges. And then, just when the outside world had stopped paying attention, Bitcoin recovered. From under $20 at the beginning of 2013 it rose to $240, crashed to below $100, and then in one dramatic arc soared to more than $1,000. In early 2014 Bitcoin’s market value exceeded $10 billion and the number of merchants willing to accept it was soaring. The market appears to have spoken: Bitcoin is for real.

Presented with no comment...

Across the spectrum of the US, Europe and Japan we have seen we see many stock markets that are “bending” towards pivotal supports and, Citi's FX Technicals group notes, A break below these supports, if seen, would suggest that we could see much more significant corrections lower across the board - "Any which way you look at it this market has a lot of potentially concerning developments but all the 'bricks' have not yet quite fallen into place here." However, as they add, VIX is showing such as move that "if seen" would almost certainly suggest a high to low move in the S&P of "double digit percentages."

"As we and others have said, the Fed is overly reliant upon models that do not account for real-world elements of instruments, markets and traders in the derivatives age. Models cannot possibly take into account unpredictable interactions among huge positions and traders in new and very complicated instruments. Thus, the Fed should be careful, humble and conservative. Instead, it is just blithely plowing ahead as if it knows exactly what is going on. Intelligent captains sail uncharted waters with extra caution and high alert; only fools think that each mile they sail without sinking the vessel further demonstrates that they are wise and the naysayers were fools. This is a formula for destruction. The crash of 2008 should have been smoking-gun evidence of the folly of this approach, but every mistake leading up to the crash, especially excessive and “invisible” leverage and interest rates that were too low, has been doubled down upon in the years since."

Tickets to see this year's frigid battle between Seattle and Denver would have cost no more than $85 if they had kept pace with the government's perspective of inflation (CPI). If Super Bowl  tickets had tracked the S&P 500's reflationary trajectory, they would cost $275. Instead, in what is the biggest surge in face-value prices YoY ever - more than doubling last year's - the highest Super Bowl tickets this year cost $2,600 face value, a record high. However, resale tickets – where the market really sets the price – tell a quite different (and more) negative story. It’s not simply a lukewarm economy.

Detroit U.S.A.: Once the most prosperous city in America. With a booming manufacturing sector and cultural magnetism, the city had bright horizons after World War II. But as the 1960?s rolled in, the marriage of Big Business and Big Government overtook Detroit. The central planners in government needed the powerful corporations, and the powerful corporations came to depend on the bureaucracy, too. The marriage worked well for the politicians and for their corporate cronies, but Detroit itself entered a decades-long decline. How did so much money change hands between the world's most powerful corporate leaders and government officials while delivering on so little of the promise sold to America by central planners? Bankrupt: How Cronyism & Corruption Took Down Detroit answers this question, and many others.

Yes, it is true that, just as had happened six months ago when the Fed first started its public ruminations about whether and when to start to reduce its stimulus, emerging markets have suffered a further bout of turbulence and it is also true that some of these are facing increasingly fraught social and political tensions, to boot. The cynic would say that such periods of upheaval are almost intrinsic to their designation as "emerging" but he would also be quick to point out that such susceptibilities are supposed to be rewarded with either a yield premium or its converse, a price discount. The ironists among market punters will even attempt to construe all this as a reason to buy more developed world stocks on the premise that the money flooding out of such places as Thailand, the Ukraine, Turkey, and Argentina will be parked in the S&P and the DAX (perhaps overlooking the fact that the purchase price of these now-unwanted positions was most likely borrowed, meaning that their liquidation will also extinguish the associated credit, not re-allocate it). The Goldilocks lovers will also tend to assume that any such disruption will serve to delay the onset of genuine tightening and may even induce further ill-advised stimulus measures on the part of the major central banks.

There are some things that today's multi-dimensional, always-on, super-eagle-eye 4k HD televisual extravanganza will not show. High above the crowds roaring in satisfaction at $2,600 per ticket show, SWAT teams and snipers will be attending Super Bowl XLVIII. The Super Bowl, simply put, is a level one national security event. So, behave yourself; do not chant 'hawks' too loud; don't boo the 'Omahas' too much; but most of all don't worry, since the FBI is watching you - “If you have an active shooter or you have anyone who may have a bomb. Snipers have a better angle then anyone who is on the ground to actually hit that target... you have individuals who are at high altitudes inside the arena and then you have individuals that are on the ground moving in and around the crowd."

So which is it?

On one hand, the record build up of inventory in the past year and especially in the last two quarters, is the primary reason why so many economists were fooled into believing the US economy was approaching escape velocity, as can be seen in BEA data. On the other hand, the composite of the manufacturing and non-manufacturing ISMs suggest that not only did inventory accumulation halt in the second half, but with a most recent print of 47.5, imply that inventory was already being rapidly liquidated as 2013 was ending. One thing is clear: they can't both be correct.

In a month of disturbing images from troubled countries in all parts of the developing world, the biggest threat to the global economy may have been lurking in the shadows...

As noted on Friday, the Greek soap opera, in which Europe pretends to bail out Greece when it is just bailing out its insolvent banks by not touching the status quo, and Greece pretends to reform and comply with austerity reforms, is about to enter its third act. Yesterday, Greek Kathimerini reported that the reason why the Troika has put Greece on ice and has is behind in the implementation of 153 actions demanded by its lenders, according to a timetable compiled by the Finance Ministry. "Of the outstanding actions, 57 are the responsibility of the Finance Ministry, 17 fall to the Development Ministry, another 17 to the Labor Ministry and eight to the Administrative Reform Ministry. The rest are divided among other ministries. A number of the actions have yet to be completed as the government remains in discussions with the troika about the measures. Inspectors are expected to return to Athens later this month but a date has not yet been fixed." In other words, the bulk of the conditions agreed to as part of the second bailout have yet to be met by Greece. So what happens next? Why a third Greek bailout of course.